<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended March 31, 1997 Commission File Number 0-13318
STAR TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0794452
(State or other jurisdiction of (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)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock,
$.01 par value
(Title of each
class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. X
The aggregate market value of voting stock held by non-affiliates of
the registrant as of June 25, 1997 was $5,589,249. 19,872,884 shares of
Common Stock were outstanding as of June 25, 1997.
<PAGE>
Document incorporated by reference:
1. Star's definitive Proxy Statement for its Annual Meeting to be held
August 21, 1997, into Part III of this Report on Form 10-K.
PART I
Item 1. Business
GENERAL
Corporate Repositioning
Star Technologies, Inc. ("Star" or the "Company") has historically been
a supplier of performance-enhancing computing products and solutions for the
image and signal processing marketplace, principally for medical imaging.
In May 1995, Star's major customer, General Electric Medical Systems
("GEMS"), ceased purchasing reconstruction processors from the Company.
(See discussion below, and in Part II, Item 7 and Item 8, Note 2.) Sales to
GEMS represented a substantial share of Star's total business. Star's
current products are DICOM 3.0-compliant solutions for the medical imaging
and information systems market, with special expertise in the area of DICOM
image storage. The Company has not yet generated any significant revenue
from these products.
The Company, over the past two years, has been actively working with
several investment banking firms, as well as other sources, to identify
potential merger and acquisition partners. The Company is committed to
growing Star through strategic mergers and acquisitions. Star is engaged in
discussions with an imaging company relating to the possible acquisition of
that company's technology and certain other assets. If such acquisition is
consummated, the Company expects that the purchase price will be material to
Star and may include the issuance of shares of the Company's common stock to
the seller. Star has reached no formal agreement with the company and the
acquisition may not be consummated.
Medical Imaging
Star's Image Management Server ("IMS") is a full DICOM 3.0 Storage
Class Provider image management system for the integration, storage and
retrieval of medical images and related information. The IMS combines a
proven industry-standard database platform with a flexible hierarchical
image storage system that is scalable to a customer's needs. The Star IMS
provides a cost-effective, centralized and convenient means of accessing
patient information from multiple acquisition sources, for applications such
as computed tomography ("CT") and magnetic resonance imaging ("MRI")
clustering, or longer term storage for an in-house image distribution
system. The IMS received Federal Food and Drug Administration ("FDA")
market clearance in fiscal 1996. The Company has not yet generated any
significant revenue from this product.
Star's other current product, the Film Image Scan System ("FISS")
converts film into a DICOM image information system environment. The FISS
combines the industry's leading film digitizers, from Lumisys and Vidar,
with a PC-based Image Quality and Reformatter Station. This combination
provides a cost-effective means to scan film studies (CT, MRI, X-ray, etc.),
convert them to digital images, include patient information, reformat images
into the DICOM 3.0 standard, and send these images anywhere they are needed
on a network (to a physician review station or to an image
-1-
<PAGE>
management or archive system). The Image Quality and Reformatter Station
also provides the functionality to preview and control image quality and
ensure proper image orientation before storing and distributing the data.
The FISS is currently being tested at potential customer sites. The FISS
received FDA market clearance in fiscal 1996. The Company has not yet
generated any significant revenue from this product.
Service
The Company provides service repair and maintenance on its
high-performance computers as well as its older computing products known as
array processors.
History
The Company was in the development stage from its formation in August
1981 until the first array processor was shipped in July 1983. In February
1984, Star contracted with General Electric Company ("GE") to develop and
sell the ST-CT array processor to GEMS under a multi-year original equipment
manufacturer ("OEM") agreement. From that time through May 1995, sales to
GEMS represented a substantial share of Star's total business.
In fiscal 1992, the Company entered into a joint development agreement
with GEMS to develop the next generation of GEMS' medical imaging product.
The Company phased the new product, the ST-RP, into production in fiscal
1994 under the OEM agreement. In fiscal 1995 GEMS informed the Company that
it did not intend to purchase additional units after May 1995. The Company
believed that GEMS was obligated, under the terms of the Development and
Technology Transfer Agreement (the "Development Agreement") between the
Company and GEMS, to continue to obtain its requirements for ST-RPs from the
Company beyond those volumes ordered, and filed a demand for arbitration
in January 1995, in accordance with the terms of the Development Agreement.
The arbitration panel appointed to resolve the dispute awarded Star $9.1
million in March 1996. GEMS paid Star $9.4 million, which includes
interest, in August 1996.
In April 1988, the Company acquired the GraphiconTM Products Division
from GE. The Company further developed this business, which included
investing in new 3-D graphics software and hardware technologies and
marketing programs to expand distribution channels. In March 1995, the
Company sold this division to the prime contractor under the United States
Navy's SH-60 helicopter contract.
In fiscal 1994, the Company began research and development ("R&D") work
on new products for the image and information management market, including
the IMS and FISS. The Company has received FDA clearance to market both
products.
CUSTOMERS
Sales to GEMS accounted for approximately 9%, 54%, and 90% of the
Company's revenue in fiscal 1997, 1996 and 1995, respectively. Fiscal 1997
sales consisted of spare parts and repairs. Fiscal 1996 and 1995 sales
consisted primarily of reconstruction processors for use in CT medical
imaging systems. CT systems use computers and scanners to produce
cross-sectional images of certain organs and body tissues. GEMS ceased
purchasing such units from the Company in fiscal 1996. (See Part II, Item 7
and Item 8, Note 2.)
-2-
<PAGE>
Revenue on a long-term subcontract for the United States Navy's SH-60
Program to supply Graphicon 2000 image generators accounted for 34%, 18% and
1% of the Company's revenue in fiscal 1997, 1996, and 1995, respectively.
Work under the contract began in fiscal 1993 and was completed in fiscal
1995. Revenue in fiscal 1997 and 1996 relates to the settlement of the
termination claim discussed in Part II, Item 7, Results of Operations.
MARKETING AND CUSTOMER SERVICE
The Company markets and services its products through its own direct
sales force, distributors, and OEMs. Star has focused its primary marketing
strategy on providing solutions to strategic OEM partners. At June 20,
1997, the Company had five employees in sales, marketing and service
activities in or near Washington, DC.
The Company provides a factory warranty (usually 90 days) covering
parts and labor for its hardware. The Company also offers non-warranty
maintenance services and software maintenance services and upgrades on a
contract basis. Certain OEM customers elect to provide their own
maintenance services, in which case the Company generally trains the
customers' service personnel. Service revenue as a percentage of total
revenue was approximately 42% in fiscal 1997, 19% in fiscal 1996, and 7% in
fiscal 1995. The percentage increases in fiscal 1997 and 1996 are not due
to higher service revenue but to significantly lower total revenue in fiscal
1997 and 1996 due to the loss of the GEMS business discussed above.
BACKLOG
The Company does not have a backlog of orders at May 31, 1997.
RESEARCH AND DEVELOPMENT
The Company is committed to technological development to maintain the
competitiveness of its products. The Company's strategy has been to
continue enhancing its existing products. Research and development
expenditures totaled $1.1 million, $2.2 million, and $4.7 million, in fiscal
1997, 1996 and 1995, respectively. Of the fiscal 1995 amount, $1.1 million
is recorded as cost of revenue as part of a long-term subcontract completed
in fiscal 1995.
COMPETITION
The Company's products compete in markets which are highly competitive
and characterized by rapid technological advances. As a result, frequent
new product introductions, increased capabilities and applications, and
improvements in the relative price/performance of available products are
common in the industry. Other important competitive factors include the
availability of software required to be developed by both the manufacturer
and its customers, product quality and reliability, ease of use, marketing
and distribution capability, and post-sale service and support.
The image management market for medical imaging is highly competitive
and includes imaging equipment manufacturers, film companies, information
systems vendors, telephone companies, system integrators and a large number
of small, independent companies. Star has focused its primary marketing
strategy on providing solutions to strategic OEM partners.
Many of the Company's competitors have significantly larger financial,
marketing, and technical resources than the Company.
-3-
<PAGE>
PATENTS
Because of rapid technological advances in the computer industry, the
Company generally has not sought patent protection for its products. The
Company believes that patents are of less significance to its industry than
such factors as the innovative skills, technological expertise and
management skills of its personnel. However, the Company considers many of
the principal elements of the design of its hardware and software to be
valuable trade secrets and confidential proprietary information. In certain
limited circumstances, the Company has obtained, and will continue to seek,
patents on certain of its proprietary products and components.
PERSONNEL
At June 20, 1997, the Company had 17 employees and contractors, of
which 2 were engaged in engineering and research and development; 5 in
marketing, sales and service; and 10 in general management, finance and
administration.
EXECUTIVE OFFICERS
The officers who may be deemed to be executive officers of the Company
are as follows:
Name Age Position
-----------------------------------------------------------------------
Robert C. Compton 50 Chairman of the Board, President
and Chief Executive Officer
Brenda A. Potosnak 35 Vice President of Finance & Administration,
Chief Financial Officer, Treasurer &
Secretary
Robert C. Compton was elected Chairman of the Board in March 1990; he
has served as Chief Executive Officer since October 1989, and as President
since June 1988. Formerly, he served as Executive Vice President and Vice
President - Finance, Administration and Corporate Development. Prior to
joining the Company in 1985, he served for 17 years in various financial,
management, and corporate auditing positions at GE.
Brenda A. Potosnak joined the Company in November 1992. She was
appointed Vice President and Chief Financial Officer in August 1996. She
assumed the duties of Treasurer and Secretary in March 1995. Previously,
she served as Controller and Principal Accounting Officer. Prior to joining
the Company, she served as Controller at Sporting Life, Inc. from 1991 to
1992 and as Assistant Controller at Kay Jewelers, Inc. from 1988 to 1990.
Prior to that, she was an auditor with Arthur Young & Co.
Item 2. Properties
The Company leases 33,000 square feet of a facility in Sterling,
Virginia under a lease expiring in October 2000. The lease was amended in
December 1996 to reflect the reduction of the Company's leased facility
space from 79,000 square feet to 33,000 square feet.
-4-
<PAGE>
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The Company's common stock is traded on the NASDAQ National Market
System under the symbol STRR. At June 25, 1997, there were approximately
1,500 holders of record of the Company's common stock. The table below
represents the high and low closing prices for the last two fiscal years (in
dollars).
<TABLE>
<CAPTION>
1997 1996
---------------------------------------
High Low High Low
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter................................ 23/32 3/8 23/32 7/32
Second Quarter............................... 13/16 15/32 19/32 11/32
Third Quarter................................ 17/32 5/16 15/32 7/32
Fourth Quarter............................... 15/32 5/16 23/32 9/32
</TABLE>
The Company has never declared nor paid dividends on its common stock
and anticipates that, for the foreseeable future, it will continue to retain
any earnings for use in its business. The Company is also restricted in the
payment of dividends on its common stock by the rights of the holders of its
preferred stock.
Item 6. Selected Financial Data
<TABLE>
FIVE-YEAR FINANCIAL SUMMARY
<CAPTION>
(In thousands, Years ended March 31,
except per share data) 1997 1996 1995 1994 1993
------------------------------------------------
Operations Statement Data:
<S> <C> <C> <C> <C> <C>
Revenue............................ $ 1,247 $ 4,282 $21,623 $29,351 $23,468
Operating income (loss)............ $(4,301) $(4,465) $ 663 $ 2,261 $ (46)
Net income (loss).................. $ 2,635 $(3,984) $ 1,193 $ 2,175 $ (188)
Net income (loss) per common
and common equivalent share...... $ .63 $ (.02) $ .16 $ .01 $ (.12)
Balance Sheet Data:
Working capital.................... $ 5,094 $ 4,562 $ 9,399 $ 8,457 $ 4,670
Property and equipment, net........ $ 271 $ 502 $ 698 $ 1,308 $ 2,409
Total assets....................... $ 6,031 $ 6,674 $13,020 $13,299 $14,613
Total debt......................... $ -- $ -- $ 49 $ 153 $ 2,660
Stockholders' equity............... $ 5,400 $ 5,208 $10,374 $10,624 $ 8,418
</TABLE>
-5-
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements in the financial discussion and analysis by
management contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. Actual future results and trends may differ materially
depending on a variety of factors, including the Company's ability to
successfully complete strategic mergers and acquisitions; the ability to
bring new products to market; risks of early stages of product development
including problems, delays, expenses and difficulties, some of which may be
beyond the Company's control; risks associated with products being
successfully developed or successfully marketed; product demand and market
acceptance risks; technological difficulties; the impact of competitive
products and pricing; and the market strength of the medical imaging
industry.
Results of Operation - Fiscal 1997 Compared to Fiscal 1996
Revenue in fiscal 1997 was $1.2 million, compared with $4.3 million in
fiscal 1996. The 71% decrease from fiscal 1996 was due primarily to the
cessation of sales to General Electric Medical Systems ("GEMS") of the
Company's reconstruction processor in May 1995, as discussed in Part I, Item
1, and in Note 2 to the Consolidated Financial Statements. Revenue from
sales to GEMS totaled $107,000 and $2.3 million for fiscal 1997 and 1996,
respectively. In June 1996, the Company and the prime contractor agreed on
final settlement of an outstanding claim under the SH-60 long-term
subcontract with the U.S. Navy. Revenue recognized on this long-term
subcontract of $418,000 and $750,000 in fiscal year 1997 and 1996,
respectively, related to the settlement of the claim. Other sources of
revenue during fiscal 1997 include maintenance and support agreements, and
sales of spare parts.
Research and development ("R&D") expense decreased 47% in fiscal 1997
from fiscal 1996. The decrease is primarily attributable to reduced staff
levels. Due to the nature of its business, the Company expects R&D expense
as a percentage of revenue to continue to be significant.
Marketing and sales expense increased 13% in fiscal 1997 from fiscal
1996. The increase is primarily the result of the hiring of additional
sales and marketing personnel as well as increased costs associated with the
Company's participation in the industry's annual tradeshow, the Radiological
Society of North America Conference.
General and administrative expense decreased 26% in fiscal 1997 from
fiscal 1996. The decrease is due to substantially lower professional fees,
including legal fees, and lower corporate expenses partially offset by a
one-time expense incurred in the third quarter of fiscal 1997 in connection
with the reduction of the Company's leased facility space. Resultant cost
savings from the facility reduction began in the fourth quarter of fiscal
1997.
Interest income in fiscal 1997 increased 34% from fiscal 1996. The
increase is primarily attributable to interest received from GEMS in fiscal
1997 on the arbitration award. (See Note 2 to the Consolidated Financial
Statements.) Other income for fiscal 1997 includes the GEMS arbitration
award of $9.1 million, excluding interest, offset by the settlement of a
patent infringement lawsuit of $2.9 million (See Notes 2 and 8 to the
Consolidated Financial Statements.)
-6-
<PAGE>
Results of Operations - Fiscal 1996 Compared to Fiscal 1995
Revenue in fiscal 1996 was $4.3 million, compared with $21.6 million in
fiscal 1995. The 80% decrease from fiscal 1995 was due to the cessation of
sales to GEMS. Revenue from sales to GEMS totaled $2.3 million and $19.6
million for fiscal 1996 and 1995, respectively. Other sources of revenue
during fiscal 1996 include partial payments received on a claim under the
U.S. Navy's SH-60 Program, discussed above, from maintenance and support
agreements, and from sales of spare parts.
In response to the elimination of reconstruction processor sales to
GEMS, in early June 1995, the Company reduced its workforce by approximately
30%, affecting manufacturing, engineering and administrative departments.
Resultant cost reductions were reflected beginning in the second quarter of
fiscal 1996.
R&D expense decreased 40% in fiscal 1996 from fiscal 1995. The
decrease is primarily attributable to lower costs as a result of the sale of
the Graphicon Products Division in March 1995 and a company-wide reduction
in workforce in June 1995.
Excluding the effect of the foreign translation gain recognized in
fiscal 1995, marketing and sales expense decreased 44% in fiscal 1996 from
fiscal 1995. The decrease is primarily the result of the sale of the
Graphicon Products Division in March 1995, the closing of the United Kingdom
division in fiscal 1995 and the closing of the Houston sales office in early
fiscal 1996.
General and administrative expense increased 4% in fiscal 1996 from
fiscal 1995. The increase is due to substantially higher legal fees,
totaling over $1.2 million, primarily associated with the GEMS arbitration
hearing and a patent infringement litigation, partially offset by the
company-wide workforce reduction in June 1995. During fiscal 1996 and 1995,
the Company earned $429,000 and $285,000, respectively, of net interest
income on its short-term investments. Other income in fiscal 1995 primarily
reflects the gain on the sale of the Graphicon Products Division in March
1995.
Liquidity and Capital Resources
The table below shows selected financial highlights which reflect the
Company's liquidity position at the end of fiscal 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
At March 31,
--------------------
1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Working Capital................................... $5,094 $4,562
Short-term Investments............................ $5,474 $4,886
Total Liabilities................................. $ 631 $1,466
Bank Debt......................................... $ -- $ --
=======================================================================
</TABLE>
Cash flow generated from operating activities in fiscal 1997, which
includes the GE arbitration award, totaled $2.9 million. This net cash
infusion, offset by the Company's repurchase of 80% of its Series B and C
Senior Preferred Stock for $2.4 million, increased the Company's short-term
investment position by $588,000. Property and equipment additions in fiscal
1997 totaled $80,000 and depreciation expense was $198,000. Based on the
Company's current plans, fiscal 1998 capital expenditures are anticipated to
be comparable to fiscal 1997.
In December 1996, the Company repurchased 28,000 shares of Series A
Preferred Stock (representing 201,600 shares of common stock on an
as-converted basis) from State
-7-
<PAGE>
Farm Mutual Automobile Insurance Company ("State Farm") for $35,000. The
Company also repurchased 48,400 shares of the Company's common stock from
State Farm for $8,000.
In August 1996, the Company repurchased 80% of the outstanding shares
of its Series B and Series C Senior Preferred Stock (the "Preferred Stock")
from GE. In the transaction, the Company paid $2.4 million for 79,445
shares of the Preferred Stock which had a redemption price of $13.0 million,
including cumulative undeclared dividends in excess of $5.0 million. GE
also issued to Star a three-year option to purchase the remaining 20% of the
Preferred Stock at the same per share price that Star paid in the August
1996 repurchase. In addition, Star and GE amended the related preferred
stock purchase agreement and Star's Certificate of Incorporation to
eliminate numerous rights that GE had as the holder of the Preferred Stock,
including the rights to elect one third of Star's Board of Directors and,
under certain circumstances, to assume control of the Board. (See Notes 2
and 5 to the Consolidated Financial Statements.)
The remaining Preferred Stock now accrues dividends at a rate of 10%
per annum effective August 1996. To the extent declared, such dividends
would be payable quarterly in the amount of $50,000 in cash. Unpaid
cumulative dividends in arrears on the Preferred Stock total $125,000 as of
March 31, 1997.
In June 1997, the Company reduced its workforce by 32%, affecting
engineering, sales and marketing, customer service and administrative
departments. Certain costs associated with the reduction will be reflected
in the first quarter of fiscal 1998. Resultant cost reductions will be
reflected beginning in the second quarter of fiscal 1998.
The Company does not currently have a line of credit nor has it
borrowed under any bank agreement since December 1993. The Company has had
sufficient cash reserves for its operating needs since that time. The
Company expects to have sufficient cash, through its current cash and
short-term investment position and from operations, to meet its fiscal 1998
operating requirements. In the event that the Company requires more funds,
there can be no assurance that the Company would be successful in raising
new capital from external sources.
The Company, over the past two years, has been actively working with
several investment banking firms, as well as other sources, to identify
potential merger and acquisition partners. The Company is committed to
growing Star through strategic mergers and acquisitions. Star is engaged in
discussions with an imaging company relating to the possible acquisition of
that company's technology and certain other assets. If such acquisition is
consummated, the Company expects that the purchase price will be material to
Star and may include the issuance of shares of the Company's common stock to
the seller. Star has reached no formal agreement with the company and the
acquisition may not be consummated.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earning per Share" ("Statement 128"). Statement 128
supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share"
("APB 15"), and its related interpretations, and promulgates new accounting
standards for the computation and manner of presentation of earnings (loss)
per share data. The Company is required to adopt the provisions of
Statement 128 for the year ending March 31, 1998. Earlier application is
not permitted; however, upon adoption the Company will be required to
restate the previously reported earnings (loss) per share data in accordance
with the provisions of Statement 128. The Company does not believe that the
adoption of Statement 128 will have a material impact on the computation or
manner of presentation of earnings (loss) per share data.
-8-
<PAGE>
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Star Technologies, Inc.:
We have audited the consolidated financial statements of Star
Technologies, Inc. and subsidiaries listed in the accompanying index
appearing under Item 14(a) on page 26. In connection with our audits of the
consolidated financial statements, we have also audited the consolidated
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Star
Technologies, Inc. and subsidiaries as of March 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in
the three-year period ended March 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related
consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
McLean, Virginia
May 9, 1997
-9-
<PAGE>
<TABLE>
Consolidated Statements of Operations
(In thousands, except per share data)
<CAPTION>
Years ended March 31,
-------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue (includes revenue from GE of $107,
$2,354 and $19,582)...................... $ 1,247 $ 4,282 $21,623
Cost of revenue.............................. 1,218 2,714 13,452
- ------------------------------------------------------------------------------
Gross margin................................. 29 1,568 8,171
- ------------------------------------------------------------------------------
Operating expenses
Research and development................. 1,130 2,151 3,590
Marketing and sales...................... 952 839 993
General and administrative............... 2,248 3,043 2,925
- ------------------------------------------------------------------------------
4,330 6,033 7,508
- ------------------------------------------------------------------------------
Operating income (loss)...................... (4,301) (4,465) 663
Interest income, net......................... 574 429 285
Other income, net............................ 6,362 52 245
- ------------------------------------------------------------------------------
Income (loss) before provision for income
taxes.................................... 2,635 (3,984) 1,193
Provision for income taxes................... -- -- --
- ------------------------------------------------------------------------------
Net income (loss)............................ $ 2,635 $(3,984) $ 1,193
==============================================================================
==============================================================================
Net income (loss)............................ $ 2,635 $(3,984) $ 1,193
Preferred stock dividend requirement......... (647) (1,342) (2,065)
Repurchase of preferred stock................ 10,580 4,954 3,968
- ------------------------------------------------------------------------------
Net income (loss) applicable to common
shares................................... $12,568 $ (372) $ 3,096
==============================================================================
Earnings (loss) per share:
Per common and common equivalent share..... $ .63 $ (.02) $ .16
Assuming full dilution..................... $ .58 $ (.02) $ .14
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-10-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Position At March 31,
(In thousands, except share data) --------------------
1997 1996
- ----------------------------------------------------------------------------------------
<S> <S> <C> <C>
Assets
Current assets
Cash.......................................................... $ 69 $ 166
Short-term investments........................................ 5,474 4,886
Accounts receivable, net...................................... 35 156
Inventory, net................................................ 85 726
Other current assets.......................................... 62 94
- ----------------------------------------------------------------------------------------
Total current assets.......................................... 5,725 6,028
Property and equipment, net....................................... 271 502
Other assets...................................................... 35 144
Total assets.................................................. $ 6,031 $ 6,674
========================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable.............................................. $ 161 $ 608
Accrued payroll and related benefits.......................... 245 408
Other accrued liabilities..................................... 225 450
- ----------------------------------------------------------------------------------------
Total current liabilities..................................... 631 1,466
- ----------------------------------------------------------------------------------------
Commitments and contingencies..................................... -- --
Stockholders' equity
Preferred stock; $.01 par value; 1,000,000 shares authorized
Series A convertible; 500,000 shares designated; 17,500 and
46,900 shares issued; 17,500 and 46,900 shares outstanding;
aggregate liquidation preference of $630 and $1,688........ 1 1
Series B convertible; 120,117 shares designated; 11,917
and 59,584 shares issued; 11,917 and 59,584 shares
outstanding; aggregate liquidation preference of $1,192
and $5,958................................................. 1 1
Series C convertible; 80,079 shares designated; 7,945 and
39,723 shares issued; 7,945 and 39,723 and shares outstand-
ing; aggregate liquidation preference of $795 and $3,972... 1 1
Common stock; $.01 par value; 60,000,000 shares authorized;
19,937,115 and 19,927,035 shares issued; 19,841,924 and
19,880,244 shares outstanding.............................. 199 199
Additional paid-in capital.................................... 61,011 63,446
Treasury stock, at cost; 95,191 and 46,791 shares............. (209) (201)
Retained deficit.............................................. (55,604) (58,239)
- ----------------------------------------------------------------------------------------
Total stockholders' equity.................................... 5,400 5,208
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity.................... $ 6,031 $ 6,674
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-11-
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Years ended March 31,
------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from (used for) operating activities
Net income (loss).................................. $ 2,635 $(3,984) $ 1,193
Adjustments to reconcile net income (loss) to net
cash from (used for) operating activities
Depreciation and amortization...................... 198 319 1,358
Gain on recognition of translation adjustment...... -- -- (494)
Gain on sale of Graphicon assets................... -- -- (257)
(Gain) loss on sale of property and equipment...... 101 (45) 18
(Increase) decrease in restricted cash............. 17 513 (530)
Decrease in accounts receivable.................... 121 92 2,518
Decrease in inventory.............................. 641 1,736 2,673
(Increase) decrease in other current assets........ 32 (24) --
Decrease in accounts payable....................... (447) (285) (249)
Increase (decrease) in accrued liabilities......... (388) (895) 220
- ---------------------------------------------------------------------------------------
Net cash from (used for) operating activities.......... 2,910 (2,573) 6,450
- ---------------------------------------------------------------------------------------
Cash flows from (used for) investing activities
Net proceeds from sale of Graphicon assets......... -- -- 1,836
Proceeds from sale of property and equipment....... 12 45 6
Capital expenditures............................... (80) (91) (437)
Other investing activities, net.................... 109 113 41
- ---------------------------------------------------------------------------------------
Net cash from (used for) investing activities.......... 41 67 1,446
- ---------------------------------------------------------------------------------------
Cash flows from (used for) financing activities
Repurchase of preferred stock...................... (2,435) (1,187) (950)
Proceeds from stock option exercises............... -- 5 1
Purchase of treasury stock......................... (8) -- --
- ---------------------------------------------------------------------------------------
Net cash from (used for) financing activities.......... (2,443) (1,182) (949)
- ---------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents........ 508 (3,688) 6,947
Cash and equivalents, beginning of year................ 5,035 8,723 1,776
- ---------------------------------------------------------------------------------------
Cash and equivalents, end of year...................... $ 5,543 $ 5,035 $ 8,723
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-12-
<PAGE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<CAPTION>
Additional
Number of Shares Preferred Common Paid-In Retained
Preferred Common Stock Stock Capital Other(a) Deficit Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 297 19,436 $3 $194 $65,582 $293 $(55,448) $10,624
Net income................... 1,193 1,193
Stock options exercised...... 3 1 1
Conversion of preferred
(Series A).................. (67) 480 5 (5) --
Repurchase of preferred
(Series B and C)............ (37) (950) (950)
Translation adjustment....... (494) (494)
- -----------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 193 19,919 3 199 64,628 (201) (54,255) 10,374
Net loss..................... (3,984) (3,984)
Stock options exercised...... 8 5 5
Repurchase of preferred
(Series B and C)............ (47) (1,187) (1,187)
- ------------------------------------------------------------------------------------------------
Balance, March 31, 1996 146 19,927 3 199 63,446 (201) (58,239) 5,208
Net income................... 2,635 2,635
Conversion of preferred
(Series A).................. (1) 10 -- -- --
Repurchase of preferred
(Series A).................. (29) -- (36) (36)
(Series B and C)............ (79) -- (2,399) (2,399)
Purchase of treasury stock... (8) (8)
- -----------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 37 19,937 $3 $199 $61,011 $(209) $(55,604) $5,400
===========================================================================================================
(a) Includes treasury stock and translation adjustment.
</TABLE>
See accompanying notes to consolidated financial statements.
-13-
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 - Summary of Significant Accounting Policies
Description of business
Star Technologies, Inc. ("Star" or the "Company") has historically been
a supplier of performance-enhancing computing products and solutions for the
image and signal processing marketplace, principally for medical imaging.
In May 1995, Star's major customer, General Electric Medical Systems
("GEMS"), ceased purchasing reconstruction processors from the Company.
(See Part I, Item 1 and Part II, Item 7 and Note 2.) Sales to GEMS
represented a substantial share of Star's total business. Star's current
products are DICOM 3.0-compliant solutions for the medical imaging and
information systems market, with special expertise in the area of DICOM
image storage. The Company has not yet generated any significant revenue
from these products.
The Company, over the past two years, has been actively working with
several investment banking firms, as well as other sources, to identify
potential merger and acquisition partners. The Company is committed to
growing Star through strategic mergers and acquisitions. Star is engaged in
discussions with an imaging company relating to the possible acquisition of
that company's technology and certain other assets. If such acquisition is
consummated, the Company expects that the purchase price will be material to
Star and may include the issuance of shares of the Company's common stock to
the seller. Star has reached no formal agreement with the company and the
acquisition may not be consummated.
Principles of consolidation
The consolidated financial statements include the accounts of Star
Technologies, Inc. and its wholly-owned subsidiaries. Intercompany balances
and transactions have been eliminated.
Certain fiscal 1996 and 1995 amounts have been reclassified for
comparative purposes.
Revenue recognition
Product sales are recognized when legal title passes, which is
generally at time of shipment, or in certain cases, when accepted by the
customer. Engineering and service revenue are recognized as revenue when
such services are provided, or ratably over the contractual service period.
Amounts received but not earned are deferred and are reflected as other
accrued liabilities. Revenue of $300,000 in fiscal 1995, on a long-term
subcontract, completed during fiscal 1995, was recognized under the
percentage-of-completion method of accounting based on the ratio of costs
incurred to total estimated costs. Revenue recognized on this subcontract
in fiscal 1997 and 1996 of $418,000 and $750,000, respectively, relates to
the final settlement of a claim under this subcontract.
Cash and equivalents
Cash and equivalents include cash and short-term investments. Cash
includes cash in banks and, at March 31, 1997, overnight reverse repurchase
agreements which totaled $17,000.
The Company's short-term investments consist entirely of commercial
paper. These investments, which are held to maturity (less than three
months from the date of purchase), are carried at cost which approximates
their market value. Interest income was $574,000, $429,000, and $287,000 in
fiscal 1997, 1996, and 1995, respectively.
The Company does not currently have a line of credit nor has it
borrowed under any bank agreement since December 1993. The Company has had
sufficient cash reserves for its operating needs since that time. The
Company expects to have sufficient cash, through its current cash and
short-term investment position and from operations, to meet its fiscal 1998
operating requirements. In the event that the Company requires more funds,
there can be no assurance that the Company would be successful in raising
new capital from external sources.
-14-
<PAGE>
Accounts receivable
Accounts receivable are shown net of an allowance for doubtful accounts
of $15,000 and $22,000 at March 31, 1997 and 1996, respectively. The
provision for doubtful accounts was $1,000, $4,000, and $32,000 in fiscal
1997, 1996, and 1995, respectively.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or
market. Inventory at March 31, 1997 and 1996 consists primarily of
components and subassemblies, which include material costs and an allocation
of overhead.
The Company records a provision for damaged or potentially excess
inventory based on a percentage of the cost of all purchased materials.
Such provisions are reflected in the consolidated statements of operations
as cost of revenue. Additionally, due to the nature of the high technology
industry, the Company analyzes, on a quarterly basis, its levels of
inventory, by product line, for any excess quantities or additional
obsolescence which may arise as a result of changes in the marketplace, new
product introductions by competitors, or other factors which could cause the
Company's levels of inventory for specific products to be in excess of what
the Company believes will be disposed of through future sales of the given
product. If, after such analysis, the Company concludes that it has
inventory in excess of saleable quantities, additional reserves are recorded
to reduce the carrying value of the inventory to its net realizable value.
Inventory is shown net of a reserve for damaged or potentially excess
inventory of $4,203,000 and $7,288,000 at March 31, 1997 and 1996,
respectively. The Company recorded provisions to cost of revenue for
damaged or potentially obsolete inventory of $571,000, $404,000, and
$1,291,000 during fiscal 1997, 1996, and 1995, respectively.
Property and equipment
Property and equipment are recorded at cost. Depreciation and
amortization are recorded on a straight-line basis over the estimated useful
lives of the assets, which range from three to five years. Leasehold
improvements and assets under capital leases are amortized on a
straight-line basis over the shorter of the related asset lives or lease
terms.
Translation of foreign currencies
Prior to the significant reduction of its foreign business and the
closing of its European offices, operating accounts of the Company's foreign
subsidiaries were translated into U.S. dollars using average currency
exchange rates during the year. Statements of financial position were
translated using the applicable exchange rates in effect at year end.
Adjustments resulting from translation of foreign financial statements were
reported as a component of consolidated stockholders' equity.
The Company recognized an accumulated foreign translation gain of
$494,000 in the first quarter of fiscal 1995 relating to the closing of its
European offices. The gain is reflected as a reduction of marketing and
sales expense in the fiscal 1995 Consolidated Statement of Operations.
Stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to
record stock-based employee compensation plans at fair value. The Company
has elected to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations.
Accordingly, compensation cost for employee stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the exercise price an employee must pay to acquire
the stock.
-15-
<PAGE>
Earnings (loss) per common share
Earnings (loss) per common and common equivalent share computations are
based on the weighted average number of common and common equivalent shares
outstanding and income applicable to common shares after preferred stock
dividends. Common equivalent shares result from the assumed exercise of
outstanding stock options and warrants that have a dilutive effect when
applying the treasury stock method. The computation of fully diluted
earnings (loss) per common and common equivalent share includes all other
shares of common stock that potentially may be issued, principally because
of conversion privileges. For fiscal 1996, the computations of fully
diluted earnings per share are antidilutive; therefore, primary and fully
diluted earnings per share are identical.
The weighted average number of common and common equivalent shares used
in the computations of earnings (loss) per common and common equivalent
share was 19,873,000, 19,879,000, and 19,680,000 for the years ended March
31, 1997, 1996, and 1995, respectively.
For the earnings (loss) per common share calculations only, earnings
(loss) is reduced (increased) for the undeclared cumulative preferred stock
dividends of $647,000, $1,342,000 and $2,065,000 for the years ended March
31, 1997, 1996 and 1995, respectively. For the years ended March 31, 1997,
1996 and 1995, earnings applicable to common shares is also increased by
$10,580,000, $4,954,000 and $3,968,000, respectively, the difference between
the carrying amount of the redeemed preferred stock, including cumulative
undeclared dividends, and the price paid by the Company to repurchase the
stock. (See Note 5.)
Income taxes
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make of estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
-16-
<PAGE>
NOTE 2 - Transactions with General Electric Company ("GE")
Sales to GE
The Company had sales to GE in fiscal 1997, 1996, and 1995 of $107,000,
$2,354,000, and $19,582,000, respectively.
Arbitration award
In August 1996, GEMS paid Star $9.4 million, which amount, including
interest, was awarded to Star in March 1996 in its claim against GEMS for
breach of contract. The payment from GEMS arose from a demand for
arbitration that Star filed against GEMS in January 1995. As previously
reported, Star filed the demand after GEMS declared that it would not
purchase any reconstruction processors from Star after May 1995. The demand
alleged that GEMS' decision to stop buying reconstruction processors from
Star violated a development and technology transfer agreement that Star and
GEMS entered into in October 1991. Following a hearing on Star's demand, a
three-member panel of the American Arbitration Association found that GEMS
violated the agreement by terminating its purchases from Star and by using
certain technology owned by Star in reconstruction processors that GEMS is
manufacturing. Of the $9.4 million received, $9.1 million is included in
other income and $300,000 is included in interest income in the fiscal 1997
Consolidated Statements of Operations.
Repurchase of preferred stock
GEMS paid the arbitration award described above in connection with an
agreement with Star that provided for Star to concurrently repurchase 80% of
Series B and Series C Senior Preferred Stock (the "Preferred Stock") held by
GE. Pursuant to the agreement, in August 1996, Star paid GE $2.4 million
for 47,667 shares of Series B Senior Preferred Stock and 31,778 shares of
Series C Senior Preferred Stock which had an aggregate redemption price of
$13.0 million, including 100% of cumulative, undeclared dividends that
totaled in excess of $5.0 million. GE also granted to Star a three-year
option to repurchase the remaining Preferred Stock at the same per share
price that Star paid in the August 1996 repurchase.
Equity holdings
Equity holdings by GE totaled 19,862 shares of the Company's Series B
and Series C Senior Preferred Stock and 624,339 shares of the Company's
common stock at March 31, 1997. (See Note 5.)
NOTE 3 - Sale of Graphicon Products Division
On March 2, 1995, the Company sold substantially all of the assets of
the Company's Graphicon Products Division located in Research Triangle Park,
North Carolina, to AAI Systems Management, Inc. ("AAI/SMI"). AAI/SMI was
the prime contractor under the United States Navy's Visual System Upgrade
Program for the SH-60 helicopter, for which the Company, under a subcontract
with AAI/SMI, had supplied Graphicon 2000 image generators.
The assets sold included certain property and equipment and all amounts
due the Company from AAI/SMI under the SH-60 subcontract. Net proceeds from
the sale totaled $1.8 million and resulted in a gain of $257,000 in fiscal
1995.
Under the agreement, AAI/SMI's license to the technology, excluding a
license to complete the SH-60 contract, would terminate October 1996 unless
AAI/SMI had aggregate sales of the G2000 of $500,000. There were
insufficient sales of the G2000 product; accordingly, the license terminated.
-17-
<PAGE>
NOTE 4 - Property and Equipment
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
At March 31,
-------------------
1997 1996
------------------------------------------------------------------------
<S> <C> <C>
Engineering and manufacturing equipment............ $ 2,658 $6,322
Office equipment and leasehold improvements........ 430 1,160
Equipment under capital leases..................... 281 281
------------------------------------------------------------------------
3,369 7,763
Less accumulated depreciation and amortization..... (3,098) (7,261)
------------------------------------------------------------------------
$ 271 $ 502
========================================================================
NOTE 5 - Stockholders' Equity
Preferred stock - series A
The Company has authorized a total of 1,000,000 shares of preferred
stock. Of the total preferred stock, 500,000 shares have been designated
Series A preferred stock, which shares are convertible into common stock.
The conversion rate, which is subject to adjustment based on certain equity
issuances, was 7.20 as of March 31, 1997.
In December 1996, the Company repurchased 28,000 shares of Series A
Preferred Stock, representing 201,600 shares of common stock on an
as-converted basis, from State Farm Mutual Automobile Insurance Company
("State Farm") for $35,000. The Company also repurchased 48,400 shares of
the Company's common stock from State Farm for $8,000.
Preferred stock - series B and C
The Company has designated 120,117 and 80,079 shares of convertible
preferred stock as Series B Senior Preferred Stock and Series C Senior
Preferred Stock (collectively, the "Preferred Stock"), respectively. As of
March 31, 1997, the Company had outstanding 11,917 and 7,945 shares of
Series B Senior Preferred Stock and Series C Senior Preferred Stock,
respectively. Since March 1995, the Company has repurchased a total of
163,234 shares of the Preferred Stock, as discussed below. The Preferred
Stock is convertible into common stock of the Company. The conversion
price, which is subject to adjustment, is currently $1.00 per share.
In August 1996, the Company repurchased 80% of the outstanding shares
of its Preferred Stock from GE. In the transaction, the Company paid $2.4
million for 79,445 shares of the Preferred Stock, which had a redemption
price of $13.0 million, including cumulative undeclared dividends in excess
of $5.0 million. GE also granted to Star a three-year option to repurchase
the remaining Preferred Stock at the same per share price that Star paid in
the August 1996 repurchase. GE remains the only holder of the Preferred
Stock.
In April 1995, the Company repurchased and retired the Preferred Stock
held by State Farm. The Company paid State Farm $1.2 million for 46,549
shares of the Preferred Stock, which had a redemption price of nearly $6.2
million, including cumulative undeclared dividends in excess of $1.5
million. In March 1995, the Company repurchased and retired the Preferred
Stock held by General Electric Pension Trust ("GEPT"). The Company paid
GEPT $950,000 for 37,240 shares of the Preferred Stock, which had a
redemption price of more than $4.9 million, including cumulative undeclared
dividends of $1.2 million. Each of these transactions was accounted for as
a reduction of additional paid-in capital in the fiscal year the transaction
occurred.
-18-
<PAGE>
In conjunction with the August 1996 repurchase of the Preferred Stock
from GE, Star and GEMS amended the related preferred stock purchase
agreement and Star's Certificate of Incorporation to eliminate numerous
rights that GE had as the sole remaining holder of the Preferred Stock,
including the rights to elect one third of Star's Board of Directors and,
under certain circumstances, to assume control of the Board.
Effective August 1996, the Preferred Stock accrues dividends at a rate
of 10% per annum. To the extent declared, such dividends would be payable
quarterly in the amount of $50,000 in cash. Unpaid cumulative dividends in
arrears on the Preferred Stock total $125,000, or $.006 per common share, as
of March 31, 1997.
All dividends accrued and accumulated prior to August 1996 were
eliminated with the repurchases of the Preferred Stock. Such dividends
accrued at an aggregate dividend rate of 12% per annum through May 31, 1995,
at 14% through June 1, 1996 and at 16% through August 1996.
Pursuant to the amended preferred stock purchase agreement, the Company
is subject to restrictions on payment of dividends in respect of any capital
stock of the Company other than the Preferred Stock.
Stock option and purchase plans
At March 31, 1997, the Company has three stock-based compensation
plans, which are described below. The Company applies APB Opinion No. 25
and its related interpretations in accounting for its plans. Accordingly,
as all options have been granted at exercise prices equal to or in excess of
the fair market value as of the date of grant, no compensation cost has been
recognized under these plans in the accompanying consolidated financial
statements. Had compensation cost for the Company's three stock-based
compensation plans been determined consistent with FASB Statement No. 123,
the Company's net income and earnings per common share would have been
reported as the pro forma amounts indicated below (in thousands, except per
share data):
</TABLE>
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------
1997 1996
-------------------------------------------------------------------------------
<S> <S> <C> <C>
Net income (loss)................... As reported $2,635 $(3,984)
Pro forma $2,630 $(3,984)
Earnings (loss) per common share.... As reported $ .63 $ (.02)
Pro forma $ .63 $ (.02)
===============================================================================
</TABLE>
The effects of compensation cost as determined under FASB Statement No.
123 on net income in fiscal 1997 and 1996 may not be representative of the
effects on pro forma net income for future periods.
1984 and 1994 stock option plans
The 1984 Stock Option Plan (the "1984 Plan") and the 1994 Stock Option
Plan (the "1994 Plan") provide for the issuance of common stock and
incentive, qualified, and non-qualified stock options to employees and
consultants, subject to certain limitations. Under both plans, the option
prices and terms are determined by the Company's Board of Directors.
Generally, options are issued with terms of up to ten years, often with
vesting restrictions, and the option exercise price is normally equal to
100% of fair market value of the stock at the date of grant.
For fiscal 1997 grants under the 1994 Plan, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: 0.0%
dividend yield; expected volatility of 15%; risk-free interest rate of
6.61%; and expected lives of three years.
-19-
<PAGE>
1989 stock option plan
The 1989 Stock Option Plan for Nonemployee Directors (the "1989 Plan")
provides for the granting of stock options to nonemployee directors of the
Company. The plan provides for the issuance of non-qualified options at
exercise prices equal to 100% of the fair market value of the Company's
common stock at the date of grant, with terms of up to ten years from the
date of grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants under the 1989 Plan in fiscal 1997 and
1996, respectively: 0.0% dividend yield for both years; expected volatility
of 15% for both years; risk-free interest rate of 6.78% and 6.10%; and
expected lives of three and five years.
<TABLE>
The following table summarizes the Company's stock option plans:
<CAPTION>
1984 Plan 1989 Plan 1994 Plan
---------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
- -----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
Outstanding options,
March 31, 1994.......... 3,033,145 $1.00 90,000 $0.89 -- --
Granted................ -- -- 30,000 $1.00 -- --
Cancelled.............. (483,002) $1.07 -- -- -- --
Exercised.............. (2,700) $0.31 -- -- -- --
- -----------------------------------------------------------------------------------------
Outstanding options,
March 31, 1995.......... 2,547,443 $0.99 120,000 $0.92 -- --
Granted................ -- -- 20,000 $1.00 -- --
Cancelled.............. (1,052,630) $0.99 -- -- -- --
Exercised.............. (8,000) $0.59 -- -- -- --
- -----------------------------------------------------------------------------------------
Outstanding options,
March 31, 1996.......... 1,486,813 $0.99 140,000 $0.93 -- --
Granted................ -- -- 20,000 $0.41 754,375 $0.41
Cancelled.............. (1,349,313) $0.99 (30,000) $0.68 (8,000) $0.41
Exercised.............. -- -- -- -- -- --
- -----------------------------------------------------------------------------------------
Outstanding options,
March 31, 1997.......... 137,500 $0.90 130,000 $1.00 746,375 $0.41
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
1984 Plan 1989 Plan 1994 Plan
----------------------------------------
Options exercisable at:
<S> <C> <C> <S>
March 31, 1996............................... 800,162 140,000 --
March 31, 1997............................... 52,866 130,000 330,259
Weighted average fair value at date of grant
of options granted during the year ended:
March 31, 1996............................... -- $.00 --
March 31, 1997............................... -- $.12 $.08
=========================================================================================
</TABLE>
-20-
<PAGE>
The following table summarizes information about the Company's stock
options outstanding at March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
- -----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$0.41-1.88 1,013,875 4.3 $0.55 513,125 $0.60
=========================================================================================
</TABLE>
Other common stock and warrants issuances
In October 1993, the Company issued a warrant to purchase 300,000
shares of common stock at $1.15 per share. The warrant expires in October
1998.
Common stock reserved for issuance
At March 31, 1997, the Company had 3,426,075 shares of common stock
reserved for issuance, consisting of 1,313,875 shares for stock options and
warrants outstanding, and 2,112,200 shares for conversion of preferred stock.
NOTE 6 - Income Taxes
There was no current or deferred income tax expense for the years ended
March 31, 1997, 1996 and 1995.
A reconciliation of the expected amount of income tax expense (benefit)
by applying the statutory Federal income tax rate of 34% to the actual
amount of income tax expense recognized follows (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------
1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Expected expense (benefit).................. $ 896 $(1,354) $ 406
Change in valuation allowance............... (898) 1,353 (406)
Other....................................... 2 1 --
----------------------------------------------------------------------------
Income tax expense.................... $ -- $ -- $ --
============================================================================
</TABLE>
-21-
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
<TABLE>
<CAPTION>
At March 31,
-----------------------
1997 1996
-----------------------------------------------------------------------------
<S> <S> <C> <C>
Deferred tax assets:
Reserves for potentially excess inventory....... $ 1,681 $ 2,915
Other accruals and reserves..................... 130 182
Property and equipment, principally due
to differences in depreciation................ 22 44
Net operating loss carryforwards
- domestic and foreign........................ 21,630 21,331
General business credit carryforwards........... 3,315 3,315
Alternative minimum tax credit carryforwards.... 84 84
-----------------------------------------------------------------------------
Total gross deferred tax assets.............. 26,862 27,871
Less valuation allowance..................... (26,862) (27,871)
-----------------------------------------------------------------------------
Net.......................................... $ -- $ --
=============================================================================
</TABLE>
The net operating loss ("NOL") and general business credit
carryforwards expire in the tax years ending March 31, 1998 through March
31, 2012. However, as a result of the May 1990 issuance of the Preferred
Stock, the utilization of the NOL and general business carryforwards
generated prior to that date is subject to an annual limitation of
approximately $823,000. NOLs generated in periods subsequent to May 1990
are not currently subject to an annual limitation. The valuation allowance
for deferred tax assets decreased by $1,009,000 for the year ended March 31,
1997 and increased by $1,556,000 and $698,000 for the years ended March 31,
1996 and 1995, respectively.
NOTE 7 - Commitments and Contingencies
<TABLE>
Operating leases
<S> <C>
The Company leases its facility and certain Fiscal Amount
equipment under noncancelable operating lease 1998............ $198
agreements expiring through fiscal 2001. Several 1999............ 201
of the leases contain options for renewal periods 2000............ 207
of up to five years. Future minimum rentals under 2001............ 132
these lease agreements are shown at right (in ----------------------
thousands). $738
======================
</TABLE>
Rent expense was $733,000, $559,000 and $856,000 in fiscal 1997, 1996,
and 1995, respectively.
-22-
<PAGE>
NOTE 8 - Settlement of Patent Litigation
In August 1996, the Company settled all claims asserted by Ronald G.
Walters ("Walters") against the Company and certain officers and directors
of the Company in a patent infringement and unjust enrichment lawsuit. In
that suit, Walters had sought over $67 million, with trebling of any damages
awarded. In response to the suit, the Company had filed a counterclaim
against Walters.
Under the terms of the settlement agreement, the Company paid Walters a
one-time payment of $2.9 million for which Walters dismissed the claims he
had brought against the Company, and the Company dismissed the counterclaim
it had asserted against Walters.
The settlement payment is reflected as a reduction of other income on
the fiscal 1997 Consolidated Statement of Operations.
-23-
<PAGE>
Quarterly Financial Summary (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Net Net Income (Loss) Per
Gross Income Common and Common
Revenue Margin (Loss) Equivalent Share
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended March 31, 1997:
First Quarter $ 715 $ 510 $ (591) $(.05)
Second Quarter 217 (42) 5,180 .78
Third Quarter 206 (227) (1,258) (.07)
Fourth Quarter 109 (212) (696) (.04)
- -----------------------------------------------------------------------------------
Total $1,247 $ 29 $ 2,635 $ .63
===================================================================================
Year ended March 31, 1996:
First Quarter $2,576 $1,220 $ (334) $ .22
Second Quarter 505 186 (964) (.07)
Third Quarter 875 203 (1,165) (.08)
Fourth Quarter 326 (41) (1,521) (.09)
- -----------------------------------------------------------------------------------
Total $4,282 $1,568 $(3,984) $(.02)
===================================================================================
</TABLE>
-24-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information set forth under the heading "Election of Directors" in the
Company's definitive Proxy Statement for its Annual Meeting to be held on
August 21, 1997, is incorporated herein by reference. Also refer to the
item entitled "Executive Officers" in Part I of this Report on Form 10-K.
Item 11. Executive Compensation
Information set forth under the heading "Executive Compensation" in the
Company's definitive Proxy Statement for its Annual Meeting to be held on
August 21, 1997 is incorporated herein by reference.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy
Statement for its Annual Meeting to be held on August 21, 1997, is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information set forth under the heading "Election of Directors" in the
Company's definitive Proxy Statement for its Annual Meeting to be held on
August 21, 1997, is incorporated herein by reference.
-25-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Report of Independent Auditors
and Financial Statements PAGE
Report of Independent Auditors 9
Consolidated Statements of Operations for
each of the years in the three-year period
ended March 31, 1997. 10
Consolidated Statements of Financial
Position at March 31, 1997 and 1996. 11
Consolidated Statements of Cash Flows for
each of the years in the three-year
period ended March 31, 1997. 12
Consolidated Statements of Changes in Stock-
holders' Equity for each of the years in the
three-year period ended March 31, 1997. 13
Notes to Consolidated Financial Statements 14
2. Financial Statement Schedule
Schedule VIII - Valuation and Qualifying Accounts. S-1
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
3. The exhibits filed herewith or incorporated by reference are set forth
on the Exhibit Index immediately preceding the exhibits.
(b) Reports on Form 8-K.
None.
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Star Technologies, Inc., certifies that it has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sterling, Commonwealth of Virginia, on the
30th day of June, 1997.
STAR TECHNOLOGIES, INC.
By: /s/ Brenda A. Potosnak
Brenda A. Potosnak
Vice President of Finance and
Administration, Secretary, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on June 30, 1997, by the following persons
in the capacities indicated:
/s/ Robert C. Compton Chairman of the Board of Directors, President
Robert C. Compton and Chief Executive Officer and Director
/s/ Brenda A. Potosnak Vice President of Finance and Administration,
Brenda A. Potosnak Secretary, Treasurer and Chief Financial
Officer
/s/ Alan O. Maxwell Director
Alan O. Maxwell
/s/ Carl E. Ravin Director
Carl E. Ravin
-27-
<PAGE>
<TABLE>
S-1
STAR TECHNOLOGIES, INC.
SCHEDULE VIII - Valuation and Qualifying Accounts
(In thousands)
<CAPTION>
Balance at Charged to Write-offs Balance
Beginning Costs and Net of at End
of Period Expenses Recoveries of Period
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
For the year ended
March 31, 1995:
Allowance for doubtful accounts $ 42 $ 32 $ -- $ 74
Inventory valuation reserve 7,013 1,291 (1,264) 7,040
------ ------ ------- ------
Totals $7,055 $1,323 $(1,264) $7,114
====== ====== ======= ======
For the year ended
March 31, 1996:
Allowance for doubtful accounts $ 74 $ (46) $ (6) $ 22
Inventory valuation reserve 7,040 404 (156) 7,288
------ ------ ------- ------
Totals $7,114 $ 358 $ (162) $7,310
====== ====== ======= ======
For the year ended
March 31, 1997:
Allowance for doubtful accounts $ 22 $ 1 $ (8) $ 15
Inventory valuation reserve 7,288 571 (3,656) 4,203
------ ------ ------- ------
Totals $7,310 $ 572 $(3,664) $4,218
====== ====== ======= ======
</TABLE>
EXHIBIT INDEX
Exhibit
No.
3.1* Restated Certificate of Incorporation of the Company, as
amended, incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1988 (Registration No. 0-13318) filed with the
Commission on June 29, 1988.
3.2* Certificate of Designation, Preferences and Rights of
Series B Senior Preferred Stock and Series C Senior
Preferred Stock ("Certificate of Designation"),
incorporated by reference from the exhibit filing to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1990 (Registration No. 0-13318) filed with
the Commission on June 29, 1990.
3.3* Certificate of Amendment of Restated Certificate of
Incorporation of the Company, dated August 29, 1994,
incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1995
(Registration No. 0-13318) filed with the Commission on
June 29, 1995.
3.4* Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated August 23, 1996,
incorporated by reference from the exhibit filing to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (Registration No. 0-13318) filed
with the Commission on November 14, 1996.
3.5* By-Laws of the Company, as amended and restated on February
24, 1994, and as further amended on August 22, 1996,
incorporated by reference from the exhibit filing to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 (Registration No. 0-13318) filed
with the Commission on November 14, 1996.
4.1* Restated Certificate of Incorporation, as amended (see
Exhibit 3.1).
4.2* Certificate of Amendment of Restated Certificate of
Incorporation (see Exhibit 3.2).
4.3* Certificate of Designation (see Exhibit 3.3).
4.4* Certificate of Amendment of Restated Certificate of
Incorporation (see Exhibit 3.4).
10.1* Lease Agreement between Richard E. Curtis and the Company
dated August 19, 1994, incorporated by reference from the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995 (Registration No. 0-13318) filed with
the Commission on June 29, 1995.
*Incorporated by reference.
-1-
<PAGE>
Exhibit
No.
10.2* Star Technologies, Inc. 1989 Stock Option Plan for
Nonemployee Directors (the "1989 Plan"), incorporated by
reference from the exhibit filing to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1990 (Registration No. 0-13318) filed with the Commission
on June 29, 1990.
10.3* 1989 Plan Stock Option Letter Agreement, incorporated by
reference from the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994 (Registration No.
0-13318) filed with the Commission on June 24, 1994.
10.4* Preferred Stock Purchase Agreement, dated as of May 31,
1990, among the Company, General Electric Capital
Corporation, Trustees of General Electric Pension Trust,
and State Farm Mutual Automobile Insurance Company,
incorporated by reference from the exhibit filing to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1990 (Registration No. 0-13318) filed with
the Commission on June 29, 1990.
10.5* Registration Rights Agreement, dated as of May 31, 1990,
among the Company, General Electric Capital Corporation,
Trustees of General Electric Pension Trust, and State Farm
Mutual Automobile Insurance Company, incorporated by
reference from the exhibit filing to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1990 (Registration No. 0-13318) filed with the Commission
on June 29, 1990.
10.6* Asset Purchase Agreement dated March 2, 1995, between the
Company and AAI Systems Management, Inc., incorporated by
reference from the exhibit filing to the Company's Current
Report on Form 8-K (Registration No. 0-13318) filed with
the Commission on March 3, 1995.
10.7* Stock Purchase Agreement dated March 31, 1995, between the
Company and Trustees of General Electric Pension Trust,
incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1995
(Registration No. 0-13318) filed with the Commission on
June 29, 1995.
10.8* Stock Purchase Agreement dated April 12, 1995, between the
Company and State Farm Mutual Automobile Insurance Company,
incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1995
(Registration No. 0-13318) filed with the Commission on
June 29, 1995.
10.9* Star Technologies, Inc., 1994 Stock Option Plan,
incorporated by reference from the exhibit filing to the
Company's Registration Statement on Form S-8 (Registration
No. 33-84184) filed with the Commission on September 20,
1994.
*Incorporated by reference.
-2-
<PAGE>
Exhibit
No.
10.10* Stock Repurchase Agreement, dated August 16, 1996, between
the Company and General Electric Company, incorporated by
reference from the exhibit filing to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 (Registration No. 0-13318) filed with
the Commission November 14, 1996.
10.11* Amendment No. 1 to Preferred Stock Purchase Agreement,
dated August 16, 1996, between General Electric Company and
the Company, incorporated by reference from the exhibit
filing to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 (Registration No.
0-13318) filed with the Commission November 14, 1996.
10.12* Stock Option Agreement, dated August 16, 1996, between
General Electric Company and the Company, incorporated by
reference from the exhibit filing to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 (Registration No. 0-13318) filed with
the Commission November 14, 1996.
10.13* Addendum No. 1 to Lease Agreement dated August 19, 1994 by
and between Richard E. Curtis, Trustee and the Company,
incorporated by reference from the exhibit filing to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996 (Registration No. 0-13318) filed
with the Commission February 14, 1997.
11 Statement Regarding Computation of Per Share Earnings.
21* Subsidiaries of the Registrant, incorporated by reference
from the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1995 (Registration No. 0-13318)
filed with the Commission on June 29, 1995.
23 Consent of KPMG Peat Marwick LLP.
*Incorporated by reference.
-3-
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS (LOSS)
(In thousands, except per share data)
<CAPTION>
Fiscal year ended March 31,
-------------------------------
Primary Per Share Earnings (Loss) 1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Average shares outstanding during period 19,873 19,879 19,680
======= ======= =======
Net income (loss) $ 2,635 $(3,984) $ 1,193
Undeclared cumulative dividends on
preferred stock (647) (1,342) (2,065)
Excess carrying amount and cumulative
undeclared dividends of Preferred Stock
over consideration 10,580 4,954 3,968
------- ------- -------
Net income (loss) applicable to common shares $12,568 $ (372) $ 3,096
======= ======= =======
Primary earnings (loss) per common and common
equivalent share:
Net income (loss) per common and common
equivalent share $ .63 $ (.02) $ .16
======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS (LOSS) (Cont'd)
(In thousands, except per share data)
<CAPTION>
Fiscal year ended March 31,
------------------------------
Fully Diluted Per Share Earnings 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Average shares outstanding during period 19,873 19,879 19,680
Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 126 338 338
Series B & C preferred stock 1,986 9,931 14,585
------- ------- -------
21,985 30,148 34,603
======= ======= =======
Net income (loss) $ 2,635 $(3,984) $ 1,193
Adjustment for repurchase of Senior
Preferred Stock (522) -- (413)
Excess carrying amount and cumulative
undeclared dividends of Preferred Stock
over consideration 10,580 4,954 3,968
------- ------- -------
Net income applicable to common shares $12,693 $ 970 $ 4,748
======= ======= =======
Fully diluted earnings per common and
common equivalent share:
Net income per common and common
equivalent share $ .58 $ .03 $ .14
======= ======= =======
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Star Technologies, Inc.:
We consent to incorporation by reference in the Registration
Statements (No. 33-42042 and No. 2-97518) on Forms S-8 of
Star Technologies, Inc. of our report dated May 9, 1997,
relating to the consolidated statements of financial position
of Star Technologies, Inc. and subsidiaries as of March 31,
1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of
the years in the three-year period ended March 31, 1997, and
the related consolidated schedule, which report appears in
the March 31, 1997 annual report on Form 10-K of Star
Technologies, Inc.
KPMG PEAT MARWICK LLP
McLean, Virginia
June 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 69
<SECURITIES> 5474
<RECEIVABLES> 50
<ALLOWANCES> 15
<INVENTORY> 85
<CURRENT-ASSETS> 5725
<PP&E> 3369
<DEPRECIATION> 3098
<TOTAL-ASSETS> 6031
<CURRENT-LIABILITIES> 631
<BONDS> 0
0
3
<COMMON> 199
<OTHER-SE> 5198
<TOTAL-LIABILITY-AND-EQUITY> 6031
<SALES> 1247
<TOTAL-REVENUES> 1247
<CGS> 1218
<TOTAL-COSTS> 1218
<OTHER-EXPENSES> 4330
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2635
<INCOME-TAX> 0
<INCOME-CONTINUING> 2635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2635
<EPS-PRIMARY> .63
<EPS-DILUTED> .58
</TABLE>
