UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Fiscal Year Ended Commission File Number 0-13318
December 31, 1998
STAR TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0794452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1151-A Seven Locks Road
Potomac, Maryland 20854
(Address of principal executive offices)
(Zip Code)
(301) 315-0240
(Registrant's telephone number, including area code)
Securities registered pursuant None
to Section 12(b) of the Act:
Securities registered pursuant Common Stock, $.01 par value
to Section 12(g) of the Act: (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, 1999 was $5,255,000 based on the closing sale
price as reported by the OTC Bulletin Board. 22,060,384 shares of Common
Stock were outstanding as of March 24, 1999.
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Document incorporated by reference:
1. Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting to be held May 20, 1999, are incorporated by reference into Part
III of this Report on Form 10-K.
PART I
This annual report on Form 10-K for the year ended December 31, 1998
contains forward-looking statements (as defined in Section 21E of the
Securities Exchange Act of 1934) that are subject to risks and uncertainties.
Forward-looking statements relate to, among other things: (1) the outcome of
our growth strategy, (2) anticipated new product introductions and market
acceptance, (3) future liquidity and capital expenditures, (4) the ability to
obtain financing and service debt and other obligations, and (5) the
projected growth of the document imaging industry. You may identify these
statements by forward-looking words such as "may," "will," "expects,"
"anticipates," "believe," "estimate," "plan," "scheduled," "potential," and
similar words. We have based these statements on our current expectations
about future events. Although we believe that our expectations reflected in
or suggested by our forward-looking statements are reasonable, we cannot
assure you that we will achieve these expectations. Our actual results and
events may differ materially from what we currently expect. Important
factors that could cause our actual results to differ materially from the
forward-looking statements in this annual report on Form 10-K are set forth
in the "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation" sections of this annual report on Form
10-K. All forward-looking statements attributable to us are expressly
qualified by these cautionary statements.
Item 1. Business
GENERAL
Star Technologies, Inc. ("Star" or the "Company") provides products and
services for government and commercial users involved in data capture, image
capture and document imaging. Its PowerScan, Inc. ("PowerScan") subsidiary
develops image capture and image processing software and services. Its
Curran Data Technologies, Inc., ("CDT") subsidiary provides full-service data
entry and document imaging services. Star's long-term growth plan is to
build market presence in the document imaging market by forging key strategic
and marketing alliances, developing new products and capabilities, and
through strategic acquisitions and technology partnerships.
Products and Services
On July 30, 1997, PowerScan acquired certain assets and software
technology for high-speed, high-volume document capture and processing from
Intrafed, Inc. (See Note 3 to the consolidated financial statements.) The
technology purchased included PowerScan(R) and StageWorks(R), document
capture and image processing software.
PowerScan(R) is a leading software for high-speed and high volume
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 the software the flexibility to operate with scanners produced by
leading manufacturers - from Bell & Howell, BancTec, Fuji, Fujitsu, Kodak,
Panasonic, Ricoh, Siemens-CGK and others - at the rated speed of the scanner.
PowerScan runs on the Windows/NT platform. Its scanning and
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viewing features provide quality, high-speed images with the ability to view
every nth image for image quality. PowerScan software provides access to
most scanner features, and lets the user index batches and perform visual
quality checks during scanning.
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 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. Industrial is a
networked system that automatically transfers image batches from
stage-to-stage (StageFlow(TM)). Industrial can process multiple image
batches through many StageFlows simultaneously. StageWorks also operates on
the Windows/NT platform.
In April 1999 at the Association for Information and Image Management
(AIIM) annual Conference, PowerScan will be introducing Integrated Digital
Environment Access ("IDEA"), an important new family of software products for
the capture and processing of digital objects in a fully integrated
environment. IDEA was built specifically for the way businesses communicate
and manage knowledge in today's digital economy. In today's information
collection solutions, capturing business documents alone is not enough.
These solutions must deal seamlessly with data from scanners, faxes, e-mail,
electronic forms as well as digital input from video, voice and audio files,
and then be able to further process those objects in an integrated
environment. IDEA is designed to address such user requirements to provide
an integrated platform for the processing of digital objects. With IDEA,
users will now be able to capture and process not only paper and film, but
also other digital objects such as audio, visual, and electronic objects, in
a single, integrated environment. Using the digital object as the basic
building block in the system, users can quickly and easily "snap in"
additional capture technologies such as forms and item processing. The
system is Windows/NT based and was designed and developed using COM/DCOM
object programming. IDEA is distinguished by its use of non-proprietary ODBC
databases. The Company anticipates shipping the first production units in
early May 1999.
In October 1997, Star acquired CDT, a data entry and document imaging
services company located in Indianapolis, Indiana. (See Note 3 to the
consolidated financial statements.) CDT's comprehensive services include:
data entry, image assisted data entry, also referred to as key from image,
forms processing and reject repair, backfile conversion, 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 image and data capture applications, including the
processing of medical and insurance claims, state taxes, customer orders,
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. 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.
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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.
CUSTOMERS
Star 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 a wide range of commercial and government
customers. The Company's data entry services provide processing for medical
and insurance claims, state taxes, 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 revenue for the year ended December 31, 1998.
SALES, MARKETING AND DISTRIBUTION
Star 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 geographically, as
well as by certain vertical markets and applications. The Company has
expanded its sales force geographically by opening sales offices in Houston,
Dallas, Los Angeles and Boston. Additional offices are planned for Chicago
and Atlanta. 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. 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. The Company has targeted additional OEMs with
which it will attempt to establish similar relationships over the next fiscal
year. 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 AND CUSTOMER SERVICE
Star believes that responsive technical support of its products and
customer service is essential to support 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 unspecified when-and-if deliverable software
upgrades 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 revenue. 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.
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Maintenance and customer service revenue as a percentage of total
revenue was approximately 22% for the year ended December 31, 1998 ("fiscal
1998"), 44% for the nine months ended December 31, 1997; and 45% for the year
ended March 31, 1997 ("fiscal 1997"). The lower percentage for the year
ended December 31, 1998 is due to higher total revenue.
BACKLOG
Star 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 on a project-oriented basis. Accordingly, the
Company does not consider its level of backlog to be a significant or
important indicator of future revenue or earnings.
RESEARCH AND DEVELOPMENT
Star 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. 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.
Research and development expenditures totaled $865,000 in fiscal 1998,
$601,000 for the nine months ended December 31, 1997, and $1.1 million in
fiscal 1997. The Company currently expenses all software development costs.
The Company anticipates that it will continue to make substantial investments
in its research and development activities.
COMPETITION
The document imaging market 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.
Star 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 as the
document imaging market continues to develop and expand. The Company's
principal competitors for its software products include Kofax Image Products,
Inc. and Input Software, 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 adversely affect its
business, operating results and financial condition.
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PROPRIETARY RIGHTS
Star 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 12, 1999, Star had 168 full- and part-time employees and
contractors, of which 16 were engaged in engineering and research and
development; 9 in marketing and sales; 128 in service and operations; and 15
in general management, finance and administration.
EXECUTIVE OFFICERS
Star's executive officers are as follows:
Name Age Position
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Robert C. Compton 51 Chairman of the Board, President
and Chief Executive Officer
Carol L. Curran 54 Executive Vice President,
President, CDT, Inc.
Curtis D. Abel 63 Vice President,
President, PowerScan, Inc.
Brenda A. Potosnak 36 Vice President of Finance & Administration,
Chief Financial Officer, Treasurer &
Secretary
Philip A. Cannon 52 Vice President of Technology
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 General Electric Company.
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Carol L. Curran was appointed an Executive Vice President of Star and
President of Curran Data Technologies in October 1997. She founded CDT 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.
Curtis D. Abel was appointed a Vice President of Star and President of
PowerScan in April 1998. Mr. Abel has over 30 years of experience with
successful imaging and computer companies. Before joining PowerScan, Mr.
Abel was Vice President of Sales and Marketing of Mitek Systems, Inc. Prior
to his association with Mitek Systems, Mr. Abel was Vice President of Sales
and Marketing at Recognition Research, Inc., Scan-Optics, Inc., Intrafed,
Inc. and Motorola Computer Systems.
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.
Philip A. Cannon was appointed Vice President of Technology in May 1998.
Previously, he served as Director of Business Development, and was involved
with Star's business refocus from the medical imaging market to the broader
document imaging market. Prior to that, he managed Star's successful OEM
relationship with GE Medical Systems for more than a decade. In the early
1980's, he was involved in the development of Star's initial array processor
product, a specialized high-speed computer used for high-performance data and
image processing applications. Mr. Cannon joined the Company in 1981.
RISK FACTORS
Potential Inability to Finance Future Capital Needs; Operating Losses
Star's operations and acquisitions to date have consumed substantial
amounts of cash. The Company incurred operating losses of $3.0 million, $2.2
million and $4.3 million for the fiscal year ended December 31, 1998, for the
nine months ended December 31, 1997 and for the fiscal year ended March 31,
1997, respectively. The Company spent $2.4 million in connection with the
acquisition of PowerScan and CDT 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.
Without continued increases in revenue or obtaining additional financing, the
Company may be required to make additional reductions in operating expenses
or sell certain assets, 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.
As of March 31, 1999, the Company has received $225,000 from its
officers and directors for short-term cash requirements. (See Management's
Discussion and Analysis - Liquidity.) In March 1999, the Company sold its
internet domain name, star.com, for $125,000. In view of the Company's
additional liquidity requirements, the Company may continue to seek to sell
additional equity or convertible debt securities or pursue debt financing
arrangements. 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.
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Limited Software Operating History; Future Operating Results Uncertain
Star has operated in the document imaging market since July 1997.
Accordingly, the Company's prospects must be considered in light of the risks
and difficulties frequently encountered by companies in the early stage of
development, particularly companies in new and rapidly evolving markets. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
personnel and continue to improve its products. The Company has not achieved
operating profitability and has incurred operating losses in each quarter
from its entry into the document imaging market through the quarter ending
December 31, 1998. The Company expects to continue to devote substantial
resources to research and development and sales and marketing and as a result
will need to achieve significant quarterly revenue to achieve profitability.
In particular, the Company intends to continue to hire additional sales and
research and development personnel in 1999 and beyond, which the Company
believes is required if the Company is to achieve significant revenue growth
in the future. Although the Company's revenue generally has increased in
recent periods, there can be no assurance that the Company's revenue will
grow in future periods, that it will grow at historical or market rates or
that the Company will become profitable on a quarterly or annual basis in the
future.
Concentration of Business In Document Imaging Market
Substantially all of Star's revenue 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.
Product Concentration
The Company currently expects the sale of its software products to
account for a substantial amount of the Company's revenue and revenue growth
for the foreseeable future. The Company's future operating results are,
therefore, heavily dependent upon continued market acceptance of its imaging
software products and enhancements to these products. Consequently, a
decline in the demand for, or market acceptance of, the Company's imaging
software products as a result of competition, technological change or other
factors, would have a material adverse effect on the Company's business,
operating results and financial condition.
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.
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Probable Fluctuations in Operating Results
Results for any period are not necessarily indicative of the results
that Star 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 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 revenue is 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 revenue, the Company may be unable to adjust its spending in a timely
manner to compensate for a shortfall in revenue. 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.
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 pursue acquisitions without additional financing,
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, 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.
Reliance on Key Personnel
Star'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
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that it will be successful in attracting, assimilating or retaining other
qualified 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 Star'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.
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.
Marketability of Common Stock
In August 1998, the Company's common stock was delisted from the Nasdaq
SmallCap Market. The Company's common stock is currently being traded 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
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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.
Year 2000 Issues
Star's software products are Year 2000 compliant as long as the
operating system on which they are used is Year 2000 compliant. The Company
has made reasonable efforts to ensure that the third-party software sold with
its products is Year 2000 compliant. Based upon its efforts, the Company is
confident that its use of third-party software will have no effect on its
software products' ability to meet Year 2000 requirements.
With respect to its internal computer systems, the Company's Year 2000
corrective actions include reprogramming impacted software when appropriate
and feasible, obtaining vendor-provided software upgrades when available and
completely replacing impacted systems when necessary. The Company expects to
implement successfully the systems and programming changes necessary to
address Year 2000 issues with respect to its internal systems by the fourth
quarter of 1999. The Company has not incurred significant costs to date and
does not believe that the cost of additional actions will have a material
adverse effect on its financial condition or results of operations.
Contingency plans are being developed which include the purchase of
off-the-shelf accounting software in the event existing systems cannot be
corrected. Although the Company is not aware of any material operational
issues or costs associated with preparing its internal systems for the Year
2000, the failure of the Company or its distributors, resellers, suppliers,
manufacturers and customers to complete the conversions or upgrades necessary
to fully address the Year 2000 issues in a timely manner could have a
material adverse effect on the Company's business, results of operations,
cash flows and financial condition.
Item 2. Properties
The Company leases approximately 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 Company relocated its corporate headquarters from Sterling,
Virginia to Potomac, Maryland in June 1998.
Item 3. Legal Proceedings
Star 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.
-10-
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The Company's common stock is traded on the Over-the-Counter Bulletin
Board under the symbol STRR. At March 23, 1999, there were approximately
1,300 holders of record of the Company's common stock. As a result of the
delisting of the Company's common stock from the Nasdaq SmallCap Market in
August 1998, investors may suffer a loss of liquidity in the shares of such
stock. Accordingly, there is a limited public trading market for the
Company's shares of common stock. Over-the-counter market quotations may
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not necessarily represent actual transactions. The table below
represents the high and low closing prices of the common stock for the
periods indicated during the last two fiscal years (in dollars).
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, 1998 December 31, 1997*
----------------- ------------------
High Low High Low
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter.............................. 1-1/2 7/8 11/32 1/4
Second Quarter............................. 1-1/16 3/8 21/32 1/4
Third Quarter.............................. 1/2 7/32 2-3/8 13/16
Fourth Quarter............................. 1/2 3/16 N/A N/A
</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 and certain debt holders.
In connection with its acquisition from Intrafed, Inc., of the PowerScan
and StageWorks software, the Company issued in September 1998, to Intrafed,
Inc., 180,000 shares and in August 1998, to Frans Kok, 195,000 shares of its
common stock without registration under the Securities Act of 1933, as
amended (the "Securities Act"). In addition, the Company issued 325,000
shares, without registration under the Securities Act, in February 1999 to
Intrafed as the final stock issuance in connection with the acquisition.
Such issuances of shares were exempt from registration pursuant to Section
4(2) of the Securities Act and represented the only unregistered issuances of
the Company's securities during the period covered by this annual report on
Form 10-K and during the first quarter of 1999.
*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 year ended December 31, 1998, as of
and for the nine months ended December 31, 1997, and as of and for the year
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, 1996 and 1995 and for each of the years in the two-year
period ended March 31, 1996 are derived from the audited consolidated
financial statements not included elsewhere herein.
-11-
<PAGE>
Results of operations for the year ended December 31, 1998 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, 1994.
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, Years ended March 31,
December 31, ----------------- -------------------------
(In thousands, except 1998 1997* 1996 1997 1996 1995
per share data) (Unaudited)
----------------------------------------------------------
Operations Statement Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue.................. $ 5,395 $ 1,706 $ 1,138 $ 1,247 $ 4,282 $21,623
Operating income (loss).. $(3,020) $(2,196) $(3,380) $(4,301) $(4,465) $ 663
Net income (loss)........ $(3,212) $(1,552) $ 3,331 $ 2,635 $(3,984) $ 1,193
Net income (loss) per
common share -
assuming dilution...... $ (.16) $ (.08) $ .61 $ .58 $ (.02) $ .14
Balance Sheet Data:
Working capital
(deficit).............. $(1,963) $ 482 $ 5,560 $ 5,094 $ 4,562 $ 9,399
Property and equipment,
net...................... $ 685 $ 775 $ 392 $ 271 $ 502 $ 698
Total assets............. $ 4,902 $ 5,663 $ 7,380 $ 6,031 $ 6,674 $13,020
Total debt............... $ 1,076 $ -- $ -- $ -- $ -- $ 49
Stockholders' equity..... $ 1,133 $ 4,075 $ 6,096 $ 5,400 $ 5,208 $10,374
*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 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 its operating subsidiary, PowerScan, Inc.
("PowerScan"), acquired document imaging and processing technology as its
entry into this broader market. Additionally, in October 1997, Star
-12-
<PAGE>
acquired Curran Data Technologies, Inc. ("CDT"), a provider of data entry
imaging services. See Notes 3 and 6 to the consolidated financial
statements. With these two acquisitions, Star provides products and services
for government and commercial users involved in data capture, image capture
and document imaging.
Results of operations for the year ended December 31, 1998 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.
Results of Operations - Fiscal Year Ended December 31, 1998 Compared to
Twelve Months Ended December 31, 1997 (Unaudited)
Revenue for the year ended December 31, 1998 was $5.4 million, which
represents the first full year of revenue from sales of the document imaging
products and services acquired during 1997. (See Note 3 to the consolidated
financial statements.) Revenue for the twelve months ending December 31,
1997 was $1.8 million, of which $1.4 million was from sales of the document
imaging products and services, with the balance from customer service revenue
on the Company's older medical imaging products.
Product revenue was $2.1 million and $670,000 for the twelve months
ended December 31, 1998 and 1997, respectively, representing 40% and 37% of
total revenue for such periods. Product revenue consists of revenue from the
sale of PowerScan and StageWorks software as well as computer hardware and
scanning equipment. Service revenue was $3.3 million and $1.1 million for
the twelve months ended December 31, 1998 and 1997, respectively,
representing 60% and 63% of total revenue for such periods. Service revenue
consists of revenue from data entry and imaging services, maintenance,
integration, installation and systems training provided to the Company's
customers. For the twelve months ended December 31, 1997, service revenue
also included customer service revenue on the Company's older medical imaging
products.
Cost of revenue for the twelve months ended December 31, 1998 and 1997
was $3 million, or 55% of total revenue, and $1.1 million, or 62% of total
revenue, respectively. The cost of revenue as a percentage of total revenue
varies from period to period depending on the ratio of software revenue,
which has a significantly lower cost than hardware revenue and revenue from
data entry and imaging services.
Cost of product revenue was $613,000 and $308,000 for the twelve
months ended December 31, 1998 and 1997, respectively, representing 29% and
46% 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 Company purchases such items
at the customer's request and does not stock an inventory of such items.
Cost of service revenue was $2.4 million and $814,000 for the twelve months
ended December 31, 1998 and 1997, respectively, representing 73% and 71% of
total service revenue in the respective periods. Cost of service revenue
primarily includes compensation and related benefits, non-employee labor
costs and other direct costs associated with the Company's data entry and
imaging services.
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 December 31, 1998, the research and development
staff consisted of 16 employees and contractors. The majority of product R&D
expense for the year relates to new product development and on-going product
enhancements. R&D expense was $865,000 and $838,000 for the twelve months
ended December 31, 1998 and 1997, respectively, representing 16% and 46% of
total revenue in the respective periods. The Company currently expenses all
software development costs. 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.
-13-
<PAGE>
Marketing and sales expense consists primarily of: compensation and
related benefits and reimbursable travel and living expenses related to the
Company's marketing and sales personnel; advertising and marketing expenses,
including trade shows and similar type sales and marketing expenses.
Marketing and sales expense for the twelve months ended December 31, 1998 was
$1.6 million, compared to $1.1 million for the same period a year ago. The
increase in the dollar amount of marketing and sales expense is primarily due
to the additional marketing and sales 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.
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 consists primarily of
compensation and related benefits related to the Company's executive,
administrative and financial personnel; professional expenses including
accounting, legal and consulting and corporate expenses, including public
company expenses and other business expenses. G&A expense for the twelve
months ended December 31, 1998 was $3.0 million, compared to $1.9 million for
the same period a year ago. The increase in the dollar amount of G&A expense
is primarily due to additional G&A expense associated with the Company's new
subsidiaries, including compensation and occupancy costs, as well as
severance costs, incurred in fiscal 1998, associated with the departure of an
officer of the Company. During the year, the Company completed restructuring
activities which included consolidation of its corporate headquarters with
its PowerScan subsidiary in the third quarter of 1998 and a reduction of G&A
personnel by 30%.
During the twelve months ended December 31, 1998, the Company incurred
$53,000 of net interest expense. During the twelve months ended December 31,
1997, the Company earned $236,000 of net interest income.
Other expense for the twelve months ended December 31, 1998 was
$139,000, which includes a loss of $120,000 representing an other than
temporary decline in the market value of its Lumisys investment. For the
twelve months ended December 31, 1997, other income totaled $633,000 and
included the gain on the sale of the Company's medical imaging archival
technology in July 1997.
The net loss for the twelve months ended December 31, 1998 was $3.2
million compared with a net loss of $2.2 million for the twelve months ended
December 31, 1997. The net loss is due primarily to the corporate
repositioning of the Company, and the associated integration of the document
imaging operations acquired as a result of the two acquisitions discussed
above. In spite of the net loss, management continues to believe that the
document imaging market is a significant market. Management believes it has
made investments in the talent and technology necessary to establish the
Company in this marketplace. However, there can be no assurance that the
Company will be able to achieve consistent profitability on a quarterly or
annual basis or that it will be able to sustain or increase its revenue
growth in future periods. Based upon the expenses associated with current
and planned staffing levels, profitability is dependent upon increasing
revenue.
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, as well as customer service revenue on the older medical imaging
products. Revenue for the nine months ended December 31, 1996 was $1.1
million and primarily consisted of customer service revenue on medical
imaging products. 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.
-14-
<PAGE>
R&D expense for the nine-month period ended December 31, 1997 decreased
33% from the comparable period in 1996 primarily due to 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.
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 the sale
of the MIMS technology in July 1997.
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 6 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.)
Liquidity and Capital Resources
The Company's net losses from operations and acquisitions to date have
consumed substantial amounts of cash. At December 31, 1998, the Company had
a working capital deficit of $2.0 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
revenue or obtaining additional financing, the Company may be required to
make additional reductions in operating expenses or sell certain assets,
which may have a material adverse effect on the Company. If the Company has
insufficient funds for its needs, the Company may not be able to raise
additional funds on favorable terms, if at all, or may not be able to do so
on a timely basis. Failure to obtain additional funds when needed could
materially adversely affect the Company.
In April 1999, the Company entered into a $175,000 two-month
subordinated note agreement with an officer of the Company. The note is
secured by certain assets of the Company, carries interest at 10% per annum
and is due June 1999.
In September 1998, the Company entered into a subordinated note
agreement with a Director. The note is secured by certain assets of the
Company and totaled $125,000 at December 31, 1998. The note, originally due
in February 1999, was extended until August 1999. The note bears interest at
12% through February 1999 and 10% thereafter. The Director has the option to
convert the note into shares of the Company's common stock, at a 30% discount
at the date of conversion, if the note is not repaid on the maturity date.
-15-
<PAGE>
In April 1998, the Company entered into a $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 December 31, 1998,
the Company had borrowed $510,000 under this line of credit and had $160,000
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 December 31, 1998, the Company had borrowed all that was currently
available under this line of credit. Such borrowings totaled $264,000 at
December 31, 1998. The Company anticipates renewing the line of credit at
the end of April 1999.
The Company has a secured promissory note with a vendor in the amount of
$114,000 at December 31, 1998. The note bears interest of 9.5% per annum
through September 1998, and 12% thereafter. The Company is currently in
default with respect to its payment obligations under this note. Such
default has resulted in the creditor having the right to accelerate the
balance due under the note and exercise other rights available under the law,
including foreclosing on CDT's essential computer equipment serving as
collateral for such note. The Company is working with the creditor to
restructure the timing of remaining payments thereunder. There can be no
assurances that such creditor will agree to waive all existing defaults and
extend the timing of remaining payments due under the note. The existence of
such default may also activate cross-default provisions under the Company's
working capital line of credit and its bank line of credit.
In addition, the Company is delinquent in its payments due many vendors
and service providers of the Company. Certain vendors have taken actions
against the Company, including initiating collection proceedings. The
Company has extended payment terms with most of these vendors as well as
others and continues to seek to extend payment terms from additional vendors
and service providers. If unsuccessful, such parties may take further
actions against the Company, including the termination of their relationship
with the Company or the initiation of legal proceedings.
In view of the Company's additional liquidity requirements, the Company
is also continuing to seek to sell additional equity or convertible debt
securities or pursue debt financing arrangements. To date, the Company has
no commitments, agreements or understandings with respect to additional
financing and there can be no assurance that the Company will be able to
consummate any such transaction or raise adequate funds from such transaction
to meet the Company's cash needs. As a result of the delisting of the
Company's common stock from the Nasdaq SmallCap Market in June 1998,
investors may suffer a loss of liquidity in the shares of such stock and the
Company may have difficulty raising funds in the capital markets. Further,
the sale of additional equity or convertible debt securities could result in
dilution to the Company's stockholders.
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 $475,000 as of December 31, 1998. 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. The Company is also restricted in the payment
of dividends on its common stock by the rights of the holders of the
Preferred Stock and certain debt holders.
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
-16-
<PAGE>
net cash flows expected to be generated from the acquired business. Since
the acquisition, the Company has generated losses and negative cash flows.
In the event the Company remains unprofitable, the PowerScan goodwill could
be impaired. The Company will continue to re-evaluate such recoverability of
the PowerScan goodwill during each quarter of 1999. If the asset is
considered to be impaired, the Company will write down the asset by the
amount by which the carrying amount of the asset exceeds fair value. No
impairment was determined at December 31, 1998 based on this analysis.
Capital expenditures for the fiscal year ended December 31, 1998, for
the nine months ended December 31, 1997, and for the fiscal year ended March
31, 1997 were $280,000, $223,000, and $80,000, respectively. Capital
expenditures for the year ended December 31, 1998 and for the nine months
ended December 31, 1997 were primarily for technology infrastructure
enhancements for CDT.
Year 2000 Disclosure
The Company's software products are Year 2000 compliant as long as the
operating system on which they are used is Year 2000 compliant. The Company
has made reasonable efforts to ensure that the third-party software sold with
its products is Year 2000 compliant. Based upon its efforts, the Company is
confident that its use of third-party software will have no effect on its
software products' ability to meet Year 2000 requirements.
With respect to its internal computer systems, the Company's Year 2000
corrective actions include reprogramming impacted software when appropriate
and feasible, obtaining vendor-provided software upgrades when available and
completely replacing impacted systems when necessary. The Company expects to
implement successfully the systems and programming changes necessary to
address Year 2000 issues with respect to its internal systems by the fourth
quarter of 1999. The Company has not incurred significant costs to date and
does not believe that the cost of additional actions will have a material
adverse effect on its financial condition or results of operations.
Contingency plans are being developed which include the purchase of
off-the-shelf accounting software in the event existing systems cannot be
corrected. Although the Company is not aware of any material operational
issues or costs associated with preparing its internal systems for the Year
2000, the failure of the Company or its distributors, resellers, suppliers,
manufacturers and customers to complete the conversions or upgrades necessary
to fully address the Year 2000 issues in a timely manner could have a
material adverse effect on the Company's business, results of operations,
cash flows and financial condition.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk-Interest
Risk
The Company is exposed to short-term market risks associated with
interest rate changes as a result of its lines of credit and short-term debt
used to fund the Company's operations. At December 31, 1998, substantially
all of the Company's debt is current. The Company's interest rate risk
management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower its overall borrowing costs. The
Company does not enter into derivative or interest rate transactions for
speculative purposes.
-17-
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
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 39. 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, 1998 and 1997, and the
results of their operations and their cash flows for the year ended December
31, 1998, the nine months ended December 31, 1997 and for the year ended
March 31, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes 2 and 5
to the consolidated financial statements, the Company has suffered recurring
losses from operations, has a working capital deficiency and is currently in
default on certain loan agreements as of December 31, 1998 that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
KPMG LLP
McLean, Virginia
March 31, 1999
-18-
<PAGE>
<TABLE>
Consolidated Statements of Operations
(In thousands, except per share data)
<CAPTION>
Nine months ended
Year ended December 31, Year ended
December 31, ----------------- March 31,
1998 1997 1996 1997
(Unaudited)
- ----------------------------------------------------------------------------------------
Revenue
<S> <C> <C> <C> <C>
Products.............................. $ 2,139 $ 660 $ 678 $ 688
Services.............................. 3,256 1,046 460 559
- ----------------------------------------------------------------------------------------
5,395 1,706 1,138 1,247
- ----------------------------------------------------------------------------------------
Cost of revenue
Products.............................. 613 173 558 693
Services.............................. 2,375 628 339 525
- ----------------------------------------------------------------------------------------
2,988 801 897 1,218
- ----------------------------------------------------------------------------------------
Gross margin.............................. 2,407 905 241 29
- ----------------------------------------------------------------------------------------
Operating expenses
Research and development.............. 865 601 893 1,130
Marketing and sales................... 1,593 876 734 952
General and administrative............ 2,969 1,624 1,994 2,248
- ----------------------------------------------------------------------------------------
5,427 3,101 3,621 4,330
- ----------------------------------------------------------------------------------------
Operating income (loss)................... (3,020) (2,196) (3,380) (4,301)
Interest income (expense), net............ (53) 157 495 574
Other income (expense), net............... (139) 487 6,216 6,362
- ----------------------------------------------------------------------------------------
Income (loss) before provision for
income taxes.......................... (3,212) (1,552) 3,331 2,635
Provision for income taxes................ -- -- -- --
- ----------------------------------------------------------------------------------------
Net income (loss)......................... $(3,212) $(1,552) $ 3,331 $ 2,635
========================================================================================
========================================================================================
Net income (loss)......................... $(3,212) $(1,552) $ 3,331 $ 2,635
Preferred stock dividend requirement...... (200) (150) (597) (647)
Repurchase of preferred stock............. -- -- 10,580 10,580
- ----------------------------------------------------------------------------------------
Net income (loss) applicable to common
shares................................ $(3,412) $(1,702) $13,314 $12,568
========================================================================================
Net income (loss) per common share
Basic................................... $ (.16) $ (.08) $ .67 $ .63
Diluted................................. $ (.16) $ (.08) $ .61 $ .58
Weighted average common shares outstanding
Basic................................... 21,535 20,645 19,884 19,873
Diluted................................. 21,535 20,645 21,996 21,985
========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Position At December 31,
(In thousands, except share data) -------------------------
1998 1997
- ----------------------------------------------------------------------------------------
Assets
Current assets
<S> <C> <C>
Cash...................................................... $ 26 $ 95
Short-term investments.................................... 394 1,117
Accounts receivable, net.................................. 1,178 630
Other current assets...................................... 176 228
- ----------------------------------------------------------------------------------------
Total current assets...................................... 1,774 2,070
Property and equipment, net................................... 685 775
Goodwill and other intangible assets, net
of accumulated amortization of $479 and $135.............. 2,329 2,673
Other assets 114 145
- ----------------------------------------------------------------------------------------
Total assets.............................................. $ 4,902 $ 5,663
========================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Notes payable and capital lease obligations............... $ 919 $ --
Notes payable to related parties.......................... 125 --
Accounts payable.......................................... 1,712 665
Accrued payroll and related benefits...................... 147 105
Deferred revenue.......................................... 445 451
Other accrued liabilities................................. 389 367
- ----------------------------------------------------------------------------------------
Total current liabilities................................. 3,737 1,588
- ----------------------------------------------------------------------------------------
Capital lease obligations, net of current portion............. 32 --
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;
21,830,575 and 21,351,575 shares issued; 21,735,384
and 21,256,384 shares outstanding....................... 218 214
Additional paid-in capital................................. 61,489 61,357
Accumulated other comprehensive loss....................... -- (134)
Treasury stock, at cost; 95,191 shares..................... (209) (209)
Retained deficit........................................... (60,368) (57,156)
- ----------------------------------------------------------------------------------------
Total stockholders' equity................................. 1,133 4,075
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity................. $ 4,902 $ 5,663
========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
-20-
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Nine months
ended
Year ended December 31, Year ended
December 31, ---------------- March 31,
1998 1997 1996 1997
(Unaudited)
- ----------------------------------------------------------------------------------------
Cash flows from (used for) operating activities
<S> <C> <C> <C> <C>
Net income (loss)............................ $(3,212) $ (1,552) $ 3,331 $ 2,635
Adjustments to reconcile net income (loss) to
net cash from (used for) operating activities
Depreciation and amortization................ 694 319 154 198
Stock compensation expense................... 125 -- -- --
Gain on sale of MIMS technology.............. -- (489) -- --
(Gain) loss on sale of property and equipment (11) 40 7 101
Loss on investment in Lumisys stock.......... 134 -- -- --
Decrease in restricted cash.................. -- -- 17 17
(Increase) decrease in accounts receivable... (548) (613) 25 121
Decrease in other current assets............. 52 48 437 673
Increase (decease) in other assets........... 31 (90) -- 109
Increase (decrease) in accounts payable...... 1,047 387 (292) (447)
Increase (decrease) in accrued liabilities... 27 (229) 110 (388)
- ----------------------------------------------------------------------------------------
Net cash from (used for) operating activities... (1,661) (2,179) 3,789 3,019
- ----------------------------------------------------------------------------------------
Cash flows from (used for) investing activities
Proceeds from sale of property and equipment. 94 -- -- 12
Capital expenditures......................... (280) (223) (51) (80)
Proceeds from sale of Lumisys stock.......... 47 -- -- --
Purchase of Intrafed technology.............. -- (2,165) -- --
Purchase of CDT, net of cash acquired........ -- (240) -- --
- ----------------------------------------------------------------------------------------
Net cash from (used for) investing activities... (139) (2,628) (51) (68)
- ----------------------------------------------------------------------------------------
Cash flows from (used for) financing activities
Net borrowings under line of credit
agreements................................. 774 -- -- --
Proceeds from issuance of notes payable...... 238 -- -- --
Proceeds from issuance of notes payable
to related parties......................... 125 -- -- --
Repayment of notes payable................... (124) -- -- --
Repurchase of preferred stock................ -- -- (2,435) (2,435)
Proceeds from stock option exercises......... 42 35 -- --
Purchase of treasury stock................... -- -- (8) (8)
- ----------------------------------------------------------------------------------------
Net cash from (used for) financing activities... 1,055 35 (2,443) (2,443)
- ----------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents. (745) (4,772) 1,295 508
Cash and equivalents, beginning of year......... 771 5,543 5,035 5,035
- ----------------------------------------------------------------------------------------
Cash and equivalents, end of year............... $ 26 $ 771 $ 6,330 $ 5,543
========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity Accu-
and Comprehensive Income (In thousands) mulated
Other
Number of Shares Additional Compre-
------------------ Preferred Common Paid-In hensive Treasury Retained
Preferred Common Stock Stock Capital Loss Stock Deficit Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
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
Comprehensive income (loss):
Net loss................. (1,552) (1,552)
Unrealized loss on short-
term investments....... (134) (134)
----- ------- ------
Total comprehensive loss... (134) (1,552) (1,686)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 33 21,352 3 214 61,357 (134) (209) (57,156) 4,075
Stock options exercised.... 104 1 41 42
Stock issued as
compensation........... 175 1 43 44
Acquisition of Intrafed
Technology............. 200 2 48 50
Comprehensive income (loss):
Net loss................. (3,212) (3,212)
Reclassification adjustment
for losses recognized
into income............ 134 134
----- ------- ------
Total comprehensive income
(loss).................... 134 (3,212) (3,078)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 33 21,831 $3 $218 $61,489 $ -- $(209) $(60,368) $ 1,133
==================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
-22-
<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 PowerScan, Inc. ("PowerScan") acquired
document imaging and processing technology as its entry into this broader
market. Additionally, in October 1997, the Company acquired Curran Data
Technologies, Inc. ("CDT"), a provider of data entry imaging services. (See
Note 3.) With these two acquisitions, Star provides products and services
for government and commercial users involved in data capture, image capture
and document imaging.
The document imaging market is a highly competitive, evolving market,
characterized by rapid technological change. Frequent new product
introductions and enhancements and increased capabilities and applications
are common in the industry. See "Item 1. Business--Risk Factors."
Substantially all of Star's revenues in the foreseeable future will be
attributed to sales of document imaging products and services.
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 twelve months ended December 31, 1998
("fiscal 1998"), for the nine months ended December 31, 1997 and 1996
(unaudited) and for the twelve months ended March 31, 1997 ("fiscal 1997").
The accompanying consolidated statements of financial position are presented
as of December 31, 1998 and 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 1997 amounts have been
reclassified for comparative purposes.
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 agreement for
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.
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.
-23-
<PAGE>
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
$676,000 at December 31, 1997. There were no such investments at December
31, 1998.
At December 31, 1998 and 1997, other short-term investments include
82,800 and 92,800 shares, respectively, of common stock of Lumisys, Inc.
("Lumisys"). (See Note 6.) 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. During 1998,
the Company recorded a loss of $120,000 representing an other than temporary
decline in the market value of its Lumisys investment.
Interest income was $7,000, $157,000 and $574,000 in fiscal 1998, for
the nine months ended December 31, 1997, and in fiscal 1997, respectively.
Accounts receivable
Accounts receivable are shown net of an allowance for doubtful accounts
of $13,000 and $22,000 at December 31, 1998 and 1997. The provision for
doubtful accounts was $11,000 and $1,000 for the nine months ended December
31, 1997 and in fiscal 1997, respectively. No such provision was recorded
during fiscal 1998.
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 December 31,
-----------------------------
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Engineering and manufacturing equipment......... $ 751 $ 979
Office equipment and leasehold improvements..... 304 719
Equipment under capital leases.................. 73 8
- -----------------------------------------------------------------------------------------
1,128 1,706
Less accumulated depreciation and amortization....... (443) (931)
- -----------------------------------------------------------------------------------------
$ 685 $ 775
=========================================================================================
</TABLE>
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.
-24-
<PAGE>
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. 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 $326,000 and
$127,000 for fiscal 1998 and for the nine months ended December 31, 1997,
respectively. In accordance with the provisions of Statement of Financial
Accounting Standards 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.
Software development costs
Software development costs incurred subsequent to establishing the
technological feasibility of a product are capitalized and amortized over the
life of the related product. As of December 31, 1998, all software
development costs have been expensed because technological feasibility was
not yet established.
Comprehensive income
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and presentation of
comprehensive income and its components in financial statements.
Comprehensive income consists of net income and net unrealized losses on
securities and is presented in the consolidated statements of stockholders'
equity and comprehensive income. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year amounts
have been reclassified to conform to the requirements of SFAS 130.
-25-
<PAGE>
Segment information
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of Enterprise and Related Information", which
establishes standards for reporting information about operating segments and
related disclosures about products and services. See Note 9.
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.
NOTE 2 - Liquidity
Star's operations and acquisitions to date have consumed substantial
amounts of cash. The Company incurred operating losses of $3.0 million, $2.2
million and $4.3 million for the fiscal year ended December 31, 1998, for the
nine months ended December 31, 1997 and for the fiscal year ended March 31,
1997, respectively. The Company spent $2.4 million in connection with the
acquisition of PowerScan and CDT in the nine months ended December 31, 1997.
As of December 31, 1998, the Company had a working capital deficit of $2.0
million due to recurring operating losses. 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
revenue or obtaining additional financing, the Company may be required to
make additional reductions in operating expenses or sell certain assets,
which may have a material adverse effect on the Company. If the Company has
insufficient funds for its needs, the Company may not be able to raise
additional funds on favorable terms, if at all, or may not be able to do so
on a timely basis. Failure to obtain additional funds when needed could
materially adversely affect the Company.
In addition, the Company is delinquent in its payments due many vendors
and service providers of the Company. Certain vendors have taken actions
against the Company, including initiating collection proceedings. The
Company has extended payment terms with most of these vendors as well as
others and continues to seek to extend payment terms from additional vendors
and service providers. If unsuccessful, such parties may take further
actions against the Company, including the termination of their relationship
with the Company or the initiation of collection proceedings.
As of March 31, 1999, the Company has received $225,000 from its
officers and directors for short-term cash requirements. (See Management's
Discussion and Analysis-Liquidity.) In view of the Company's additional
liquidity requirements, the Company may continue to seek to sell additional
equity or convertible debt securities or pursue debt financing arrangements.
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, substantial doubt exists regarding the
Company's ability to meet its obligations in 1999 and to continue as a going
concern.
-26-
<PAGE>
NOTE 3 - 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. Under the terms of the purchase agreement, 500,000
shares of Star common stock were payable to Intrafed in connection with the
termination from PowerScan of a former executive of Intrafed. The fair value
of the shares totaled $125,000 and was expensed in fiscal 1998. 175,000
shares were issued in September 1998. The remaining 325,000 shares, issued
in February 1999, were accrued at a value of $81,000 at December 31, 1998.
No additional shares of Star common stock will be issued under the purchase
agreement.
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 was 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 to 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):
<TABLE>
<S> <C>
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
======
</TABLE>
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 and bears interest at a rate of 8% per annum. At
December 31, 1998 and 1997, the note totaled $50,000 and $96,000,
respectively, 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 was 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 to the net assets acquired, goodwill of approximately $264,000 was
recorded. Such goodwill is being amortized on a straight-line basis over 10
years.
-27-
<PAGE>
The purchase price paid for CDT is computed as follows (in thousands):
<TABLE>
<S> <C>
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
======
</TABLE>
APB Opinion 16 requires, for purchase business combinations, the
presentation of pro-forma combined results of operations for the year of
acquisition 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).
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
------------------
1997 1996
---- ----
<S> <C> <C>
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
======= =======
</TABLE>
NOTE 4 - Related Party Transactions
Indebtedness to certain directors and officers
As of December 31, 1998, the Company was indebted to a Director in the
amount of $96,000 for consulting services incurred during the year.
In September 1998, the Company entered into a subordinated note
agreement with a Director. The note is secured by certain assets of the
Company, and totaled $125,000 at December 31, 1998. The note, originally due
in February 1999, was extended until August 1999. The note bears interest at
12% through February 1999 and 10% thereafter. The Director has the option to
convert the note into shares of the Company's common stock, at a 30% discount
on the conversion date, if the note is not repaid on the maturity date. The
value of the beneficial conversion feature is not considered to be
significant.
-28-
<PAGE>
Transactions with General Electric Company ("GE")
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 related to
the prior medical imaging business. The payment from GEMS arose from a
demand for arbitration that Star filed against GEMS in January 1995.
Following a hearing on Star's demand, a three-member panel of the American
Arbitration Association found that GEMS violated the agreement. 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.
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 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, 1998. (See Note 7.)
NOTE 5 - Notes Payable and Capital Lease Obligations
The table below reflects the amounts outstanding under the Company's
notes payable and capital lease obligations at December 31, 1998. No such
amounts were outstanding at December 31, 1997. (Amounts are in thousands.)
<TABLE>
<CAPTION>
At December 31,
1998
-------------------------------------------------------------------------
<S> <C>
Revolving line of credit up to $750, due on demand,
interest at prime plus 3%, secured by
substantially all assets........................... $ 510
Bank line of credit, expiring April 30, 1999,
interest at prime plus 1%, secured by the
Company's short-term investment in Lumisys, Inc.
common stock....................................... 264
Secured promissory note, interest at 9.5% through
September 1998 and 12% thereafter, due on demand... 114
Secured promissory note with a Director (see Note 4),
expiring August 1999, interest at 12% through
February 1999 and 10% thereafter................... 125
Capital lease obligations............................ 63
-------------------------------------------------------------------------
Total.......................................... 1,076
Less current portion................................. 1,044
-------------------------------------------------------------------------
Non-current portion.................................. $ 32
=========================================================================
</TABLE>
-29-
<PAGE>
In April 1998, the Company entered into a $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 December 31, 1998,
the Company had borrowed $510,000 under this line of credit and had $160,000
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 December 31, 1998, the Company had borrowed all that was currently
available under this line of credit. Such borrowings totaled $264,000 at
December 31, 1998.
The Company has a secured promissory note with a vendor in the amount
of $114,000 at December 31, 1998. The note bears interest of 9.5% per annum
through September 1998, and 12% thereafter. The Company is currently in
default with respect to its payment obligations under this note. Such
default has resulted in the creditor having the right to accelerate the
balance due under the note and exercise other rights available under the law,
including foreclosing on the computer equipment serving as collateral for
such note. The Company is working with the creditor to restructure the
timing of remaining payments thereunder. There can be no assurances that
such creditor will agree to waive all existing defaults and extend the timing
of remaining payments due under the note. The existence of such default may
also activate cross-default provisions under the Company's working capital
line of credit and its bank line of credit.
Interest expensed and paid in fiscal 1998 was $60,000. No such amounts
were incurred during the nine months ended December 31, 1997 or in fiscal
1997.
NOTE 6 - 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 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.
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.
-30-
<PAGE>
NOTE 7 - 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, 1998.
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, 1998, 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.
In August 1996, the Company repurchased 79,445 shares of the Preferred
Stock (the "Repurchased Preferred Stock") for $2.4 million. The Repurchased
Preferred Stock had an aggregate redemption price of $13.0 million, including
cumulative undeclared dividends in excess of $5.0 million. The repurchase
transaction was accounted for as a reduction of additional paid-in capital in
fiscal 1997.
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 $475,000, or $.02 per common share, as of December 31, 1998. All
dividends accrued and accumulated prior to August 1996 were eliminated with
the repurchase 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, 1998, 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):
-31-
<PAGE>
<TABLE>
<CAPTION>
Year ended Nine Months Year ended
December 31, ended March 31,
1998 December 31, 1997 1997
-------------------------------------------------------------------------------
Net income (loss)
<S> <C> <C> <C>
As reported $ (3,212) $(1,552) $2,635
Pro forma $ (3,278) $(1,577) $2,630
Earnings (loss) per common share-
assuming dilution
As reported $ (.16) $ (.08) $ .58
Pro forma $ (.16) $ (.08) $ .58
================================================================================
</TABLE>
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 for the year ended
December 31, 1998, for the nine months ended December 31, 1997 and for the
year ended March 31, 1997, respectively: 0.0% dividend yield for each of the
three periods; expected volatility of 87%, 145% and 15%; risk-free interest
rates of 4.56%, 5.71% and 6.61%; and expected lives of five, 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 for the year ended
December 31, 1998, for the nine months ended December 31, 1997 and for the
year ended March 31, 1997, respectively: 0.0% dividend yield for each of the
three periods; expected volatility of 87%, 145%, and 15%; risk-free interest
rates of 4.55%, 5.68%, and 6.78%; and expected lives of five, five and three
years.
-32-
<PAGE>
<TABLE>
The following table summarizes the Company's stock option plans:
<CAPTION>
1984 Plan 1989 Plan 1994 Plan
--------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
- -----------------------------------------------------------------------------------------
Outstanding options,
<S> <C> <C> <C> <C> <C>
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
Granted................ -- -- 10,000 $0.56 262,000 $0.90
Cancelled.............. -- -- -- -- (126,625) $0.38
Exercised.............. -- -- -- -- (104,000) $0.41
- -----------------------------------------------------------------------------------------
Outstanding options,
December 31, 1998....... 137,500 $1.00 120,000 $0.49 954,750 $0.54
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
1984 Plan 1989 Plan 1994 Plan
----------------------------------------
Options exercisable at:
<S> <C> <C> <C>
March 31, 1997............................... 52,866 130,000 330,259
December 31, 1997............................ 137,500 110,000 390,830
December 31, 1998............................ 137,500 120,000 534,070
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
Year ended December 31, 1998................. -- $.32 $.64
=========================================================================================
</TABLE>
-33-
<PAGE>
<TABLE>
The following table summarizes information about the Company's stock options
outstanding at December 31, 1998:
<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> <S> <C> <C> <C>
$0.38-1.25 1,212,250 5 yrs. 4 mos. $0.59 791,570 $0.53
=========================================================================================
</TABLE>
Common stock reserved for issuance
At December 31, 1998, the Company had 3,293,490 shares of common stock
reserved for issuance, consisting of 1,212,250 shares for stock options
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, Year ended
December 31, ----------------- March 31,
1998 1997 1996 1997
(Unaudited)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic weighted average common shares.... 21,535 20,645 19,884 19,873
Convertible preferred stock............. N/A N/A 2,112 2,112
------ ------ ------ ------
Diluted weighted average common shares.. 21,535 20,645 21,996 21,985
====== ====== ====== ======
</TABLE>
NOTE 8 - Income Taxes
There was no current or deferred income tax expense for fiscal 1998, for
the nine months ended December 31, 1997 or for fiscal 1997.
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>
Year ended Nine months ended Year ended
December 31, December 31, March 31,
1998 1997 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected expense (benefit)......... $(1,092) $(528) $ 896
Change in valuation allowance...... 1,087 524 (898)
Other.............................. 5 4 2
- --------------------------------------------------------------------------------------
Income tax expense........ $ -- $ -- $ --
======================================================================================
</TABLE>
-34-
<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 December 31,
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Reserves for potentially excess inventory.... $ 1,675 $ 1,681
Other accruals and reserves.................. 128 135
Property and equipment, principally due
to differences in depreciation............. 7 1
Net operating loss carryforwards
- domestic and foreign..................... 23,408 22,082
General business credit carryforwards........ 3,315 3,315
Alternative minimum tax credit carryforwards. 84 84
- ---------------------------------------------------------------------------------------
Total gross deferred tax assets........... 28,617 27,298
Less valuation allowance.................. (28,617) (27,298)
- ---------------------------------------------------------------------------------------
Net....................................... $ -- $ --
=======================================================================================
</TABLE>
The net operating loss ("NOL") and general business credit carryforwards
expire in the tax years ending December 31, 1998 through December 31, 2013.
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 $1,319,000
for the year ended December 31, 1998, increased by $658,000 for the nine
months ended December 31, 1997 and decreased by $1,231,000 for the year ended
March 31, 1997. Management believes that it is more likely than not that
deferred tax assets are not realizable based on estimates of future taxable
income and consideration of available tax planning strategies.
NOTE 9 - Segment Reporting
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly
by Star's chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. Star's
chief operating decision maker is its Chief Executive Officer. The operating
segments of the Company are managed separately because each segment
represents a strategic business unit that offers different products or
services. The Company's reportable operating segments include products and
related services and data entry and imaging services. The accounting
policies of the Company's operating segments are the same as those described
in Note 1 - Summary of Significant Accounting Policies.
-35-
<PAGE>
<TABLE>
Summarized information concerning the reportable segments is presented
in the following table (in thousands).
<CAPTION>
Data
Products Entry
and and
Related Imaging
Services Services Other* Total
-------- -------- ------- -------
Year ended December 31, 1998:
<S> <C> <C> <C> <C>
Revenue $ 3,114 $2,029 $ 252 $ 5,395
Depreciation and amortization $ 482 $ 172 $ 40 $ 694
Operating loss $(1,306) $ (491) $(1,223) $(3,020)
Net loss $(1,373) $ (496) $(1.343) $(3.212)
Total assets $ 3,343 $1,016 $ 543 $ 4,902
Capital expenditures $ 25 $ 255 $ -- $ 280
Nine Months ended December 31, 1997:
Revenue $ 1,080 $ 288 $ 338 $ 1,706
Depreciation and amortization $ 219 $ 33 $ 67 $ 319
Operating loss $ (402) $ (112) $(1,682) $(2,196)
Net loss $ (402) $ (117) $(1,033) $(1,552)
Total assets $ 3,340 $ 897 $ 1,426 $ 5,663
Capital expenditures $ 29 $ 192 $ 2 $ 223
Year ended March 31, 1997:
Reportable segments disclosed did not exist prior to July 1997.
* Other includes customer service revenue and expenses associated with the
Company's older medical imaging products as well as corporate expenses
for executive and financial compensation and benefits, legal,
accounting, insurance, occupancy and other corporate costs.
Substantially all sales were made domestically and all assets are held in
the United States.
</TABLE>
NOTE 10 - Commitments and Contingencies
<TABLE>
Operating leases Fiscal Amount
The Company leases its facilities and certain ----------------------
<S> <C>
equipment under noncancelable operating lease 1999........... $ 356
agreements expiring through fiscal 2005. Several 2000........... 321
of the leases contain options for renewal periods 2001........... 291
of up to five years. Future minimum rentals under 2002........... 288
these lease agreements are shown at right (in 2003........... 286
thousands). Thereafter..... 449
----------------------
$1,991
======================
</TABLE>
Rent expense was $540,000, $302,000, and $733,000 in fiscal year 1998,
for the nine months ended December 31, 1997, and in fiscal 1997, respectively.
-36-
<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. Under
the terms of the settlement agreement, the Company paid Walters a one-time
payment of $2.9 million for which Walters dismissed the claims he had brought
against the Company, and the Company dismissed the counterclaim it had
asserted against Walters. The settlement payment is reflected as a reduction
of other income on the fiscal 1997 Consolidated Statement of Operations.
<TABLE>
Quarterly Financial Summary (Unaudited)
(In thousands, except per share data)
<CAPTION>
Net Net Income (Loss)
Gross Income Per Share -
Revenue Margin (Loss) Assuming Dilution
- -----------------------------------------------------------------------------------
Year ended December 31, 1998:
<S> <C> <C> <C> <C>
First Quarter $1,143 $ 475 $(1,117)* $(.05)
Second Quarter 1,541 721 (665) (.03)
Third Quarter 1,673 763 (561) (.03)
Fourth Quarter 1,038 448 (869) (.04)
- -----------------------------------------------------------------------------------
Total $5,395 $2,407 $(3,212) $(.16)
===================================================================================
Nine months ended
December 31, 1997**:
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)
===================================================================================
*Includes year-end adjustment of $125,000 for issuance of common stock
associated with the termination from PowerScan of a former Intrafed
executive.
**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
Not applicable.
-37-
<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 20, 1999, which Proxy Statement will be
filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year 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 20, 1999, which Proxy Statement will be
filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year 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 20, 1999, which Proxy Statement will be
filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year 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 20, 1999, which Proxy Statement will be
filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year covered by this Report, is incorporated
herein by this reference.
-38-
<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 18
Consolidated Statements of Operations for the fiscal
year ended December 31, 1998, for the nine
months ended December 31, 1997 and 1996 (unaudited),
and for the fiscal year ended March 31, 1997. 19
Consolidated Statements of Financial Position as of
December 31, 1998 and 1997. 20
Consolidated Statements of Cash Flows for the fiscal
year ended December 31, 1998, for the nine
months ended December 31, 1997 and 1996 (unaudited),
and for the fiscal year ended March 31, 1997. 21
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the fiscal year
ended December 31, 1998, for the nine months ended
December 31, 1997, and for the fiscal year ended
March 31, 1997. 22
Notes to Consolidated Financial Statements 23
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.
None.
-39-
<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 Montgomery County, State of Maryland, on the 15th day of
April, 1999.
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 April 15, 1999, 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/ Curtis D. Abel Vice President;
Curtis D. Abel President, PowerScan, Inc.
/s/ Brenda A. Potosnak Vice President of Finance and
Brenda A. Potosnak Administration, Secretary, Treasurer
and Chief Financial Officer
/s/ Philip A. Cannon Vice President of Technology
Philip A. Cannon
/s/ Alan O. Maxwell Director
Alan O. Maxwell
/s/ Carl E. Ravin Director
Carl E. Ravin
/s/ Herbert F. Schantz Director
Herbert F. Schantz
-40-
<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).
-1-
<PAGE>
Exhibit
No.
10.1* 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.
10.2* 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.
10.3* 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.
10.4* 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.
10.5* 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.
10.6* 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 on
November 14, 1996.
10.7* 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 on November 14, 1996.
-2-
<PAGE>
Exhibit
No.
10.8* 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 on
November 14, 1996.
10.9* 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.
10.10* 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.
10.11* 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 LLP.
27 Financial Data Schedule
-3-
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS (LOSS)
(In thousands, except per share data)
<CAPTION>
Year ended Year ended
December 31, Nine months ended March 31,
1998 December 31, 1997
------------ ----------------- ----------
Basic Per Share Earnings (Loss) 1997 1996
<S> <C> <C> <C> <C>
Average shares outstanding during period 21,535 20,645 19,884 19,873
======= ======= ======= =======
Net income (loss) $(3,212) $(1,552) $ 3,331 $ 2,635
Undeclared cumulative dividends on
preferred stock (200) (150) (597) (647)
Excess carrying amount and cumulative
undeclared dividends of Preferred
Stock over consideration -- -- 10,580 10,580
------- ------- ------- --------
Net income (loss) applicable to common
shares $(3,412) $(1,702) $13,314 $12,568
======= ======= ======= =======
Basic net income (loss) per common share $ (.16) $ (.08) $ .67 $ .63
======= ======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS (LOSS) (Cont'd)
(In thousands, except per share data)
<CAPTION>
Year ended Year ended
December 31, Nine months ended March 31,
1998 December 31, 1997
------------ ----------------- ----------
Diluted Per Share Earnings (Loss) 1997 1996
<S> <C> <C> <C> <C>
Average shares outstanding during period 21,535 20,645 19,884 19,873
Employee stock options assumed exercised 3 185 -- --
Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 95 95 126 126
Series B & C preferred stock 1,986 1,986 1,986 1,986
------ ------- ------- -------
23,619 22,911 21,996 21,985
======= ======= ======= =======
Net income (loss) $(3,212) $(1,552) $ 3,331 $ 2,635
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
------- ------- ------- -------
Net income applicable to common shares $(3,212) $(1,552) $13,389 $12,693
======= ======= ======= =======
Diluted net income (loss) per common
share $ (.14) $ (.07) $ .61 $ .58
======= ======= ======= =======
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
As of December 31, 1998, 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 March 31, 1999, relating to the
consolidated statements of financial position of Star Technologies, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for the year ended December 31, 1998,
for the nine months ended December 31, 1997 and for the year ended March
31, 1997, which report appears in the annual report for the year ended
December 31, 1998 on Form 10-K of Star Technologies, Inc.
KPMG LLP
McLean, Virginia
April 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-K for the year ended December 31, 1998 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 26
<SECURITIES> 394
<RECEIVABLES> 1,191
<ALLOWANCES> 13
<INVENTORY> 50
<CURRENT-ASSETS> 1,774
<PP&E> 1,128
<DEPRECIATION> 443
<TOTAL-ASSETS> 4,902
<CURRENT-LIABILITIES> 3,737
<BONDS> 0
0
3
<COMMON> 218
<OTHER-SE> 912
<TOTAL-LIABILITY-AND-EQUITY> 4,902
<SALES> 5,395
<TOTAL-REVENUES> 5,395
<CGS> 2,988
<TOTAL-COSTS> 2,988
<OTHER-EXPENSES> 5,427
<LOSS-PROVISION> (9)
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> (3,212)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,212)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
