<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________TO____________________ .
COMMISSION FILE NUMBER 1-9190
----------------
STARTRONIX INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1263272
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2402 MICHELSON DRIVE, SUITE 160, IRVINE, CA 92612-1314
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 714-474-1700
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 shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
---------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JANUARY 31, 1997
----- -------------------------------
<S> <C>
Common stock, $.001 par value..................... 27,289,690
Preferred stock, $.01 par value................... 395,500
</TABLE>
================================================================================
<PAGE> 2
STARTRONIX INTERNATIONAL INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I Financial information
Condensed consolidated balance sheets at December 31,
1996 (unaudited) and June 30, 1996............................. 3
Condensed consolidated statements of loss (unaudited) -- three
and six month periods ended December 31, 1996 and 1995......... 4
Condensed consolidated statements of cash flow (unaudited) --
six month periods ended December 31, 1996 and 1995............. 5
Notes to condensed consolidated financial statements........... 6
Management's discussion and analysis of financial conditions
and results of operations...................................... 10
PART II Other Information
Item 1 Legal Proceedings...................................... 12
Item 2 Changes in Securities.................................. 12
Item 3 Defaults Upon Senior Securities........................ 12
Item 4 Submission of Matters to a Vote of Security holders.... 12
Item 5 Other Information...................................... 12
Item 6 Exhibits and Reports on Form 8-K....................... 13
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
STARTRONIX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1996*
----------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets
Cash ......................................... $ 31,734 $ 2,355
Accounts Receivable, Net ..................... 21,193 1,628
Inventory .................................... 1,212,501 84,533
Deposits, Purchase of Inventory .............. 1,524,558 293,065
Prepaids and Other Current Assets ............ 454,179 197,149
------------ ------------
Total Current Assets ................. 3,244,165 578,730
Property and Equipment ......................... 1,327,496 411,854
Less Accumulated Depreciation and Amortization 145,070 35,802
------------ ------------
1,182,426 376,052
Other Assets
Subordinated Debenture Receivable ............ 1,492,272 1,427,750
Minority Interest Investments ................ -- 900,000
Prepaid Production Costs ..................... 300,000 300,000
Other ........................................ 84,695 12,855
------------ ------------
Total Other Assets .................. 1,876,967 2,640,605
------------ ------------
$ 6,303,558 $ 3,595,387
============ ============
LIABILITIES
Current Liabilities
Accounts Payable ............................. $ 1,822,922 $ 443,292
Notes Payable ................................ 400,000 400,000
Dividends Payable ............................ 62,870 -
Accrued Expenses ............................. 1,272,450 604,425
Contingency Reserve .......................... 424,582 424,582
------------ ------------
Total Current Liabilities ............ 3,982,824 1,872,299
Stockholders' Equity
Preferred Stock, $.01 Par, Series B .......... 0 900
Preferred Stock, $.01 Par, Series C .......... 3,955 150
Common Stock, $.001 Par ...................... 23,538 15,475
Additional Paid in Capital ................... 21,744,826 15,553,068
Retained Earnings ............................ (17,385,335) (12,680,255)
Unrealized Holding Gains (Losses) ............ (2,066,250) (1,166,250)
------------ ------------
Total Stockholders' Equity ........... 2,320,734 1,723,088
------------ ------------
$ 6,303,558 $ 3,595,387
============ ============
</TABLE>
- ----------
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
3
<PAGE> 4
STARTRONIX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales, net $ 641,198 $ 20,718 $ 1,344,539 $ 68,396
Cost of sales 132,066 18,822 715,367 73,238
------------ ------------ ------------ ------------
Gross Profit $ 509,132 $ 1,896 $ 629,172 ($4,842)
Selling, general and administrative expenses 2,084,604 1,701,816 5,164,577 2,897,844
Depreciation and amortization expense 82,330 13,125 109,267 38,902
Interest income 32,832 74,597 65,093 149,194
Interest expense 8,195 41,736 15,695 83,469
------------ ------------ ------------ ------------
Income (loss) before income taxes $ (1,633,165) $ (1,680,184) $ (4,595,274) $ (2,875,863)
Income taxes 0 0 0 0
Net income before dividends on preferred stock $ (1,633,165) $ (1,680,184) $ (4,595,274) $ (2,875,863)
Dividends on preferred stock 61,098 0 109,806 0
------------ ------------ ------------ ------------
Net income (loss) applicable to common stockholders $ (1,694,263) $ (1,680,184) $ (4,705,080) $ (2,875,863)
============ ============ ============ ============
Weighted average number of shares outstanding
Primary 22,703,485 11,503,412 19,026,474 10,476,239
Net loss per share
Primary $ (0.07) $ (0.15) $ (0.25) $ (0.27)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
4
<PAGE> 5
STARTRONIX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ............................ $(4,705,080) $(2,875,863)
Depreciation ................................. 109,268 38,902
Stock Issued for services and dividends ...... 1,239,146 1,233,000
Increases in inventory ....................... (1,127,968) -
Increases in deposits ........................ (1,231,493) (27,318)
(Increase) decrease in other assets .......... (341,117) 307,267
Increases in Accounts Payable and accrueds ... 2,110,526 480,306
----------- -----------
Net cash used in operations .................. (3,946,718) (843,706)
Cash flows from investing activities
Capital expenditures ......................... (915,642) (56,908)
Deposits ..................................... (71,840) -
----------- -----------
Cash used for investing activities ........... (987,482) (56,908)
Cash flows from financing activities
Funds received from issuance of capital
stock ...................................... 5,363,579 900,000
Accrued stock financing costs................. (400,000) -
----------- -----------
Cash provided by financing activities ........ 4,963,579 900,000
Net increase (decrease) in cash ................ 29,379 (614)
Cash, beginning of period ...................... 2,355 6,150
----------- -----------
Cash, end of period ............................ $ 31,734 $ 5,536
=========== ===========
Cash payments for
Interest expense ............................. $ 0 $ 0
Income taxes..................................
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
5
<PAGE> 6
STARTRONIX INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit (except for the balance sheet information
as of June 30, 1996) in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q and Article
10 of Regulation S-X. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included.
The accompanying condensed consolidated financial statements do not include
certain footnotes and financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's Report on Form
10-K for the fiscal year ended June 30, 1996. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: Eagle Claw Mining Company Inc., StarTronix
Inc. (formerly StarTronix USA), Global TelCom Inc., StarTronix TelCom Inc.
(formerly GoldTone Communications, Inc.) StarTronix Online, Inc. and StarTronix
Marketing N.A. Inc. All significant intercompany accounts and transactions have
been eliminated.
Property and Equipment
Equipment is stated at cost. Depreciation is provided over the estimated
useful lives of the respective assets, using the straight-line method.
Cash Equivalents
For the purpose of the consolidated balance sheets and statements of cash
flows, the Company considers a cash equivalent to be any highly liquid debt
instrument purchased with an original maturity of three months or less.
Inventory
As of June 30, 1996, the Company carried in inventory certain marketing
materials, referred to as "Starter Kits", and related items held for sale in the
normal course of business. During fiscal 1997, the Company began receiving
shipments of its principal products: the StarScreen telephone, StarVoice
telephone, StarVoice/Data Bank, and proprietary health, nutritional products,
and beauty aids. Inventories are stated at the lower of cost, determined under
the first-in, first-out (FIFO) method, or market.
Prepaid Production Costs (Infomercial)
In October 1994, the Company contracted with U.S. Corporate Development
Group Inc. (USCDG) to produce a one half-hour infomercial related to its
StarScreen and direct sales marketing plan, issuing 500,000 shares of the
Company's common stock in satisfaction of the $300,000 contract price. In
September 1996, USCDG contracted with Harmony Media Communications, Inc. to
produce the infomercial. Film footage of sponsored events has begun, and the
infomercial is scheduled to air in April, 1997. Under SOP 93-7, the costs of the
infomercial will be expensed when the infomercial airs for the first time. The
Company has determined that realizability of the benefit of the prepaid cost can
be reasonably assured.
Minority Interest Investments
6
<PAGE> 7
During fiscal 1996, the Company made an investment in AmWest Environmental
Group, Inc. (a Nevada corporation). The value of this investment is determined
under the rules set forth in Statement of Financial Accounting Standards (FAS)
No. 115 for securities "available-for-sale".
Net Loss per Share
Net loss per share amounts are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during each
period. Common stock equivalents, which include or included warrants,
convertible preferred stock, stock options and stock appreciation rights, have
been excluded from net loss per share calculations for all periods presented
because under Accounting Practice Bulletin (APB) No. 15 they would be
anti-dilutive.
Income Taxes
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards (SFAS) No. 109.
Accounting for Income Taxes. Under this approach, deferred income taxes are
recorded to reflect the tax consequences on future years of differences between
the tax basis of assets and liabilities and their financial reporting amounts at
each year end.
Reclassification
Certain amounts for 1995 have been reclassified to conform to the 1996
presentation.
NOTE 2: INVENTORIES
Inventories at December 31, 1996, have been calculated at lower of cost,
determined on a first-in, first-out (FIFO) basis, or market. The composition of
inventories at December 31, 1996 and June 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Sales material .......... $ 551,325 $ 84,533
StarScreen .............. 407,483 -
StarVoice Telephone ..... 113,056 -
Body products ........... 51,022 -
Nutritional products .... 12,089 -
Carrying Case ........... 42,249 -
StarData Bank ........... 35,277 -
---------- ----------
$1,212,501 $ 84,533
========== ==========
</TABLE>
At December 31, 1996, management increased the carrying value of
inventories $384,718, thereby decreasing cost of sales a corresponding amount.
This adjustment was primarily the result of overcosting amounts charged to cost
of sales ($348,514). The effect of this adjustment on reported assets and
earnings for the first quarter ended September 30, 1996 would not have been
material, and therefore the entire amount is reported as an adjustment to the
inventory and cost of sales for the quarter ended December 31, 1996.
NOTE 3: DEPOSITS, PURCHASES OF INVENTORY
Since the Company is in the initial stages of establishing its product for
future sales, supplying vendors have requested deposits in advance of producing
and shipping of product. Upon physical receipt of products, amounts as
applicable, are reclassed from deposits to inventory. The Company made advance
payments on production commitments and prepaid the cost of certain inventory
items as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Voice telephone ...... $ 23,943 $ 90,665
Voice data bank ...... 0 23,800
Body products ........ 0 33,600
Nutritional products . 0 10,000
Screen telephone ..... 1,500,615 135,000
---------- ----------
$1,524,558 $ 293,065
========== ==========
</TABLE>
7
<PAGE> 8
The Company made cash payments of $1,727,500 to the manufacturer of its
StarScreen telephone during the six months ending December 31, 1996. Payments of
$195,000 had been made through June 30, 1996. Additionally, the manufacturer
shipped 360 StarScreen telephones in December 1996 to the Company, resulting in
certain amounts being reclassified to inventory.
NOTE 4: CAPITAL EXPENDITURES
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Office furniture and equipment ... $ 221,869 $ 241,524
Computer equipment and peripherals 961,343 118,521
Leasehold improvements ........... 144,284 51,809
---------- ----------
1,327,496 411,854
Less accumulated depreciation .... 145,070 35,802
---------- ----------
Net property and equipment ....... $1,182,426 $ 376,052
========== ==========
</TABLE>
The increase in computer equipment and peripherals is a direct result of an
increase in the Company's customer and technical support services, as well as
assets purchased by StarTronix On-line Inc., the Company's internet and web
services subsidiary.
NOTE 5. DEPOSITS
Additional deposits were made for the six month period ended December 31,
1996 which include $56,500 to attorneys in Canada as a retainer fee to purchase
bonds to do business in Canada.
NOTE 6. MINORITY INTEREST INVESTMENTS
During fiscal 1996, the Company exchanged 1,500,000 shares of its restricted
Rule 144 common stock for 1,500,000 shares of the restricted Rule 144 stock of
AmWest Environmental Group, Inc. (AmWest). The Company made the investment as a
vehicle to facilitate entry into foreign markets, particularly Hong Kong. The
market value of the AmWest common stock at the date of the transaction was $1.45
per share. The Company recorded the investment at $2,066,250, after discounting
for restriction. Under Statement of Financial Accounting Standards (FAS) 115 for
securities "available for sale", the investment is carried at fair value and net
unrealized holding gains or losses are excluded from earnings and reported
separately in shareholders' equity. At December 31, 1996, the Company valued
this investment at zero due to inactivity in the market and no reasonable
assurance of current marketability. The net unrealized holding loss carried in
shareholders' equity is $2,066,250. The restriction on the AmWest common stock
lapsed in September 1996.
NOTE 7. SUBORDINATED DEBENTURE RECEIVABLE
The subordinated zero coupon debenture carries a $4,000,000 redemption
price, matures in June 2008, and is presented in the consolidated balance sheet
net of an unamortized discount based on an imputed interest rate of 8.75%.
NOTE 8. MATERIAL MANAGEMENT ADJUSTMENTS
Corrections to Accounts Payable and Accrued Expenses
During the second quarter ended December 31, 1996, management recorded
adjustments to accounts payable and accrued expenses which decreased reported
expenses by $231,713 relating to the first quarter ended September 30, 1996.
This adjustment is not material to the results of operations or net assets
reported in the first quarter; however, had these amounts been properly
recorded in the first quarter the separate quarter loss from operations and
weighted average loss per share would have been as follows:
8
<PAGE> 9
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED 6 MONTHS ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1996
------------------ ----------------- -----------------
<S> <C> <C> <C>
Net Loss, as reported ...... $(3,010,817) $(1,694,263) $(4,705,080)
Decrease in accounts payable
and accrued expenses ....... 231,713 (231,713) --
Net loss, adjusted ......... $(2,779,104) $(1,925,976) $(4,705,080)
Loss per share ............. $(0.17) $(0.09) $(0.25)
</TABLE>
NOTE 9. RELATED PARTY TRANSACTIONS
During the six months ending December 31, 1996, the Company had the following
transactions with related parties:
The Company issued 600,000 shares of its common stock at $1.50 per share to T.
Davis Capital for stock promotion services, taking a total charge to income of
$900,000.
The Company issued 215,800 shares of its common stock at $1.00 per share to
Marketing Direct Concepts and its designees for financial marketing services,
resulting in a charge to income of $215,800.
The Company issued 150,000 shares of common stock at $1.00 per share to the
president of StarTronix Inc. as a performance incentive. He rescinded his rights
to this stock during December, 1996 and the stock was retired. The transaction
had no effect on net income.
The Company issued 110,000 shares of its common stock pursuant to a settlement
agreement with a former officer of the Company. The total value of these shares
was $76,414. The Company also paid the former officer $75,000. These amounts had
been accrued for at June 30, 1996; therefore, there was no effect on current
earnings.
The Company paid or accrued $60,000 to U.S. Corporate Development Group pursuant
to a consulting agreement dated July, 1994. Additionally, the Company accrued
$400,000 in finders' fees under the same agreement for performance in connection
with capital raising efforts. These transactions reduce net income and net
equity $60,000 and $460,000, respectively.
The Company paid $14,000 to Pacific Horizons, Inc., a company owned by a
personal friend of the President and CEO for consulting services.
9
<PAGE> 10
STARTRONIX INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying condensed consolidated
financial statements.
THREE AND SIX MONTH PERIOD ENDING DECEMBER 31, 1996 AND 1995
Sales and cost of sales for the three and six months ended December 31, 1995
were from sales of prepaid telephone calling cards and related long distance
activity of the Company's subsidiary, Global TelCom Inc. This business has been
discontinued.
All sales and cost of sales for the three and six month period ended
December 31, 1996, resulted from activity of the Company's subsidiary,
StarTronix Inc., which provides a home-based business opportunity to independent
distributors thereby enabling them to become both users and marketers of the
Company's product.
The majority of the sales for this period were realized from the sale of the
Company's "starter kit" which sells for $59.95 plus shipping and handling, and
provides the recipient with an introduction to the Company and sets forth the
requirements to become an independent distributor. Approximately 10.8% of the
total sales of $1,344,539 for the six month period ending December 31, 1996 were
to distributors in the providence's of Canada. An analysis of sales, by mix, for
the three month and six month periods ending December 31, 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 % DECEMBER 31, 1996 %
------------------ ------ ----------------- ------
<S> <C> <C> <C> <C>
Voice telephone $ 8,257 1.29 $ 19,733 1.47
Voice data bank 5,894 .90 12,787 .95
Body products 1,118 .17 2,201 .16
Nutritional products 1,643 .26 4,968 .37
Sales material and Starter kit 624,286 97.38 1,304,850 97.05
---------- ------ ---------- ------
$ 641,198 100.00 $1,344,539 100.00
========== ====== ========== ======
</TABLE>
Consolidated selling, general and administrative expense for all entities
for the three and six month periods ending December 31, 1996 was $2,166,934 and
$5,273,844, respectively, and included:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 % DECEMBER 31, 1996 %
----------------- ------ ----------------- ------
<S> <C> <C> <C> <C>
Payroll and payroll taxes, including
benefits $ 767,423 35.42 $1,219,402 23.12
Professional services & consulting 462,732 21.35 700,392 13.28
Financial marketing services 55,110 2.55 1,192,160 22.60
Advertising and promotion 230,422 10.63 363,122 6.88
Distributor commissions and fees 350,573 16.18 518,992 9.82
Start-up and development costs 16,526 .76 371,404 7.03
Other selling, general and
administrative 284,147 13.11 908,372 17.27
---------- ------ ---------- ------
Total selling, general and
administrative $2,166,934 100.00 $5,273,844 100.00
========== ====== ========== ======
</TABLE>
Consolidated selling, general and administrative expense for all entities
for the three and six months ending December 31, 1995 was $1,714,941 and
$2,936,746 respectively, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 % DECEMBER 31, 1995 %
----------------- ------ ----------------- ------
<S> <C> <C> <C> <C>
Professional services &
consulting $ 646,723 37.71 $ 962,080 32.76
Financial marketing services 875,000 51.02 1,125,000 38.31
Write-off of goodwill 0 0 475,911 16.20
Other selling, general and
administrative 193,218 11.27 373,755 12.73
---------- ------ ---------- ------
Total selling, general and
administrative $1,714,941 100.00 $2,936,746 100.00
========== ====== ========== ======
</TABLE>
During the six months ending December 31, 1996, the Company significantly
increased its operating activities, including substantially increasing its
employee base to provide technical and customer support services. Also, the
Company began promoting and marketing its products and services, including
newspaper advertising, roadshows, and product demonstrations. Additionally, the
Company's direct marketing subsidiary, StarTronix, Inc., began processing fees
and commissions related to the selling efforts of its distributors. There were
no such activities in the comparable period ending December 31, 1995.
During the six months ending December 31, 1996 and 1995, the Company used the
services of third party promoters to raise working capital. These services were
compensated by the issuance of common stock. Refer to Item 5 and discussions in
the June 30, 1996 Form 10-K for detailed information.
10
<PAGE> 11
The net loss for the three and six months through the first quarter ended
December 31, 1996, was $1,694,263 and $4,705,080, respectively, compared to a
loss of $1,680,184 and $2,875,863, respectively, for the comparable periods
ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES AT DECEMBER 31, 1996
The Company has reported net operating losses since inception. These losses
have been funded by the issuance of capital stock and borrowings.
Continuation of the Company is contingent upon the Company establishing
markets for its products and services and achieving profitable operations. Such
operations will also require management to secure additional financing for the
Company in the form of debt or equity, which management plans to partially
satisfy through the issuance of shares of its capital stock.
During fiscal 1996, the Company made a private placement offering of 200,000
shares of its Series "B" $0.01 par value convertible preferred stock. As of June
30, 1996, 90,000 shares had been issued for $900,000, less $90,000 issue costs
and $45,000 in finder's fees. The Series "B" preferred stock is convertible into
common stock at any time 45 days after the issuance date. The conversion rate is
$10.00 divided by the conversion price, which is based on a predetermined
formula. As of December 31, 1996, all 90,000 shares had been converted into
952,847 shares of common stock at an average price of $0.97 per share. In
addition 21,176 shares of stock with a value of $20,326 were issued to pay
dividends due on the Series "B" preferred stock at date of conversion.
During fiscal 1996, the Company made a private placement offering of 650,000
shares of its Series "C" $0.01 par value convertible preferred stock. As of June
30, 1996, the Company had issued 15,000 shares for $150,000, less $24,017 in
issue costs and $7,500 in finder's fees. The Series "C" preferred stock is
convertible into common stock at any time 41 days after the issuance date. The
conversion rate is $10.00 divided by the conversion price, which is based on a
predetermined formula. During the three month period ended September 30, 1996,
the Company issued an additional 433,250 shares of Series "C" preferred stock,
realizing gross proceeds of $4,332,500, less $694,958 in issuance costs. During
the three month period ending December 31, 1996, the Company issued an
additional 201,750 shares of Series "C" preferred stock, realizing profits of
$2,017,500, less $322,800 in issuance costs. As of December 31, 1996, 254,500
shares had been converted into 6,121,766 shares of common stock at an average
price of $0.45 per share. In addition 61,884 shares of common stock with a value
of $26,610 were issued to pay dividends due on the Series "C" preferred stock at
date of conversion. See Item 1 for suspension of conversion feature and
resulting litigation.
All series of preferred stock pay dividends at a rate of $0.60 per share per
year. These dividends are cumulative and accrue day by day whether or not
declared. All dividends are payable in common stock of the Company and paid only
upon conversion. Cash dividends may be paid at the discretion of the Company's
Board of Directors, however no common stock dividends may be declared or paid to
the common stock holders until the preferred stock holders have been paid their
dividends in full. During the three and six month periods ending December 31,
1996, dividends on the preferred stock of $61,098 and $109,806 were paid
($29,262) and ($46,936) or accrued ($31,836) and ($62,870), respectively.
In February, 1997, the Company made a private placement offering of its
Series "D" $0.01 par value convertible preferred stock, not to exceed
$15,000,000. The series is expected to be issued in two traunches of $7,500,000
each. As of the date of this filing, no firm subscriptions have been received
and no shares have been issued.
In addition to common shares issued for conversion of the Series "B" and
Series "C" preferred stock and payment of applicable dividends on the preferred
stock, additional shares were issued for the following:
<TABLE>
<CAPTION>
VALUE TOTAL
RECIPIENT SHARES PER SHARE AMOUNT ACCOUNT CHARGED
--------- ------ --------- ------ ---------------
<S> <C> <C> <C> <C>
T. Davis Capital........ 600,000 $ 1.50 $ 900,000 Promotion, common stock
MDC Marketing........... 215,800 1.00 215,800 Financial marketing
Individual issues....... 3,814,000 - $1,532,000 Cash
</TABLE>
11
<PAGE> 12
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
In November 1996 the Company suspended the conversion of its Series "C"
Convertible Preferred Stock as a result of the concerted market irregularities
in the trading of the Company's common stock, which management believes is
related to the conversion terms contained in the private placement offering of
the Series "C" Preferred Stock. The suspension of the conversion provisions of
the private placement offering is more fully described in the Company's Form 8-K
filed with the SEC on October 25, 1996.
Subsequent to the Company suspending the conversion of the Series "C"
Preferred Stock, a shareholder group filed a lawsuit against the Company in the
United States District Court in New York. The action seeks to compel the Company
to resume conversion of the Class "C" Preferred Stock or, in the alternative, to
rescind the subscription agreement and recover the shareholders' original
investment in the amount of $1,337,500. Limited discovery has commenced as of
the date of this report. Management intends to vigorously defend its position,
however the ultimate outcome of any litigation on this matter cannot be
determined at this time.
In December 1996, a second action was filed by a shareholder group in the
Superior Court of the State of California in Los Angeles County related to the
suspension of the conversion feature of the Series "C" Preferred Stock. The
action seeks to compel the Company to resume conversion of the Series "C"
Preferred Stock or, in the alternative, to rescind subscription agreement and
recover the shareholders' original investment in the amount of $2,367,500, plus
interest and punitive damages. Limited discovery has commenced, the ultimate
outcome of any litigation on this matter cannot be determined at this time;
however, management intends to vigorously defend its position.
ITEM 2 CHANGE IN SECURITIES
The Series "C" Preferred Stock authorized the issuance of 400,000 shares at
$10.00 per share. This was subsequently increased to 650,000 shares. The
registered holders of outstanding shares of Series "C" Preferred Stock are also
entitled to a number of privileges and rights including the right to receive
cumulative dividends at the annual rate of $0.60 per share payable in common
stock, conversion rights according to a predetermined formula and liquidation
rights in the event of a liquidation, dissolution or winding up of the Company.
On November 7, 1996 a suspension of conversion of the Series "C" Convertible
Preferred stock was announced to preferred stockholders as a result of
irregularities in the trading of the Company's common stock which management
believes is related to the conversion terms of the Regulation S private
placement. A shareholder has filed a lawsuit against the Company to compel the
conversion of certain class "C" Preferred Stock to Common stock.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 OTHER INFORMATION
At June 30, 1996, the Company had 90,000 warrants outstanding to various
entities for the purchase of 90,000 shares of the Company's common stock. For
the quarter ended December 31, 1996, no additional warrants were issued and none
were exercised.
12
<PAGE> 13
In December, 1996, a related party transaction occurred where Greg Gilbert,
Chairman and CEO, transferred 2,331,360 shares of common stock to Degerstrom,
Inc., Neal Degerstrom, Robert E. Sterling and Dale D. Popp pursuant to their
rights under certain agreements which required the specific performance of Mr.
Gilbert thereunder.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a). EXHIBITS
Exhibit 27 Financial Data Schedule
(b). Reports on Form 8-K
Form 8-K, dated September 20, 1996 and filed with the Commission on
September 27, 1996, reporting on the resignation of BDO Seidman LLP
as the Company's independent auditors.
Form 8 K/A, dated September 20, 1996 and filed with the Commission on
October 4, 1996 reporting on BDO Seidman's agreement on content of the
Company's Form 8-K dated September 20, 1996.
Form 8-K, dated October 24, 1996 and filed with the Commission on
October 29, 1996 reporting on the appointment of Strabala Ramirez &
Associates as the Company's independent auditors.
Form 8-K, dated October 25, 1996 and filed with the Commission on
November 7, 1996 reporting on the suspension of the conversion of the
Company's Series "C" Convertible Preferred Stock.
Form 8-K, dated January 15, 1997 and filed on January 16, 1997,
reporting on the issuance of 3,750,000 shares of the Company's common
stock to an accredited investor.
The Company is in the process of filing a Form 8-K reporting on the
resignation of a member of the Board of Directors. The resignation
became effective February 13, 1997. The Company is expecting a
resignation letter from the member to attach to the Form 8-K.
13
<PAGE> 14
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 authorized.
STARTRONIX INTERNATIONAL INC.
(Registrant)
Date: February 19, 1997 By: /s/ GREG GILBERT
----------------------------------
Greg Gilbert
President
Date: February 19, 1997 By: /s/ JAMES VALLE
-----------------------------------
James Valle
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the December
31, 1996 financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 31,734
<SECURITIES> 0
<RECEIVABLES> 358,686
<ALLOWANCES> 337,493
<INVENTORY> 1,212,501
<CURRENT-ASSETS> 3,244,165
<PP&E> 1,327,496
<DEPRECIATION> 145,070
<TOTAL-ASSETS> 6,303,558
<CURRENT-LIABILITIES> 3,982,824
<BONDS> 0
0
3,955
<COMMON> 23,538
<OTHER-SE> 2,293,241
<TOTAL-LIABILITY-AND-EQUITY> 6,303,558
<SALES> 1,344,539
<TOTAL-REVENUES> 1,344,539
<CGS> 715,367
<TOTAL-COSTS> 715,367
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,695
<INCOME-PRETAX> (4,705,080)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,705,080)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,705,080)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
