SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 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)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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
19,872,884 shares of Common Stock were outstanding as of June 30, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended
June 30,
1997 1996
<S> <C> <C>
Revenue $ 169 $ 715
Cost of revenue 137 205
------ ------
Gross margin 32 510
------ ------
Operating expenses
Research and development 227 375
Selling, general and administrative 573 787
------ ------
Total operating expenses 800 1,162
------ ------
Operating loss (768) (652)
Interest and other income, net 66 61
------ ------
Net loss before provision for income taxes (702) (591)
Provision for income taxes - -
------ ------
Net loss $ (702) $ (591)
====== ======
Net loss $ (702) $ (591)
Preferred stock dividend requirement (50) (348)
------ ------
Net loss applicable to common shares $ (752) $ (939)
====== ======
Earnings (loss) per share:
Per common and common equivalent share $ (.04) $ (.05)
====== ======
Assuming full dilution $ (.04) $ (.05)
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(In thousands, except share data)
<CAPTION>
June 30, March 31,
Assets 1997 1997
Current assets
<S> <C> <C>
Cash $ 43 $ 69
Short-term investments 4,799 5,474
Accounts receivable, net 85 35
Other current assets, net 117 147
------- -------
Total current assets 5,044 5,725
Property and equipment, net 245 271
Other assets 35 35
------- -------
Total assets $ 5,324 $ 6,031
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 152 $ 161
Accrued payroll and related benefits 248 245
Other accrued liabilities 225 225
------- -------
Total current liabilities 625 631
------- -------
Commitments and contingencies - -
Stockholders' equity
Preferred stock; $.01 par value; 1,000,000 shares authorized
Series A convertible; 500,000 shares designated; 13,200 and
17,500 shares issued; 13,200 and 17,500 shares outstanding;
aggregate liquidation preference of $475 and $630 1 1
Series B convertible; 120,117 shares designated; 11,917
shares issued and outstanding; aggregate liquidation
preference of $1,192 1 1
Series C convertible; 80,079 shares designated; 7,945
shares issued and outstanding; aggregate liquidation
preference of $795 1 1
Common stock; $.01 par value; 60,000,000 shares authorized;
19,968,075 and 19,937,115 shares issued; 19,872,884 and
19,841,924 shares outstanding 200 199
Additional paid-in capital 61,011 61,011
Treasury stock, at cost; 95,191 shares (209) (209)
Retained deficit (56,306) (55,604)
------- -------
Total stockholders' equity 4,699 5,400
------- -------
Total liabilities and stockholders' equity $ 5,324 $ 6,031
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Three Months Ended
June 30,
1997 1996
Cash flows from (used for) operating activities
<S> <C> <C>
Net loss $ (702) $ (591)
Adjustments to reconcile net loss to net cash
from (used for) operating activities
Depreciation and amortization 30 54
Increase in accounts receivable (50) (395)
Decrease in other current assets 30 63
Decrease in accounts payable (9) (160)
Increase (decrease) in accrued liabilities 3 (72)
------ ------
Net cash used for operating activities (698) (1,101)
------ ------
Cash flows used for investing activities
Capital expenditures (3) (35)
------ ------
Net cash used for investing activities (3) (35)
------ ------
Cash flows from (used for) financing activities - -
------ ------
Net decrease in cash and equivalents (701) (1,136)
Cash and equivalents, beginning of period 5,543 5,035
------ ------
Cash and equivalents, end of period $4,842 $3,899
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Star Technologies, Inc. ("Star" or the "Company") recently completed a
transition from providing performance-enhancing computing products and
solutions for the medical imaging market to providing imaging solutions for
the document imaging market. In July 1997, the Company, through a
newly-created operating subsidiary, PowerScan, Inc. ("PowerScan"), acquired
document imaging and processing technology and the Company sold its medical
imaging technology as part of the Company's long-term growth strategy to
refocus its business from the medical imaging archival market to the broader
document imaging market. (See Note 4 and Management's Discussion and
Analysis.) With these transactions, Star is becoming a provider of imaging
software solutions, principally high-speed, high-volume document capture and
processing software. The consolidated statements of operations and
statements of financial position presented herein do not reflect either of
these transactions.
The Company anticipates filing, as an amendment to its Current Report on
Form 8-K which is being filed with the Securities and Exchange Commission on
August 14, 1997, pro-forma financial statements that reflect the occurrence
of the above two transactions as soon as practicable but no later than
October 13, 1997. Revenue generated from the acquired technologies during
the 1996 calendar year totaled $4.1 million.
NOTE 1 - Financial Information
The interim consolidated financial statements presented herein are
unaudited. They reflect all adjustments that, in the opinion of management,
are necessary to fairly present the Company's financial position and results
of operations for the interim periods presented. All such adjustments are of
a normal, recurring nature. The results of operations for the three-month
period ended June 30, 1997 are not necessarily indicative of the results to
be expected for the entire fiscal year. (See Note 4.)
The interim consolidated financial information should be read in
conjunction with the Company's Annual Report on Form 10-K, Commission file
number 0-13318, for the fiscal year ended March 31, 1997.
Certain fiscal 1997 amounts have been reclassified for comparative
purposes.
NOTE 2 - Short-Term Investments
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.
NOTE 3 - Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful accounts
of $12,000 and $15,000 at June 30, 1997 and March 31, 1997, respectively.
-4-
<PAGE>
NOTE 4 - Subsequent Events
On July 30, 1997, PowerScan 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. PowerScan will further develop and market the
document capture and processing products acquired from Intrafed.
The consideration for the acquisition was $1.9 million in cash and up to
2.6 million shares of Star common stock. A portion of the stock
consideration will be issued to Intrafed based upon the future performance of
PowerScan. The 1.3 million shares of the Company's 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.
Also on July 30, 1997, the Company sold its Medical Image Management
Systems technology, including the Image Management Server and Film Image Scan
System software, to CompuRAD, Inc. ("CompuRAD"), a publicly-traded company.
The selling price included 100,000 shares of CompuRAD stock, valued at
approximately $575,000, and 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 Company retains the rights to use the
technology in non-medical imaging markets.
-5-
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
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 document imaging
industry.
Corporate Repositioning
Star Technologies, Inc. ("Star" or the "Company") recently completed a
transition from providing performance-enhancing computing products and
solutions for the medical imaging market to providing imaging solutions for
the document imaging market. In July 1997, the Company, through a
newly-created operating subsidiary, PowerScan, Inc. ("PowerScan"), acquired
document imaging and processing technology and the Company sold its medical
imaging technology as part of the Company's long-term growth strategy to
refocus its business from the medical imaging archival market to the broader
document imaging market. (See Note 4 to Consolidated Financial Statements.)
With these transactions, Star is becoming a provider of imaging software
solutions, principally high-speed, high-volume document capture and
processing software. The consolidated statements of operations and
statements of financial position presented herein do not reflect either of
these transactions.
The Company anticipates filing, as an amendment to its Current Report on
Form 8-K which is being filed with the Securities and Exchange Commission on
August 14, 1997, pro-forma financial statements that reflect the occurrence
of the above two transactions as soon as practicable but no later than
October 13, 1997. Revenue generated from the acquired technologies during
the 1996 calendar year totaled $4.1 million.
Results of Operations
Revenue for the first quarter of fiscal 1998 decreased 76% from the same
quarter a year ago. The decrease is primarily attributable to the final
settlement on a claim, under a long-term subcontract under the U.S. Navy's
SH-60 program, payment of which was received and recognized as revenue in the
first quarter of fiscal 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 are reflected in
the first quarter of fiscal 1998. Resultant cost reductions will be
reflected beginning in the second quarter of fiscal 1998.
Research and development ("R&D") expense for the first quarter of fiscal
1998 decreased 39% from the prior year quarter. The decrease is primarily
attributable to reduced staff levels. Due to the nature of the document
imaging business, the Company expects R&D expense as a percentage of revenue
to continue to be a significant operating expense.
-6-
<PAGE>
Selling, general and administrative ("SG&A") expense for the first
quarter of fiscal 1998 decreased 27% from the same quarter a year ago
primarily due to lower legal fees associated with the General Electric
Medical Systems arbitration. The Company expects SG&A expense to increase
over current levels due to the recent technology acquisition. (See Note 4 to
Consolidated Financial Statements.)
During the three-month period ended June 30, 1997 and 1996, the Company
earned $65,000 and $61,000, respectively, of interest income on its
short-term investments.
Liquidity and Capital Resources
The Company had a net cash outflow from operating activities of $-
698,000 for the quarter ended June 30, 1997, primarily as a result of lower
levels of revenue.
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. Although the Company
does not currently need borrowing availability to meet its anticipated
operating requirements, the Company is beginning discussions with several
banks regarding potential credit agreement arrangements. 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 Series B and Series C Senior Preferred Stock (the "Preferred Stock")
currently 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
$175,000 as of June 30, 1997.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings 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.
-7-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
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.
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1997.
-8-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR TECHNOLOGIES, INC.
Dated: August 14, 1997 /s/ Brenda A. Potosnak
Brenda A. Potosnak
Vice President of Finance and
Administration, Secretary, Treasurer,
and Chief Financial Officer
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<PAGE>
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).
10.14* 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 (Registration No. 0-13318) filed with the
Commission on August 14, 1997.
*Incorporated by reference.
-10-
<PAGE>
10.15* 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 (Registration No.
0-13318) filed with the Commission on August 14, 1997.
10.16* 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 (Registration No. 0-13318) filed with the
Commission on August 14, 1997.
11 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
*Incorporated by reference.
-11-
<TABLE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<CAPTION>
Three Months Ended
June 30,
Primary Per Share Earnings 1997 1996
<S> <C> <C>
Average shares outstanding during period 19,857 19,883
====== =======
Net loss $ (702) $ (591)
Undeclared cumulative dividends on
preferred stock (50) (348)
------ -------
Net income (loss) applicable to common shares $ (752) $ (939)
====== =======
Primary earnings (loss) per common and common
equivalent share:
Net loss per common and common equivalent share $ (.04) $ (.05)
====== =======
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS (Cont'd)
(In thousands, except per share data)
<CAPTION>
Three Months Ended
June 30,
<S> <C> <C>
Fully Diluted Per Share Earnings 1997 1996
Average shares outstanding during period 19,857 19,883
Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 95 328
Series B & C preferred stock 1,986 9,931
------ ------
21,938 30,142
====== ======
Net loss applicable to common shares $ (702) (591)
====== ======
Fully diluted earnings (loss) per common and common
equivalent share:
Net loss per common and common equivalent share $ (.03) $ (.02)
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 43
<SECURITIES> 4799
<RECEIVABLES> 97
<ALLOWANCES> 12
<INVENTORY> 79
<CURRENT-ASSETS> 5044
<PP&E> 3372
<DEPRECIATION> 3127
<TOTAL-ASSETS> 5324
<CURRENT-LIABILITIES> 625
<BONDS> 0
0
3
<COMMON> 200
<OTHER-SE> 4496
<TOTAL-LIABILITY-AND-EQUITY> 5324
<SALES> 169
<TOTAL-REVENUES> 169
<CGS> 137
<TOTAL-COSTS> 137
<OTHER-EXPENSES> 800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (702)
<INCOME-TAX> 0
<INCOME-CONTINUING> (702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (702)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
