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 March 31, 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 March 31, 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
March 31,
----------------------
1999 1998
Revenue ------- -------
<S> <C> <C>
Products $ 608 $ 327
Services 634 816
------- -------
1,242 1,143
------- -------
Cost of revenue
Products 321 61
Services 464 607
------- -------
785 668
------- -------
Gross margin 457 475
------- -------
Operating expenses
Research and development 281 189
Selling, general and administrative 846 1,404
------- -------
Total operating expenses 1,127 1,593
------- -------
Operating loss (670) (1,118)
Interest and other income, net 79 1
------- -------
Net loss before provision for income taxes (591) (1,117)
Provision for income taxes - -
------- -------
Net loss $ (591) $(1,117)
======= =======
Net loss $ (591) $(1,117)
Preferred stock dividend requirement (50) (50)
------- -------
Net loss applicable to common shares $ (641) $(1,167)
======= =======
Net loss per common share
Basic $ (.03) $ (.05)
Diluted $ (.03) $ (.05)
Weighted average common shares outstanding
Basic 21,898 21,306
Diluted 23,979 23,387
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(In thousands, except share data)
<CAPTION>
March 31, December 31,
Assets 1999 1998
Current assets -------- ------------
<S> <C> <C>
Cash $ 13 $ 26
Short-term investments 244 394
Accounts receivable, net 732 1,178
Other current assets, net 146 176
------- -------
Total current assets 1,135 1,774
Property and equipment, net 628 685
Goodwill and other intangible assets, net 2,242 2,329
------- -------
Other assets 121 114
------- -------
Total assets $ 4,126 $ 4,902
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Notes payable and capital lease obligations $ 711 $ 919
Notes payable to related parties 225 125
Accounts payable 1,939 1,712
Accrued payroll and related benefits 152 147
Deferred revenue 416 445
Other accrued liabilities 187 389
------- -------
Total current liabilities 3,630 3,737
------- -------
Capital lease obligations, net of current portion 22 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) (150) -
Treasury stock, at cost; 95,191 shares (209) (209)
Retained deficit (60,959) (60,368)
------- -------
Total stockholders' equity 474 1,133
------- -------
Total liabilities and stockholders' equity $ 4,126 $ 4,902
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
------- -------
Cash flows from (used for) operating activities
<S> <C> <C>
Net loss $ (591) $ (992)
Adjustments to reconcile net loss to net cash
from (used for) operating activities
Depreciation and amortization 154 183
Decrease in accounts receivable 446 177
(Increase) decrease in other current assets 30 (33)
Increase in other assets (7) -
Increase in accounts payable 227 241
Decrease in accrued liabilities (145) (27)
------- ------
Net cash from (used for) operating activities 114 (451)
------- ------
Cash flows from (used) for investing activities
Capital expenditures (9) (247)
------- ------
Net cash used for investing activities (9) (247)
------- ------
Cash flows from (used for) financing activities
Net borrowings under line of credit agreements (265) -
Proceeds from issuance of notes payable 57 -
Proceeds from issuance of notes payable
to related parties 100 -
Repayment of capital lease obligations (10) -
Proceeds from stock option exercises - 40
------- ------
Net cash from (used for) financing activities (118) 40
------- ------
Net decrease in cash and equivalents (13) (658)
Cash and equivalents, beginning of period 26 771
------- ------
Cash and equivalents, end of period $ 13 $ 113
======= ======
</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 acquisitions and 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-month
period ended March 31, 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
March 31,
1999 1998
------- -------
<S> <C> <C>
Basic weighted average common shares 21,898 21,306
Convertible preferred stock 2,081 2,081
------ ------
Diluted weighted average common shares 23,979 23,387
====== ======
</TABLE>
NOTE 3 - Short-Term Investments
At March 31, 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 March 31, 1999 and December 31, 1998.
NOTE 5 - Related Party Transactions
Indebtedness to certain directors and officers
At March 31, 1999 and December 31, 1998, the Company was indebted to a
Director for consulting services in the amount of $113,000 and $96,000,
respectively.
In March 1999, the Company entered into a $100,000 subordinated note
agreement with an Officer of the Company. The note is secured by certain
assets of the Company, bears interest at 10% and is due in June 1999.
In September 1998, the Company entered into a subordinated note
agreement with a Director. The note is secured by certain assets of the
Company, and totaled $125,000 at March 31, 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
Director has the option to convert the note into shares of the Company's
common stock, at a 30% discount on the conversion date, if the note is not
repaid on the maturity date. The value of the beneficial conversion feature
is not considered to be significant.
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<PAGE>
NOTE 6 - Notes Payable
<TABLE>
The table below reflects the amounts outstanding under the Company's
notes payable and capital lease obligations at March 31, 1999 and December
31, 1998. (Amounts are in thousands.)
<CAPTION>
At March 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....................... $ 264 $ 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)........... 100 -
Promissory note, expiring January 2000, non-interest
bearing except upon default....................... 57 -
Capital lease obligations........................... 53 63
--------------------------------------------------------------------------------------
Total............................................... 958 1,076
Less current portion................................ 936 1,044
--------------------------------------------------------------------------------------
Non-current portion................................. $ 22 $ 32
======================================================================================
</TABLE>
In February 1999, the Company issued a promissory note to Intrafed, Inc.
The note is payable in monthly amounts from March 1999 through January 2000
and is without interest except in the case of default, in which event
interest accrues at 18% per annum until paid. The note totaled $57,000 at
March 31, 1999.
In April 1998, the Company entered into a $750,000 working capital line
of credit with a financial institution. The line of credit is secured by the
Company's accounts receivable, inventory and other assets and allows
borrowings of up to 80% of the eligible accounts receivable balance. The
line of credit carries an interest rate of prime plus 3% as well as a service
fee ranging from .75% to 1.5% of the amount borrowed. At March 31, 1999, the
Company had borrowed $264,000 under this line of credit and had $62,000
available for future borrowings. Additional available credit under this
facility will depend on the Company generating additional revenue.
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<PAGE>
In April 1998, the Company entered into a one-year $300,000 line of
credit with a bank. The Company is in the process of renewing the line of
credit. The line of credit is secured by the Company's short-term investment
in Lumisys common stock, carries interest at prime plus one percent and
allows borrowings of up to 70% of the Lumisys stock market value. At March
31, 1999 the Company had borrowed all that was currently available under this
line of credit. Such borrowings totaled $245,000 and $264,000 at March 31,
1999 and December 31, 1998, respectively.
The Company has a secured promissory note with a vendor in the amount of
$114,000 at March 31, 1999. The note bears interest of 9.5% per annum
through September 1998, and 12% thereafter. The Company is currently in
default with respect to its payment obligations under this note. Such
default has resulted in the creditor having the right to accelerate the
balance due under the note and exercise other rights available under the law,
including foreclosing on CDT's essential computer equipment serving as
collateral for such note. The Company is working with the creditor to
restructure the timing of remaining payments thereunder. There can be no
assurances that such creditor will agree to waive all existing defaults and
extend the timing of remaining payments due under the note. The existence of
such default may also activate cross-default provisions under the Company's
working capital line of credit and its bank line of credit.
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
March 31,
1999 1998
------- -------
<S> <C> <C>
Net loss, as reported $ (591) $ (992)
Unrealized loss on investment (150) (35)
------- -------
Total comprehensive income (loss) $ (741) $(1,027)
======= =======
</TABLE>
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.
-7-
<PAGE>
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 March 31, 1999:
<S> <C> <C> <C> <C>
Revenue $ 833 $ 407 $ 2 $ 1,242
Depreciation and amortization $ 109 $ 43 $ 2 $ 154
Net loss $ (375) $ (99) $ (117) $ (591)
Total assets $ 2,806 $1,005 $ 315 $ 4,126
Capital expenditures $ 9 $ - $ - $ 9
Quarter ended March 31, 1998:
Revenue $ 564 $ 488 $ 91 $ 1,143
Depreciation and amortization $ 130 $ 37 $ 16 $ 183
Net loss $ (757) $ (88) $ (272) $(1,117)
Total assets $ 3,011 $1,129 $ 750 $ 4,890
Capital expenditures $ 18 $ 229 $ - $ 247
</TABLE>
* Other includes customer service revenue and expenses associated with the
Company's older medical imaging products as well as corporate expenses
for executive and financial compensation and benefits, legal,
accounting, insurance, occupancy and other corporate costs.
Substantially all sales were made domestically and all assets are held in
the United States.
NOTE 9 - Liquidity
As of March 31, 1999, the Company had a working capital deficit of $2.5
million due to recurring operating losses. The continuing operation of the
Company's business, and the continued development and commercialization of
its technology, products and services, will require the availability of
additional funds for the foreseeable future. The Company's ability to obtain
cash adequate to fund its needs depends generally on the results of its
operations and the availability of financing. Without continued increases in
revenue or obtaining additional financing, the Company may be required to
make additional reductions in operating expenses or sell certain assets,
which may have a material adverse effect on the Company. If the Company has
insufficient funds for its needs, the Company may not be able to raise
additional funds on favorable terms, if at all, or may not be able to do so
on a timely basis. Failure to obtain additional funds when needed could
materially adversely affect the Company.
In addition, the Company is delinquent in its payments due many vendors
and service providers of the Company. Certain vendors have taken actions
against the Company, including initiating collection proceedings. The
Company has extended payment
-8-
<PAGE>
terms with most of these vendors as well as others and continues to seek to
extend payment terms from additional vendors and service providers. If
unsuccessful, such parties may take further actions against the Company,
including the termination of their relationship with the Company or the
initiation of collection proceedings.
As of April 30, 1999, the Company has received an aggregate of $400,000
from an officer, a director and a private investor for short-term cash
requirements. (See Management's Discussion and Analysis-Liquidity.) In view
of the Company's additional liquidity requirements, the Company may continue
to seek to sell additional equity or convertible debt securities or pursue
debt financing arrangements. There can be no assurance that the Company will
be able to consummate any such transaction or raise adequate funds from such
transaction to meet the Company's cash needs. As a result, substantial doubt
exists regarding the Company's ability to meet its obligations in 1999 and to
continue as a going concern.
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.
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 acquisitions and technology partnerships.
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<PAGE>
Results of Operations
Revenue
Total revenue for the three months ended March 31, 1999 increased 9% to
$1,242,000 from $1,143,000 for the same period a year ago. Product revenue
was $608,000 and $327,000 for the three months ended March 31, 1999 and 1998,
respectively, representing 49% and 29% of total revenue for such periods.
The increase in the dollar amount of product revenue is primarily
attributable to higher sales of computer hardware and scanning equipment as
well as higher sales of software in the current quarter. Product revenue
consists of revenue from the sale of PowerScan and StageWorks software as
well as computer hardware and scanning equipment.
Service revenue was $634,000 and $816,000 for the three months ended March
31, 1999 and 1998, respectively, representing 51% and 71% of total revenue
for such periods. The decrease in the dollar amount of service revenue 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. Service revenue consists of revenue from data entry
and imaging services, maintenance, integration, installation, and systems
training provided to the Company's customers.
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. These products will be ready for
shipment during the second quarter of 1999.
Cost of Revenue
Cost of product revenue was $321,000 and $61,000 for the three months
ended March 31, 1999 and 1998, respectively, representing 53% and 19% of
total product revenue in the respective periods. The increase in cost of
product revenue is primarily attributable to higher sales of computer
hardware and scanning equipment in the current quarter. 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 $464,000 and $607,000 for the three months
ended March 31, 1999 and 1998, respectively, representing 73% and 74% of
total service revenue in the respective periods. Cost of service revenue
primarily includes compensation and related benefits, non-employee labor
costs and other direct costs associated with the Company's data entry and
imaging services.
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<PAGE>
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 $281,000 and $189,000 for the
three-month period ended March 31, 1999 and 1998, respectively, representing
23% and 17% of total revenue in the respective periods. The increase in the
dollar amount of R&D expenses for the three month period ended March 31, 1999
compared to the same period of the prior year is primarily attributable to
expenses associated with new product development as the Company hired more
engineers to meet the development schedule. At March 31, 1999, the research
and development staff consisted of 16 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 March
31, 1999, were $846,000, compared to $1.4 million for the same period a year
ago. The 40% decrease in SG&A expenses is 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 severance costs for the
departure of an officer of the Company.
Interest and Other Income
During the three months ended March 31, 1999, the Company incurred $29,000
of net interest expense. During the three months ended March 31, 1998, the
Company earned $5,000 of net interest income. Other income for the three
months ended March 31, 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 $591,000 ($.03
per share) compared with a net loss of $1,117,000 ($.05 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 consistent
profitability on a quarterly or annual basis or that it will be able to
sustain or increase its revenue growth in future periods. Based upon the
expenses associated with current and planned staffing levels, profitability
is dependent upon increasing revenues.
-11-
<PAGE>
Liquidity and Capital Resources
The Company's net losses from operations and acquisitions to date have
consumed substantial amounts of cash. At March 31, 1999, the Company had a
working capital deficit of $2.5 million. The continuing operation of the
Company's business, and the continued development and commercialization of
its technology, products and services, will require the availability of
additional funds for the foreseeable future. The Company's ability to obtain
cash adequate to fund its needs depends generally on the results of its
operations and the availability of financing. Without continued increases in
revenue or obtaining additional financing, the Company may be required to
make additional reductions in operating expenses or sell certain assets,
which may have a material adverse effect on the Company. If the Company has
insufficient funds for its needs, the Company may not be able to raise
additional funds on favorable terms, if at all, or may not be able to do so
on a timely basis. Failure to obtain additional funds when needed could
materially adversely affect the Company.
In April 1999, the Company entered into a $100,000 subordinated note
agreement with a private investor. The note is secured by certain assets of
the Company, carries interest at 10% per annum and is due in August 1999.
In March 1999 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. Both notes are secured by certain assets of the
Company, carry interest at 10% per annum and are due in June 1999.
In February 1999, the Company issued a promissory note to Intrafed, Inc.
The note is payable in monthly amounts from March 1999 through January 2000
and is without interest except in the case of default, in which event
interest accrues at 18% per annum until paid. The note totaled $57,000 at
March 31, 1999.
In September 1998, the Company entered into a subordinated note
agreement with a Director. The note is secured by certain assets of the
Company and totaled $125,000 at March 31, 1999. The note, originally due in
February 1999, was extended until August 1999. The note bears interest at
12% through February 1999 and 10% thereafter. The Director has the option to
convert the note into shares of the Company's common stock, at a 30% discount
at the date of conversion, if the note is not repaid on the maturity date.
In April 1998, the Company entered into a $750,000 working capital line
of credit with a financial institution. The line of credit is secured by the
Company's accounts receivable, inventory and other assets and allows
borrowings of up to 80% of the eligible accounts receivable balance. The
line of credit carries an interest rate of prime plus 3% as well as a service
fee ranging from .75% to 1.5% of the amount borrowed. At March 31, 1999, the
Company had borrowed $264,000 under this line of credit and had $62,000
available for future borrowings. Additional available credit under this
facility will depend on the Company generating additional revenue.
In April 1998, the Company entered into a one-year $300,000 line of
credit with a bank. The Company is in the process of renewing the line of
credit. The line of credit is secured by the Company's short-term investment
in Lumisys common stock, carries interest at prime plus one percent and
allows borrowings of up to 70% of the Lumisys stock's market value. At March
31, 1999, the Company had borrowed all that was currently available under
this line of credit. Such borrowings totaled $245,000 at March 31, 1999.
-12-
<PAGE>
The Company has a secured promissory note with a vendor in the amount of
$114,000 at March 31, 1999. The note bears interest of 9.5% per annum
through September 1998, and 12% thereafter. The Company is currently in
default with respect to its payment obligations under this note. Such
default has resulted in the creditor having the right to accelerate the
balance due under the note and exercise other rights available under the law,
including foreclosing on CDT's essential computer equipment serving as
collateral for such note. The Company is working with the creditor to
restructure the timing of remaining payments thereunder. There can be no
assurances that such creditor will agree to waive all existing defaults and
extend the timing of remaining payments due under the note. The existence of
such default may also activate cross-default provisions under the Company's
working capital line of credit and its bank line of credit.
In addition, the Company is delinquent in its payments due many vendors
and service providers of the Company. Certain vendors have taken actions
against the Company, including initiating collection proceedings. The
Company has extended payment terms with most of these vendors as well as
others and continues to seek to extend payment terms from additional vendors
and service providers. If unsuccessful, such parties may take further
actions against the Company, including the termination of their relationship
with the Company or the initiation of legal proceedings.
In view of the Company's additional liquidity requirements, the Company
is also continuing to seek to sell additional equity or convertible debt
securities or pursue debt financing arrangements. To date, the Company has
no commitments, agreements or understandings with respect to additional
financing and there can be no assurance that the Company will be able to
consummate any such transaction or raise adequate funds from such transaction
to meet the Company's cash needs. As a result of the delisting of the
Company's common stock from the Nasdaq SmallCap Market in June 1998,
investors may suffer a loss of liquidity in the shares of such stock and the
Company may have difficulty raising funds in the capital markets. Further,
the sale of additional equity or convertible debt securities could result in
dilution to the Company's stockholders.
The Company's Series B and Series C Senior Preferred Stock (the
"Preferred Stock") currently accrues dividends at a rate of 10% per annum.
To the extent declared, such dividends would be payable quarterly in the
amount of $50,000 in cash. Unpaid cumulative dividends in arrears on the
Preferred Stock totaled $525,000 as of March 31, 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 March 31, 1999 based on
this analysis.
-13-
<PAGE>
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.
-14-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to litigation arising in the
normal course of its business. Such claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources.
Management believes that no currently pending or threatened actions will have
a material and adverse effect on the financial condition or results of
operations of the Company.
Item 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 March 31, 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: May 24, 1999 /s/ Brenda A. Potosnak
------------ ------------------------
Brenda A. Potosnak
Vice President of Finance and Administration,
Secretary, Treasurer and Chief Financial
Officer
-15-
<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.
-16-
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS (LOSS)
(In thousands, except per share data)
<CAPTION>
Three Months Ended
March 31,
Basic Per Share Earnings (Loss) 1999 1998
<S> <C> <C>
Average shares outstanding during period 21,898 21,306
======= =======
Net loss $ (591) $(1,117)
Undeclared cumulative dividends on
preferred stock (50) (50)
------- -------
Net loss applicable to common shares $ (641) $(1,167)
======= =======
Basic net loss per common share $ (.03) $ (.05)
======= =======
</TABLE>
<PAGE>
EXHIBIT 11
<TABLE>
COMPUTATION OF PER SHARE EARNINGS (LOSS) (Cont'd)
(In thousands, except per share data)
<CAPTION>
Three Months Ended
March 31,
Diluted Per Share Earnings (Loss) 1999 1998
<S> <C> <C>
Average shares outstanding during period 21,898 21,306
Employee stock options assumed exercised - 598
Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 95 95
Series B & C preferred stock 1,986 1,986
------- -------
23,979 23,985
======= ======
Net loss applicable to common shares $ (591) (1,117)
======= ======
Diluted net loss per common share $ (.02) $ (.05)
======= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q for the quarter ended March 31, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 13
<SECURITIES> 244
<RECEIVABLES> 745
<ALLOWANCES> 13
<INVENTORY> 53
<CURRENT-ASSETS> 1,135
<PP&E> 1,137
<DEPRECIATION> 509
<TOTAL-ASSETS> 4,126
<CURRENT-LIABILITIES> 3,360
<BONDS> 0
0
3
<COMMON> 222
<OTHER-SE> 249
<TOTAL-LIABILITY-AND-EQUITY> 4,126
<SALES> 1,242
<TOTAL-REVENUES> 1,242
<CGS> 785
<TOTAL-COSTS> 785
<OTHER-EXPENSES> 1,127
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (591)
<INCOME-TAX> 0
<INCOME-CONTINUING> (591)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (591)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
