SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 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 June 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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenue
<S> <C> <C> <C> <C>
Products $ 579 $ 539 $ 1,187 $ 866
Services 642 1,002 1,276 1,818
------ ------ ------- -------
1,221 1,541 2,463 2,684
------ ------ ------- -------
Cost of revenue
Products 90 140 411 201
Services 502 680 966 1,287
------ ------ ------- -------
592 820 1,377 1,488
------ ------ ------- -------
Gross margin 629 721 1,086 1,196
------ ------ ------- -------
Operating expenses
Research and development 273 218 554 407
Selling, general and administrative 973 1,160 1,819 2,564
------ ------ ------- -------
Total operating expenses 1,246 1,378 2,373 2,971
------ ------ ------- -------
Operating loss (617) (657) (1,287) (1,775)
Interest and other income (expense), net (37) (8) 42 (7)
------ ------ ------- -------
Net loss before provision for income taxes (654) (665) (1,245) (1,782)
Provision for income taxes - - - -
------ ------ ------- -------
Net loss $ (654) $ (665) $(1,245) $(1,782)
====== ====== ======= =======
Net loss $ (654) $ (665) $(1,245) $(1,782)
Preferred stock dividend requirement (50) (50) (100) (100)
------ ------ ------- -------
Net loss applicable to common shares $ (704) $ (715) $(1,345) $(1,882)
====== ====== ======= =======
Earnings (loss) per share
Basic $ (.03) $ (.03) $ (.06) $ (.09)
Diluted $ (.03) $ (.03) $ (.06) $ (.09)
Weighted average common shares outstanding
Basic 22,060 21,506 21,968 21,406
Diluted 24,141 23,587 24,049 23,487
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(In thousands, except share data)
<CAPTION>
June 30, December 31,
Assets 1999 1998
Current assets
<S> <C> <C>
Cash $ 25 $ 26
Short-term investments 272 394
Accounts receivable, net 866 1,178
Other current assets, net 77 176
------- -------
Total current assets 1,240 1,774
Property and equipment, net 565 685
Goodwill and other intangible assets, net 2,156 2,329
Other assets 121 114
------- -------
Total assets $ 4,082 $ 4,902
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Notes payable and capital lease obligations $ 789 $ 919
Notes payable to related parties 400 125
Accounts payable 2,214 1,712
Accrued payroll and related benefits 160 147
Deferred revenue 412 445
Other accrued liabilities 241 389
------- -------
Total current liabilities 4,216 3,737
------- -------
Capital lease obligations, net of current portion 18 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) (122) -
Treasury stock, at cost; 95,191 shares (209) (209)
Retained deficit (61,613) (60,368)
------- -------
Total stockholders' equity (152) 1,133
------- -------
Total liabilities and stockholders' equity $ 4,082 $ 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>
Six Months Ended
June 30,
1999 1998
Cash flows from (used for) operating activities
<S> <C> <C>
Net loss $(1,245) $(1,782)
Adjustments to reconcile net loss to net cash
from (used for) operating activities
Depreciation and amortization 303 369
Stock compensation expense - 125
Loss on sale of property and equipment - 26
(Increase) decrease in accounts receivable 312 (227)
(Increase) decrease in other current assets 99 (38)
Increase in other assets (7) -
Increase in accounts payable 502 591
Decrease in accrued liabilities (87) (109)
------- -------
Net cash from (used for) operating activities (123) (1,045)
------- -------
Cash flows from (used) for investing activities
Capital expenditures (9) (342)
------- -------
Net cash used for investing activities (9) (342)
------- -------
Cash flows from (used for) financing activities
Net borrowings under line of credit agreements (170) 589
Proceeds from issuance of notes payable 40 -
Proceeds from issuance of notes payable
to related parties 275 -
Repayment of capital lease obligations (14) -
Proceeds from stock option exercises - 40
------- -------
Net cash from (used for) financing activities 131 629
------- -------
Net decrease in cash and equivalents (1) (758)
Cash and equivalents, beginning of period 26 771
------- -------
Cash and equivalents, end of period $ 25 $ 13
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
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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
six-month periods ended June 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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Net income (loss) per share
Basic and diluted net income (loss) per share were computed in
accordance with Statement of Financial Accounting Standards No.128, "Earnings
Per Share." The differences between basic weighted average common shares
outstanding and diluted weighted average common shares outstanding are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic weighted average common shares 22,060 21,506 21,968 21,406
Convertible preferred stock 2,081 2,081 2,081 2,081
------ ------ ------ ------
Diluted weighted average common shares 24,141 23,587 24,049 23,487
====== ====== ====== ======
</TABLE>
NOTE 3 - Short-Term Investments
At June 30, 1999 and December 31, 1998, short-term investments include
83,000 shares of common stock of Lumisys, Inc. ("Lumisys") acquired from the
sale of the Company's medical imaging archival technology in July 1997. The
Company does not actively seek to trade this investment for purposes of
maximizing trading gains and classifies it as "available for sale."
Accordingly, the temporary excess (deficiency) of market value over (under)
the underlying cost is reported as an unrealized gain (loss) as a separate
component of stockholders' equity.
NOTE 4 - Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful accounts
of $13,000 at June 30, 1999 and December 31, 1998.
NOTE 5 - Related Party Transactions
Indebtedness to certain directors and officers
At June 30, 1999 and December 31, 1998, the Company was indebted to a
Director for consulting services in the amount of $137,000 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 is due in August 1999. The Company does not expect to make
payment in August and anticipates that the note will be extended
approximately 120 days.
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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interest at 10% per annum. The notes, originally due in June 1999, were
extended to August 1999. The Company does not expect to make payment in
August and anticipates that the notes will be extended approximately 120 days.
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 June
30, 1999 and 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 Company does not expect to make
payment in August and anticipates that the note will be extended
approximately 120 days.
NOTE 6 - Notes Payable
The table below reflects the amounts outstanding under the Company's
notes payable and capital lease obligations at June 30, 1999 and
December 31, 1998. (Amounts are in thousands.)
<TABLE>
<CAPTION>
At June 31, At December 31,
1999 1998
-------------------------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit up to $750, due on
demand, interest at prime plus 3%, secured
by substantially all assets....................... $ 359 $ 510
Bank line of credit, interest at prime plus 1%,
secured by the Company's short-term investment
in Lumisys, Inc. common stock..................... 245 264
Secured promissory note, interest at 12%, due on
demand............................................ 114 114
Secured promissory note with a Director, expiring
August 1999, interest at 12% through February 1999
and 10% thereafter (See Note 5)................... 125 125
Secured promissory note with an officer, expiring
June 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 January 2000, non-interest
bearing except upon default....................... 40 -
Capital lease obligations........................... 49 63
-------------------------------------------------------------------------------------
Total............................................... 1,207 1,076
Less current portion................................ 1,189 1,044
-------------------------------------------------------------------------------------
Non-current portion................................. $ 18 $ 32
=====================================================================================
</TABLE>
The Company has a secured promissory note with a vendor in the amount of
$114,000 at June 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.
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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.
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 June 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.
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 June 30, 1999, the Company had
borrowed $359,000 under this line of credit and had $18,000 available for
future borrowings. Additional available credit under this facility will
depend on the Company generating additional revenue.
In August 1999, the Company entered into a second two-month extension of
its $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, and carries
interest at prime plus one percent and is due September 30, 1999. At June
30, 1999 the Company had borrowed all that was currently available under this
line of credit. Such borrowings totaled $245,000 and $264,000 at June 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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net loss, as reported $ (654) $ (665) $(1,245) $(1,782)
Unrealized loss on investment 28 (58) (122) (93)
------- ------- ------- -------
Total comprehensive income (loss) $ (626) $ (723) $(1,367) $(1,875)
======= ======= ======= =======
</TABLE>
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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 June 30, 1999:
<S> <C> <C> <C> <C>
Revenue $ 565 $ 436 $ 220 $ 1,221
Depreciation and amortization $ 105 $ 41 $ 3 $ 149
Net loss $ (471) $ (152) $ (31) $ (654)
Total assets $ 2,575 $ 970 $ 537 $ 4,082
Capital expenditures $ - $ - $ - $ -
Quarter ended June 30, 1998:
Revenue $ 784 $ 687 $ 70 $ 1,541
Depreciation and amortization $ 124 $ 48 $ 14 $ 186
Net loss $ (262) $ (64) $ (339) $ (665)
Total assets $ 3,284 $ 1,171 $ 569 $ 5,024
Capital expenditures $ - $ 95 $ - $ 95
Six Months ended June 30, 1999:
Revenue $ 1,398 $ 843 $ 222 $ 2,463
Depreciation and amortization $ 214 $ 84 $ 5 $ 303
Net loss $ (846) $ (251) $ (148) $(1,245)
Total assets $ 2,575 $ 970 $ 537 $ 4,082
Capital expenditures $ 9 $ - $ - $ 9
Six Months ended June 30, 1998:
Revenue $ 1,348 $ 1,175 $ 161 $ 2,684
Depreciation and amortization $ 254 $ 85 $ 30 $ 369
Net loss $(1,019) $ (152) $ (611) $(1,782)
Total assets $ 3,284 $ 1,171 $ 569 $ 5,024
Capital expenditures $ 18 $ 324 $ - $ 342
* 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.
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NOTE 9 - Liquidity
As of June 30, 1999, the Company had a working capital deficit of $3.0
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, 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 second half 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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Corporate Repositioning
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 June 30, 1999 decreased 21% to
$1,221,000 from $1,541,000 for the same period a year ago. Total revenue for
the six months ended June 30, 1999 decreased 8% to 2,463,000 from $2,684,000
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 $579,000 and $539,000 for the three
months ended June 30, 1999 and 1998, respectively, representing 47% and 35%
of total revenue for such periods. Product revenue for the three months
ended June 30, 1999 included revenue of $215,000 from the sale of the
Company's former business line of medical imaging assets offset by a
corresponding decrease in sales of computer hardware and scanning equipment.
Product revenue was $1,187,000 and $866,000 for the six months ended
June 30, 1999 and 1998, respectively, representing 48% and 32% of total
revenue for such periods. The increase in the dollar amount of product
revenue for the six months ended June 30, 1999 is primarily attributable to
the sale of the medical imaging assets as well as higher sales of computer
hardware and scanning equipment and document imaging software.
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 $642,000 and
$1,002,000 for the three months ended June 30, 1999 and 1998, respectively,
representing 53% and 65% of total revenue for such periods. Service revenue
was $1,276,000 and $1,818,000 for the six months ended June 30, 1999 and
1998, respectively, representing 52% and 68% 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 and customer service revenue on the Company's
older medical imaging products in the current quarter.
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
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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 expects
to commence shipments of the Client/Server version in September 1999.
Cost of Revenue
Cost of product revenue was $90,000 and $140,000 for the three months
ended June 30, 1999 and 1998, respectively, representing 16% and 26% 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 $411,000 and $201,000 for the six months ended June 30, 1999 and
1998, respectively, representing 35% and 23% of total product revenue in the
respective periods. The increase in cost of product revenue is primarily
attributable to higher sales of hardware and scanning equipment as well as
costs associated with the sale of the medical imaging assets. 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 $502,000 and $680,000 for the three months
ended June 30, 1999 and 1998, respectively, representing 78% and 68% of total
service revenue in the respective periods. Cost of service revenue was
$966,000 and $1,287,000 for the six months ended June 30, 1999 and 1998,
respectively, representing 76% 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 $273,000 and $218,000 for the
three-month period ended June 30, 1999 and 1998, respectively, representing
22% and 14% of total revenue in the respective periods. R&D expenses were
$554,000 and $407,000 for the six-month periods ended June 30, 1999 and 1998,
respectively, representing 22% and 15% of total revenue in the respective
periods. The increase in the dollar amount of R&D expenses for the three-
and
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six-month periods ended June 30, 1999 compared to the same periods of the
prior year is primarily attributable to higher expenses associated with new
product development for the IDEA products. At June 30, 1999, the research
and development staff consisted of 14 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.
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 June 30,
1999, decreased 16% to $973,000, from $1,160,000 for the same period a year
ago. SG&A expenses for the six months ended June 30, 1999, decreased 29% to
$1,819,000 from $2,564,000 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 cost reduction actions, elimination of duplicate costs
associated with the Company's two acquisitions and the facility consolidation
during the prior year. In addition, SG&A expenses during the quarter ended
March 31, 1998 included $325,000 of charges associated with the departure of
an officer of the Company.
Interest and Other Income
During the three months ended June 30, 1999 and 1998, the Company
incurred $30,000 and $12,000, respectively, of net interest expense. During
the six months ended June 30, 1999 and 1998, the Company incurred $59,000 and
$9,000, 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 six months
ended June 30, 1999 included $125,000 from the sale of the Company's former
internet domain name.
Net Loss
The net loss for the three months ended March 31, 1999 was $654,000
($.03 per share) compared with a net loss of $665,000 ($.03 per share) for
the same period of the prior year. The net loss for the six months ended
June 30, 1999 was $1,245,000 ($.06 per share) compared with a net loss of
$1,782,000 ($.09 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.
-12-
<PAGE>
Liquidity and Capital Resources
The Company's net losses from operations and acquisitions to date have
consumed substantial amounts of cash. At June 30, 1999, the Company had a
working capital deficit of $3.0 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.
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. The Company is also delinquent in its payments to its
landlord in Potomac, MD. The Company is currently involved in discussions
with the landlord which include the reduction of existing rented space,
payment plan for the outstanding balance and an early termination of the
current lease. There can be no assurance that the Company's efforts to
negotiate with its creditors or landlord will be successful.
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.) In addition, the Company sold certain medical imaging equipment used in
a discontinued business line for $215,000 during June 1999. The Company's
cash-flow constraints may necessitate the sale of additional assets.
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.
The Company has a secured promissory note with a vendor in the amount of
$114,000 at June 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.
-13-
<PAGE>
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 is due in August 1999. The Company does not expect to make
payment in August and anticipates that the note will be extended
approximately 120 days.
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 August
1999. The Company does not expect to make payment in August and anticipates
that the notes will be extended approximately 120 days.
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 June 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.
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 June
30, 1999 and 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 Company does not expect to make
payment in August and anticipates that the note will be extended
approximately 120 days.
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 June 30, 1999, the Company had
borrowed $359,000 under this line of credit and had $18,000 available for
future borrowings. Additional available credit under this facility will
depend on the Company generating additional revenue.
In August 1999, the Company entered into a second two-month extension of
its $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 is due September 30, 1999. At June 30, 1999,
the Company had borrowed all that was currently available under this line of
credit. Such borrowings totaled $245,000 at June 30, 1999. In July, the
Company liquidated 25,900 shares of this stock at prices ranging from $3.50
to $3.75 and accordingly reduced the line of credit.
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.
-14-
<PAGE>
In view of the Company's additional liquidity requirements, the Company
is also continuing to seek to sell additional equity or convertible debt
securities or pursue debt financing arrangements. To date, the Company has
no commitments, agreements or understandings with respect to additional
financing and there can be no assurance that the Company will be able to
consummate any such transaction or raise adequate funds from such transaction
to meet the Company's cash needs. 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 $575,000 as of June 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 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 June 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 include reprogramming impacted software when appropriate
and feasible, obtaining vendor-provided software upgrades when available and
completely replacing impacted systems when necessary. The Company continues
to implement the systems and programming changes necessary to address Year
2000 issues with respect to its internal systems and anticipates completion
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.
-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.
On June 18, 1999, the Company filed with the Commission a Current
Report on Form 8-K, dated June 17, 1999, regarding the rescheduling
of the 1999 Annual Shareholders Meeting from June 1999 to
September 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: August 16, 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 Six Months Ended
June 30, June 30,
Basic Per Share Earnings (Loss) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Average shares outstanding during period 22,060 21,506 21,968 21,406
======= ======= ======= =======
Net loss $ (654) $ (665) $(1,245) $(1,782)
Undeclared cumulative dividends on Series B
and Series C Senior Preferred Stock (50) ( 50) (100) (100)
------- ------- ------- -------
Net loss applicable to common shares $ (704) $ (715) $(1,345) $(1,882)
======= ======= ======= =======
Basic loss per common share $ (.03) $ (.03) $ (.06) $ (.09)
======= ======= ======= =======
</TABLE>
-18-
<PAGE>
<TABLE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS (Cont'd)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Diluted Per Share Earnings (Loss) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Average shares outstanding during period 22,060 21,506 21,968 21,406
Employee stock options assumed exercised - 324 - 473
Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 95 95 95 95
Series B & C preferred stock 1,986 1,986 1,986 1,986
------- ------- ------- -------
24,141 23,911 24,049 23,960
======= ======= ======= =======
Net loss applicable to common shares $ (654) $ (665) $(1,245) $(1,782)
======= ======= ======= =======
Diluted net loss per common share $ (.03) $ (.03) $ (.05) $ (.07)
======= ======= ======= =======
</TABLE>
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q for the quarter ended June 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 25
<SECURITIES> 272
<RECEIVABLES> 879
<ALLOWANCES> 13
<INVENTORY> 6
<CURRENT-ASSETS> 1,240
<PP&E> 1,137
<DEPRECIATION> 572
<TOTAL-ASSETS> 4,082
<CURRENT-LIABILITIES> 4,216
<BONDS> 0
0
3
<COMMON> 222
<OTHER-SE> (377)
<TOTAL-LIABILITY-AND-EQUITY> 4,082
<SALES> 2,463
<TOTAL-REVENUES> 2,463
<CGS> 1,377
<TOTAL-COSTS> 1,377
<OTHER-EXPENSES> 2,373
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> (1,245)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,245)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
