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 September 30, 1998 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.)
1151-A Seven Locks Road
Potomac, Maryland 20854
(Address of principal executive offices)
(Zip Code)
(301) 315-0240
(Registrant's telephone number, including area code)
515 Shaw Road
Sterling, Virginia 20166
(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
21,560,384 shares of Common Stock were outstanding as of September 30, 1998.
<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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenue
<S> <C> <C> <C> <C>
Products $ 837 $ 160 $ 1,703 $ 205
Services 836 279 2,654 512
------- ------- ------- -------
1,673 439 4,357 717
------- ------- ------- -------
Cost of revenue
Products 302 28 503 191
Services 608 96 1,895 391
------- ------- ------- -------
910 124 2,398 582
------- ------- ------- -------
Gross margin 763 315 1,959 135
------- ------- ------- -------
Operating expenses
Research and development 182 203 589 667
Selling, general and administrative 1,136 794 3,575 1,839
------- ------- ------- -------
Total operating expenses 1,318 997 4,164 2,506
------- ------- ------- -------
Operating loss (555) (682) (2,205) (2,371)
Interest income (expense), net (19) 69 (28) 212
Other income, net 13 489 15 637
------- ------- ------- -------
Net income (loss) before provision for income taxes (561) (124) (2,218) (1,522)
Provision for income taxes - - - -
------- ------- ------- -------
Net loss $ (561) $ (124) $(2,218) $(1,522)
======= ======= ======= =======
Net loss $ (561) $ (124) $(2,218) $(1,522)
Preferred stock dividend requirement (50) (50) (150) (150)
------- ------- ------- -------
Net loss applicable to common shares $ (611) $ (174) $(2,368) $(1,672)
======= ======= ======= =======
Earnings (loss) per share
Basic $ (.03) $ (.01) $ (.11) $ (.08)
Diluted $ (.03) $ (.01) $ (.11) $ (.08)
Weighted average common shares outstanding
Basic 21,559 20,850 21,457 20,247
Diluted 23,640 22,931 23,538 22,328
</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>
Sept. 30, December 31,
Assets 1998 1997
Current assets
<S> <C> <C>
Cash $ 28 $ 95
Short-term investments 302 1,117
Accounts receivable, net 1,091 630
Other current assets, net 349 318
-------- --------
Total current assets 1,770 2,160
Property and equipment, net 745 775
Goodwill and other intangible assets, net of
accumulated amortization of $394 and $135 2,415 2,673
Other assets 54 55
-------- --------
Total assets $ 4,984 $ 5,663
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,684 $ 665
Notes payable and capital lease obligations 807 -
Accrued payroll and related benefits 150 105
Deferred revenue 260 451
Other accrued liabilities 250 367
-------- --------
Total current liabilities 3,151 1,588
Capital lease obligations, net of current portion 22 -
-------- --------
Total liabilities 3,173 1,588
-------- --------
Commitments and contingencies - -
Stockholders' equity
Preferred stock; $.01 par value; 1,000,000 shares authorized
Series A convertible; 500,000 shares designated; 13,200
shares issued and outstanding; aggregate liquidation
preference of $475 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;
21,655,575 and 21,351,575 shares issued; 21,560,384 and
21,256,384 shares outstanding 217 214
Additional paid-in capital 61,447 61,357
Accumulated other comprehensive income (loss) (273) (134)
Treasury stock, at cost; 95,191 shares (209) (209)
Retained deficit (59,374) (57,156)
-------- --------
Total stockholders' equity 1,811 4,075
-------- --------
Total liabilities and stockholders' equity $ 4,984 $ 5,663
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
Cash flows from (used for) operating activities
<S> <C> <C>
Net loss $(2,218) $(1,522)
Adjustments to reconcile net income (loss) to net cash
from (used for) operating activities
Depreciation and amortization 544 184
Gain on sale of MIMS technology - (489)
(Gain) loss on sale of property and equipment (11) 116
Increase in accounts receivable (461) (89)
(Increase) decrease in other current assets (31) 207
Increase in accounts payable 1,019 11
Decrease in deferred revenue (191) (144)
Decrease in accrued liabilities (22) (533)
------- -------
Net cash from (used for) operating activities (1,371) (2,259)
------- -------
Cash flows from (used for) investing activities
Proceeds from sale of property and equipment 94 12
Capital expenditures (275) (40)
Other investing activities - 109
Purchase of Intrafed technology - (2,147)
------- -------
Net cash used for investing activities (181) (2,066)
Cash flows from (used for) financing activities
Proceeds from notes payable 767 -
Proceeds from stock option exercises 42 4
------- -------
Net cash from financing activities 809 4
------- -------
Net decrease in cash and equivalents (743) (4,321)
Cash and equivalents, beginning of period 771 6,330
------- -------
Cash and equivalents, end of period $ 28 $ 2,009
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, Star Technologies, Inc. ("Star" or the "Company") completed
a transition from providing performance-enhancing computing products and
solutions principally for the medical imaging market to providing imaging
solutions for the broader document imaging market. In July 1997, the Company
sold its medical imaging archival technology and, through a newly-created
operating subsidiary, PowerScan, Inc. ("PowerScan"), acquired document
imaging and processing technology as its entry into this broader market.
Additionally, in October 1997, the Company acquired Curran Data Technologies,
Inc. ("CDT"), a provider of data entry imaging services. With these two
acquisitions, Star is a provider of integrated products and services for
commercial and government users involved in data capture, image capture and
document imaging. These two acquisitions are part of the Company's long-term
growth plan to build market presence in the document imaging market through
strategic acquisitions and alliances.
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- and
nine-month periods ended September 30, 1998 are not necessarily indicative of
the results to be expected for the entire fiscal year.
The interim consolidated financial information should be read in
conjunction with the Company's Transition Report on Form 10-K, Commission
file number 0-13318, for the Transition Period from April 1, 1997 to December
31, 1997.
Certain 1997 amounts have been reclassified for comparative purposes.
NOTE 2 - Accounting Policies
Revenue recognition
On January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") which superseded Statement of
Position 91-1, "Software Revenue Recognition." SOP 97-2 focuses on when and
in what amounts revenue should be recognized for licensing, selling, leasing
or otherwise marketing computer software. The adoption of SOP 97-2 did not
have a material impact on the Company's revenue recognition policies.
Revenue from the sale of commercial, off-the-shelf software is recognized
when the following four criteria are met: (1) the sale is in writing, (2)
the software has been shipped, (3) the fee is fixed or determinable and (4)
collectibility is probable. Customized software revenue is recognized when
the software is accepted by the customer.
-4-
<PAGE>
Maintenance revenue, which includes unspecified when-and-if deliverable
software upgrades, user documentation and technical support for software
products, is deferred and recognized on a straight-line basis over the term
of the maintenance agreement, generally one year. Revenue from services
including data entry, integration, installation and system training is
recognized when the services are performed. Amounts received but not earned
are deferred.
Net income (loss) per share
Basic and diluted net income (loss) per share were computed in accordance
with Statement of Financial Accounting Standards No.128, "Earnings Per
Share." The differences between basic weighted average common shares
outstanding and diluted weighted average common shares outstanding are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic weighted average common shares 21,559 20,850 21,457 20,247
Convertible preferred stock 2,081 2,081 2,081 2,081
------ ------- ------ ------
Diluted weighted average common shares 23,640 22,931 23,538 22,328
====== ======= ====== ======
</TABLE>
All outstanding stock options and warrants are anti-dilutive and are
therefore, excluded from the computations of basic and diluted net income
(loss) per share.
NOTE 3 - Cash and Equivalents and Short-Term Investments
Cash and equivalents include cash and short-term investments in
commercial paper. Short-term investments in commercial paper, which are held
to maturity (less than three months from the date of purchase), are carried
at cost which approximates their market value. These investments totaled $0
and $676,000 at September 30, 1998 and December 31, 1997, respectively.
At September 30, 1998 and December 31, 1997, other short-term
investments include 92,800 shares of common stock of Lumisys, Inc.
("Lumisys") acquired from the sale of the Company's medical imaging archival
technology in July 1997. The Company does not actively seek to trade this
investment for purposes of maximizing trading gains and classifies it as
"available for sale." Accordingly, the temporary excess (deficiency) of
market value over (under) the underlying cost is reported as an unrealized
gain (loss) as a separate component of stockholders' equity.
NOTE 4 - Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful accounts
of $13,000 and $22,000 at September 30, 1998 and December 31, 1997,
respectively.
-5-
<PAGE>
NOTE 5 - Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
The new disclosure requirements with respect to comprehensive income (loss)
are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Comprehensive income (loss):
<S> <C> <S> <C> <C> <C> <C>
Net loss, as reported $(561) $(124) $(2,218) $(1,522)
Unrealized gain (loss) on investment (46) 38 (139) 38
----- ----- ------- -------
Total comprehensive income (loss) $(607) $ (86) $(2,357) $(1,484)
===== ===== ======= =======
</TABLE>
NOTE 6 - Notes Payable
In September 1998, the Company entered into a subordinated note
agreement with a Director. The note is secured by certain assets of the
Company, carries interest at 12% per annum, is due in February 1999 and
totalled $125,000 at September 30, 1998. The Director has the option to
convert the note into shares of the Company's common stock if the note goes
into default.
In April 1998, the Company entered into a one-year $750,000 working
capital line of credit with a financial institution. The line of credit is
secured by the Company's accounts receivable, inventory and other assets and
allows borrowings of up to 80% of the eligible accounts receivable balance.
The line of credit carries an interest rate of prime plus 3% as well as a
service fee ranging from .75% to 1.5% of the amount borrowed. At September
30, 1998, the Company had borrowed $284,000 under this line of credit and had
$263,000 available for future borrowings. Additional available credit under
this facility will depend on the Company generating additional revenue.
Also in April 1998, the Company entered into a one-year $300,000 line of
credit with a bank. The line of credit is secured by the Company's
short-term investment in Lumisys common stock, carries interest at prime plus
one percent and allows borrowings of up to 70% of the Lumisys stock's market
value. At September 30, 1998, the Company had borrowed all that was
currently available under this line of credit. Such borrowings totalled
$243,000 at September 30, 1998.
The Company has a secured promissory note with a vendor in the amount of
$115,000 at September 30, 1998. The note bears interest of 9.5% per annum
through September 1998, and 12% thereafter. The Company is currently in
default with respect to its payment obligations under this note. The Company
is working with the creditor to restructure the timing of remaining payments
thereunder (see Note 7).
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<PAGE>
NOTE 7 - Liquidity
The Company's net losses from operations and acquisitions to date have
consumed substantial amounts of cash. Through the nine months ended
September 30, 1998, the Company has used cash from operations of
approximately $1.4 million. The continuing operation of the Company's
business, and the continued development and commercialization of its
technology, products and services, will require the availability of
additional funds for the foreseeable future. The Company's ability to obtain
cash adequate to fund its needs depends generally on the results of its
operations and the availability of financing. Without continued increases in
revenues or obtaining additional financing, the Company may be required to
make additional reductions in operating expenses, which may have a material
adverse effect on the Company. If the Company has insufficient funds for its
needs, the Company may not be able to raise additional funds on favorable
terms, if at all, or may not be able to do so on a timely basis. Failure to
obtain additional funds when needed could materially adversely affect the
Company.
The Company is currently in default with respect to its payment
obligations under a secured promissory note on which payment in the
approximate principal amount of $115,000 remains payable. Such default has
resulted in the creditor having the right to accelerate the balance due under
the note and exercise other rights available under the law, including
foreclosing on the computer equipment serving as collateral for such note.
The Company is working with the creditor to waive any current defaults and to
restructure the timing of remaining payments thereunder. There can be no
assurances that such creditor will agree to waive all existing defaults and
extend the timing of remaining payments due under the note. The existence of
such default may also activate cross-default provisions under the Company's
bank line of credit.
In addition, the Company is delinquent in its payments due certain
vendors to the Company. The Company has extended payment terms with certain
vendors and continues to seek to extend payment terms from additional
vendors. If unsuccessful, such parties may take actions against the Company,
including the termination of their relationship with the Company or the
initiation of collection proceedings.
In view of the Company's additional liquidity requirements, the Company
is also continuing to seek to sell additional equity or convertible debt
securities or pursue debt financing arrangements. To date, the Company has
no commitments, agreements or understandings with respect to additional
financing and there can be no assurance that the Company will be able to
consummate any such transaction or raise adequate funds from such transaction
to meet the Company's cash needs. As a result of the delisting of the
Company's common stock from the Nasdaq SmallCap Market in June 1998,
investors may suffer a loss of liquidity in the shares of such stock and the
Company may have difficulty raising funds in the capital markets. Further,
the sale of additional equity or convertible debt securities could result in
dilution to the Company's stockholders.
-7-
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto and in conjunction
with Management's Discussion and Analysis of Financial Condition and Results
of Operations in the Company's Form 10-K for the Transition Period from April
1, 1997 through December 31, 1997. This Quarterly Report, and in particular
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain forward-looking statements (as defined in Section 21E of
the Securities Exchange Act of 1934, as amended) which reflect management's
current views with respect to certain future events and financial
performance. Actual future results and trends may differ materially
depending upon a variety of factors, including, among others, risk of
technological change and uncertainty of product development, risks associated
with acquisitions, the potential inability to finance future capital needs,
operating losses, competition, probable fluctuations in operating results,
reliance on key personnel, the risk of business interruptions, potential
inability to protect proprietary rights and the risk of defects, as discussed
under the heading "Risk Factors" in the Company's Form 10-K for the
Transition Period from April 1, 1997 through December 31, 1997.
Corporate Repositioning
During 1997, Star Technologies, Inc. ("Star" or the "Company") completed
a transition from providing performance-enhancing computing products and
solutions principally for the medical imaging market to providing imaging
solutions for the broader document imaging market. In July 1997, the Company
sold its medical imaging archival technology, and through a newly-created
operating subsidiary, PowerScan, Inc. ("PowerScan"), acquired document
imaging and processing technology as its entry into this broader market.
Additionally, in October 1997, the Company acquired Curran Data Technologies,
Inc. ("CDT"), a provider of data entry imaging services. With these two
acquisitions, Star is a provider of integrated products and services for
commercial and government users involved in data capture, image capture and
document imaging. These two acquisitions are part of the Company's long-term
growth plan to build market presence in the document imaging market through
strategic acquisitions and alliances.
Results of Operations
Results of operations for the three and nine months ended September 30,
1998 are not directly comparable to the results of operations for the same
prior-year period due to the repositioning of the Company's line of business
from the medical imaging market to the document imaging market.
Revenue
Total revenue for the three months ended September 30, 1998 increased to
$1,673,000, from $439,000 for the same period a year ago. Total revenue for
the nine months ended September 30, 1998 increased to $4,357,000, from
$717,000 for the same period a year ago.
-8-
<PAGE>
Product revenue was $837,000 and $160,000 for the three months ended
September 30, 1998 and 1997, respectively, representing 50% and 36% of total
revenue for such periods. Product revenue was $1,703,000 and $205,000 for
the nine months ended September 30, 1998 and 1997, respectively, representing
39% and 29% of total revenue for such periods. Product revenue consists of
revenue from the sale of PowerScan and StageWorks software as well as
computer hardware and scanning equipment.
Service revenue was $836,000 and $279,000 for the three months ended
September 30, 1998 and 1997, respectively, representing 50% and 64% of total
revenue for such periods. Service revenue was $2,654,000 and $512,000 for
the nine months ended September 30, 1998 and 1997, respectively, representing
61% and 71% of total revenue for such periods. Service revenue consists of
revenue from data entry and imaging services, maintenance, integration,
installation, and systems training provided to the Company's customers.
In the first nine months of 1998, the Company broadened its distribution
strategy for its imaging software by expanding its presence within the
channels and building strategic relationships with leading developers of
workflow and document processing products. In this regard, the Company's
PowerScan subsidiary continued to add to its growing list of Value Added
Resellers ("VAR"), distributors and integrators that market the PowerScan and
StageWorks software. In January 1998, the Company entered into a software
purchase agreement with BancTec, Inc. for BancTec to purchase PowerScan and
StageWorks software products and integrate them into a new microfilm-based
digital capture product. BancTec has advised the Company that delivery under
this agreement is now expected to commence in the first quarter of 1999.
There can be no assurance that these arrangements or agreements will result
in substantial sales.
Cost of Revenue
Cost of product revenue was $302,000 and $28,000 for the three months
ended September 30, 1998 and 1997, respectively representing 36% and 18% of
total product revenue in the respective periods. Cost of product revenue was
$503,000 and $191,000 for the nine months ended September 30, 1998 and 1997,
respectively, representing 30% and 93% of total product revenue in the
respective periods. Cost of product revenue primarily includes costs
associated with the purchase of hardware products and scanning equipment for
resale. The cost of product revenue as a percentage of product revenue
varies from period to period depending on the ratio of software revenue,
which has a significantly lower cost than hardware revenue.
Cost of service revenue was $608,000 and $96,000 for the three months
ended September 30, 1998 and 1997, respectively, representing 73% and 34% of
total service revenue in the respective periods. Cost of service revenue was
$1,895,000 and $391,000 for the nine months ended September 30, 1998 and
1997, respectively, representing 71% and 76% of total service revenue in the
respective periods. The increase in the dollar amount of cost of service
revenue is primarily attributable to an increase in compensation and related
benefits, non-employee labor costs and third party maintenance contracts.
-9-
<PAGE>
Research and Development
Research and development ("R&D") expense consists primarily of:
compensation and related benefits; the use of independent contractors for
development projects; and an allocated portion of general overhead costs,
including occupancy. At September 30, 1998, the research and development
staff consisted of 10 employees and contractors. The majority of product R&D
expense for the current quarter and nine months relates to on-going product
enhancements. R&D expense was $182,000 and $203,000 for the three-month
period ended September 30, 1998 and 1997, respectively, representing 11% and
46% of total revenue in the respective periods. R&D expense was $589,000 and
$667,000 for the nine-month period ended September 30, 1998 and 1997,
respectively, representing 14% and 93% of total revenue in the respective
periods. The decrease in the dollar amount of R&D expense for the three- and
nine-month periods ended September 30, 1998 compared to the same period of
the prior year is primarily attributable to the Company's sale in July 1997
of its medical imaging technology, offset in part by R&D expense associated
with the Company's document imaging software, acquired in July 1997. The
decrease as a percentage of total revenue is due to the Company's corporate
repositioning and the resultant increased revenue. The Company believes that
R&D expenditures, including compensation of technical personnel, are
essential to maintaining its competitive position and expects these costs to
increase and continue to constitute a significant percentage of revenue.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense consists primarily
of: compensation and related benefits and reimbursable travel and living
expenses related to the Company's sales, marketing and administrative
personnel; advertising and marketing expenses, including trade shows and
similar type sales and marketing expenses; and general corporate expenses,
including occupancy costs. SG&A expense for the three months ended September
30, 1998 was $1,136,000, compared to $794,000 for the same period a year ago.
SG&A expense for the nine months ended September 30, 1998 was $3.6 million,
compared to $1.8 million for the same period a year ago. The increase in the
dollar amount of SG&A expense is primarily due to the additional SG&A expense
associated with the Company's new PowerScan and CDT subsidiaries, offset in
part by the elimination of certain costs associated with the Company's former
medical imaging business.
Interest and Other Income
During the three and nine months ended September 30, 1998, the Company
incurred $19,000 and $28,000, respectively, of net interest expense. During
the three and nine months ended September 30, 1997, the Company earned
$69,000 and $212,000, respectively, of net interest income.
Other income for the three and nine months ended September 30, 1998 was
$13,000 and $15,000, respectively. For the three and nine months ended
September 30, 1997, other income totalled $489,000 and $637,000 and included
the gain on the sale of the Company's medical imaging archival technology in
July 1997.
-10-
<PAGE>
Net Loss
The net loss for the three months ended September 30, 1998 was $561,000
($.03 per share) compared with a net loss of $124,000 ($.01 per share) for
the same period of the prior year. The net loss for the nine months ended
September 30, 1998 was $2.2 million ($.11 per share) compared with a net loss
of $1.5 million ($.08 per share) for the same period of the prior year. The
net loss is due primarily to the corporate repositioning of the Company, and
the associated integration of the document imaging operations acquired as a
result of the two acquisitions discussed above. In spite of the net loss,
management continues to believe that the document imaging market is a
significant market. Management believes it has made investments in the
talent and technology necessary to establish the Company in this marketplace.
However, there can be no assurance that the Company will be able to achieve
consistent profitability on a quarterly or annual basis or that it will be
able to sustain or increase its revenue growth in future periods. Based upon
the expenses associated with current and planned staffing levels,
profitability is dependent upon increasing revenues.
Liquidity and Capital Resources
At September 30, 1998, the Company had $28,000 of cash and equivalents
and $263,000 borrowing availability under its credit facilities discussed
below. The Company had a net cash outflow from operating activities of $1.4
million for the nine months ended September 30, 1998.
In September 1998, the Company entered into a subordinated note
agreement with a Director. The note is secured by certain assets of the
Company, carries interest at 12% per annum, is due in February 1999 and
totalled $125,000 at September 30, 1998. The Director has the option to
convert the note into shares of the Company's common stock if the note goes
into default.
In April 1998, the Company entered into a one-year $750,000 working
capital line of credit with a financial institution. The line of credit is
secured by the Company's accounts receivable, inventory and other assets and
allows borrowings of up to 80% of the eligible accounts receivable balance.
The line of credit carries an interest rate of prime plus 3% as well as a
service fee ranging from .75% to 1.5% of the amount borrowed. At September
30, 1998, the Company had borrowed $284,000 under this line of credit and had
$263,000 available for future borrowings. Additional available credit under
this facility will depend on the Company generating additional revenue.
Also in April 1998, the Company entered into a one-year $300,000 line of
credit with a bank. The line of credit is secured by the Company's
short-term investment in Lumisys common stock, carries interest at prime plus
one percent and allows borrowings of up to 70% of the Lumisys stock's market
value. At September 30, 1998, the Company had borrowed all that was
currently available under this line of credit. Such borrowings totalled
$243,000 at September 30, 1998.
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<PAGE>
The Company has a secured promissory note with a vendor in the amount of
$115,000 at September 30, 1998. The note bears interest of 9.5% per annum
through September 1998, and 12% thereafter. The Company is currently in
default with respect to its payment obligations under this note. Such
default has resulted in the creditor having the right to accelerate the
balance due under the note and exercise other rights available under the law,
including foreclosing on the computer equipment serving as collateral for
such note. The Company is working with the creditor to waive any current
defaults and to restructure the timing of remaining payments thereunder.
There can be no assurances that such creditor will agree to waive all
existing defaults and extend the timing of remaining payments due under the
note. The existence of such default may also activate cross-default
provisions under the Company's working capital line of credit and its bank
line of credit.
In addition, the Company is delinquent in its payments due certain
vendors to the Company. The Company has extended payment terms with certain
vendors and continues to seek to extend payment terms from additional
vendors. If unsuccessful, such parties may take actions against the Company,
including the termination of their relationship with the Company or the
initiation of collection proceedings.
The Company's net losses from operations and acquisitions to date have
consumed substantial amounts of cash. The continuing operation of the
Company's business, and the continued development and commercialization of
its technology, products and services, will require the availability of
additional funds for the foreseeable future. The Company's ability to obtain
cash adequate to fund its needs depends generally on the results of its
operations and the availability of financing. Without continued increases in
revenues or obtaining additional financing, the Company may be required to
make additional reductions in operating expenses, which may have a material
adverse effect on the Company. If the Company has insufficient funds for its
needs, the Company may not be able to raise additional funds on favorable
terms, if at all, or may not be able to do so on a timely basis. Failure to
obtain additional funds when needed could materially adversely affect the
Company.
In view of the Company's additional liquidity requirements, the Company
is also continuing to seek to sell additional equity or convertible debt
securities or pursue debt financing arrangements. To date, the Company has
no commitments, agreements or understandings with respect to additional
financing and there can be no assurance that the Company will be able to
consummate any such transaction or raise adequate funds from such transaction
to meet the Company's cash needs. As a result of the delisting of the
Company's common stock from the Nasdaq SmallCap Market in June 1998,
investors may suffer a loss of liquidity in the shares of such stock and the
Company may have difficulty raising funds in the capital markets. Further,
the sale of additional equity or convertible debt securities could result in
dilution to the Company's stockholders.
The Series B and Series C Senior Preferred Stock (the "Preferred Stock")
currently accrue 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 Preferred Stock total
$425,000 as of September 30, 1998.
-12-
<PAGE>
Year 2000 Disclosure
The Company's software products are Year 2000 compliant as long as the
operating system on which they are used is Year 2000 compliant. The Company
has made reasonable effort to ensure that the third-party software sold with
its products is Year 2000 compliant. Based upon its efforts, the Company is
confident that its use of third-party software will have no effect on its
software products' ability to meet Year 2000 requirements.
With respect to its internal computer systems, the Company's Year 2000
corrective actions include reprogramming impacted software when appropriate
and feasible, obtaining vendor-provided software upgrades when available and
completely replacing impacted systems when necessary. The Company expects to
implement successfully the systems and programming changes necessary to
address Year 2000 issues with respect to its internal systems and does not
believe that the cost of such action will have a material adverse effect on
its financial condition or results of operations. Although the Company is
not aware of any material operational issue or costs associated with
preparing its internal systems for the Year 2000, the failure of the Company
or its distributors, resellers, suppliers, manufacturers and customers to
complete the conversions or upgrades necessary to fully address the Year 2000
issues in a timely manner could have a material adverse effect on the
Company's business, results of operations, cash flows and financial condition.
Effect of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("FAS No. 131"), "Disclosure about
Segments of an Enterprise and Related Information". FAS No. 131 requires the
Company to present certain information about operating segments and related
information, including geographic and major customer data, in its annual
financial statements and in condensed financial statements for interim
periods. The Company is required to adopt the provisions of this Statement
during the fourth quarter of fiscal year 1998. The effect of adoption of
this statement will be limited to the form and content of the Company's
disclosures and will not impact the Company's results of operations, cash
flow or financial position.
-13-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to litigation arising in the
normal course of its business. Such claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources.
Management believes that no currently pending or threatened actions will have
a material and adverse effect on the financial condition or results of
operations of the Company.
-14-
<PAGE>
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.
On August 17, 1998, the Company filed with the Commission a Current
Report on Form 8-K, dated August 17, 1998, regarding the delisting
of the Company's common stock from the Nasdaq SmallCap Market.
-15-
<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: November 16, 1998 /s/ Brenda A. Potosnak
Brenda A. Potosnak
Vice President of Finance and
Administration, Secretary, Treasurer
and Chief Financial Officer
-16-
<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.
11 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
*Incorporated by reference.
-17-
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Basic Per Share Earnings (Loss) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Average shares outstanding during period 21,559 20,850 21,457 20,247
======= ======= ======= =======
Net loss $ (561) $ (124) $(2,218) $(1,522)
Undeclared cumulative dividends on Series B
and Series C Senior Preferred Stock (50) ( 50) (150) (150)
------- ------- ------- -------
Net loss applicable to common shares $ (611) $ (174) $(2,368) $(1,672)
======= ======= ======= =======
Basic loss per common share $ (.03) $ (.01) $ (.11) $ (.08)
======= ======= ======= =======
</TABLE>
-18-
<PAGE>
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS (Cont'd)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Diluted Per Share Earnings (Loss) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Average shares outstanding during period 21,559 20,850 21,457 20,247
Employee stock options assumed exercised - - 206 -
Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 95 95 95 95
Series B & C preferred stock 1,986 1,986 1,986 1,986
------- ------- ------- -------
23,640 22,931 23,744 22,328
======= ======= ======= =======
Net loss applicable to common shares $ (561) $ (124) $(2,218) $(1,522)
======= ======= ======= =======
Diluted loss per common share $ (.02) $ (.01) $ (.09) $ (.07)
======= ======= ======= =======
</TABLE>
-19-
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 28
<SECURITIES> 302
<RECEIVABLES> 1,104
<ALLOWANCES> 13
<INVENTORY> 49
<CURRENT-ASSETS> 1,770
<PP&E> 1,121
<DEPRECIATION> 376
<TOTAL-ASSETS> 4,984
<CURRENT-LIABILITIES> 3,151
<BONDS> 0
0
3
<COMMON> 217
<OTHER-SE> 1,591
<TOTAL-LIABILITY-AND-EQUITY> 4,984
<SALES> 4,357
<TOTAL-REVENUES> 4,357
<CGS> 2,398
<TOTAL-COSTS> 2,398
<OTHER-EXPENSES> 4,164
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (2,218)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,218)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,218)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
