SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1999 Commission File Number 0-13318
STAR TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0794452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1151-A Seven Locks Road
Potomac, Maryland 20854
(Address of principal executive offices)
(Zip Code)
(301) 315-0240
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
22,060,384 shares of Common Stock were outstanding as of September 30, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenue
<S> <C> <C> <C> <C>
Products $ 350 $ 837 $ 1,537 $ 1,703
Services 650 836 1,926 2,654
------- ------- ------- -------
1,000 1,673 3,463 4,357
------- ------- ------- -------
Cost of revenue
Products 58 302 469 503
Services 443 608 1,409 1,895
------- ------- ------- -------
501 910 1,878 2,398
------- ------- ------- -------
Gross margin 499 763 1,585 1,959
------- ------- ------- -------
Operating expenses
Research and development 177 182 731 589
Selling, general and administrative 694 1,136 2,513 3,700
------- ------- ------- -------
Total operating expenses 871 1,318 3,244 4,289
------- ------- ------- -------
Operating loss (372) (555) (1,659) (2,330)
Interest income (expense) and other, net (136) (6) (94) (13)
------- ------- ------- -------
Net loss before provision for income taxes (508) (561) (1,753) (2,343)
Provision for income taxes - - - -
------- ------- ------- -------
Net loss $ (508) $ (561) $(1,753) $(2,343)
======= ======= ======= =======
Net loss $ (508) $ (561) $(1,753) $(2,343)
Preferred stock dividend requirement (50) (50) (150) (150)
------- ------- ------- -------
Net loss applicable to common shares $ (558) $ (611) $(1,903) $(2,493)
======= ======= ======= =======
Earnings (loss) per share
Basic $ (.03) $ (.03) $ (.09) $ (.12)
Diluted $ (.03) $ (.03) $ (.09) $ (.12)
Weighted average common shares outstanding
Basic 22,060 21,559 21,995 21,457
Diluted 24,141 23,640 24,076 23,538
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(In thousands, except share data)
<CAPTION>
September 30, December 31,
Assets 1999 1998
Current assets
<S> <C> <C>
Cash $ 15 $ 26
Short-term investments 63 394
Accounts receivable, net 700 1,178
Other current assets, net 29 176
------- -------
Total current assets 807 1,774
Property and equipment, net 507 685
Goodwill and other intangible assets, net 2,070 2,329
Other assets 117 114
------- -------
Total assets $ 3,501 $ 4,902
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Notes payable and capital lease obligations $ 657 $ 919
Notes payable to related parties 400 125
Accounts payable 2,171 1,712
Accrued payroll and related benefits 181 147
Deferred revenue 429 445
Other accrued liabilities 240 389
------- -------
Total current liabilities 4,078 3,737
------- -------
Capital lease obligations, net of current portion 12 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;
22,155,575 and 21,830,575 shares issued; 22,060,384 and
21,735,384 shares outstanding 222 218
Additional paid-in capital 61,567 61,489
Accumulated other comprehensive income (loss) (51) -
Treasury stock, at cost; 95,191 shares (209) (209)
Retained deficit (62,121) (60,368)
------- -------
Total stockholders' equity (589) 1,133
------- -------
Total liabilities and stockholders' equity $ 3,501 $ 4,902
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
1999 1998
Cash flows from (used for) operating activities
<S> <C> <C>
Net loss $(1,753) $(2,343)
Adjustments to reconcile net loss to net cash
from (used for) operating activities
Depreciation and amortization 447 544
Stock compensation expense - 125
Gain on sale of property and equipment - (11)
Loss on investment in Lumisys stock 97 -
(Increase) decrease in accounts receivable 478 (461)
(Increase) decrease in other current assets 147 (31)
Increase in other assets (3) -
Increase in accounts payable 459 1,019
Decrease in accrued liabilities (50) (213)
------- -------
Net cash from (used for) operating activities (178) (1,371)
------- -------
Cash flows from (used for) investing activities
Capital expenditures (9) (275)
Proceeds from sale of property and equipment - 94
Proceeds from sale of Lumisys stock 183 -
------- -------
Net cash used for investing activities 174 (181)
------- -------
Cash flows from (used for) financing activities
Net borrowings under line of credit agreements (421) 528
Proceeds from issuance of notes payable 168 114
Proceeds from issuance of notes payable
to related parties 275 125
Repayment of notes payable (9) -
Repayment of capital lease obligations (20) -
Proceeds from stock option exercises - 42
------- -------
Net cash from (used for) financing activities (7) 809
------- -------
Net decrease in cash and equivalents (11) (743)
Cash and equivalents, beginning of period 26 771
------- -------
Cash and equivalents, end of period $ 15 $ 28
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Star Technologies, Inc. ("Star" or the "Company") is a provider of
high-quality products and services for government and commercial users
worldwide involved in data capture, image capture and document imaging.
Star's PowerScan subsidiary designs, develops and supplies a complete line of
document image capture and processing software. Star also offers a wide
range of outsourcing data entry and document imaging services through its
Curran Data Technologies subsidiary. 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 technology partnerships.
NOTE 1 - Financial Information
The interim consolidated financial statements presented herein are
unaudited. They reflect all adjustments that, in the opinion of management,
are necessary to fairly present the Company's financial position and results
of operations for the interim periods presented. All such adjustments are of
a normal, recurring nature. The results of operations for the three- and
nine-month periods ended September 30, 1999 are not necessarily indicative of
the results to be expected for the entire fiscal year.
The interim consolidated financial information should be read in
conjunction with the Company's Report on Form 10-K, Commission file number
0-13318, for the year ending December 31, 1998.
Certain 1998 amounts have been reclassified for comparative purposes.
NOTE 2 - Accounting Policies
Revenue recognition
On January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") which superseded Statement of
Position 91-1, "Software Revenue Recognition." SOP 97-2 focuses on when and
in what amounts revenue should be recognized for licensing, selling, leasing
or otherwise marketing computer software. The adoption of SOP 97-2 did not
have a material impact on the Company's revenue recognition policies.
Revenue from the sale of commercial, off-the-shelf software is
recognized when the following four criteria are met: (1) the sale is in
writing, (2) the software has been shipped, (3) the fee is fixed or
determinable and (4) collectibility is probable. Customized software revenue
is recognized when the software is accepted by the customer.
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.
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<PAGE>
Net income (loss) per share
Basic and diluted net income (loss) per share were computed in
accordance with Statement of Financial Accounting Standards No.128, "Earnings
Per Share." The differences between basic weighted average common shares
outstanding and diluted weighted average common shares outstanding are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic weighted average common shares 22,060 21,559 21,995 21,457
Convertible preferred stock 2,081 2,081 2,081 2,081
------ ------ ------ ------
Diluted weighted average common shares 24,141 23,640 24,076 23,538
====== ====== ====== ======
</TABLE>
NOTE 3 - Short-Term Investments
At September 30, 1999 and December 31, 1998, short-term investments
include 24,000 and 83,000 shares of common stock of Lumisys, Inc.
("Lumisys"), respectively, acquired from the sale of the Company's medical
imaging archival technology in July 1997. The Company does not actively seek
to trade this investment for purposes of maximizing trading gains and
classifies it as "available for sale." Accordingly, the temporary excess
(deficiency) of market value over (under) the underlying cost is reported as
an unrealized gain (loss) as a separate component of stockholders' equity.
NOTE 4 - Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful accounts
of $13,000 at September 30, 1999 and December 31, 1998.
NOTE 5 - Related Party Transactions
Indebtedness to certain directors and officers
At September 30, 1999 and December 31, 1998, the Company was indebted to
a Director for consulting services in the amount of $161,000 and $96,000,
respectively. The Company and the Director understand that payment for these
services will be deferred or delayed until more critical vendor obligations
are satisfied.
In April 1999, the Company entered into a $100,000 subordinated note
agreement with a Director. The proceeds of the note were used to fund
short-term operating needs. The note is secured by stock of the CDT
subsidiary and other certain assets of the Company, carries interest at 10%
per annum and has been extended until December 31, 1999.
In March and April 1999, the Company entered into subordinated note
agreements with an Officer of the Company in the amounts of $100,000 and
$75,000, respectively. The proceeds of the notes were used to fund
short-term operating needs. The notes are secured by stock of the CDT
subsidiary and other certain assets of the Company and bear
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<PAGE>
interest at 10% per annum. The notes, originally due in June 1999, were
extended to December 1, 1999. As of November 15, 1999, this officer will no
longer be associated with the Company. Accordingly, no assurance can be
provided that the Company can negotiate a further extension.
In September 1998, the Company entered into a subordinated note
agreement with a Director. The note is secured by stock of the CDT
subsidiary and certain assets of the Company, and totaled $125,000 at
September 30, 1999 and December 31, 1998. The note, due in August 1999, was
extended until December 31, 1999. The note bears interest at 12% through
February 1999 and 10% thereafter.
NOTE 6 - Notes Payable
The table below reflects the amounts outstanding under the Company's
notes payable and capital lease obligations at September 30, 1999 and
December 31, 1998. (Amounts are in thousands.)
<TABLE>
<CAPTION>
At September 30, At December 31,
1999 1998
-------------------------------------------------------------------------------------
Revolving line of credit up to $750, due on
demand, interest at prime plus 3%, secured
<S> <C> <C>
by substantially all assets.................... $ 285 $ 510
Bank line of credit, interest at prime plus 1%,
secured by the Company's short-term investment
in Lumisys, Inc. common stock.................. 68 264
Secured promissory note, interest at 12%, due on
demand......................................... 105 114
Secured promissory note with a Director, expiring
December 1999, interest at 12% through February
1999 and 10% thereafter (See Note 5)........... 125 125
Secured promissory note with an officer, expiring
August 1999, interest at 10% (See Note 5)....... 175 -
Secured promissory note with a Director, expiring
August 1999, interest at 10% (see Note 5)...... 100 -
Promissory note, expiring December 1, 1999,
interest at 12%................................ 128 -
Promissory note, expiring January 2000, non-interest
bearing except upon default.................... 40 -
Capital lease obligations........................ 43 63
-------------------------------------------------------------------------------------
Total............................................ 1,069 1,076
Less current portion............................. 1,057 1,044
-------------------------------------------------------------------------------------
Non-current portion.............................. $ 12 $ 32
=====================================================================================
</TABLE>
The Company has a secured promissory note with a vendor in the amount of
$105,000 at September 30, 1999. The note bears interest at 12% per annum.
The Company is currently in default with respect to its payment obligations
under this note. In July 1999, the vendor took legal action to obtain an
agreed judgment against the Company in the amount of $119,255, representing
the principal, interest, attorney's fees and costs of collection due and
owing under the note. The terms of the judgment stipulate a repayment
schedule of biweekly payments of $3,000 beginning in August 1999, increasing
to $5,000 in October 1999, with a final payment at December 31, 1999 of
$72,000.
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<PAGE>
In the event the Company fails to comply with this repayment schedule,
the vendor has the right to take any and all legal action to enforce payment
of the entire amount due and, among other things, to foreclosure sale of
computer equipment securing the note. Such computer equipment is essential
to CDT's continuing operations. The Company was unable to pay the scheduled
payment due at the end of October 1999, but made the payment due in
mid-November 1999. The Company is working with the vendor to resolve the
missed payment.
In September 1999, the Company executed a promissory note with a vendor
to evidence its indebtedness to such vendor in the amount of $128,000. The
note is due December 1, 1999 and carries interest at 12%, after December 1,
1999.
In February 1999, the Company issued a promissory note to Intrafed, Inc.
in the principal amount of $82,500. The outstanding principal balance under
the note totaled $40,000 at September 30, 1999, to be paid over eight monthly
installments. The Company has failed to pay such installments and is
accordingly in default under the note. Intrafed has taken steps to have a
judgment entered against the Company in the Circuit Court for Montgomery
County, Maryland in the amount of $53,660, representing the principal amount
outstanding under the note, attorney's fees and interest at a default rate of
18% per annum which will continue to accrue until the amounts due are paid.
Intrafed has also obtained a lien on the Company's assets located at its
Maryland office.
The Company has 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 September 30, 1999, the Company
had borrowed $285,900, all that was available, under this line of credit.
Additional available credit under this facility will depend on the Company
generating additional revenue.
In September 1999, the Company entered into a two-month extension of its
line of credit with a bank. The line of credit is secured by the Company's
short-term investment in Lumisys common stock, and carries interest at prime
plus one percent and is due November 30, 1999. During the third quarter, the
Company sold 59,000 shares of this stock at prices ranging from $3.50 to
$3.75, and accordingly reduced the line of credit. At September 30, 1999 the
Company had borrowed all that was currently available under this line of
credit. Such borrowings totaled $68,000 and $264,000 at September 30, 1999
and December 31, 1998, respectively.
Both of the Company's primary lines of credit contain cross-default
provisions which provide its lenders with the right to declare such lines to
be in default based on the above-described defaults under the notes issued in
favor of Intrafed and the vendor, and exercise the rights and remedies
provided for under such lines of credit.
NOTE 7 - Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
The new disclosure requirements with respect to comprehensive income (loss)
are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net loss, as reported $ (508) $ (561) $(1,753) $(2,343)
Unrealized loss on investment 71 (46) (51) (139)
------- ------- ------- -------
Total comprehensive income (loss) $ (437) $ (607) $(1,804) $(2,482)
======= ======= ======= =======
</TABLE>
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<PAGE>
NOTE 8 - 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.
Summarized information concerning the reportable segments is presented
in the following table (in thousands).
<TABLE>
<CAPTION>
Data
Products Entry
and and
Related Imaging
Services Services Other* Total
Quarter ended September 30, 1999:
<S> <C> <C> <C> <C>
Revenue $ 571 $ 426 $ 3 $ 1,000
Depreciation and amortization $ 100 $ 42 $ 2 $ 144
Net loss $ (167) $ (57) $ (284) $ (508)
Total assets $ 2,552 $ 849 $ 100 $ 3,501
Capital expenditures $ - $ - $ - $ -
Quarter ended September 30, 1998:
Revenue $ 1,060 $ 530 $ 83 $ 1,673
Depreciation and amortization $ 119 $ 47 $ 9 $ 175
Net loss $ (123) $ (154) $ (284) $ (561)
Total assets $ 3,374 $ 1,100 $ 510 $ 4,984
Capital expenditures $ - $ - $ - $ -
Nine Months ended September 30, 1999:
Revenue $ 1,969 $ 1,269 $ 225 $ 3,463
Depreciation and amortization $ 314 $ 126 $ 7 $ 447
Net loss $(1,013) $ (308) $ (432) $(1,753)
Total assets $ 2,552 $ 849 $ 100 $ 3,501
Capital expenditures $ 9 $ - $ - $ 9
Nine Months ended September 30, 1998:
Revenue $ 2,408 $ 1,705 $ 244 $ 4,357
Depreciation and amortization $ 373 $ 132 $ 39 $ 544
Net loss $(1,142) $ (306) $ (895) $(2,343)
Total assets $ 3,374 $ 1,100 $ 510 $ 4,984
Capital expenditures $ 25 $ 250 $ - $ 274
* 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.
</TABLE>
Substantially all sales were made domestically and all assets are held in
the United States.
-8-
<PAGE>
NOTE 9 - Liquidity
As of September 30, 1999, the Company had a working capital deficit of
$3.3 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, require additional financing.
Further, the Company must continue to negotiate with its creditors (including
vendors and service providers) to extend the terms of repayment of
outstanding indebtedness and to obtain the agreement of such creditors to
forego exercising the rights and remedies available under such indebtedness.
There can be no assurance that the Company's efforts to raise additional
capital or negotiate with its creditors will be successful. As a result,
substantial doubt exists regarding the Company's ability to meet its
obligations during the remainder of fiscal 1999 and to continue as a going
concern.
As of April 30, 1999, the Company has received an aggregate of
$400,000 from an officer and directors for short-term cash requirements.
(See Note 5 and Management's Discussion and Analysis-Liquidity.) In the
three-month period ended June 30, 1999, the Company sold certain medical
imaging equipment used in a discontinued business line for $215,000. The
Company's cash-flow constraints may necessitate the sale of additional
assets, if it can identify a buyer for such assets, or the additional scaling
back of operations, which may have a material adverse effect on the Company
and its results of operations.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto and in conjunction
with the Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company's Form 10-K for the year ending December
31, 1998. This Quarterly Report, and in particular Management's Discussion
and Analysis of Financial Condition and Results of Operations, contain
forward-looking statements (as defined in Section 21E of the Securities
Exchange Act of 1934, as amended) 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 report on Form 10-Q
are set forth in the "Risk Factors" and Management's Discussion and Analysis
of Financial Condition and Results of Operation" sections of the Company's
annual report on Form 10-K for the year ended December 31, 1998. All
forward-looking statements attributable to us are expressly qualified by
these cautionary statements.
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<PAGE>
Star Technologies, Inc. ("Star" or the "Company") is a provider of
high-quality products and services for government and commercial users
worldwide involved in data capture, image capture and document imaging.
Star's PowerScan subsidiary designs, develops and supplies a complete line of
document image capture and processing software. Star also offers a wide
range of outsourcing data entry and document imaging services through its
Curran Data Technologies subsidiary. 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 technology partnerships.
Results of Operations
Revenue
Total revenue for the three months ended September 30, 1999 decreased
40% to $1,000,000 from $1,673,000 for the same period a year ago. Total
revenue for the nine months ended September 30, 1999 decreased 21% to
3,463,000 from $4,357,000 for the same period a year ago.
Product revenue generally consists of revenue from the sale of
PowerScan, StageWorks and IDEA software as well as computer hardware and
scanning equipment. Product revenue was $350,000 and $837,000 for the three
months ended September 30, 1999 and 1998, respectively, representing 35% and
50% of total revenue for such periods. Product revenue was $1,537,000 and
$1,703,000 for the nine months ended September 30, 1999 and 1998,
respectively, representing 44% and 39% of total revenue for such periods.
The decrease in the dollar amount of product revenue for the three and nine
months ended September 30, 1999 is primarily attributable to lower sales of
document imaging software as well as computer hardware and scanning
equipment. The lower sales were caused by disappointing results from the
sales strategy implemented earlier in the year at PowerScan as well as some
customer purchasing delays related to Y2K. Earlier in the year, PowerScan
decentralized its sales force by opening four locations nationally. During
the past quarter, the Company closed the field offices and is reorganizing
and refocusing its sales approach to a centralized strategy.
In April 1999, the Company introduced IDEA, Integrated Digital
Environment Access, a new family of software products for the capture and
processing of digital objects in a fully integrated environment. IDEA is
designed to address 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 IDEA family of products is currently comprised of IDEA Capture,
IDEA Desktop, and the Client/Server versions. IDEA Capture is a
full-featured application for the capture of digital objects and index data.
IDEA Desktop is a complete, self-contained, single user workstation for the
capture and processing of digital objects. The IDEA Client/Server version is
a multi-user version that provides for the capture and processing of digital
objects and is available with ODBC databases. The Company began shipment of
IDEA Capture and IDEA Desktop in May and July 1999, respectively, and
commenced shipments of the Client/Server version in September 1999.
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<PAGE>
Service revenue consists of revenue from data entry and imaging
services, maintenance, integration, installation, and systems training
provided to the Company's customers. Service revenue was $650,000 and
$836,000 for the three months ended September 30, 1999 and 1998,
respectively, representing 65% and 50% of total revenue for such periods.
Service revenue was $1,926,000 and $2,654,000 for the nine months ended
September 30, 1999 and 1998, respectively, representing 56% and 61% of total
revenue for such periods. The decrease in the dollar amount of service
revenue for both comparative periods is primarily attributable to lower
revenue from data entry and imaging services due to the completion of a large
government contract in December 1998 as well as lower customer service
revenue on the Company's older medical imaging products.
Cost of Revenue
Cost of product revenue was $58,000 and $302,000 for the three months
ended September 30, 1999 and 1998, respectively, representing 17% and 36% of
total product revenue in the respective periods. The decrease in cost of
product revenue is primarily attributable to the lower amount of sales of
hardware products and scanning equipment during the current quarter. Cost of
product revenue was $469,000 and $503,000 for the nine months ended September
30, 1999 and 1998, respectively, representing 31% and 30% 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. The cost of product
revenue as a percentage of product revenue may vary from period to period
depending on the ratio of software revenue, which has a lower cost, to
hardware revenue.
Cost of service revenue was $443,000 and $608,000 for the three months
ended September 30, 1999 and 1998, respectively, representing 68% and 73% of
total service revenue in the respective periods. Cost of service revenue was
$1,409,000 and $1,895,000 for the nine months ended September 30, 1999 and
1998, respectively, representing 73% and 71% of total service revenue in the
respective periods. The decreases in cost of service revenue for both
comparative periods are primarily attributable to lower revenue from data
entry and imaging services. 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
Research and development ("R&D") expenses consist primarily of:
compensation and related benefits; the use of independent contractors for
development projects; and an allocated portion of general overhead costs,
including occupancy. R&D expenses were $177,000 and $182,000 for the
three-month period ended September 30, 1999 and 1998, respectively,
representing 18% and 11% of total revenue in the respective periods. R&D
expenses were $731,000 and $589,000 for the nine-month periods ended
September 30, 1999 and 1998, respectively, representing 21% and 14% of total
revenue in the respective periods. The increase in the dollar amount of R&D
expenses for the nine-month period ended September 30, 1999 compared to the
same period of the prior year is primarily attributable to higher expenses
associated with new product development for the IDEA products. At September
30, 1999, the research and development staff consisted of 10 employees. The
Company believes that R&D expenditures, including compensation of technical
personnel, are essential to maintaining its competitive position and expects
these costs to continue to constitute a significant percentage of revenue.
-11-
<PAGE>
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses consist primarily
of: compensation and related benefits and reimbursable travel and living
expenses related to the Company's sales, marketing and administrative
personnel; advertising and marketing expenses, including trade shows and
similar type sales and marketing expenses; and general corporate expenses,
including occupancy costs. SG&A expenses for the three months ended
September 30, 1999, decreased 39% to $694,000, from $1,136,000 for the same
period a year ago. SG&A expenses for the nine months ended September 30,
1999, decreased 32% to $2,513,000 from $3,700,000 for the same period a year
ago. The percentage decreases in SG&A expenses for both comparative periods
are primarily due to the Company's facility consolidation during the prior
year, cost reduction actions and elimination of duplicate costs associated
with the Company's two acquisitions.
Interest and Other Income
During the three months ended September 30, 1999 and 1998, the Company
incurred $29,000 and $19,000, respectively, of net interest expense. During
the nine months ended September 30, 1999 and 1998, the Company incurred
$88,000 and $28,000, respectively, of net interest expense. The increase in
interest expense for both comparative periods reflects higher levels of
borrowing under the Company's credit lines and additional debt incurred in
the second half of last year and the current year. Other income for the nine
months ended September 30, 1999 included $125,000 from the sale of the
Company's former internet domain name. Other expense for the three months
ended September 30, 1999 included $97,000 from the loss on the sale of
Lumisys stock.
Net Loss
The net loss for the three months ended September 30, 1999 was $508,000
($.03 per share) compared with a net loss of $561,000 ($.03 per share) for
the same period of the prior year. The net loss for the nine months ended
September 30, 1999 was $1,753,000 ($.09 per share) compared with a net loss
of $2,343,000 ($.12 per share) for the same period of the prior year. 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 profitability on a quarterly or annual basis or that
it will be able to increase its revenue in future periods. Based upon the
expenses associated with current and planned staffing levels, profitability
is dependent upon increasing revenues.
Liquidity and Capital Resources
The Company's net losses from operations and acquisitions to date have
consumed substantial amounts of cash. At September 30, 1999, the Company had
a working capital deficit of $3.3 million. The continuing operation of the
Company's business, and the continued development and commercialization of
its technology, products and services, require additional financing. 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.
-12-
<PAGE>
Without 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. 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.
In addition, the Company is delinquent in its payments due many vendors
and service providers of the Company. The Company must continue to negotiate
with its creditors (including vendors and service providers) to extend the
terms of repayment of outstanding indebtedness and to obtain the agreement of
such creditors to forego exercising the rights and remedies available under
such indebtedness. There can be no assurance that the Company's efforts to
negotiate with its creditors will be successful.
The Company is also delinquent in its payments to its landlord in
Potomac, MD in the amount of $240,000. In October 1999, the Company entered
into an agreement with its landlord to, among other things, defer payment of
the delinquent amount owed until December 31, 1999; reduce in half the amount
of rented space and; release the Company from the lease as of November 30,
1999. The Company is currently looking for alternate space. In the event
that the Company cannot find alternate space by November 30, 1999, the
Company believes it can work with the landlord to extend the amended lease.
In September 1999, the Company executed a promissory note with a vendor
to evidence its indebtedness to such vendor in the amount of $128,000. The
note is due December 1, 1999 and carries interest at 12%, after December 1,
1999.
The Company has a secured promissory note with a vendor in the amount of
$105,000 at September 30, 1999. The notes bear interest of 12% per annum.
The Company is currently in default with respect to its payment obligations
under this note. In July 1999, the vendor took legal action to obtain an
agreed judgment against the Company in the amount of $119,255, representing
the principal, interest, attorney's fees and costs of collection due and
owing under the note. The terms of the judgment stipulate a repayment
schedule of biweekly payments of $3,000 beginning in August 1999, increasing
to $5,000 in October 1999, with a final payment at December 31, 1999 of
$72,000.
In the event the Company fails to comply with this repayment schedule,
the vendor has the right to take any and all legal action to enforce payment
of the entire amount due and, among other things, to foreclosure sale of
computer equipment securing the note. Such computer equipment is essential
to CDT's continuing operations. The Company was unable to pay the scheduled
payment due at the end of October 1999, but made the payment due in
mid-November 1999. The Company is working with the vendor to resolve the
missed payment.
In April 1999, the Company entered into a $100,000 subordinated note
agreement with a Director. The proceeds of the note were used to fund
short-term operating needs. The note is secured by stock of the CDT
subsidiary and other certain assets of the Company and carries interest at
10% per annum. The note, due in August 1999, was extended until December 31,
1999.
-13-
<PAGE>
In March and April 1999, the Company entered into subordinated note
agreements with an Officer of the Company in the amounts of $100,000 and
$75,000, respectively. The proceeds of the notes were used to fund
short-term operating needs. The notes are secured by stock of the CDT
subsidiary and other certain assets of the Company and bear interest at 10%
per annum. The notes, originally due in June 1999, were extended to December
1, 1999. As of November 15, 1999, this officer will no longer be associated
with the Company. Accordingly, no assurance can be provided that the Company
can negotiate a further extension.
In February 1999, the Company issued a promissory note to Intrafed, Inc.
in the principal amount of $82,500. The outstanding principal balance under
the note totaled $40,000 at September 30, 1999, to be paid over eight monthly
installments. The Company has failed to pay such installments and is
accordingly in default under the note. Intrafed has taken steps to have a
judgment entered against the Company in the Circuit Court for Montgomery
County, Maryland in the amount of $53,660, representing the principal amount
outstanding under the note, attorney's fees and interest at a default rate of
18% per annum which will continue to accrue until the amounts due are paid.
Intrafed has also obtained a lien on the Company's assets located at its
Maryland office.
In September 1998, the Company entered into a subordinated note
agreement with a Director. The note is secured by stock of the CDT
subsidiary and certain assets of the Company, and totaled $125,000 at
September 30, 1999 and December 31, 1998. The note, originally due in
February 1999, was extended until December 31, 1999. The note bears interest
at 12% through February 1999 and 10% thereafter.
The Company has 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 September 30, 1999, the Company
had borrowed $285,000, all that was available, under this line of credit.
Additional available credit under this facility will depend on the Company
generating additional revenue.
In September 1999, the Company entered into a two-month extension of its
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 is due November 30, 1999. During the third quarter, the
Company sold 59,000 shares of this stock at prices ranging from $3.50 to
$3.75 and accordingly reduced the line of credit. At September 30, 1999, the
Company had borrowed all that was currently available under this line of
credit. Such borrowings totaled $68,000 at September 30, 1999.
Both of the Company's primary lines of credit contain cross-default
provisions which provide its lenders with the right to declare such lines to
be in default based on the above-described defaults under the notes issued in
favor of Intrafed and the vendor, and exercise the rights and remedies
provided for under such lines of credit.
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. Further, the sale of additional equity or
convertible debt securities could result in dilution to the Company's
stockholders.
-14-
<PAGE>
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 $625,000 as of September 30, 1999. 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 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 totaling $1.9 million, net, 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 September 30, 1999 based on this analysis.
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 included reprogramming impacted software, obtaining
vendor-provided software upgrades and completely replacing certain impacted
systems. The Company continues to implement the final minor systems and
programming changes necessary to address Year 2000 issues with respect to its
internal systems and anticipates completion during 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. 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.
-15-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to litigation arising in the
normal course of its business. Such claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources.
Management believes that no currently pending or threatened actions will have
a material and adverse effect on the financial condition or results of
operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits filed herewith or incorporated by reference are set
forth on the Exhibit Index immediately preceding the exhibits.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR TECHNOLOGIES, INC.
Dated: November 15, 1999 /s/ Brenda A. Potosnak
Brenda A. Potosnak
Vice President of Finance and
Administration, Secretary, Treasurer and
Chief Financial Officer
-16-
<PAGE>
EXHIBIT INDEX
Exhibit
No.
3.1* Restated Certificate of Incorporation of the Company, as
amended, incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1988
(Registration No. 0-13318) filed with the Commission on June
29, 1988.
3.2* Certificate of Designation, Preferences and Rights of Series
B Senior Preferred Stock and Series C Senior Preferred Stock
("Certificate of Designation"), incorporated by reference
from the exhibit filing to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1990
(Registration No. 0-13318) filed with the Commission on June
29, 1990.
3.3* Certificate of Amendment of Restated Certificate of
Incorporation of the Company, dated August 29, 1994,
incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1995
(Registration No. 0-13318) filed with the Commission on June
29, 1995.
3.4* Certificate of Amendment of Restated Certificate of
Incorporation of the Company, dated August 23, 1996,
incorporated by reference from the exhibit filing to the
Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1996 (Registration No. 0-13318) filed
with the Commission on November 14, 1996.
3.5* By-Laws of the Company, as amended and restated on February
24, 1994, and as further amended on August 22, 1996,
incorporated by reference from the exhibit filing to the
Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1996 (Registration No. 0-13318) filed
with the Commission on November 14, 1996.
11 Statement Regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
*Incorporated by reference.
-17-
<TABLE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Basic Per Share Earnings (Loss) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Average shares outstanding during period 22,060 21,559 21,995 21,457
======= ======= ======= =======
Net loss $ (508) $ (561) $(1,753) $(2,343)
Undeclared cumulative dividends on Series B
and Series C Senior Preferred Stock (50) ( 50) (150) (150)
------- ------- ------- -------
Net loss applicable to common shares $ (558) $ (611) $(1,903) $(2,493)
======= ======= ======= =======
Basic loss per common share $ (.03) $ (.03) $ (.09) $ (.12)
======= ======= ======= =======
</TABLE>
-18-
<PAGE>
<TABLE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS (Cont'd)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Diluted Per Share Earnings (Loss) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Average shares outstanding during period 22,060 21,559 21,995 21,457
Employee stock options assumed exercised - - - 206
Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 95 95 95 95
Series B & C preferred stock 1,986 1,986 1,986 1,986
------- ------- ------- -------
24,141 23,640 24,076 23,744
======= ======= ======= =======
Net loss applicable to common shares $ (508) $ (561) $(1,753) $(2,343)
======= ======= ======= =======
Diluted loss per common share $ (.02) $ (.02) $ (.07) $ (.10)
======= ======= ======= =======
</TABLE>
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q for the quarter ended September 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15
<SECURITIES> 63
<RECEIVABLES> 713
<ALLOWANCES> 13
<INVENTORY> 4
<CURRENT-ASSETS> 807
<PP&E> 1137
<DEPRECIATION> 630
<TOTAL-ASSETS> 3501
<CURRENT-LIABILITIES> 4078
<BONDS> 0
0
3
<COMMON> 222
<OTHER-SE> (814)
<TOTAL-LIABILITY-AND-EQUITY> 3501
<SALES> 3463
<TOTAL-REVENUES> 3463
<CGS> 1878
<TOTAL-COSTS> 1878
<OTHER-EXPENSES> 3244
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 88
<INCOME-PRETAX> (1753)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1753)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1753)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
