UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period From Commission File Number 0-13318
April 1, 1997 to December 31, 1997
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.
Yes X No
The aggregate market value of voting stock held by non-affiliates of
the registrant as of March 24, 1998 was $26,028,093 based on the closing
sales price as reported by the Nasdaq National Market. 21,356,384 shares of
Common Stock were outstanding as of March 24, 1998.
<PAGE>
Document incorporated by reference:
1. Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting to be held May 21, 1998, are incorporated by reference into
Part III of this Report on Form 10-K.
PART I
This Report on Form 10-K for the nine months ended December 31, 1997
contains forward-looking statements (as defined in Section 21E of the
Securities Exchange Act of 1934, as amended) including statements regarding
the ability of the Company to successfully complete strategic mergers and
acquisitions, the ability of the Company to profitably manage or successfully
integrate such acquired companies into the Company, anticipated product
introduction dates and other statements contained herein 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,
those discussed below under "Item 1. Business--Risk Factors".
Item 1. Business
GENERAL
Corporate Repositioning
During the nine-month period ended December 31, 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 from Intrafed, Inc., 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. (See Notes 2 and 3
to the consolidated financial statements.)
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. The Company continues its search to identify
additional acquisition opportunities in this market. With these two
acquisitions, Star is now a provider of integrated products and services for
government and commercial users involved in data capture, image capture and
document imaging.
PowerScan, Inc.
On July 30, 1997, PowerScan, Inc., a newly-created, wholly-owned
subsidiary of the Company, acquired certain assets and software technology
for high-speed, high-volume document capture and processing from Intrafed,
Inc. The technology purchased includes PowerScan(R) and StageWorks(R),
document capture and image processing software.
PowerScan(R) is a leading software for high-speed document capture.
This easy-to-use, off-the-shelf document imaging software drives and controls
image scanners with a single, common user interface. This gives PowerScan
the flexibility to operate with scanners produced by leading manufacturers -
from Bell & Howell, BancTec, Fuji, Fujitsu, Kodak, Panasonic, Ricoh and
others - at the rated speed of the scanner. PowerScan runs on Windows and
UNIX platforms. Its scanning and viewing features provide quality,
high-speed images and a view into the scanning process. PowerScan provides
access to most scanner features, and lets the user index documents and
perform visual quality checks during scanning.
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StageWorks is a post-scan, image processing system that provides
advanced image processing functions, called stages, in a single system. Some
of these stages include quality control, image enhancement, optical character
recognition, indexing and formatting. The StageWorks system is scalable from
a single-user system to a multi-user, networked system as the customer's
needs expand, while maintaining the same user interface. The StageWorks
family of products includes Desktop, Office, Production and Industrial.
Desktop and Office are single user systems. Desktop is an entry-level
solution for low-end volume applications. Office allows the operator to add
specialized functions, such as Bates numbering or Bar Code reading.
Production and Industrial are networked systems that automatically transfer
image batches from stage-to-stage (StageFlow(TM)). Production can process
one image batch at a time, through a user specified StageFlow, while
Industrial can process multiple image batches through many StageFlows
simultaneously. StageWorks also operates on Windows and UNIX platforms.
Curran Data Technologies, Inc. ("CDT")
In October 1997, the Company acquired CDT, a data entry and document
imaging services company located in Indianapolis, Indiana. CDT, founded in
1988, provides a wide range of domestic and offshore data entry services.
CDT's comprehensive services include: data entry, image assisted data entry,
forms processing and reject repair, automated data entry via Optical
Character Recognition ("OCR")/Intelligent Character Recognition ("ICR"),
document imaging, EDI telecommunications, scanning and archival storage and
retrieval. Organizations in the private and public sectors use CDT for a
broad range of cross-industry applications, including medical and insurance
claims processing, state tax processing, inventory control systems, order
processing, loan and mortgage applications, and personnel records, among
other applications.
History
Star has historically been a supplier of performance-enhancing
computing products and solutions for the image and signal processing
marketplace, principally for medical imaging. The Company was in the
development stage from its formation in August 1981 until its first product,
an array processor, was shipped in July 1983. In 1984, Star contracted with
General Electric Medical Systems ("GEMS") to develop and sell array
processors to GEMS under a multi-year original equipment manufacturer ("OEM")
agreement.
In April 1988, the Company acquired the Graphicon(TM) Products
Division from General Electric. This division developed state-of-the-art
image generation, simulation and training systems. In March 1995, the
Company sold this division to the prime contractor under the United States
Navy's SH-60 helicopter contract.
In fiscal 1992, the Company entered into a joint development agreement
with GEMS to develop the next generation of GEMS' medical imaging product.
From inception of the original 1984 contract through May 1995, sales to GEMS
represented a substantial share of Star's business. 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 to continue to
obtain its requirements from the Company beyond those volumes ordered, and
filed a demand for arbitration, in accordance with the terms of the
development agreement. The arbitration panel awarded Star $9.1 million in
March 1996. GEMS paid Star $9.4 million, which included interest, in August
1996.
In fiscal 1994, the Company began research and development work on new
products for the medical image and information management market. In July
1997, the Company sold this technology to CompuRAD, Inc., now Lumisys,
Incorporated.
As discussed above, in 1997, the Company refocused its business to the
document imaging market with the purchase from Intrafed, Inc., of high-speed,
high-volume document capture and image processing technology and the
acquisition of CDT.
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CUSTOMERS
The Company has more than 500 installations, in the private and public
sectors, for its PowerScan and StageWorks software which perform a broad
range of cross-industry applications including claims processing, litigation
support, intelligence analysis and records management. The Company's
software solutions are used worldwide by insurance companies, large
manufacturers, the federal government, international governments and service
bureaus. The Company's data entry services provide processing for medical
and insurance claims, state taxes, inventory control systems, order
processing, loan and mortgage applications, and personnel records, among
other applications.
No single customer accounted for more than 10% of the Company's
consolidated revenues for the nine-month period ended December 31, 1997.
SALES, MARKETING AND DISTRIBUTION
The Company markets and distributes its products and services through
independent distributors, value-added resellers ("VARs"), integrators, OEMs
and its own direct sales force. Sales teams are organized by vertical
markets and applications, as well as geographically. The Company has
established relationships with OEMs who offer the Company's software products
with their scanners using their own direct and channel distribution sales
forces. Two of the OEMs with which the Company has entered into purchase
agreements are Fuji Photo Film U.S.A. and BancTec, Inc. The Company has
targeted additional OEMs with which it will attempt to establish similar
relationships over the next fiscal year. In addition, the Company intends to
strengthen its distribution channel by increasing the number of VARs,
distributors and integrators who will integrate the Company's products into
their end users applications.
To support its sales force, the Company is expanding its marketing
programs, which include public relations, advertising, seminars, tradeshows,
training, and education conferences. The Company expects sales and marketing
expenses will continue to increase in the future as the Company expands its
marketing programs and sales coverage of key markets.
PRODUCT MAINTENANCE CUSTOMER SERVICE
The Company believes that responsive technical support of its products
and customer service are essential customer requirements. The Company has an
internal customer service department that handles installation, maintenance
and service requirements. The Company provides product maintenance and
support on a contractual basis through both telephone and on-site support.
The majority of inquiries are handled by telephone, with visits to the
customer's facilities as needed. Customers with software maintenance
coverage receive software releases from the Company. In addition, the
Company provides its resellers with product support and comprehensive
training programs.
To the extent that the installed base of its products grows, the
Company anticipates that the customer service function will become a more
significant source of recurring revenue. Costs incurred by the Company to
supply maintenance and support services are charged to cost of revenues. The
Company currently provides a warranty of 90 days on its software. The
Company has not experienced any significant maintenance problems or unusual
warranty expenses to date.
The Company continues to provide maintenance and support on its older
medical imaging products. The Company expects this service revenue, which is
not material to the Company's ongoing business, to continue to decrease over
the next few years.
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Maintenance and customer service revenue as a percentage of total
revenue was approximately 44% for the nine months ended December 31, 1997,
45% in fiscal 1997, and 19% in fiscal 1996. The higher percentages for the
nine months ended December 31, 1997 and in fiscal 1997 are due to lower total
revenue in those periods. However, the Company expects such service revenue
as a percentage of total revenue to decrease to the extent total revenue
dollars increase. Service revenue in fiscal 1997 and 1996 principally
relates to the Company's older medical imaging products.
BACKLOG
The Company typically ships its product within a short period of time
after acceptance of orders, which is common in the software industry. The
Company's service operation typically operates under contracts for a
specified time period or that are project oriented. Accordingly, the Company
does not consider the level of backlog to be a significant or important
indicator of future revenue or earnings.
RESEARCH AND DEVELOPMENT
The Company is committed to technological development to enhance its
existing software products and services, to maintain the competitiveness of
its products and services, and to develop or acquire software products that
satisfactorily meet user needs and that are synergistic with the Company's
current products and services. The Company reviews customer feedback on its
existing products and works with customers and potential customers to
anticipate future functionality requirements, as part of its product
development efforts. The Company anticipates the introduction of its
PowerScan software Windows NT version in April 1998, however, there can be no
assurance that such product will actually be introduced at such time. (See
Risk Factors--Risk of Technological Change and Uncertainty of Product
Development.)
Research and development expenditures totaled $601,000 for the nine
months ended December 31, 1997, and $1.1 million and $2.2 million in fiscal
1997 and 1996, respectively. The Company anticipates that it will continue
to make substantial investments in its research and development activities.
COMPETITION
The Company's products and services compete in the document imaging
market, which is highly competitive and characterized by rapid technological
advances. Frequent new product introductions and enhancements, increased
capabilities and applications, and improvements in the relative
price/performance of available products and services are common in the
industry. Other important competitive factors include product and service
quality, reliability, and ease of use, marketing and distribution capability,
and post-sale support.
The Company has a number of current and potential competitors for its
products and services, many of which have significantly greater financial,
technical, marketing and other resources than does the Company. The Company
expects additional competition from other established and emerging companies
if the document imaging market continues to develop and expand. The
Company's principle competitors for its software products include Kofax Image
Products, Inc. and Cornerstone Imaging, Inc. A significant source of
competition for its service revenue is the in-house document handling
capability of the Company's targeted client base, as well as numerous
outsourcing and data entry companies. The Company expects that competition
will increase as a result of, among other things, software industry
consolidations. Increased competition could result in additional price
reductions, reduced margins and loss of market share, which could
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materially adversely affect the Company. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition.
PROPRIETARY RIGHTS
The Company considers many of the principal elements of the design of
its software to be valuable trade secrets and confidential proprietary
information. The Company relies on a combination of trade secret, copyright
and trademark laws, nondisclosure and other contractual agreements and
technical measures to protect its proprietary rights in its products. In
certain limited circumstances, the Company has obtained, and plans to
continue to seek, patents on certain of its proprietary products and
components. There can be no assurance that the steps taken by the Company
will prevent misappropriation of its technology, and such protections may not
preclude competitors from developing products with features similar to the
Company's products. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. The
Company believes that its products and trademarks do not infringe upon the
proprietary rights of third parties. There can be no assurance, however,
that third parties will not assert infringement claims against the Company in
the future or that such claims will not require the Company to enter into
royalty arrangements or result in costly litigation. Because the document
imaging industry is characterized by rapid technological change, the Company
believes that factors such as the technological expertise and creative skills
of its personnel, new product developments, frequent product and service
enhancements, name recognition and reliable product maintenance are more
important to establishing and maintaining a technology leadership position
than various legal protections of its technology.
PERSONNEL
At March 13, 1998, the Company had 183 full- and part-time employees
and contractors, of which 11 were engaged in engineering and research and
development; 11 in marketing and sales; 145 in service and operations; and 16
in general management, finance and administration.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
Name Age Position
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Robert C. Compton 50 Chairman of the Board, President
and Chief Executive Officer
Carol L. Curran 53 Executive Vice President,
President, CDT, Inc.
Brenda A. Potosnak 35 Vice President of Finance & Administration,
Chief Financial Officer, Treasurer &
Secretary
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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 management,
financial and corporate auditing positions at GE.
Carol L. Curran was appointed Executive Vice President for Star
Technologies and President of Curran Data Technologies, Inc. in October 1997.
She founded Curran Data Technologies, Inc. in 1988 and served as its Chief
Executive Officer until the sale of CDT to Star in October 1997. Previously,
she was a Division Manager for Anacomp from 1980 to 1988. She has been in
the document processing business for more than 25 years.
Brenda A. Potosnak was appointed Vice President and Chief Financial
Officer in August 1996. She has served as Treasurer and Secretary since
March 1995. Previously, she served as Controller and Principal Accounting
Officer. Prior to joining the Company in November 1992, 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.
RISK FACTORS
This Report on Form 10-K for the nine months ended December 31, 1997
contains 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, those discussed
below.
Risk of Technological Change and Uncertainty of Product Development
The document imaging industry is characterized by rapid technological
change. The introduction of products and services embodying new technology
and the emergence of new industry standards can create downward price
pressure and render existing products and services obsolete and unmarketable.
The Company's future success will depend on its ability to address the
increasingly sophisticated needs of its customers by enhancing its current
products and services and by developing and introducing on a timely basis new
products and services that keep pace with technological developments and
emerging industry standards. There can be no assurance that the Company will
be successful in developing and marketing product and service enhancements or
new products and services that respond to technological change or evolving
industry standards, that the Company will not experience difficulties or
expenses that could delay or prevent the successful development, introduction
and sale of these products and services, or that any new products, product
enhancements or services will achieve market acceptance. If the Company is
unable, for technological or any other reason, to develop, introduce, and
sell its products and services in a timely manner, the Company's business,
operating results, and financial condition could be materially and adversely
affected.
Risks Associated With Acquisitions
The Company's long-term growth plan includes building market presence in
the document imaging market through strategic alliances and the acquisition
of additional document imaging technologies or businesses that will
complement its existing businesses. There can be no assurance that the
Company will be able to identify or reach mutually agreeable terms with
acquisition candidates and their owners, or that the Company will be able to
manage profitably its previously-acquired businesses or any additional
businesses or to integrate successfully such businesses into the Company
without substantial costs, delays or other problems. The Company's recent
acquisitions involve, and any future acquisitions will involve, a number of
risks commonly encountered in such transactions,
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including: difficulties associated with assimilating the personnel and
operations of an acquired business; the Company's potential inability to
achieve expected financial results or strategic goals for the acquired
product line or business; the potential disruption of the Company's ongoing
business; the diversion of significant management and other Company
resources; adverse short-term effects on the Company's operating results;
increased dependence on the retention, hiring and training of key personnel;
and risks associated with unanticipated problems or legal liabilities. Some
or all of these risks could have a material and adverse effect on the
Company's business, operating results and financial condition.
Potential Inability to Finance Future Capital Needs; Operating Losses
The Company's operations and acquisitions to date have consumed
substantial amounts of cash. The Company incurred operating losses of $2.2
million, $4.3 million and $4.5 million for the nine months ended December 31,
1997 and for the fiscal years ended March 31, 1997 and 1996, respectively.
The Company spent $2.4 million for the two acquisitions in the nine months
ended December 31, 1997. 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. The Company currently does not have a line of
credit or other credit facility in place, although the Company is in
discussions with several financial institutions regarding potential credit
arrangements, including property and equipment financing, asset backed lines
of credit and factoring arrangements. If the Company is unable to secure
acceptable credit arrangements, if the cash flow from operations is
insufficient, or if the Company makes acquisitions requiring significant cash
outlays, the Company likely would be required to raise additional funds from
debt or equity placements or reduce discretionary operating and captial
expenditures. There can be no assurance that the Company would be able to
raise additional funds through the issuance of equity or debt securities as a
result of factors within and outside the Company's control, including, among
others: the effect on the price of the Company's common stock of sales or
anticipated sales of the Company's capital stock by the Company or holders
thereof; material announcements by the Company, significant customers or
competitors; changes in economic or other conditions affecting the Company's
market segments or changes in general economic conditions; and broad
fluctuations in the securities markets. 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 and adversely
affect the Company.
Competition
The Company's products and services compete in the document imaging
market, which is highly competitive and characterized by rapid technological
advances. Frequent new product introductions and enhancements, increased
capabilities and applications, and improvements in the relative
price/performance of available products and services are common in the
industry. Other important competitive factors include product and services
quality, reliability, marketing and distribution capability, and post-sale
support.
The Company has a number of current and potential competitors, many of
which have significantly greater financial, technical, marketing and other
resources than does the Company. The Company expects additional competition
from other established and emerging companies if the document imaging market
continues to develop and expand. The
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Company's principal competitors for its software products include Kofax Image
Products, Inc. and Cornerstone Imaging, Inc. A significant source of
competition for its service revenue is the in-house document handling
capability of the Company's targeted client base, as well as numerous
outsourcing and data entry companies. The Company expects that competition
will increase as a result of, among other things, software industry
consolidations. Increased competition could result in additional price
reductions, reduced margins and loss of market share, which could materially
adversely affect the Company. There can be no assurance that the Company
will be able to compete successfully against current and future competitors
or that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results and financial condition.
Document Imaging Market
Substantially all of the Company's revenues in the foreseeable future
will be attributable to sales of document imaging products and services. The
document imaging market is a rapidly evolving market, and it may not continue
to grow at all or at historical rates. If the document imaging market fails
to grow or grows more slowly than the Company currently anticipates, the
Company's business, operating results and financial condition could be
materially and adversely affected.
Probable Fluctuations in Operating Results
Results for any period are not necessarily indicative of the results
that the Company may achieve for any subsequent period. Quarterly or annual
results may vary materially as a result of a number of factors, including,
among others: the size or timing of customer orders; the timing, structure
and cost of acquisitions; the gain or loss of material customer
relationships; the timing of new product or service introductions; changes in
pricing policies by the Company, its competitors or suppliers; market
acceptance of new or enhanced products or services of the Company; delays in
the introduction of new products or product enhancements by the Company, the
Company's competitors or other providers of hardware or software for the
document imaging market; and fluctuations in general economic conditions. In
addition, since a significant portion of the Company's service revenue is
generated on a project-by-project basis, the timing or completion of material
projects could result in fluctuations in the Company's results of operations
for particular periods. Any of these factors may cause the Company's results
of operations in some future quarters to be below the expectations of
securities analysts and investors or operating results of prior quarters,
which could have a material and adverse effect on the market price of the
Company's common stock.
Because quarterly revenues are dependent largely on the volume and
timing of orders received during such quarter, which may be difficult to
forecast, and the Company's operating expenses are based in part on its
estimate of future revenues, the Company may be unable to adjust its spending
in a timely manner to compensate for a shortfall in revenues. Any
significant decrease in customer orders, for any reason, could have an
immediate material and adverse effect on the Company's business, operating
results and financial condition.
Reliance on Key Personnel
The Company's operations are dependent on the continued efforts of its
key technical and senior management personnel. The Company's operations are
also dependent on its continuing ability to attract and retain highly
qualified technical, managerial and operational personnel. Competition for
such personnel is intense and there can be no assurance that the Company will
retain its key managerial and technical employees or that it will be
successful in attracting, assimilating or retaining other qualified
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technical, managerial and operational personnel in the future. If any of
these people is unable or unwilling to continue in his or her present role,
or if the Company is unable to attract and retain other qualified personnel,
the Company's business, operating results and financial condition could be
materially and adversely affected.
Risk of Business Interruptions
Certain of the Company's service operations are performed at a single
location and are dependent on continuous computer, electrical and telephone
service. As a result, any interruption of such service would disrupt the
Company's day-to-day operations and could have a material adverse effect on
the Company's business, operating results and financial condition. There can
be no assurance that a fire, flood, power loss, telephone service loss or
other event affecting one or more of the Company's facilities would not
interrupt or disable these services. Any significant damage to any such
facility or other failure that causes significant interruptions in the
Company's operations may not be covered by insurance. Any uninsured or
underinsured loss could have a material and adverse effect on the Company's
business, operating results and financial condition.
Potential Inability to Protect Proprietary Rights
The Company considers many of the principal elements of the design of
its software to be valuable trade secrets and confidential proprietary
information. The Company relies on a combination of trade secret, copyright,
and trademark laws, nondisclosure and other contractual agreements and
technical measures to protect its proprietary rights in its products. In
certain limited circumstances, the Company has obtained, and will continue to
seek, patents on certain of its proprietary products and components. There
can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology, and such protections may not preclude
competitors from developing products with features similar to the Company's
products. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries. The Company believes
that its products and trademarks do not infringe upon the proprietary rights
of third parties. There can be no assurance, however, that third parties
will not assert infringement claims against the Company in the future or that
such claims will not require the Company to enter into royalty arrangements
or result in costly litigation.
Risk of Defects
The Company has occasionally discovered errors or defects in its
products after their commercial shipment. To date, such defects and errors
have not been significant; however, there can be no assurance that
significant defects and errors will not be discovered in new products,
existing products or in new versions or enhancements of existing products,
and if discovered, will be successfully and timely corrected. Discovery of
errors or defects in the Company's products after commercial shipment could
result in adverse customer reaction, negative publicity regarding the Company
or its products, a delay in or failure to achieve market acceptance or a
diversion of management and product development resources, any of which could
have a material and adverse effect on the Company's business, operating
results and financial condition.
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Item 2. Properties
The Company leases approximately 33,000 square feet of a facility in
Sterling, Virginia under a lease expiring in October 2000; 12,000 square feet
of office space in Indianapolis, Indiana under a lease expiring in June 2000;
and 27,000 square feet of office space in Potomac, Maryland under a lease
expiring in July 2005. The disposition of its medical imaging business has
significantly reduced the Company's need for manufacturing facilities. As a
result, the Company anticipates that it will vacate the Sterling, Virginia
facility in the near future and believes that its remaining facilities are
generally adequate for its immediate and foreseeable needs.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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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 March 24, 1998, there were approximately
1,400 holders of record of the Company's common stock. The table below
represents the high and low closing prices of the common stock for the last
two fiscal periods (in dollars).
<TABLE>
<CAPTION>
Nine months ended Year ended
December 31, 1997* March 31, 1997
---------------------------------------
High Low High Low
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter................................ 11/32 1/4 23/32 3/8
Second Quarter............................... 21/32 1/4 13/16 15/32
Third Quarter................................ 2 3/8 13/16 17/32 5/16
Fourth Quarter............................... N/A N/A 15/32 5/16
</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.
In connection with its acquisition from Intrafed, Inc., of the PowerScan
and StageWorks software, the Company issued in July 1997, to Intrafed, Inc.,
1.3 million shares of its common stock without registration under the
Securities Act of 1933, as amended (the "Securities Act"). Such issuance of
shares was exempt from registration pursuant to Section 4(2) of the
Securities Act and represented the only unregistered issuance of the
Company's securities during the period covered by this Report on Form 10-K.
*Effective December 31, 1997, the Company changed its fiscal year end from
March 31st to December 31st. (See Note 1 to the consolidated financial
statements.)
Item 6. Selected Financial Data
The following selected consolidated financial data relating to the
Company should be read in conjunction with the Company's consolidated
financial statements and the related notes thereto, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the other
financial information included herein. The selected financial data set forth
below for the Company as of and for the nine months ended December 31, 1997,
as of March 31, 1997 and for each of the two years in the periods ended March
31, 1997 are derived from the audited consolidated financial statements
included elsewhere herein. The selected financial data set forth below for
the Company as of and for the nine months ended December 31, 1996 are derived
from the Company's unaudited financial statements, which are not included
herein. The selected financial data set forth below for the Company as of
March 31, 1994 and 1995 and for each of the years in the two-year period
ended March 31, 1995 are derived from the consolidated financial statements
not included elsewhere herein.
Results of operations for the nine months ended December 31, 1997 are
not directly comparable to the results of operations for prior periods due to
the repositioning of the Company's line of business from the medical imaging
market to the document imaging market and the occurrence of other significant
events since April 1, 1993. See "Item 1. Business--General--History" for a
general discussion of certain of these events.
-11-
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
December 31, Years ended March 31,
-------------------- ------------------------------------
(In thousands, except 1997* 1996 1997 1996 1995 1994
per share data) (Unaudited)
----------------------------------------------------------
Operations Statement Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue.................. $ 1,706 $ 1,138 $ 1,247 $ 4,282 $21,623 $29,351
Operating income (loss).. $(2,196) $(3,380) $(4,301) $(4,465) $ 663 $ 2,261
Net income (loss)........ $(1,552) $ 3,331 $ 2,635 $(3,984) $ 1,193 $ 2,175
Net income (loss) per
common share -
assuming dilution...... $ (.08) $ .61 $ .58 $ (.02) $ .14 $ .01
Balance Sheet Data:
Working capital.......... $ 572 $ 5,560 $ 5,094 $ 4,562 $ 9,399 $ 8,457
Property and equipment,
net...................... $ 775 $ 392 $ 271 $ 502 $ 698 $ 1,308
Total assets............. $ 5,663 $ 7,380 $ 6,031 $ 6,674 $13,020 $13,299
Total debt............... $ -- $ -- $ -- $ -- $ 49 $ 153
Stockholders' equity..... $ 4,075 $ 6,096 $ 5,400 $ 5,208 $10,374 $10,624
*Effective December 31, 1997, the Company changed its fiscal year end from March 31st
to December 31st. (See Note 1 to the consolidated financial statements.)
</TABLE>
-12-
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion contains 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,
those discussed below as well as those discussed under "Item 1.
Business--Risk Factors".
The following discussion of the Company's historical results of
operations and its liquidity and capital resources should be read in
conjunction with the selected financial data and the consolidated financial
statements of the Company and related notes thereto and other financial
information included elsewhere herein. Effective December 31, 1997, the
Company changed its fiscal year end from March 31st to December 31st.
Overview
During the nine-month period ended December 31, 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 from Intrafed, Inc., 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. See Notes 2 and 3
to the consolidated financial statements.
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. The Company continues its search to identify
additional acquisition opportunities in this market. With these two
acquisitions, Star is now a provider of integrated products and services for
government and commercial users involved in data capture, image capture and
document imaging.
Results of operations for the nine months ended December 31, 1997 are
not directly comparable to the results of operations for prior periods due to
the repositioning of the Company's line of business from the medical imaging
market to the document imaging market and the occurrence of other significant
events during prior periods. See "Item 1. Business--General--History" for a
general discussion of certain of these events.
Results of Operations - Nine Months Ended December 31, 1997 Compared to Nine
Months Ended December 31, 1996 (Unaudited)
Revenue for the nine months ended December 31, 1997 was $1.7 million,
primarily from sales of the new document imaging products and services
acquired in the current period, as well as customer service revenue on the
older medical imaging products. Medical imaging customer service revenue is
expected to decline in the future as the Company has transitioned from a
medical imaging to a document imaging business. Revenue for the nine months
ended December 31, 1996 was $1.1 million and primarily consisted of customer
service revenue on medical imaging products, as well as non-recurring revenue
relating to a claim for recovery of inventory and related costs under the
termination of the U.S. Navy's SH-60 Program.
-13-
<PAGE>
The Company's customer service revenue as a percentage of total revenue
was approximately 44% and 40% for the nine months ended December 31, 1997 and
1996, respectively. To the extent that the installed base of its new
products grows, the Company anticipates that the service revenue related
thereto will become a more significant source of recurring revenue. However,
the Company expects such service revenue as a percentage of total revenue to
decrease to the extent that total revenue dollars increase.
Research and development ("R&D") expense for the nine-month period ended
December 31, 1997 decreased 33% from the comparable period in 1996 primarily
due to company-wide cost reductions, reduced staff levels and the sale of the
Medical Image Management Systems ("MIMS") technology in July 1997, offset
partially by additional R&D expense associated with the document imaging
software. The Company believes that investment in research and development
is critical to its future growth and the Company anticipates that R&D expense
will continue to be a significant operating expense.
Marketing and sales expense for the nine months ended December 31, 1997
increased 19% from the same prior-year period due to additional marketing and
sales expense associated with the new PowerScan and CDT subsidiaries. The
increase was offset partially by lower costs, primarily relating to
company-wide cost reductions, reduced staff levels, and the sale of the MIMS
technology in July 1997. The Company expects sales and marketing expense
will continue to increase in the future as the Company continues to expand
sales and marketing programs related to its software products and services.
General and administrative ("G&A") expense decreased 19% for the nine
months ended December 31, 1997 compared to the nine months ended December 31,
1996. The decrease is primarily attributable to lower professional fees,
including legal fees, company-wide cost reductions, and reduced corporate
facility costs due to the reduction of the Company's leased corporate
facility space for which the Company incurred a one-time expense in the nine
months ended December 31, 1996. The decrease is offset in part by additional
G&A expense associated with the new PowerScan and CDT subsidiaries.
During the nine months ended December 31, 1997 and 1996, the Company
earned $157,000 and $495,000, respectively, of interest income. Interest
income for the nine months ended December 31, 1996 included approximately
$276,000 of interest received on the GEMS arbitration settlement.
Other income for the nine months ended December 31, 1997 totaled
$487,000 and is primarily related to the gain on the sale of the MIMS
technology. (See Note 3 to the consolidated financial statements.) For the
nine months ended December 31, 1996, other income totaled $6.2 million and
included the GEMS arbitration award of $9.1 million, excluding interest,
offset by the settlement of a patent infringement lawsuit of $2.9 million.
(See Note 4 to the consolidated financial statements.)
Results of Operations - Fiscal Year Ended March 31, 1997 Compared to Fiscal
Year Ended March 31, 1996
Revenue in the fiscal year ended March 31, 1997 was $1.2 million,
compared with $4.3 million in the fiscal year ended March 31, 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 4 to the
consolidated financial statements. Revenue from sales to GEMS totaled
$107,000 and $2.3 million for the fiscal years ended March 31, 1997 and 1996,
respectively. In June 1996, the Company and the prime contractor agreed on
final settlement of an outstanding termination claim under the SH-60
long-term subcontract with the U.S. Navy. Revenue recognized on this
long-term subcontract of $418,000 and
-14-
<PAGE>
$750,000 in the fiscal years ended March 31, 1997 and 1996, respectively,
related to the settlement of the claim. Other sources of revenue during the
fiscal years ended March 31, 1997 included maintenance and support
agreements, and sales of spare parts.
Research and development ("R&D") expense decreased 47% in the fiscal
year ended March 31, 1997 from the fiscal year ended March 31, 1996. The
decrease was primarily attributable to reduced staff levels.
Marketing and sales expense increased 13% in the fiscal year ended March
31, 1997 from the fiscal year ended March 31, 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 medical imaging industry's annual tradeshow.
General and administrative expense decreased 26% in the fiscal year
ended March 31, 1997 from the fiscal year ended March 31, 1996. The decrease
was 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 the fiscal year ended March 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 the fiscal year
ended March 31, 1997.
Interest income in the fiscal year ended March 31, 1997 increased 34%
from the fiscal year ended March 31, 1996. The increase was primarily
attributable to interest received from GEMS in the fiscal year ended March
31, 1997 on the arbitration award. (See Note 4 to the consolidated financial
statements.)
Other income for the fiscal year ended March 31, 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 Note 4 to
the consolidated financial statements.)
Liquidity and Capital Resources
At December 31, 1997, the Company had $771,000 of cash and equivalents
and $441,000 of short-term investments. The Company had a net cash outflow
from operating activities of $2.2 million for the nine months ended December
31, 1997. Cash used for investment activities was $2.6 million, primarily
due to the acquisitions of the PowerScan and StageWorks technologies and CDT.
(See Note 2 to the consolidated financial statements.) The Company financed
these acquisitions with its cash and short-term investments and with shares
of its common stock.
The Company's operations, acquisitions and preferred stock repurchases
to date have consumed substantial amounts of cash. The Company incurred
operating losses of $2.2 million, $4.3 million and $4.5 million for the nine
months ended December 31, 1997 and for the fiscal years ended March 31, 1997
and 1996, respectively. The Company spent $2.4 million for the two
acquisitions in the nine months ended December 31, 1997 and an aggregate $3.6
million for the preferred stock repurchases in the fiscal years ended March
31, 1997 and 1996. 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. The Company currently does not have a line of
credit or other credit facility in place, although the Company is in
discussions with several financial institutions regarding potential credit
arrangements, including property and equipment financing, asset backed lines
of credit and factoring arrangements and believes that it will obtain one or
more of such financings. The Company believes that available funds and
expected cash flow to be
-15-
<PAGE>
generated from operations, together with any borrowings under possible future
credit arrangements, will be sufficient to meet its anticipated cash needs
through the end of 1998. If the Company is unable to secure acceptable
credit arrangements, if the cash flow from operations is insufficient, or if
the Company makes acquisitions requiring significant cash outlays, the
Company likely would be required to raise additional funds from debt or
equity placements, or reduce discretionary operating and capital
expenditures. 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's 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 totaled $275,000 as of December 31, 1997. The Company does
not intend to declare any dividend on the Preferred Stock or Common Stock and
intends to retain any future earnings to finance the expansion and
development of its business.
Capital expenditures for the nine months ended December 31, 1997, and
for the fiscal years ended March 31, 1997 and 1996 were $223,000, $80,000,
and $91,000, respectively. Capital expenditures for the nine months ended
December 31, 1997 were primarily for technology infrastructure enhancements
for CDT.
Year 2000 Disclosure
The Company has made a preliminary assessment of potential Year 2000
issues with respect to various computer-related systems. The Company's
corrective actions will include reprogramming impacted software when
appropriate and feasible, obtaining vendor-provided software upgrades when
available and completely replacing impacted systems when necessary. The
Company believes that the costs to correct its systems will not materially
and adversely affect its business, results of operations or its financial
condition. However, there can be no assurance that the Company has
identified all Year 2000 impacted systems or that its corrective actions will
be timely and successful.
Impact of Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." These Standards will
become effective for the Company's 1998 fiscal year. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. SFAS
No. 131 changes current practice by establishing a new framework on which to
base segment reporting (referred to as the "management" approach) and also
requires interim reporting of segment information. The effect of adoption of
these statements 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.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP
97-2") which supersedes 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, and is effective for transactions entered into by the Company
beginning January 1, 1998. The Company does not expect that the adoption of
SOP 97-2 will have a material effect on the Company's financial position or
results of operations.
-16-
<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 36. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 December 31, 1997 and March 31,
1997, and the results of their operations and their cash flows for the nine
months ended December 31, 1997 and for each of the years in the two-year
period ended March 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
McLean, Virginia
February 13, 1998
-17-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(In thousands, except per share data)
Nine months ended Years ended
December 31, March 31,
----------------- ------------------
1997 1996 1997 1996
(Unaudited)
- ------------------------------------------------------------------------------------
Revenue
<S> <C> <C> <C> <C>
Products............................. $ 660 $ 678 $ 688 $ 3,302
Services............................. 1,046 460 559 980
- ------------------------------------------------------------------------------------
1,706 1,138 1,247 4,282
- ------------------------------------------------------------------------------------
Cost of revenue
Products............................. 173 558 693 2,314
Services............................. 628 339 525 400
- ------------------------------------------------------------------------------------
801 897 1,218 2,714
- ------------------------------------------------------------------------------------
Gross margin............................. 905 241 29 1,568
- ------------------------------------------------------------------------------------
Operating expenses
Research and development............. 601 893 1,130 2,151
Marketing and sales.................. 876 734 952 839
General and administrative........... 1,624 1,994 2,248 3,043
- ------------------------------------------------------------------------------------
3,101 3,621 4,330 6,033
- ------------------------------------------------------------------------------------
Operating income (loss).................. (2,196) (3,380) (4,301) (4,465)
Interest income, net..................... 157 495 574 429
Other income, net........................ 487 6,216 6,362 52
- ------------------------------------------------------------------------------------
Income (loss) before provision for income
taxes................................ (1,552) 3,331 2,635 (3,984)
Provision for income taxes............... -- -- -- --
- ------------------------------------------------------------------------------------
Net income (loss)........................ $(1,552) $ 3,331 $ 2,635 $(3,984)
====================================================================================
====================================================================================
Net income (loss)........................ $(1,552) $ 3,331 $ 2,635 $(3,984)
Preferred stock dividend requirement..... (150) (597) (647) (1,342)
Repurchase of preferred stock............ -- 10,580 10,580 4,954
- ------------------------------------------------------------------------------------
Net income (loss) applicable to common
shares............................... $(1,702) $13,314 $12,568 $ (372)
====================================================================================
Net income (loss) per common share
Basic.................................. $ (.08) $ .67 $ .63 $ (.02)
Diluted................................ $ (.08) $ .61 $ .58 $ (.02)
Weighted average common shares outstanding
Basic.................................. 20,645 19,884 19,873 19,879
Diluted................................ 22,726 21,996 21,985 30,147
====================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Position At At
(In thousands, except share data) December 31, March 31,
1997 1997
- ----------------------------------------------------------------------------------------
Assets
Current assets
<S> <C> <C>
Cash....................................................... $ 95 $ 69
Short-term investments..................................... 1,117 5,474
Accounts receivable, net................................... 630 35
Inventory, net............................................. 58 85
Other current assets....................................... 260 62
- ----------------------------------------------------------------------------------------
Total current assets....................................... 2,160 5,725
Property and equipment, net.................................... 775 271
Goodwill and other assets, net................................. 2,728 35
- ----------------------------------------------------------------------------------------
Total assets............................................... $ 5,663 $ 6,031
========================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable........................................... $ 665 $ 161
Accrued payroll and related benefits....................... 105 245
Deferred revenue........................................... 451 31
Other accrued liabilities.................................. 367 194
- ----------------------------------------------------------------------------------------
Total current liabilities.................................. 1,588 631
- ----------------------------------------------------------------------------------------
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 outstand-
ing; aggregate liquidation preference of $475 and $630... 1 1
Series B convertible; 120,117 shares designated; 11,917
shares issued; 11,917 shares outstanding; aggregate
liquidation preference of $1,192......................... 1 1
Series C convertible; 80,079 shares designated; 7,945
shares issued; 7,945 shares outstanding; aggregate
liquidation preference of $795........................... 1 1
Common stock; $.01 par value; 60,000,000 shares authorized;
21,351,575 and 19,937,115 shares issued; 21,256,384 and
19,841,924 shares outstanding............................ 214 199
Additional paid-in capital.................................. 61,357 61,011
Unrealized gain (loss) on investment........................ (134) --
Treasury stock, at cost; 95,191 shares...................... (209) (209)
Retained deficit............................................ (57,156) (55,604)
- ----------------------------------------------------------------------------------------
Total stockholders' equity.................................. 4,075 5,400
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity.................. $ 5,663 $ 6,031
========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands)
Nine months ended Years ended
December 31, March 31,
----------------- ---------------
1997 1996 1997 1996
(Unaudited)
- ----------------------------------------------------------------------------------------
Cash flows from (used for) operating activities
<S> <C> <C> <C> <C>
Net income (loss)............................. $(1,552) $ 3,331 $ 2,635 $(3,984)
Adjustments to reconcile net income (loss) to
net cash from (used for) operating activities
Depreciation and amortization................. 319 154 198 319
Gain on sale of MIMS technology............... (489) -- -- --
(Gain) loss on sale of property and equipment. 40 7 101 (45)
Decrease in restricted cash................... -- 17 17 513
(Increase) decrease in accounts receivable.... (613) 25 121 92
Decrease in inventory......................... 27 435 641 1,736
(Increase) decrease in other current assets... (69) 2 32 (24)
Increase (decrease) in accounts payable....... 387 (292) (447) (285)
Increase (decrease) in accrued liabilities.... (229) 110 (388) (895)
- -----------------------------------------------------------------------------------------
Net cash from (used for) operating activities.... (2,179) 3,789 2,910 (2,573)
- -----------------------------------------------------------------------------------------
Cash flows from (used for) investing activities
Proceeds from sale of property and equipment.. -- -- 12 45
Capital expenditures.......................... (223) (51) (80) (91)
Other investing activities, net............... -- -- 109 113
Purchase of Intrafed technology............... (2,165) -- -- --
Purchase of CDT, net of cash acquired......... (240) -- -- --
- -----------------------------------------------------------------------------------------
Net cash from (used for) investing activities.... (2,628) (51) 41 67
- -----------------------------------------------------------------------------------------
Cash flows from (used for) financing activities
Repurchase of preferred stock................. -- (2,435) (2,435) (1,187)
Proceeds from stock option exercises.......... 35 -- -- 5
Purchase of treasury stock.................... -- (8) (8) --
- -----------------------------------------------------------------------------------------
Net cash from (used for) financing activities.... 35 (2,443) (2,443) (1,182)
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents.. (4,772) 1,295 508 (3,688)
Cash and equivalents, beginning of year.......... 5,543 5,035 5,035 8,723
- -----------------------------------------------------------------------------------------
Cash and equivalents, end of year................ $ 771 $ 6,330 $ 5,543 $ 5,035
=========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
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, 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
Net loss..................... (1,552) (1,552)
Conversion of preferred
(Series A)................ (4) 31 1 -- 1
Stock options exercised...... 84 1 34 35
Acquisition of Intrafed
Technology................. 1,300 13 312 325
Unrealized gain (loss)
on investment.............. (134) (134)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 33 21,352 $3 $214 $61,357 $(343) $(57,156) $4,075
===========================================================================================================
(a) Includes treasury stock and unrealized gain (loss) on investment.
See accompanying notes to consolidated financial statements.
</TABLE>
-21-
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 - Summary of Significant Accounting Policies
Description of business
During the nine-month period ended December 31, 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 from Intrafed, Inc., 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. (See Notes 2 and 3
to the consolidated financial statements.)
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. The Company continues its search to identify
additional acquisition opportunities in this market. With these two
acquisitions, Star is now a provider of integrated products and services for
government and commercial users involved in data capture, image capture and
document imaging.
Change in fiscal year end
The Company's Board of Directors voted to change the Company's fiscal
year end from March 31st to December 31st, effective December 31, 1997. The
accompanying consolidated statements of operations, stockholders' equity and
cash flows are presented for the nine months ended December 31, 1997 and 1996
(unaudited) and for the twelve months ended March 31, 1997 and 1996 ("fiscal
1997" and "fiscal 1996", respectively). The accompanying consolidated
statements of financial position are presented as of December 31, 1997 and
March 31, 1997.
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 1997 and 1996 amounts have been reclassified for
comparative purposes.
Revenue recognition
Revenue from the sale of computer software and hardware is recognized
when the products are shipped. Customized software revenue is recognized
when the software is accepted by the customer. Revenue from services
including data entry, integration, installation, and systems training is
recognized when the services are performed. Revenue from the sale of
maintenance contracts is recognized ratably over the contractual service
period. Amounts received but not earned are deferred.
Cash and equivalents and short-term investments
Cash and equivalents include cash and short-term investments in
commercial paper. Cash includes cash in banks and, at March 31, 1997,
overnight reverse repurchase agreements which totaled $17,000. 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 $676,000 and $5,474,000 at
December 31, 1997 and March 31, 1997, respectively.
-22-
<PAGE>
At December 31, 1997, other short-term investments include 92,800 shares
of common stock of Lumisys, Inc. ("Lumisys"). (See Note 3.) 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.
Interest income was $157,000, $574,000, $429,000 for the nine months
ended December 31, 1997, and in fiscal 1997 and 1996, respectively.
Accounts receivable
Accounts receivable are shown net of an allowance for doubtful accounts
of $22,000 at December 31, 1997 and $15,000 at March 31, 1997. The provision
for doubtful accounts was $11,000, $1,000, and $4,000 for the nine months
ended December 31, 1997, and in fiscal 1997 and 1996, respectively.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or
market. Inventory at December 31, 1997 and March 31, 1997 consists of
components and subassemblies, primarily relating to the Company's older
medical imaging products. Such inventory is expected to be used on existing
and future maintenance contracts and for non-warranty repairs. The Company
recorded provisions to cost of revenue for damaged or potentially obsolete
inventory of $571,000 and $404,000 during fiscal 1997 and 1996, respectively.
No such provision was recorded during the nine months ended December 31, 1997.
Property and equipment
Property and equipment are recorded at cost or estimated fair market
value if acquired in a business combination. 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.
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
At At
December 31, March 31,
1997 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Engineering and manufacturing equipment.................. $1,020 $ 2,658
Office equipment and leasehold improvements.............. 678 430
Equipment under capital leases........................... 8 281
- -----------------------------------------------------------------------------------------
1,706 3,369
Less accumulated depreciation and amortization........... (931) (3,098)
- -----------------------------------------------------------------------------------------
$ 775 $ 271
=========================================================================================
</TABLE>
-23-
<PAGE>
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 employee 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.
Net income (loss) per share
The Company has adopted Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS 128"). SFAS 128 requires the presentation of
basic and diluted net income per share. Net income (loss) per share for all
prior periods has been restated to conform with the provisions of SFAS 128.
Basic net income (loss) per share is computed as net income (loss) less
preferred dividends divided by the weighted average number of shares of
common stock outstanding during the period. Diluted net income (loss) per
share is computed as net income (loss) less preferred dividends divided by
the weighted average number of shares of common stock and common equivalent
shares outstanding during the period. Common equivalent shares consist of
convertible preferred stock (using the if converted method) and stock options
and warrants (using the treasury stock method). Common equivalent shares are
excluded from the diluted computation if their effect is antidilutive.
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.
Goodwill
The excess of the cost over the fair value of net tangible and
identifiable intangible assets acquired in the PowerScan and CDT business
combinations ("goodwill") is amortized on a straight-line basis over periods
of 8 and 10 years, respectively. Goodwill amortization totaled $135,000 for
the nine months ended December 31, 1997. In accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", the Company evaluates the
recoverability of its goodwill whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Recoverability is
measured by a comparison of the carrying amount of goodwill to future net
cash flows expected to be generated from the acquired business. If the asset
is considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds its fair value.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
-24-
<PAGE>
NOTE 2 - Acquisitions
In July 1997, PowerScan, Inc. ("PowerScan"), a newly-formed,
wholly-owned subsidiary of the Company, acquired from Intrafed, Inc.
("Intrafed") intellectual property related to the PowerScan(R) and
Stageworks(R) software products, and certain related fixed assets,
inventory, contracts and licenses, and assumed certain liabilities, including
those under customer maintenance contracts. At closing, the consideration
paid to Intrafed was $1,880,000 in cash and 1.3 million shares of Star common
stock valued at $325,000, with up to an additional 1.3 million shares
issuable to Intrafed based upon the future performance of PowerScan.
The business combination has been accounted for using the purchase
method under Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB Opinion 16"). The purchase price has been allocated to
the assets acquired and liabilities assumed based on management's estimate of
the fair value as of the date of acquisition. Based on the allocation of the
purchase price over the net assets acquired, goodwill of approximately
$2,393,000 was recorded. Such goodwill is being amortized on a straight-line
basis over 8 years.
The purchase price of the assets acquired and liabilities assumed from
Intrafed is computed as follows (in thousands):
Cash consideration $1,880
Fair value of common stock issued 375
Transaction costs 285
------
$2,540
======
The purchase price is allocated as follows (in thousands):
Current assets $ 88
Property and equipment 382
Other assets 20
Patents and trademarks 150
Goodwill 2,393
Liabilities assumed (493)
------
$2,540
======
In October 1997, the Company acquired Curran Data Technologies, Inc.
("CDT"), a data entry and document imaging services company located in
Indianapolis, Indiana. At closing, the consideration paid for the
acquisition was $212,000 in cash and $96,000 in a note payable. The note
payable is unsecured, bears interest of a rate of 8% per annum, is payable in
four quarterly amounts beginning in January 1998, totaled $96,000 at December
31, 1997 and is included in other accrued liabilities.
The CDT business combination has been accounted for using the purchase
method under APB Opinion 16. The purchase price has been allocated to the
assets acquired and liabilities assumed based on management's estimate of the
fair value as of the date of acquisition. Based on the allocation of the
purchase price over the net assets acquired, goodwill of approximately
$264,000 was recorded. Such goodwill is being amortized on a straight-line
basis over 10 years.
-25-
<PAGE>
The purchase price paid for CDT is computed as follows (in thousands):
Cash consideration $ 212
Transaction costs 30
Note payable 96
------
$ 338
======
The purchase price is allocated as follows (in thousands):
Current assets $ 25
Property and equipment 209
Goodwill 264
Liabilities assumed (160)
------
$ 338
======
APB Opinion 16 requires, for purchase business combinations, the
presentation of pro-forma combined results of operations for the current year
and comparable prior-year period as if the two transactions described above
had occurred at the beginning of each period. The following unaudited
pro-forma results of operations are not necessarily indicative of actual
future results of operations (in thousands, except per share data).
Nine Months Ended
December 31,
1997 1996
Revenue $ 4,374 $ 4,851
Gross margin $ 1,962 $ 1,942
Net income (loss) before
provision for income taxes $(1,698) $ 1,856
Net income (loss) $(1,698) $ 1,856
======= =======
Net income (loss) per share -
assuming dilution $ (.08) $ .61
======= =======
NOTE 3 - Sale of Medical Image Management Systems ("MIMS") Technology
On July 30, 1997, the Company sold its MIMS technology, including the
Image Management Server and Film Image Scan System software, to CompuRAD,
Inc. ("CompuRAD"). As consideration, the Company received 100,000 shares of
CompuRAD common stock, valued at approximately $575,000 on the date of the
transaction, and possible future payments by CompuRAD of up to approximately
$850,000 on software sales by CompuRAD of the MIMS technology for a five-year
period commencing July 30, 1997. To date, no significant payments on
CompuRAD software sales have been received. The Company retained the rights
to use the technology in non-medical imaging markets.
-26-
<PAGE>
Included with the technology sold to CompuRAD was property and
equipment with a net book value of $86,000. The gain recognized on the
transaction was $489,000 and is included as other income on the consolidated
statement of operations for the nine months ended December 31, 1997.
In November 1997, CompuRAD merged with Lumisys, Incorporated
("Lumisys"), a publicly-traded medical imaging company. In the transaction,
each share of CompuRAD common stock was converted into .928 shares of Lumisys
common stock. Accordingly, the Company's 100,000 shares of CompuRAD common
stock were converted into 92,800 unrestricted shares of Lumisys common stock.
Lumisys has assumed the obligations of CompuRAD relating to the sale of the
MIMS technology discussed above.
NOTE 4 - Transactions with General Electric Company ("GE")
Arbitration award
In August 1996, General Electric Medical Systems ("GEMS") paid Star
$9.4 million, which amount, including interest, was awarded to Star in March
1996 in its arbitration 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 Statement 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 December 31, 1997. (See Note 5.)
Sales to GE
The Company had sales to GE for the nine months ended December 31,
1997, and in fiscal 1997 and 1996, of $18,000, $107,000 and $2,354,000,
respectively.
-27-
<PAGE>
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 December 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
December 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. 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.
Since March 1995, the Company has repurchased a total of 163,234 shares
of the Preferred Stock (the "Repurchased Preferred Stock") for $4.6 million.
The Repurchased Preferred Stock had an aggregate redemption price of $24.1
million, including cumulative undeclared dividends in excess of $7.7 million.
The repurchase transactions were accounted for as a reduction of additional
paid-in capital in the fiscal years in which the transactions occurred.
In conjunction with the repurchase of the Preferred Stock from GE in
August 1996, 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 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 $275,000, or $.01 per common share, as
of December 31, 1997. All dividends accrued and accumulated prior to August
1996 were eliminated with the repurchases of the Preferred Stock.
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 December 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 (loss) and earnings (loss) per common share would
have been reported as the pro forma amounts indicated below (in thousands,
except per share data):
-28-
<PAGE>
<TABLE>
<CAPTION>
Years ended
Nine months ended March 31,
December 31, 1997 1997 1996
-------------------------------------------------------------------------------
Net income (loss)
<S> <C> <C> <C>
As reported $(1,552) $2,635 $(3,984)
Pro forma $(1,577) $2,630 $(3,984)
Earnings (loss) per common share-
assuming dilution
As reported $ (.08) $ .58 $ (.02)
Pro forma $ (.08) $ .58 $ (.02)
================================================================================
</TABLE>
The effects of compensation cost as determined under FASB Statement No.
123 on net income (loss) for the nine months ended December 31, 1997 and for
the year ended March 31, 1997 may not be representative of the effects on pro
forma net income (loss) 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.
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 1994 Plan during the nine
months ended December 31, 1997 and in the year ended March 31, 1997,
respectively: 0.0% dividend yield for both periods; expected volatility of
145% and 15%; risk-free interest rates of 5.71% and 6.61%; and expected lives
of five and three years.
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 during the nine
months ended December 31, 1997 and in the years ended March 31, 1997 and
1996, respectively: 0.0% dividend yield for the three periods; expected
volatility of 145%, 15% and 15%; risk-free interest rates of 5.68%, 6.78% and
6.10%; and expected lives of three, three and five years.
-29-
<PAGE>
The following table summarizes the Company's stock option plans:
<TABLE>
<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
- -----------------------------------------------------------------------------------------
Outstanding options,
<C> <C> <C> <C> <C> <S>
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 $1.00 130,000 $1.00 746,375 $0.41
Granted................ -- -- 60,000 $0.40 362,000 $0.38
Cancelled.............. -- -- (80,000) $1.11 (101,500) $0.41
Exercised.............. -- -- -- -- (83,500) $0.41
- -----------------------------------------------------------------------------------------
Outstanding options,
December 31, 1997....... 137,500 $1.00 110,000 $0.48 923,375 $0.40
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
1984 Plan 1989 Plan 1994 Plan
----------------------------------------
Options exercisable at:
<C> <C> <C> <C>
March 31, 1997............................... 52,866 130,000 330,259
December 31, 1997............................ 137,500 110,000 390,830
Weighted average fair value at date of grant
of options granted during the:
Year ended March 31, 1997.................... -- $.12 $.08
Nine months ended December 31, 1997.......... -- $.31 $.36
=========================================================================================
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 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 Price Exercisable Price
- -----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$0.38-1.00 1,170,875 5 yrs. 8 mos. $0.49 638,330 $0.55
=========================================================================================
</TABLE>
-30-
<PAGE>
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 December 31, 1997, the Company had 3,452,115 shares of common stock
reserved for issuance, consisting of 1,370,875 shares for stock options and
warrants outstanding, and 2,081,240 shares for conversion of preferred stock.
Net income per share
Basic and diluted net income (loss) per share were computed in
accordance with SFAS 128. The differences between basic weighted average
common shares outstanding and diluted weighted average common shares
outstanding are as follows (in thousands):
<TABLE>
<CAPTION>
Nine months ended Year ended
December 31, March 31,
----------------- -----------------
1997 1996 1997 1996
(unaudited)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic weighted average common shares......... 20,645 19,884 19,873 19,879
Convertible preferred stock.................. 2,081 2,112 2,112 10,268
------ ------ ------ ------
Diluted weighted average common shares....... 22,726 21,996 21,985 30,147
====== ====== ====== ======
</TABLE>
NOTE 6 - Income Taxes
There was no current or deferred income tax expense for the nine months
ended December 31, 1997 or for the years ended March 31, 1997 and 1996.
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
Nine months ended March 31,
December 31, 1997 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected expense (benefit)............... $(528) $ 896 $(1,354)
Change in valuation allowance............ 524 (898) 1,353
Other.................................... 4 2 1
-------------------------------------------------------------------------------------
Income tax expense................ $ -- $ -- $ --
=====================================================================================
</TABLE>
-31-
<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 At
December 31, March 31,
1997 1997
-------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Reserves for potentially excess inventory........ $ 1,681 $ 1,681
Other accruals and reserves...................... 111 130
Property and equipment, principally due
to differences in depreciation................. 12 22
Net operating loss carryforwards
- domestic and foreign......................... 22,010 21,408
General business credit carryforwards............ 3,315 3,315
Alternative minimum tax credit carryforwards..... 84 84
-------------------------------------------------------------------------------
Total gross deferred tax assets.............. 27,213 26,640
Less valuation allowance..................... (27,213) (26,640)
-------------------------------------------------------------------------------
Net.......................................... $ -- $ --
===============================================================================
</TABLE>
The net operating loss ("NOL") and general business credit carryforwards
expire in the tax years ending December 31, 1998 through December 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 increased
by $573,000 for the nine months ended December 31, 1997, decreased by
$1,231,000 for the year ended March 31, 1997 and increased by $1,556,000 for
the year ended March 31, 1996.
NOTE 7 - Commitments and Contingencies
<TABLE>
Operating leases
<S> <C>
The Company leases its facilities and certain Fiscal Amount
equipment under noncancelable operating lease 1998............ $513
agreements expiring through fiscal 2005. Several 1999............ 553
of the leases contain options for renewal periods 2000............ 496
of up to five years. Future minimum rentals under 2001............ 286
these lease agreements are shown at right (in 2002............ 284
thousands). Thereafter...... 734
----------------------
$2,866
======================
</TABLE>
Rent expense was $302,000, $733,000 and $559,000 for the nine months
ended December 31, 1997, and in fiscal 1997 and 1996, respectively.
-32-
<PAGE>
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 adverse effect on the financial condition or results of operations
of the Company.
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 a reduction of other income on the
fiscal 1997 Consolidated Statement of Operations.
Liquidity
The Company's operations, acquisitions and preferred stock repurchases
to date have consumed substantial amounts of cash. The Company incurred
operating losses of $2.2 million, $4.3 million and $4.5 million for the nine
months ended December 31, 1997 and for the fiscal years ended March 31, 1997
and 1996, respectively. The Company spent $2.4 million for the two
acquisitions in the nine months ended December 31, 1997 and an aggregate $3.6
million for the preferred stock repurchases in the fiscal years ended March
31, 1997 and 1996. 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. The Company currently does not have a line of
credit or other credit facility in place, although the Company is in
discussions with several financial institutions regarding potential credit
arrangements, including property and equipment financing, asset backed lines
of credit and factoring arrangements and believes that it will obtain one or
more of such financings. The Company believes that available funds and
expected cash flow to be generated from operations, together with any
borrowings under possible future credit arrangements, will be sufficient to
meet its anticipated cash needs through the end of 1998. If the Company is
unable to secure acceptable credit arrangements, if the cash flow from
operations is insufficient, or if the Company makes acquisitions requiring
significant cash outlays, the Company likely would be required to raise
additional funds from debt or equity placements, or reduce discretionary
operating and capital expenditures. 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.
-33-
<PAGE>
<TABLE>
<CAPTION>
Quarterly Financial Summary (Unaudited)
(In thousands, except per share data)
Net Net Income (Loss)
Gross Income Per Share -
Revenue Margin (Loss) Assuming Dilution
- -----------------------------------------------------------------------------------
Nine months ended
December 31, 1997*:
<S> <C> <C> <C> <C>
First Quarter $ 169 $ 32 $ (702) $(.04)
Second Quarter 439 315 (124) (.01)
Third Quarter 1,098 558 (726) (.04)
- -----------------------------------------------------------------------------------
Total $1,706 $ 905 $(1,552) $(.08)
===================================================================================
Year ended March 31, 1997:
First Quarter $ 715 $ 510 $ (591) $(.05)
Second Quarter 217 (42) 5,180 .70
Third Quarter 206 (227) (1,258) (.07)
Fourth Quarter 109 (212) (696) (.04)
- -----------------------------------------------------------------------------------
Total $1,247 $ 29 $ 2,635 $ .58
===================================================================================
*Effective December 31, 1997, the Company changed its fiscal year end from March 31st to
December 31st. (See Note 1 to the consolidated financial statements.)
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-34-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information set forth in the Company's definitive Proxy Statement for
its Annual Meeting to be held on May 21, 1998, which Proxy Statement will be
filed with the Securities and Exchange Commission no later than 120 days
after the end of the transition period covered by this Report, is
incorporated herein by this 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 in the Company's definitive Proxy Statement for
its Annual Meeting to be held on May 21, 1998, which Proxy Statement will be
filed with the Securities and Exchange Commission no later than 120 days
after the end of the transition period covered by this Report, is
incorporated herein by this reference.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Information set forth in the Company's definitive Proxy Statement for
its Annual Meeting to be held on May 21, 1998, which Proxy Statement will be
filed with the Securities and Exchange Commission no later than 120 days
after the end of the transition period covered by this Report, is
incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information set forth in the Company's definitive Proxy Statement for
its Annual Meeting to be held on May 21, 1998, which Proxy Statement will be
filed with the Securities and Exchange Commission no later than 120 days
after the end of the transition period covered by this Report, is
incorporated herein by this reference.
-35-
<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 17
Consolidated Statements of Operations for the nine
months ended December 31, 1997 and 1996 (unaudited),
and for each of the fiscal years in the two-year
period ended March 31, 1997. 18
Consolidated Statements of Financial Position as of
December 31, 1997 and March 31, 1997. 19
Consolidated Statements of Cash Flows for the nine
months ended December 31, 1997 and 1996 (unaudited),
and for each of the fiscal years in the two-year
period ended March 31, 1997. 20
Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended December 31, 1997,
and for each of the fiscal years in the two-year
period ended March 31, 1997. 21
Notes to Consolidated Financial Statements 22
2. Financial Statement Schedules
All 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.
On October 8, 1997, the Company filed with the Commission an
amended Current Report on Form 8-K/A, dated July 30, 1997,
regarding the acquisition and disposition of certain assets.
-36-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Star Technologies, Inc., certifies that it has duly caused this Transition
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in the County of Loudoun, Commonwealth of Virginia, on the
31st day of March, 1998.
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 March 31, 1998, by the following persons
in the capacities indicated:
/s/ Robert C. Compton Chairman of the Board of Directors,
Robert C. Compton President and Chief Executive Officer
and Director
/s/ Carol L. Curran Executive Vice President;
Carol L. Curran President, Curran Data Technologies,
Inc.
/s/ Brenda A. Potosnak Vice President of Finance and
Brenda A. Potosnak Administration, Secretary, Treasurer
and Chief Financial Officer
/s/ Alan O. Maxwell Director
Alan O. Maxwell
/s/ Carl E. Ravin Director
Carl E. Ravin
/s/ Herbert F. Schantz Director
Herbert F. Schantz
-37-
<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).
10.1* 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.
-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.
-2-
<PAGE>
Exhibit
No.
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.
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.
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) dated July 30,
1997 filed with the Commission on August 14, 1997.
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) dated July 30, 1997 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) dated July 30,
1997 filed with the Commission on August 14, 1997.
-3-
<PAGE>
Exhibit
No.
10.17* Employment Agreement dated October 16, 1997 between Star
Technologies, Inc. and Carol L. Curran.
11 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
-4-
<TABLE>
<CAPTION>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS (LOSS)
(In thousands, except per share data)
Nine months ended Fiscal years ended
December 31, March 31,
Basic Per Share Earnings (Loss) 1997 1996 1997 1996
(Unaudited)
<S> <C> <C> <C> <C>
Average shares outstanding during period 20,645 19,884 19,873 19,879
======= ======= ======= =======
Net income (loss) $(1,552) $ 3,331 $ 2,635 $(3.984)
Undeclared cumulative dividends on
preferred stock (150) (597) (647) (1,342)
Excess carrying amount and cumulative
undeclared dividends of Preferred
Stock over consideration -- 10,580 10,580 4,954
------- ------- ------- -------
Net income (loss) applicable to common
shares $(1,702) $13,314 $12,568 $ (372)
======= ======= ======= =======
Basic net income (loss) per common share $ (.08) $ .67 $ .63 $ (.02)
======= ======= ======= =======
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS (LOSS) (Cont'd)
(In thousands, except per share data)
Nine months ended Fiscal years ended
December 31, March 31,
Diluted Per Share Earnings 1997 1996 1997 1996
(Unaudited)
<S> <C> <C> <C> <C>
Average shares outstanding during period 20,645 19,884 19,873 19,879
Employee stock options assumed exercised 185 -- -- --
Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 95 126 126 337
Series B & C preferred stock 1,986 1,986 1,986 9,931
------- ------- ------- -------
22,911 21,996 21,985 30,147
======= ======= ======= =======
Net income (loss) $(1,552) $ 3,331 $ 2,635 $(3,984)
Adjustment for repurchase of Senior
Preferred Stock -- (522) (522) --
Excess carrying amount and cumulative
undeclared dividends of Preferred Stock
over consideration -- 10,580 10,580 4,954
------- ------- ------- -------
Net income applicable to common shares $(1,552) $13,389 $12,693 $ 970
======= ======= ======= =======
Diluted net income (loss) per common share $ (.07) $ .61 $ .58 $ .03
======= ======= ======= =======
</TABLE>
-2-
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
As of December 31, 1997, Star Technologies, Inc. had the following
wholly-owned subsidiaries:
PowerScan, Inc.
Curran Data Technologies, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Star Technologies, Inc.:
We consent to incorporation by reference in the Registration Statements
(No. 33-84184, No. 33-42042 and No. 2-97518) on Forms S-8 of Star
Technologies, Inc. of our report dated February 13, 1998, relating to the
consolidated statements of financial position of Star Technologies, Inc. and
subsidiaries as of December 31, 1997 and March 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the nine months ended December 31, 1997 and each of the years in the
two-year period ended March 31, 1997, which report appears in the transition
report for the period April 1, 1997 to December 31, 1997 on Form 10-K of Star
Technologies, Inc.
KPMG PEAT MARWICK LLP
McLean, Virginia
March 31, 1998
<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.
Effective December 31, 1997, the Company changed its fiscal year end from
March 31st to December 31st.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
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<CURRENT-ASSETS> 2160
<PP&E> 1706
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<COMMON> 214
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