SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1998 Commission File Number 0-13318
STAR TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0794452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 Shaw Road
Sterling, Virginia 20166
(Address of principal executive offices)
(Zip Code)
(703) 689-4400
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
21,556,384 shares of Common Stock were outstanding as of June 30, 1998.
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PART I. FINANCIAL INFORMATION
<TABLE>
Item 1. Financial Statements
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenue
<S> <C> <C> <C> <C>
Products $ 539 $ 35 $ 866 $ 45
Services 1,002 134 1,818 233
------ ------ ------- -------
1,541 169 2,684 278
Cost of revenue ------ ------ ------- -------
Products 140 28 201 163
Services 680 109 1,287 295
------ ------ ------- -------
820 137 1,488 458
------ ------ ------- -------
Gross margin 721 32 1,196 (180)
------ ------ ------- -------
Operating expenses
Research and development 218 227 407 464
Selling, general and administrative 1,160 573 2,439 1,045
------ ------ ------- -------
Total operating expenses 1,378 800 2,846 1,509
------ ------ ------- -------
Operating loss (657) (768) (1,650) (1,689)
Interest and other income (expense), net (8) 66 (7) 291
------ ------ ------- -------
Net loss before provision for income taxes (665) (702) (1,657) (1,398)
Provision for income taxes - - - -
------ ------ ------- -------
Net loss $ (665) $ (702) $(1,657) $(1,398)
====== ====== ======= =======
Net loss $ (665) $ (702) $(1,657) $(1,398)
Preferred stock dividend requirement (50) (50) (100) (100)
------ ------ ------- -------
Net loss applicable to common shares $ (715) $ (752) $(1,757) $(1,498)
====== ====== ======= =======
Earnings (loss) per share
Basic $ (.03) $ (.04) $ (.08) $ (.08)
Diluted $ (.03) $ (.04) $ (.08) $ (.08)
Weighted average common shares outstanding
Basic 21,506 19,857 21,406 19,851
Diluted 23,587 21,938 23,487 21,932
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(In thousands, except share data)
<CAPTION>
June 30, December 31,
Assets 1998 1997
Current assets
<S> <C> <C>
Cash $ 13 $ 95
Short-term investments 348 1,117
Accounts receivable, net 857 630
Other current assets, net 356 318
-------- --------
Total current assets 1,574 2,160
Property and equipment, net 894 775
Other assets 2,556 2,728
-------- --------
Total assets $ 5,024 $ 5,663
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,256 $ 665
Notes payable and capital lease obligations 562 -
Accrued payroll and related benefits 102 105
Other accrued liabilities 662 818
-------- --------
Total current liabilities 2,582 1,588
Capital lease obligations, net of current portion 27 -
-------- --------
Total liabilities 2,609 1,588
-------- --------
Commitments and contingencies - -
Stockholders' equity
Preferred stock; $.01 par value; 1,000,000 shares authorized
Series A convertible; 500,000 shares designated; 13,200
shares issued and outstanding; aggregate liquidation
preference of $475 1 1
Series B convertible; 120,117 shares designated; 11,917
shares issued and outstanding; aggregate liquidation
preference of $1,192 1 1
Series C convertible; 80,079 shares designated; 7,945
shares issued and outstanding; aggregate liquidation
preference of $795 1 1
Common stock; $.01 par value; 60,000,000 shares authorized;
21,651,575 and 21,351,575 shares issued; 21,556,384 and
21,256,384 shares outstanding 217 214
Additional paid-in capital 61,444 61,357
Accumulated other comprehensive income (loss) (227) (134)
Treasury stock, at cost; 95,191 shares (209) (209)
Retained deficit (58,813) (57,156)
-------- --------
Total stockholders' equity 2,415 4,075
-------- --------
Total liabilities and stockholders' equity $ 5,024 $ 5,663
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Six Months Ended
June 30,
1998 1997
Cash flows from (used for) operating activities
<S> <C> <C>
Net loss $(1,657) $(1,398)
Adjustments to reconcile net loss to net cash
from (used for) operating activities
Depreciation and amortization 369 74
Loss on sale of property and equipment 26 101
(Increase) decrease in accounts receivable (227) 46
(Increase) decrease in other current assets (38) 266
Increase (decrease) in accounts payable 591 (164)
Decrease in accrued liabilities (109) (495)
------- -------
Net cash used for operating activities (1,045) (1,570)
------- -------
Cash flows from (used for) investing activities
Proceeds from sale of property and equipment - 12
Capital expenditures (342) (39)
Other investing activities, net - 109
------- -------
Net cash from (used for) investing activities (342) 82
------- -------
Cash flows from (used for) financing activities
Increase in notes payable and capital lease obligations 589 -
Proceeds from stock option exercise 40 -
------- -------
Net cash from financing activities 629 -
------- -------
Net decrease in cash and equivalents (758) (1,488)
Cash and equivalents, beginning of period 771 6,330
------- -------
Cash and equivalents, end of period $ 13 $ 4,842
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, Star Technologies, Inc. ("Star" or the "Company") completed
a transition from providing performance-enhancing computing products and
solutions principally for the medical imaging market to providing imaging
solutions for the broader document imaging market. In July 1997, the Company
sold its medical imaging archival technology and, through a newly-created
operating subsidiary, PowerScan, Inc. ("PowerScan"), acquired document
imaging and processing technology 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.
With these two acquisitions, Star is a provider of integrated products and
services for commercial and government users involved in data capture, image
capture and document imaging. These two acquisitions are part of the
Company's long-term growth plan to build market presence in the document
imaging market through strategic acquisitions and alliances. The Company
continues its search to identify additional acquisition opportunities in this
market, although any such acquisition may depend, in part, on the Company
obtaining additional financing.
NOTE 1 - Financial Information
The interim consolidated financial statements presented herein are
unaudited. They reflect all adjustments that, in the opinion of management,
are necessary to fairly present the Company's financial position and results
of operations for the interim periods presented. All such adjustments are of
a normal, recurring nature. The results of operations for the three- and
six-month periods ended June 30, 1998 are not necessarily indicative of the
results to be expected for the entire fiscal year.
The interim consolidated financial information should be read in
conjunction with the Company's Transition Report on Form 10-K, Commission
file number 0-13318, for the Transition Period from April 1, 1997 to December
31, 1997.
Certain 1997 amounts have been reclassified for comparative purposes.
NOTE 2 - Accounting Policies
Revenue recognition
On January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") which superseded Statement of
Position 91-1, "Software Revenue Recognition." SOP 97-2 focuses on when and
in what amounts revenue should be recognized for licensing, selling, leasing
or otherwise marketing computer software. The adoption of SOP 97-2 did not
have a material impact on the Company's revenue recognition policies.
Revenue from the sale of commercial, off-the-shelf software is
recognized when the following four criteria are met: (1) the sale is in
writing, (2) the software has been shipped, (3) the fee is fixed or
determinable and (4) collectibility is probable. Customized software revenue
is recognized when the software is accepted by the customer.
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Maintenance revenue, which includes unspecified when-and-if deliverable
software upgrades, user documentation and technical support for software
products, is deferred and recognized on a straight-line basis over the term
of the maintenance agreement, generally one year. Revenue from services
including data entry, integration, installation and system training is
recognized when the services are performed. Amounts received but not earned
are deferred.
Net income (loss) per share
Basic and diluted net income (loss) per share were computed in
accordance with Statement of Financial Accounting Standards No.128, "Earnings
Per Share." The differences between basic weighted average common shares
outstanding and diluted weighted average common shares outstanding are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic weighted average common shares 21,506 19,857 21,406 19,851
Convertible preferred stock 2,081 2,081 2,081 2,081
------ ------- ------ ------
Diluted weighted average common shares 23,587 21,938 23,487 21,932
====== ======= ====== ======
</TABLE>
All outstanding stock options and warrants are anti-dilutive and are
therefore, excluded from the computations of basic and diluted net income
(loss) per share.
NOTE 3 - Cash and Equivalents and Short-Term Investments
Cash and equivalents include cash and short-term investments in
commercial paper. Short-term investments in commercial paper, which are held
to maturity (less than three months from the date of purchase), are carried
at cost which approximates their market value. These investments totaled $0
and $676,000 at June 30, 1998 and December 31, 1997, respectively.
At June 30, 1998 and December 31, 1997, other short-term investments
include 92,800 shares of common stock of Lumisys, Inc. ("Lumisys") acquired
from the sale of the Company's medical imaging archival technology in July
1997. The Company does not actively seek to trade this investment for
purposes of maximizing trading gains and classifies it as "available for
sale." Accordingly, the temporary excess (deficiency) of market value over
(under) the underlying cost is reported as an unrealized gain (loss) as a
separate component of stockholders' equity.
NOTE 4 - Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful accounts
of $13,000 and $22,000 at June 30, 1998 and December 31, 1997, respectively.
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<PAGE>
NOTE 5 - Comprehensive Income (Loss)
<TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
The new disclosure requirements with respect to comprehensive income (loss)
are as follows (in thousands):
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Comprehensive income (loss):
<S> <C> <C> <C> <C>
Net loss, as reported $(665) $(702) $(1,657) $(1,398)
Unrealized loss on investment (58) - (93) -
----- ----- ------- -------
Total comprehensive income (loss) $(723) $(702) $(1,750) $(1,398)
===== ===== ======= =======
</TABLE>
NOTE 6 - Notes Payable
In April 1998, the Company entered into a one-year $750,000 working
capital line of credit with a financial institution. The line of credit is
secured by the Company's accounts receivable, inventory and other assets and
allows borrowings of up to 80% of the eligible accounts receivable balance.
The line of credit carries an interest rate of prime plus 3% as well as a
service fee ranging from .75% to 1.5% of the amount borrowed. At June 30,
1998, the Company had borrowed $292,000 under this line of credit and had
$257,000 available for future borrowings. Additional available credit under
this facility will depend on the Company generating additional revenue.
Also in April 1998, the Company entered into a one-year $300,000 line of
credit with a bank. The line of credit is secured by the Company's
short-term investment in Lumisys common stock, carries interest at prime plus
one percent and allows borrowings of up to 70% of the Lumisys stock's market
value. At June 30, 1998, the Company had borrowed $235,000 under this line
of credit and had $33,000 available for future borrowings.
NOTE 7 - Liquidity
The Company's net losses from operations and acquisitions to date have
consumed substantial amounts of cash. Through the six months ended June 30,
1998, the Company has used cash from operations of approximately $1.0
million. The continuing operation of the Company's business, and the
continued development and commercialization of its technology, products and
services, will require the availability of additional funds for the
foreseeable future. The Company's ability to obtain cash adequate to fund
its needs depends generally on the results of its operations and the
availability of financing. Without continued increases in revenues or
obtaining additional financing, the Company may be required to make
additional reductions in operating expenses, which may have a material
adverse effect on the Company. If the Company has insufficient funds for its
needs, the Company may not be able to raise additional funds on favorable
terms, if at all, or may not be able to do so on a timely basis. Failure to
obtain additional funds when needed could materially adversely affect the
Company.
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<PAGE>
The Company is currently in default with respect to its payment
obligations under an unsecured promissory note and a secured promissory note
on which payments in the approximate principal amounts of $50,000 and
$120,000, respectively, remain payable. Such defaults have resulted in the
creditors having the right to accelerate the balance due under the notes and
exercise other rights available under the law, including, in the case of the
secured note, foreclosing on the computer equipment serving as collateral for
such note. The Company is currently in discussions with both creditors to
waive any current defaults and to restructure the timing of remaining
payments thereunder. There can be no assurances that such creditors will
agree to waive all existing defaults and extend the timing of remaining
payments due under the notes. The existence of such defaults may also
activate cross-default provisions under the Company's working capital line of
credit and its bank line of credit.
In addition, the Company is delinquent in its payments due certain
vendors to the Company and is seeking to extend payment terms from such
providers. If unsuccessful, such parties may take actions against the
Company, including the termination of their relationship with the Company or
the initiation of collection proceedings.
In view of the Company's additional liquidity requirements, the Company
is also continuing to seek to sell additional equity or convertible debt
securities or pursue debt financing arrangements. To date, the Company has
no commitments, agreements or understandings with respect to additional
financing and there can be no assurance that the Company will be able to
consummate any such transaction or raise adequate funds from such transaction
to meet the Company's cash needs. As a result of the delisting of the
Company's common stock from the Nasdaq SmallCap Market, investors may suffer
a loss of liquidity in the shares of such stock and the Company may have
difficulty raising funds in the capital markets. Further, the sale of
additional equity or convertible debt securities could result in dilution to
the Company's stockholders.
NOTE 8 - Subsequent Event
During the three months ended June 30, 1998, the Company's common stock
was delisted from the Nasdaq National Market and moved to the Nasdaq SmallCap
Market based upon the Company's failure to meet Nasdaq's heightened listing
requirements, which went into effect on February 23, 1998. On August 11,
1998 the Company's common stock was delisted from the Nasdaq SmallCap Market
due to the Company's noncompliance with a condition to its continued listing
on the SmallCap Market imposed by Nasdaq at the time of its transfer to the
SmallCap Market. Trading in the Company's common stock is currently being
conducted on the Over The Counter ("OTC") Bulletin Board of the National
Association of Securities Dealers, Inc. under the symbol STRR.
Because the Company's common stock is no longer listed on Nasdaq,
trading in the Company's common stock is subject to certain rules promulgated
under the Securities Exchange Act of 1934 ("Exchange Act"), which impose
additional disclosure and various sales practice requirements on
broker-dealers in connection with any trades involving a stock defined as a
"penny stock" (generally, any non-exchange listed equity security that has a
market price of less than $5.00 per share, subject to certain exceptions).
Under Exchange Act Rule 15g-9 broker-dealers must, prior to selling a penny
stock, (i) obtain from the investor information concerning the person's
financial situation, investment experience and investment objectives, (ii)
reasonably determine that transactions in penny stocks are suitable for such
investor and that such investor (or such investor's independent adviser in
the transaction) has sufficient knowledge and experience in financial matters
so as reasonably to be expected to be capable of
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evaluating the risks of transactions in penny stocks, and (iii) deliver a
written statement, which must be signed and returned to the broker-dealer by
the investor, setting forth among other things the basis on which the
broker-dealer approved the investor's account for the transaction. If the
penny stock rules are not followed by a broker-dealer, the investor has no
obligation to purchase the shares. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from
effecting transactions in the Company's common stock and the ability of
purchasers of the Company's common stock to resell such stock in the
secondary market.
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<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto and in conjunction
with Management's Discussion and Analysis of Financial Condition and Results
of Operations in the Company's Form 10-K for the Transition Period from April
1, 1997 through December 31, 1997. This Quarterly Report, and in particular
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contain forward-looking statements (as defined in Section 21E of
the Securities Exchange Act of 1934, as amended) which reflect management's
current views with respect to certain future events and financial
performance. Actual future results and trends may differ materially
depending upon a variety of factors, including, among others, risk of
technological change and uncertainty of product development, risks associated
with acquisitions, the potential inability to finance future capital needs,
operating losses, competition, probable fluctuations in operating results,
reliance on key personnel, the risk of business interruptions, potential
inability to protect proprietary rights and the risk of defects, as discussed
under the heading "Risk Factors" in the Company's Form 10-K for the
Transition Period from April 1, 1997 through December 31, 1997.
Corporate Repositioning
During 1997, Star Technologies, Inc. ("Star" or the "Company") completed
a transition from providing performance-enhancing computing products and
solutions principally for the medical imaging market to providing imaging
solutions for the broader document imaging market. In July 1997, the Company
sold its medical imaging archival technology, and through a newly-created
operating subsidiary, PowerScan, Inc. ("PowerScan"), acquired document
imaging and processing technology 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.
With these two acquisitions, Star is a provider of integrated products and
services for commercial and government users involved in data capture, image
capture and document imaging. These two acquisitions are part of the
Company's long-term growth plan to build market presence in the document
imaging market through strategic acquisitions and alliances. The Company
continues its search to identify additional acquisition opportunities in this
market, although any such acquisition may depend, in part, on the Company
obtaining additional financing.
Results of Operations
Results of operations for the three and six months ended June 30, 1998
are not directly comparable to the results of operations for the same
prior-year period due to the repositioning of the Company's line of business
from the medical imaging market to the document imaging market.
Revenue
Total revenue for the three months ended June 30, 1998 increased to
$1,541,000, from $169,000 for the same period a year ago. Product revenue
was $539,000 and $35,000 for the three months ended June 30, 1998 and 1997,
respectively, representing 35% and 21% of total revenue for such periods.
Service revenue was $1,002,000 and $134,000 for the three months ended June
30, 1998 and 1997, respectively, representing 65% and 79% of total revenue
for such periods.
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<PAGE>
Total revenue for the six months ended June 30, 1998 increased to
$2,684,000, from $278,000 for the same period a year ago. Product revenue
was $866,000 and $45,000 for the six months ended June 30, 1998 and 1997,
respectively, representing 32% and 16% of total revenue for such periods.
Service revenue was $1,818,000 and $233,000 for the six months ended June 30,
1998 and 1997, respectively, representing 68% and 84% of total revenue for
such periods. Product revenue consists of revenue from the sale of PowerScan
and StageWorks software as well as computer hardware and scanning equipment.
Service revenue consists of revenue from data entry and imaging services,
maintenance, integration, installation, and systems training provided to the
Company's customers.
The increases in product and service revenue are primarily attributable
to sales of the new document imaging products and services following the
acquisitions described above. See "Corporate Repositioning." In the first
six months of 1998, the Company broadened its distribution strategy for its
imaging software by focusing on channel, value added reseller ("VAR") and
integrator distribution. In this regard, the Company's PowerScan subsidiary
added to its growing list of VARs that market the PowerScan and StageWorks
software. PowerScan also entered into several key industry partnerships,
including Kodak. The change in distribution strategy, as well as the
recently entered into original equipment manufacturer ("OEM") agreements
with, among others, Fuji Photo Film USA and BancTec Inc., should have a
favorable impact on the Company's results of operations beginning in the
second half of 1998, although there can be no assurance that these
arrangements will result in substantial sales.
Cost of Revenue
Cost of product revenue was $140,000 and $28,000 for the three months
ended June 30, 1998 and 1997, respectively representing 26% and 80% of total
product revenue in the respective periods. Cost of product revenue was
$201,000 and $163,000 for the six months ended June 30, 1998 and 1997,
respectively, representing 23% and 362% of total product revenue in the
respective periods. Cost of product revenue primarily includes costs
associated with the purchase of hardware products and scanning equipment for
resale. The cost of product revenue as a percentage of product revenue may
vary from period to period depending on the ratio of software revenue, which
has a lower cost, to hardware revenue.
Cost of service revenue was $680,000 and $109,000 for the three months
ended June 30, 1998 and 1997, respectively, representing 68% and 81% of total
service revenue in the respective periods. Cost of service revenue was
$1,287,000 and $295,000 for the six months ended June 30, 1998 and 1997,
respectively, representing 71% and 127% of total product revenue in the
respective periods. The increase in the dollar amount of cost of service
revenue is primarily attributable to an increase in compensation and related
benefits, the use of independent contractors and third party maintenance
contracts in connection with the corresponding increase in service revenue
associated with the Company's corporate repositioning.
Research and Development
Research and development ("R&D") expense consists primarily of:
compensation and related benefits; the use of independent contractors for
development projects; and an allocated portion of general overhead costs,
including occupancy. At June 30, 1998, the research and development staff
consisted of 10 employees. The majority of product R&D expense for the
current quarter and six months relates to on-going product enhancements. R&D
expense was $218,000 and $227,000 for the three-month period ended
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<PAGE>
June 30, 1998 and 1997, respectively, representing 14% and 134% of total
revenue in the respective periods. R&D expense was $407,000 and $464,000 for
the six-month period ended June 30, 1998 and 1997, respectively, representing
15% and 167% of total revenue in the respective periods. The decrease in the
dollar amount of R&D expense for the three- and six-month periods ended June
30, 1998 compared to the same period of the prior year is primarily
attributable to the Company's sale in July 1997 of its medical imaging
technology, offset in part by R&D expense associated with the Company's
document imaging software, acquired in July 1997. The decrease as a
percentage of total revenue is due to the Company's corporate repositioning
and the resultant increased revenue. The Company believes that R&D
expenditures, including compensation of technical personnel, are essential to
maintaining its competitive position and expects these costs to increase and
continue to constitute a significant percentage of revenue.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense consists primarily
of: compensation and related benefits and reimbursable travel and living
expenses related to the Company's sales, marketing and administrative
personnel; advertising and marketing expenses, including trade shows and
similar type sales and marketing expenses; and general corporate expenses,
including occupancy costs. SG&A expense for the three months ended June 30,
1998 was $1,160,000, compared to $573,000 for the same period a year ago.
SG&A expense for the six months ended June 30, 1998 was $2.4 million,
compared to $1.0 million for the same period a year ago. The increase in the
dollar amount of SG&A expense is primarily due to the additional SG&A expense
associated with the Company's new PowerScan and CDT subsidiaries, offset in
part by the elimination of certain costs associated with the Company's former
medical imaging business.
Interest and Other Income
During the three and six months ended June 30, 1998, the Company
incurred $13,000 and $9,000, respectively, of net interest expense. During
the three and six months ended June 30, 1997, the Company earned $65,000 and
$144,000, respectively, of net interest income. Other income for the six
months ended June 30, 1997 included a one-time refund payment of $116,000
received from the Company's former health insurance company in connection
with its conversion from a mutual insurance company to a stock company.
Net Loss
The net loss for the three months ended June 30, 1998 was $665,000 ($.03
per share) compared with a net loss of $702,000 ($.04 per share) for the same
period of the prior year. The net loss for the six months ended June 30,
1998 was $1.7 million ($.08 per share) compared with a net loss of $1.4
million ($.08 per share) for the same period of the prior year. The net loss
is due to the corporate repositioning of the Company, and the associated
integration of the document imaging operations acquired as a result of the
two acquisitions discussed above. In spite of the net loss, management
continues to believe that the document imaging market is a significant
market. Management believes it has made investments in the talent and
technology necessary to establish the Company in this marketplace. However,
there can be no assurance that the Company will be able to achieve consistent
profitability on a quarterly or annual basis or that it will be able to
sustain or increase its revenue growth in future periods. Based upon the
expenses associated with current and planned staffing levels, profitability
is dependent upon increasing revenues.
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Liquidity and Capital Resources
At June 30, 1998, the Company had $13,000 of cash and equivalents and
$290,000 borrowing availability under its credit facilities discussed below.
The Company had a net cash outflow from operating activities of $1.0 million
for the six months ended June 30, 1998.
In April 1998, the Company entered into a one-year $750,000 working
capital line of credit with a financial institution. The line of credit is
secured by the Company's accounts receivable, inventory and other assets and
allows borrowings of up to 80% of the eligible accounts receivable balance.
The line of credit carries an interest rate of prime plus 3% as well as a
service fee ranging from .75% to 1.5% of the amount borrowed. At June 30,
1998, the Company had borrowed $292,000 under this line of credit and had
$257,000 available for future borrowings. Additional available credit under
this facility will depend on the Company generating additional revenue.
Also in April 1998, the Company entered into a one-year $300,000 line of
credit with a bank. The line of credit is secured by the Company's
short-term investment in Lumisys common stock, carries interest at prime plus
one percent and allows borrowings of up to 70% of the Lumisys stock's market
value. At June 30, 1998, the Company had borrowed $235,000 under this line
of credit and had $33,000 available for future borrowings.
The Company's net losses from operations and acquisitions to date have
consumed substantial amounts of cash. Through the six months ended June 30,
1998, the Company has used cash from operations of approximately $1.0
million. The continuing operation of the Company's business, and the
continued development and commercialization of its technology, products and
services, will require the availability of additional funds for the
foreseeable future. The Company's ability to obtain cash adequate to fund
its needs depends generally on the results of its operations and the
availability of financing. Without continued increases in revenues or
obtaining additional financing, the Company may be required to make
additional reductions in operating expenses, which may have a material
adverse effect on the Company. If the Company has insufficient funds for its
needs, the Company may not be able to raise additional funds on favorable
terms, if at all, or may not be able to do so on a timely basis. Failure to
obtain additional funds when needed could materially adversely affect the
Company.
The Company is currently in default with respect to its payment
obligations under an unsecured promissory note and a secured promissory note
on which payments in the approximate principal amounts of $50,000 and
$120,000, respectively, remain payable. Such defaults have resulted in the
creditors having the right to accelerate the balance due under the notes and
exercise other rights available under the law, including, in the case of the
secured note, foreclosing on the computer equipment serving as collateral for
such note. The Company is currently in discussions with both creditors to
waive any current defaults and to restructure the timing of remaining
payments thereunder. There can be no assurances that such creditors will
agree to waive all existing defaults and extend the timing of remaining
payments due under the notes. The existence of such defaults may also
activate cross-default provisions under the Company's working capital line of
credit and its bank line of credit.
In addition, the Company is delinquent in its payments due certain
vendors to the Company and is seeking to extend payment terms from such
providers. If unsuccessful, such parties may take actions against the
Company, including the termination of their relationship with the Company or
the initiation of collection proceedings.
-12-
<PAGE>
In view of the Company's additional liquidity requirements, the Company
is also continuing to seek to sell additional equity or convertible debt
securities or pursue debt financing arrangements. To date, the Company has
no commitments, agreements or understandings with respect to additional
financing and there can be no assurance that the Company will be able to
consummate any such transaction or raise adequate funds from such transaction
to meet the Company's cash needs. As a result of the delisting of the
Company's common stock from the Nasdaq SmallCap Market, investors may suffer
a loss of liquidity in the shares of such stock and the Company may have
difficulty raising funds in the capital markets. Further, the sale of
additional equity or convertible debt securities could result in dilution to
the Company's stockholders.
The Series B and Series C Senior Preferred Stock (the "Preferred Stock")
currently accrue dividends at a rate of 10% per annum. To the extent
declared, such dividends would be payable quarterly in the amount of $50,000
in cash. Unpaid cumulative dividends in arrears on the Preferred Stock total
$375,000 as of June 30, 1998.
Delisting of Common Stock From Nasdaq National Market
During the three months ended June 30, 1998, the Company's common stock
was delisted from the Nasdaq National Market and moved to the Nasdaq SmallCap
Market based upon the Company's failure to meet Nasdaq's heightened listing
requirements, which went into effect on February 23, 1998. On August 11,
1998 the Company's common stock was delisted from the Nasdaq SmallCap Market
due to the Company's noncompliance with a condition to its continued listing
on the SmallCap Market imposed by Nasdaq at the time of its transfer to the
SmallCap Market. Trading in the Company's common stock is currently being
conducted on the Over The Counter ("OTC") Bulletin Board of the National
Association of Securities Dealers, Inc. under the symbol STRR.
Because the Company's common stock is no longer listed on Nasdaq,
trading in the Company's common stock is subject to certain rules promulgated
under the Securities Exchange Act of 1934 ("Exchange Act"), which impose
additional disclosure and various sales practice requirements on
broker-dealers in connection with any trades involving a stock defined as a
"penny stock" (generally, any non-exchange listed equity security that has a
market price of less than $5.00 per share, subject to certain exceptions).
Under Exchange Act Rule 15g-9 broker-dealers must, prior to selling a penny
stock, (i) obtain from the investor information concerning the person's
financial situation, investment experience and investment objectives, (ii)
reasonably determine that transactions in penny stocks are suitable for such
investor and that such investor (or such investor's independent adviser in
the transaction) has sufficient knowledge and experience in financial matters
so as reasonably to be expected to be capable of evaluating the risks of
transactions in penny stocks, and (iii) deliver a written statement, which
must be signed and returned to the broker-dealer by the investor, setting
forth among other things the basis on which the broker-dealer approved the
investor's account for the transaction. If the penny stock rules are not
followed by a broker-dealer, the investor has no obligation to purchase the
shares. The additional burdens imposed upon broker-dealers by such
requirements may discourage broker-dealers from effecting transactions in the
company's Common stock and the ability of purchasers of the Company's common
stock to resell such stock in the secondary market.
-13-
<PAGE>
Year 2000 Disclosure
The Company has made a preliminary assessment of potential Year 2000
issues with respect to various computer-related systems, including those of
its vendors. 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.
Effect of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("FAS No. 131"), "Disclosure about
Segments of an Enterprise and Related Information". FAS No. 131 requires the
Company to present certain information about operating segments and related
information, including geographic and major customer data, in its annual
financial statements and in condensed financial statements for interim
periods. The Company is required to adopt the provisions of this Statement
during the fourth quarter of fiscal year 1998. The effect of adoption of
this statement will be limited to the form and content of the Company's
disclosures and will not impact the Company's results of operations, cash
flow or financial position.
-14-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to litigation arising in the
normal course of its business. Such claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources.
Management believes that no currently pending or threatened actions will have
a material and adverse effect on the financial condition or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 21, 1998. A
total of 19,957,251 shares of the Company's Common Stock and Preferred Stock
were present, in person or by proxy, at the Annual Meeting to vote on the
election of one director.
At the Annual Meeting, Alan Maxwell was elected to the Company's Board
of Directors for a term equal to the earliest of three years, the election
and qualification of his successor, or until his death, resignation or
removal from office. Holders of the Company's Common Stock and Preferred
Stock were eligible to vote on the nomination of Mr. Maxwell to the Board of
Directors. A total of 19,673,487 shares were voted for Mr. Maxwell and
283,764 were withheld.
Mr. Herbert Schantz, Mr. Robert Compton and Dr. Carl Ravin continue as
Directors of the Company. Mr. Schantz's term expires on the date of the 1999
Annual Meeting of Stockholders. Mr. Compton and Dr. Ravin's terms expire on
the date of the 2000 Annual Meeting of Stockholders.
Mr. John Meshinsky, appointed to the Board of Directors in July 1997,
resigned from the Board in March 1998.
Item 5. Other Information
The Company received notice from The Nasdaq Stock Market, Inc. that the
Company's common stock was delisted from the Nasdaq SmallCap Market as of the
close of business on August 11, 1998. Nasdaq's delisting notification
follows the June 10, 1998, decision of a Nasdaq Listing Qualifications Panel
to move the Company's common stock from the Nasdaq National Market to the
Nasdaq SmallCap Market as a result of the Company's non-compliance with
certain of Nasdaq's heightened listing requirements, which went into effect
on February 23, 1998. The Panel's decision set forth certain conditions to
the continued listing of the Company's common stock on the Nasdaq SmallCap
Market, including the Company's making a public filing, on or before August
10, 1998, with the Securities and Exchange Commission and Nasdaq evidencing a
minimum of $3,000,000 in net tangible assets. The Company was not in
compliance with this condition on such date.
Trading in the Company's common stock is currently being conducted on
the Over The Counter ("OTC") Bulletin Board of the National Association of
Securities Dealers, Inc. under the symbol STRR.
Because the Company's common stock is no longer listed on Nasdaq,
trading in the Company's common stock is subject to certain rules promulgated
under the Securities Exchange Act of 1934 ("Exchange Act"), which impose
additional disclosure and various
-15-
<PAGE>
sales practice requirements on broker-dealers in connection with any trades
involving a stock defined as a "penny stock" (generally, any non-exchange
listed equity security that has a market price of less than $5.00 per share,
subject to certain exceptions). Under Exchange Act Rule 15g-9 broker-dealers
must, prior to selling a penny stock, (i) obtain from the investor
information concerning the person's financial situation, investment
experience and investment objectives, (ii) reasonably determine that
transactions in penny stocks are suitable for such investor and that such
investor (or such investor's independent adviser in the transaction) has
sufficient knowledge and experience in financial matters so as reasonably to
be expected to be capable of evaluating the risks of transactions in penny
stocks, and (iii) deliver a written statement, which must be signed and
returned to the broker-dealer by the investor, setting forth among other
things the basis on which the broker-dealer approved the investor's account
for the transaction. If the penny stock rules are not followed by a
broker-dealer, the investor has no obligation to purchase the shares. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the company's Common
stock and the ability of purchasers of the Company's common stock to resell
such stock in the secondary market.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits filed herewith or incorporated by reference are set
forth on the Exhibit Index immediately preceding the exhibits.
(b) Reports on Form 8-K.
On June 23, 1998, the Company filed with the Commission Current
Report on Form 8-K, dated June 23, 1998, regarding the potential
delisting of the Company's common stock from the Nasdaq Stock Market.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR TECHNOLOGIES, INC.
Dated: August 14, 1998 /s/ Brenda A. Potosnak
Brenda A. Potosnak
Vice President of Finance and
Administration, Secretary, Treasurer
and Chief Financial Officer
-17-
<PAGE>
EXHIBIT INDEX
Exhibit
No.
3.1* Restated Certificate of Incorporation of the Company, as
amended, incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1988
(Registration No. 0-13318) filed with the Commission on June
29, 1988.
3.2* Certificate of Designation, Preferences and Rights of Series
B Senior Preferred Stock and Series C Senior Preferred Stock
("Certificate of Designation"), incorporated by reference
from the exhibit filing to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1990
(Registration No. 0-13318) filed with the Commission on June
29, 1990.
3.3* Certificate of Amendment of Restated Certificate of
Incorporation of the Company, dated August 29, 1994,
incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1995
(Registration No. 0-13318) filed with the Commission on June
29, 1995.
3.4* Certificate of Amendment of Restated Certificate of
Incorporation of the Company, dated August 23, 1996,
incorporated by reference from the exhibit filing to the
Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1996 (Registration No. 0-13318) filed
with the Commission on November 14, 1996.
3.5* By-Laws of the Company, as amended and restated on February
24, 1994, and as further amended on August 22, 1996,
incorporated by reference from the exhibit filing to the
Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1996 (Registration No. 0-13318) filed
with the Commission on November 14, 1996.
11 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
*Incorporated by reference.
-18-
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Basic Per Share Earnings (Loss) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Average shares outstanding during period 21,506 19,857 21,406 19,851
======= ======= ======= =======
<S> <C> <C> <C> <C>
Net loss $ (665) $ (702) $(1,657) $(1,398)
Undeclared cumulative dividends on Series B
and Series C Senior Preferred Stock (50) ( 50) (100) (100)
------- ------- ------- -------
Net loss applicable to common shares $ (715) $ (752) $(1,757) $(1,498)
======= ======= ======= =======
Basic loss per common share $ (.03) $ (.04) $ (.08) $ (.08)
======= ======= ======= =======
</TABLE>
-19-
<PAGE>
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS (Cont'd)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Diluted Per Share Earnings (Loss) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Average shares outstanding during period 21,506 19,857 21,406 19,851
Employee stock options assumed exercised 324 - 473 -
Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 95 95 95 95
Series B & C preferred stock 1,986 1,986 1,986 1,986
------- ------- ------- -------
23,911 21,938 23,960 21,932
======= ======= ======= =======
<S> <C> <C> <C> <C>
Net loss applicable to common shares $ (665) $ (703) $(1,657) $(1,398)
======= ======= ======= =======
Diluted net loss per common share $ (.03) $ (.03) $ (.07) $ (.06)
======= ======= ======= =======
</TABLE>
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13
<SECURITIES> 348
<RECEIVABLES> 870
<ALLOWANCES> 13
<INVENTORY> 41
<CURRENT-ASSETS> 1574
<PP&E> 2022
<DEPRECIATION> 1128
<TOTAL-ASSETS> 5024
<CURRENT-LIABILITIES> 2582
<BONDS> 0
0
3
<COMMON> 217
<OTHER-SE> 2195
<TOTAL-LIABILITY-AND-EQUITY> 5024
<SALES> 2684
<TOTAL-REVENUES> 2684
<CGS> 1488
<TOTAL-COSTS> 1488
<OTHER-EXPENSES> 2846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (1657)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1657)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1657)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
