SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER 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.)
7700 IRVINE CENTER DRIVE, SUITE 510
IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (949) 727-7420
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 No X.
-----
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $1,846,772
State the aggregate market value of voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of a specified date within the past 60 days. (See definition of affiliate in
rule 12b-2 of the Exchange Act.) $5,586,770, based on the closing price of
$0.16 for the common stock on June 30, 1997.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of June 30, 1997, there
were 38,517,298 shares of common stock, par value $0.001, issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990). None.
Transitional Small Business Disclosure
Format (check one):
Yes _____ No __X__
-
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STARTRONIX INTERNATIONAL INC.
TABLE OF CONTENTS
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PART I
Item 1 Description of Business.
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders.
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.
Item 6 Management's Discussion and Analysis or Plan or Operations.
Item 7 Financial Statements.
Item 8 Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and Management.
Item 12 Certain Relationships and Related Transactions.
Item 13 Exhibits and Reports on Form 8-K.
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PART I
This Annual Report includes forward-looking statements within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based
on management's beliefs and assumptions, and on information currently available
to management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company set forth under
the heading "Financial Information-Management's Discussion and Analysis of
Financial Condition or Plan of Operation." Forward-looking statements also
include statements in which words such as "expect," "anticipate," "intend,"
"plan," "believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue reliance on
any forward-looking statements.
ITEM 1 - DESCRIPTION OF BUSINESS
OVERVIEW
On or about March 1997, management of the Company suspended all operations
due to a lack of funding. The disclosure contained in this Part I describes the
business and operations of the Company assuming it had not been suspended based
on management's assumption that the Company will at some point in the future
resume operations.
StarTronix International Inc. is a holding company in the high technology
electronic products and on-line service industry that began selling its primary
product, the StarScreen, in 1997. The StarScreen is the first screen-phone that
integrates a telephone and computer capability to provide home shopping,
banking, E-mail and unlimited Internet access and bill paying or shopping by
using the debit/credit card reader feature on the StarScreen. StarTronix Inc.
is an independent distributor network company marketing on-line services,
screen-based phones, software training and telecommunications products to run a
home-based business and discount long distance telephone service through its
sister company, StarTronix TelCom Inc., using the least cost routing method.
StarTronix International's business strategy is to develop and market "easy
to use", "plug and play" high-technology electronic products and on-line
services through the Internet to the home-based business industry. Through its
wholly owned subsidiary, StarTronix Inc., it will distribute its Internet
screen-phone, STARSCREEN, to its home-based distributors. STARSCREEN is a multi
functional screen phone that integrates a telephone with a speaker phone and
answering machine, PC, fax/modem, and debit/credit card reader that provides
on-line services through the Internet. The Company has also begun marketing its
first proprietary product, the STARVOICE PHONE, a voice recognition dialing,
state-of-the-art phone with the following features: 40 voice trigger dialing,
large LCD directory display, 10 number speed dialing capability, 3 one touch
dialing, automatic redial every 4 minutes and an outgoing dialing data log. In
addition, StarTronix Inc. provides a range of "How To" training programs for its
distributors; instructing them on running a home-based business.
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HISTORY
StarTronix International Inc., formerly Gold Express Communications Inc.
and Gold Express Corporation, (hereinafter "the Company" or "StarTronix" or "the
Registrant") was originally incorporated in the State of Washington on June 26,
1984, as a mining and natural resource company. In June of 1986, the Company
sold 511,634 shares of its common stock to the public for gross proceeds
totaling $2,558,170, which were used to fund the Company's limited operations.
Since its incorporation through December 1994, the Company had limited
operations and no operating revenues. Effective April 14, 1994, the Company
acquired all of the outstanding stock of StarTronix Inc. ("StarTronix Inc."),
formerly SmartCom International, Inc. and StarTronix International Inc., an
emerging company in the on-line services business. In April 1994, the Company
issued 2,800,000 shares of its common stock in exchange for all the outstanding
shares of common stock of StarTronix Inc. StarTronix Inc., an entity formed in
January 1994, is a marketing company of new on-line service and screen phone for
user friendly access to the Internet. StarTronix Inc. has had limited
operations to date and its ability to achieve future profitable operations is
dependent on obtaining sufficient funds to initiate its business plans.
Concurrently with the issuance of the 2,800,000 shares by StarTronix, certain
stockholders of the Company entered into separate agreements with a party
related to the former stockholder of StarTronix Inc. Under the terms of these
agreements the Company's stockholders sold one-half of their shares of the
Company common stock (approximately 1,165,000 shares) to this party. This
exchange of stock resulted in voting control of StarTronix transferring to the
former stockholder of StarTronix Inc.
In December 1994, the Company issued 500,000 shares of its common stock in
exchange for all of the outstanding stock of GlobalTelCom Inc. ("GlobalTelCom"),
a provider of products and services relating to long distance telephone and
debit card services. With this change in ownership and the acquisition of
GlobalTelCom, the Board of Directors changed the business focus and orientation
of the Company out of mining and natural resources and into on-line services and
hardware/software products for user friendly access to the Internet.
In September 1995, the Company took the following actions: changed the
state of incorporation from the State of Washington to the State of Delaware,
changed the name of the corporation from Gold Express Communications Inc. to
StarTronix International Inc., increased the authorized common stock to
50,000,000 shares and created a class of preferred stock in the amount of
10,000,000 shares. During fiscal 1996, the Company initiated two separate
preferred stock offerings, with rights, allowing for conversion into common
stock to raise $6,000,000. During fiscal 1996, the Company also changed the
name of its subsidiary from StarTronix USA Inc. to StarTronix Inc.
SUBSIDIARIES
EAGLE CLAW MINING COMPANY, INC. The Company is the sole shareholder of
Eagle Claw Mining Company, Inc., an Idaho corporation ("Eagle Claw"), which was
engaged in preliminary exploration of minerals on properties located in Idaho.
All of the Company's operations in these properties was terminated during fiscal
year ended June 30, 1988, and the remaining equipment was sold during fiscal
year ended June 30, 1990. As part of the StarTronix Inc. acquisition, the
ownership of the Vulcan/Gold Dike Property and the subordinated debentures
receivable obtained by the Company through the sale of the Copper Flat Property,
were to be transferred to Eagle Claw Mining Company, Inc. This transfer did not
take place and remains on the books of StarTronix and does not have any impact
on the consolidated financial statements. In December 1995, the assets were
transferred to Globex-Nevada, Inc. and there are no remaining assets on the
books of Eagle Claw Mining Company, Inc. Eagle Claw Mining Company, Inc. was
administratively dissolved by the State of Idaho in December 1996.
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STARTRONIX INC. The Company is the sole shareholder of StarTronix Inc., a
Delaware corporation which is a marketing company that is concentrating on the
development and marketing of home-based services and products, including
personal communications and telecommunications products.
GLOBALTELCOM INC. The Company is the sole shareholder of GlobalTelCom, a
Georgia corporation which is a primary provider of long-distance telephone
communications and debit card services. GlobalTelCom lost its primary customers
during fiscal 1995 and has since had little activity. At the end of the 1996
fiscal year, the company ceased operations, and was dissolved in April 1997.
STARTRONIX TELCOM INC. The Company is the sole shareholder of StarTronix
TelCom Inc., (formerly GoldTone Communications, Inc.), a new subsidiary formed
in August 1995 and which changed its name in November 1995 for the purpose of
providing specialized long distance telephone and debit card services. There
has been no activity as of the date of this report.
STARTRONIX ON-LINE INC. The Company formed this new subsidiary in November
1995 to provide on-line services and Internet access to StarTronix. StarTronix
On-Line Inc. provides home banking, shopping, bill paying, news, financial
services, email and distributor services through the Internet via local dial-up.
It is continually expanding its services to meet the emerging needs of its
users. No substantial operations will occur until the Company begins to deliver
its premier product.
STARTRONIX MARKETING N.A. INC. The Company formed this new subsidiary, a
Canadian company, on June 4, 1996 to market the products and services of
StarTronix Inc. in the Canadian marketplace. As of the date of this report,
this entity has had little activity.
MANUFACTURING AND DISTRIBUTION
Full scale sales and marketing of the products and services are dependent
on the Company's ability to raise funds independent of the Company's assets.
Because of the financial problems encountered during 1997, the Company will need
to identify and contract with new manufacturers, and new distributors will
need to be signed, once operations are revived.
StarTronix marketing plan is to allow average individuals to participate in
the information age without the need to learn how to use a computer or other
unfamiliar devices. At the same time, provide a business opportunity and income
generator for the individuals marketing the program. StarTronix feels by using
this residual income marketing approach it will retain a much higher degree of
its customers and users than the traditional marketing approach.
The Company will require certain levels of inventory to be maintained to
meet increased growth of the distribution base. This growth will require
additional working capital to be generated through additional debt and equity
offerings. Additionally, the growth of the number of distributors will provide
additional capital through the purchase of the distributor contracts.
INTELLECTUAL PROPERTY
StarTronix has no patents, licenses, franchises, or concessions which are
considered by the Company to be material. StarTronix Inc. negotiated with
Golden Source Electronics Ltd., a Hong Kong based company to manufacture the
StarScreen system.
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SEASONALITY AND GOVERNMENT CONTRACTS
The primary business of StarTronix is marketing on-line services and
products and is not affected by seasonal changes.
The Company has no contracts with the Federal or any state government.
COMPETITION
The Company believes that the StarScreen has no competitors at this time,
there are many large company's who do sell computers, software, on-line services
and connectivity but none that have combined all aspects to run a home-based
business. There are several companies such as Oracle, Sony, and Apple that have
announced their future version of a Internet Terminal. All of these companies
are relying on a TV set top box. These units are not independent and need other
appliances such as a TV in order to work. In addition, they do not provide
expandability or portability like the StarScreen and are not packaged in a
familiar appliance already in the home -- the telephone.
The Company's competitors current marketing plans calls for a traditional
approach, selling their units in retail outlets. They are in the hardware
business. By using this approach they do not provide many important things that
StarTronix does. StarTronix provides a complete package for its users and
marketers eliminating the confusion of compatibility, software, hardware, modems
and connectivity issues for the user.
EMPLOYEES
As of June 30, 1997 there are approximately 3 employees in the Company,
other than the officers. All of the employees were serving administrative
functions during the suspension of operations.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company maintained its corporate offices in Irvine, California. The
premises, consisting of approximately 13,273 square feet, are currently leased
at a monthly rental of $14,600 for a thirty-six (36) month period which expired
in April 1999. Currently the property utilized is meeting the Company
requirements, however as the distributor base and sales volume increases, it may
require additional space for expansion for our growing products and services.
Until November 1996, the Company leased office space in Atlanta Georgia for
the operations of GlobalTelCom. The lease required a monthly rental of $3,450,
and as of November 1996 the Company did not renew the lease.
ITEM 3 - LEGAL PROCEEDINGS
The Company had been involved in a legal proceeding with a former officer
and director related to a dispute as to balances owing on an employment
contract. A lawsuit was filed in District Court, County of Douglas, State of
Colorado on March 25, 1994 and was dismissed with prejudice. The matter was
settled by an arbitration agreement dated May 22, 1996 in favor of the former
officer and director. As a result, the Company has expended an amount of
$103,882 as final settlement.
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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 StarTronixs' Common Stock which management
believes is related to the conversion terms of the Regulation S private
placement. A shareholder has brought an action against the Company to compel
the conversion of certain class "C" Preferred Stock to Common stock or to
rescind the subscription agreement and recover the shareholders' original
investment in the amount of $1,337,500. The Company has answered and counter
claimed denying the allegations of the complaint and asserting counter claims
against the plaintiff for misrepresentations and security law violations. As of
June 30, 1997, the Company was in settlement negotiations with the shareholder,
and the lawsuit was settled in August 1997.
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 the subscription agreement
and recover the shareholders' original investment in the amount of $2,367,500,
plus interest and punitive damages. As of June 30, 1997, the Company was in
settlement negotiations with the shareholder, and the lawsuit was settled in
August 1997.
In August 1997, the Company settled the lawsuits with all but two of the
Series "C" Preferred Stock holders, resulting in the conversion of their shares
as originally contemplated. In August 1999 and May 2000, a settlement was
reached with the final two holders of Series "C" Preferred Stock, who were
issued 1,250,000 and 2,000,000 shares of common stock, respectively.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders for a vote during the
period covered by this report.
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PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on NASDAQ National Market until
October 22, 1993. Effective on that date, the NASDAQ removed the Company from
the National Market System because the Company no longer met the price per share
qualifications for such listing. The Company's common Stock is still reported
on the NASDAQ Over the Counter Exchange. All available quarterly high and low
sales prices of the Company's stock for the two years preceding June 30, 1997
are listed in the table below, as adjusted to reflect a 10 for 1 reverse stock
split January 20, 1994.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
BID PRICES
YEAR PERIOD HIGH LOW
1997 First Quarter .68 .23
Second Quarter .65 .16
1996 First Quarter 2.50 .44
Second Quarter 2.16 1.09
Third Quarter. 1.50 .81
Fourth Quarter 1.25 .45
1995 First Quarter 1.38 1.38
Second Quarter 1.31 1.31
Third Quarter. 1.50 .84
Fourth Quarter 1.10 .53
</TABLE>
NUMBER OF SHAREHOLDERS
The number of beneficial holders of record of the common stock of the Company as
of the close of business on June 30, 1997 was approximately 1,000. Many of the
shares of the Company's common stock are held in "street name" and consequently
reflect numerous additional beneficial owners. In addition, due to the change
of transfer agents twice between June 30, 1997 and the date of this report, the
Company is estimating the number of shareholders for purposes hereof.
DIVIDEND POLICY
To date, the Company has declared no cash dividends on its common stock, and
does not expect to pay cash dividends in the near term. The Company intends to
retain future earnings, if any, to provide funds for operation of its business.
RECENT SALES OF UNREGISTERED SECURITIES
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In 1996, the Company authorized the issuance of 400,000 shares of Series
"C" Preferred Stock at $10.00 per share. This was subsequently increased to
650,000 shares. The registered holders of Series "C" Preferred Stock were
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.
The Company received an aggregate of $6,500,000 in proceeds from the offering,
minus offering costs of approximately $1,000,000.
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. Numerous shareholders filed a lawsuit against the Company to compel
the conversion of certain class "C" Preferred Stock to common stock.
In January 1997, the Company sold an aggregate of 3,750,000 shares of
common stock, restricted in accordance with Rule 144 promulgated under
Regulation D, to one accredited investor, for cash consideration of $1,500,000.
The issuance was exempt under Rule 4(2) of the Securities Act of 1933.
In January 1997, the Company sold an aggregate of 64,000 shares of common
stock, restricted in accordance with Rule 144 promulgated under Regulation D, to
one accredited investor, for cash consideration of $32,000. The issuance was
exempt under Rule 4(2) of the Securities Act of 1933.
In February 1997, an aggregate of 150,000 shares of common stock which had
been previously issued to the President of StarTronix Inc as a performance
incentive were retired.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
On or about March 1997, management of the Company suspended all operations
due to a lack of adequate funding. Management anticipates that the Company will
resume operations in the future, however, the exact time and the extent that
operations will be continued is unknown.
RESULTS OF OPERATIONS
During the year ended June 30, 1997, the Company reported revenues of
$1,846,772 and a net loss of $15,338,481 compared to revenues of $97,654 and a
net loss of $6,021,898 for the year ended June 30, 1996. These sales consist of
$1,304,850 (70%) from the sale of "starter kits," and $502,233 (27%) from the
sale of the StarScreen.
During the year ended June 30, 1997, the Company incurred operating
expenses of $14,114,496, resulting in an operating loss of $13,243,806, compared
with operating expenses and loss of $5,786,920 and $6,021,898, respectively, for
the year ended June 30, 1996. This represents an increase of over 120% in both
instances. The operating expenses include a write down of impaired assets in
the amount of $5,386,591 which reflects a write off of all the Company's assets,
and the forfeiture of a deposit with the StarScreen supplier in the amount of
$1,607,570 with the third party who was manufacturing the StarScreen product,
both of which occurred as a result of the Company's suspension of operations on
March 31, 1997. Other operating expenses include professional fees and
consulting ($1,785,742), financial marketing services ($1,292,160), salary
expense ($2,450,132) and other selling, general and administrative ($1,157,661),
all of which were incurred as a result of the Company's increased efforts to
manufacture and market its StarScreen product.
For the year ended June 30, 1997, the Company incurred other expenses
(income) equal to $2,094,675, which consisted primarily of a loss on investments
related to the write-off of the Company's investment in AmWest Environmental
Group, Inc. equal to $2,066,250. This is compared to other expenses (income) of
$234,978 for the year ended June 30, 1996, an increase of nearly nine-fold.
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As a result of the above, the Company incurred a net loss of $15,338,481, or
$0.61 per share, for the year ended June 30, 1997, as compared to $6,021,898, or
$0.48 per share, for the year ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended June 30, 1997, the Company reported cash from
financing activities equal to $6,359,739, of which $4,827,739 was from the sale
of their Series "C" Convertible Preferred Stock, and $1,532,000 was from the
sale of common stock. During this same period, the Company used $5,391,832 in
its operating activities, along with $959,287 in its investing activities,
resulting in a net increase in cash during the period from $2,355 at June 30,
1996 to $10,975 at June 30, 1997.
For the fiscal year ended June 30, 1996, cash from financing activities was
equal to $2,335,982. During this same period, cash used in operating activities
was equal to $1,962,606, a decrease of 63% as compared to the year ended June
30, 1997.
Cash used in investing activities for the year ended June 30, 1997
consisted of an acquisition of fixed assets equal to $915,642 which consists of
computers and other equipment, and an investment in a Canadian joint venture
equal to $43,645.
At June 30, 1997, as a result of the suspension of operations by management
and the related write-down of all of the Company's assets, the only asset
consisted of $10,975 in cash and $56,500 representing a deposit held in
connection with a joint venture. This is compared to total assets of $3,595,387
at June 30, 1996.
At June 30, 1997, total liabilities were equal to $4,531,026 as compared to
$1,872,299 at June 30, 1996. This increase was due in part to an increase in
accounts payable - trade from $443,292 at June 30, 1996 to $2,032,234 at June
30, 1997, an increase of over 350% arising from the Company's increased
manufacturing and sales activities during the applicable period. The Company
also reported $659,719 due to related parties, $277,058 due to officers and
directors, $1,162,015 in accrued expenses (including $400,000 as a reserve for
claims brought as a result of the suspension of operations), and $400,000 in
related party notes payable.
As a result of the above, total stockholders equity went from $1,723,088 at
June 30, 1996 to a deficit of ($4,463,551) at June 30, 1997.
The Company's independent certified public accountants' report on the June
30, 1997 consolidated financial statements contained an explanatory paragraph
expressing substantial doubt as to the Company's ability to continue as a going
concern. The Company has minimal capital resources presently available to meet
obligations that normally can be expected to be incurred by similar companies.
To carry out its planned activities, the Company requires additional capital
infusion. The success of management's plan for the continuation of the Company
as a going concern is dependent upon the Company's ability to raise working
capital and successfully market its premier product, the StarScreen.
ITEM 7 - FINANCIAL STATEMENTS
The financial statements called for under this item appear under the caption
Index to Financial Statements (Page F-1 hereof).
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ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective September 20, 1996, the independent accounting firm of BDO
Seidman, LLP ("BDO"), previously engaged as the principal accountant to audit
the financial statements of the Company resigned. BDO informed the Company that
it believed it could no longer rely on management's representations due to the
following facts, which were discussed with the Company's Board of Directors:
BDO raised issues regarding amounts reported by the Company for the
quarters ended September 30, 1995, December 31, 1995, and March 31, 1996,
relating to goodwill, stock compensation and disbursement items; The Company
failed to notify BDO of the Company's use of financial statements audited by BDO
as part of its private placement memorandums, and; The Company did not have the
internal controls necessary to develop reliable financial statements.
BDO's reports on the consolidated financial statements for the fiscal years
ending June 30, 1994 and 1995 contained an explanatory paragraph as to the
Company's ability to continue as a going concern. The reports for both such
fiscal years also noted that the Company changed its method for accounting for
income taxes effective July 1, 1993. The report on the consolidated financial
statements for the fiscal year ended June 30, 1995 referenced a matter discussed
in Note 5 to the financial statements regarding a demand letter from the
purchaser of gold mine property alleging breaches in the terms of the sales
contract and seeking a reduction in the sales price and in the corresponding
amount due to the Company in the form of debentures.
Effective October 24, 1996, the Company's Board of Directors engaged the
independent accounting firm of Strabala, Ramirez and Associates ("Strabala") as
the principal accountant to audit the financial statements of the Company
through and as of June 30, 1996. Strabala agreed to audit the financial
statements of the Company based on the following facts:
1. The Company has initiated changes in the management structure and
internal control environment, including hiring a new CFO, establishing an
accounting department with segregation of duties, and reorganization of
management to take control away from officers and executives who were primarily
responsible for the presentation of financial information which was one of
several factors which lead to the resignation of BDO Seidman LLP.
2. The Company has agreed to propose to its shareholders to take action
to expand the current Board of Directors from three (3) to five (5) individuals,
with two (2) of the new directors to be independent members of the community,
and to replace two of the existing directors, and;
3. The Company has agreed to amend the Forms 10-Q filed for the first
three quarters of fiscal 1996 to correct the misstatements contained therein,
and;
4. The Company has assured Strabala that it will obtain its consent to
use the audited financial statements of Strabala in future registration
statements and private placement memorandums.
BDO was authorized to fully respond to Strabala's inquiries concerning the
subject matter of each reportable event. BDO was authorized by the Board of
Directors to expand the scope of their audit as a result of such issues. Due to
BDO's resignation, however, BDO did not expand the scope of its audit.
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PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names and ages of the directors and
executive officers of the Company as of June 30, 1997, the principal offices and
positions with the Company held by each person and the date such person became a
director or executive officer of the Company. The executive officers of the
Company are elected annually by the Board of Directors. The directors serve one
year terms until their successors are elected. The executive officers serve
terms of one year or until their death, resignation or removal by the Board of
Directors. There are no family relationships between any of the directors and
executive officers. In addition, there was no arrangement or understanding
between any executive officer and any other person pursuant to which any person
was selected as an executive officer.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Positions
Greg Gilbert 55 Mr. Gilbert has been CEO of StarTronix and a Director
Chairman & CEO since April 15, 1994 and is also owner of Gilbert &
of StarTronix Intl. Associates, a financial investment and consulting firm
since 1971.
James Valle 37 Mr. Valle is a Certified Public Accountant who joined
Vice-President & the firm in late August 1996. Prior to joining
Chief Financial Officer StarTronix International Inc., he was Chief Operating
of StarTronix Intl. Officer and Chief Financial Officer of a national
internet server provider, and was Chief Financial
Officer of a multi-million dollar service and
manufacturing organization.
Gerald Fitch 63 Mr. Fitch joined the Company in May 1995 as COO and
Chief Operating Officer elected a Director in August 1995. Prior to joining
of StarTronix Intl. StarTronix, he was Senior V.P. and Chief Financial
Officer for Astech/MCI during the period from 1992 to
1995 and was Chief Financial Officer for Jermar
Industries Inc. from 1984 to 1992.
Norman Shink 44 Mr. Shink joined the Company in March 1996 as President
President, StarTronix Inc. of StarTronix Inc. From 1990 through February 1996
Mr. Shink was Executive Vice President for Applied
Electronics. Concurrently, Mr. Shink was Executive Vice
President of Quorum International, an Applied
Electronics related company. In September 1996, Quorum
International Applied Electronics filed a petition for
protection under Chapter 11 of the United States
Bankruptcy Code.
12
<PAGE>
J. Michael Sellards 48 Mr. Sellards has been Executive Vice President of
Executive Vice President StarTronix Inc. a Director of the Company since 1994.
of StarTronix Inc., Mr. Sellards has worked for Mr. Gilbert for twenty years
Director providing a wide range of operating support.
Christopher Reid 40 Mr. Reid joined the Company in September 1996 as Senior
Senior Vice President Vice President, General Counsel of StarTronix Inc. From
General Counsel of 1992 through September 1996 Mr. Reid served as Vice
StarTronix Inc. and President and General counsel for Quorum International
Canadian General Manager Applied Electronics. Prior to that, he served as Vice
President of the Edper Group.
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than ten percent of a
registered class of the Company's equity securities to file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Officers, directors and greater than
ten percent shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company's knowledge, the following officers and directors have been
delinquent in their Section 16(a) filing requirements:
Name Times Delinquent
---- -----------------
Greg Gilbert four
J. Michael Sellards three
Norman Shink three
Gerald Fitch three
13
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities for the fiscal years ended June 30, 1995,
1996, and 1997. Other than as set forth herein, no executive officer's salary
and bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the number
of stock options granted and certain other compensation, if any, whether paid or
deferred. Note that all employment contracts were cancelled and all but three
employees terminated with the suspension of operations in 1997. Additionally,
Greg Gilbert, President, agreed to waive any salary until such time as adequate
funding was found to revive operations.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------------
Awards Payouts
------------- --------------
Securities
Other Annual Restricted Underlying LTIP All Other
Name and Principal Salary Bonus Compensation Stock Awards Options Payouts ($) Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Position Year ($) ($) ($) ($) SARs(#) ($)
Greg Gilbert 1997 $120,000 -0- -0- -0- -0- -0- -0-
(President, CEO)
1996 $164,650 -0- -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0- -0-
James Valle (2) 1997 $110,000 -0- -0- -0- -0- -0- -0-
CFO
1996 -0- -0- -0- -0- -0- -0- -0-
Gerald Fritch(3)1997 $120,000 -0- -0- -0- -0- -0- -0-
COO
1996 $115,000 -0- -0- $162,600(7) -0- -0- -0-
1995 $18,650 -0- -0- -0- -0- -0- -0-
Norman M. Shink 1997 $144,000 -0- -0- -0- -0- -0- -0-
(4)
1996 $47,031 -0- -0- -0- 100,000 -0- $16,009 (9)
J. Michael 1997 $120,000 -0- -0- -0- -0- -0- -0-
Sellars (5)
1996 $104,500 -0- -0- -0- -0- -0- $130,000 (8)
1995 $15,000 -0- -0- -0- -0- -0- -0-
Christopher Reid 1997 $102,000 -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S GRANTED EXERCISE OF
OPTIONS/SAR'S GRANTED TO EMPLOYEES IN FISCAL BASE PRICE
NAME (#) YEAR ($/Sh) EXPIRATION DATE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES Value of Unexercised
In-The-Money
Number of Unexercised Option/SARs At
Shares Securities Underlying FY-End ($)
Acquired On Value Options/SARs At FY-End Exercisable/Unexer-
Name Exercise (#) Realized ($) Exercisable/Unexercisable cisable
---- ----------- ------------- -------------------------- -------------------
<S> <C> <C> <C> <C>
N/A N/A N/A N/A N/A
</TABLE>
(1) Pursuant to a five year employment agreement, which expires on July
1, 2000, between the Company and Greg Gilbert, Mr. Gilbert is currently entitled
to an annual salary of $120,000. The agreement also provides that Mr. Gilbert
is entitled to a salary adjustment and eligible for a bonus on a graduating
scale based on the performance of the Company. Such salary adjustment and bonus
eligibility become effective when the company's net income exceeds $1,000,000.
In addition to salary and bonus, under the terms of his employment agreement the
company is required to provide Mr. Gilbert with other benefits including
automobile expense allowance, unallocable expense allowance and health and
dental insurance coverage. Pursuant to the employment agreement, Mr. Gilbert is
required to devote his full productive time to the business of the Company, as
reasonably directed by the Board of Directors. If Mr. Gilbert is terminated by
the Company under certain circumstances, including a change in control of the
Company, he will be entitled to severance pay under the employment agreement of
up to one year of his then current salary and group health insurance. Mr.
Gilbert's salary was accrued but not paid in fiscal 1997 and 1996 and he
declined to take any salary in fiscal 1995. During fiscal 1996, the Company
granted performance oriented options to Greg Gilbert as part of his employment
agreement. Mr. Gilbert may receive options based on 1% of pre-tax income
according to a pre-determined formula.
15
<PAGE>
(2) Mr. Valle was hired in August 1996. Pursuant to a five year
employment agreement, which expires on August 15, 2001, between the Company and
James Valle, Mr. Valle is currently entitled to an annual base salary of
$120,000. The agreement also provides that Mr. Valle is entitled to a salary
adjustment and eligible for a bonus on a graduating scale based on the
performance of the Company. Such salary adjustment and bonus eligibility become
effective when the company's net income exceeds $1,000,000. In addition to
salary and bonus, under the terms of his employment agreement the company is
required to provide Mr. Valle with other benefits including automobile expense
allowance, unallocable expense allowance, and health and dental insurance
coverage. Under the terms of his employment agreement, the Company is required
to provide Mr. Valle with other benefits consistent with those provided
similarly situated employee. As an incentive to join the Company, Mr. Valle was
awarded a stock option for 100,000 shares of Common Stock, vested immediately
and exercisable for up to 5 years. Mr. Valle is also a participant in the
Company Executive Stock Option Plan. Pursuant to the employment agreement, Mr.
Valle is required to devote his full productive time to the business of the
Company, as reasonably directed by the Board of Directors. If Mr. Valle is
terminated by the Company under certain circumstances, including a change in
control of the Company, he will be entitled to severance pay under the
employment agreement of one year of his then current salary plus adjustment
bonus and group health insurance. Mr. Valle will also be eligible for a payment
of at least $250,000 two years after separation of service, provided he complies
with certain confidentiality and non-competition terms of his agreement.
(3) Pursuant to a five year employment agreement, which expires on
September 30, 2000, between the Company and Gerald Fitch, Mr. Fitch is currently
entitled to an annual base salary of $120,000. Pursuant to the employment
agreement the Company also issued 250,000 shares of Common Stock to Mr. Fitch.
Such Common Stock is subject to repurchase by the Company upon the terms set
forth in the employment agreement. The agreement also provides that Mr. Fitch is
entitled to a salary adjustment and eligible for a bonus on a graduating scale
based on the performance of the Company. Such salary adjustment and bonus
eligibility become effective when the Company's net income exceeds $1,000,000.
In addition to salary and bonus, under the term of his employment agreement the
Company is required to provide Mr. Fitch with other benefits including
automobile expense allowance, and health and dental insurance coverage. Pursuant
to the employment agreement, Mr. Fitch is required to devote his full productive
time to the business of the Company, as directed by the Board of Directors. If
Mr. Fitch is terminated by the Company under certain circumstances, including a
change in control of the Company, he may be entitled to severance pay under the
employment agreement of up to one year of his then current salary and group
health insurance coverage.
(4) Pursuant to a five year employment agreement, which expires on
February 28, 2001, between the Company and Norman M. Shink, Mr. Shink is entitle
to an annual base salary of $144,000. The agreement also provides that Mr. Shink
is entitled to a salary adjustment and eligible for a bonus on a graduating-
scale based on the performance of the Company. In addition to salary and bonus,
under the terms of his employment agreement the Company is required to provide
Mr. Shink with other benefits including health and dental insurance coverage.
Mr. Shink was granted a stock option to purchase 100,000 shares at an exercise
price of $1.50 per share. Pursuant to the employment agreement, Mr. Shink is
required to devote his productive time and best efforts to the business of the
Company, as reasonable directed by the Board of Directors. If Mr. Shink is
terminated by the Company under certain circumstances, he will entitle to
severance pay under the employment agreement of up to one half of his annual
base salary.
16
<PAGE>
(5) Pursuant to a five year employment agreement, which expires on June
1, 2001, between the Company and J. Michael Sellards, Mr. Sellards is entitle
to an annual base salary of $120,000. The agreement also provides that Mr.
Sellards is entitled to a salary adjustment and eligible for a bonus on a
graduating scale based on the performance of the Company. Such salary adjustment
and bonus eligibility become effective when the Company's net income exceeds
$1,500,000. In addition to salary and bonus, under the terms of his employment
agreement the Company is required to provide Mr. Sellards with other benefits
consistent with those provided to similarly situated executives of the Company.
Pursuant to the employment agreement, Mr. Sellards is required to devote his
full productive time to the business of the Company, as directed by the Board of
Directors. If Mr. Sellard's employment is terminated by him or the Company under
certain circumstances, including a change in control of the Company, he will be
entitled to severance pay under the employment agreement of up to one year of
his then current salary and group health insurance coverage; Mr. Sellards will
also be eligible for a payment after two years of at least $250,000 provided he
complies with certain confidentiality and non-competition terms of his
agreement.
(6) Pursuant to a five year agreement, which expires on September 5,
2001, between the Company and Christopher A. Reid, Mr. Reid is currently
entitled to an annual base salary of $102,000. The agreement also provides that
Mr. Reid is entitled to a salary adjustment and eligible for a bonus on a
graduating scale based on the performance of the Company. Such salary adjustment
and bonus eligibility become effective when the Company's net income exceeds
$1,200,000. In addition to salary and bonus, under the terms of his employment
agreement, the Company is required to provide Mr. Reid with other benefits
including a leased automobile, a travel and lodging expense allowance, certain
office equipment for a home office, legal membership fees, and health and dental
insurance coverage. Mr. Reid is also a participant in the Company Executive
Stock Option Plan. Pursuant to the employment agreement, Mr. Reid is required to
devote his full productive time to the business of the Company, as reasonably
directed by the Board of Directors. If Mr. Reid is terminated by the Company
under certain circumstances, including a change in control of the Company he
will be entitled to severance pay under the employment agreement based on length
of employment from a minimum of six months to maximum of one year of his then
current salary plus group health insurance. Mr. Reid is also eligible for a
payment; the lesser of $250,000 or 2% of the average net income amount before
tax for twelve month periods, however, in no event less than $100,000, provided
he complies with certain confidentiality and non-competition terms of his
agreement.
(7) On October 23, 1995 250,000 shares of common stock were awarded to
Mr. Fitch, and such shares are subject to repurchase pursuant to the terms of
his employment agreement. No other restricted stock awards of the Company are
outstanding. Such restricted stock will be treated the same as all other common
stock for the purpose of the payment of dividends, although no such dividends
are expected to be paid.
(8) On October 23, 1995, 200,000 shares of common stock were awarded to
Mr. Sellards.
(9) Norman Shink's other Compensation includes $16,000 income related
to a grant of options to purchase common stock below fair market value at the
grant date.
COMPENSATION OF DIRECTORS
The Directors have not received any compensation for serving in such capacity,
and the Company does not currently contemplate compensating its Directors in the
future for serving in such capacity.
17
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 1997, certain information with
respect to the Company's equity securities owned of record or beneficially by
(i) each Officer and Director of the Company; (ii) each person who owns
beneficially more than 5% of each class of the Company's outstanding equity
securities; and (iii) all Directors and Executive Officers as a group.
COMMON STOCK
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner (1) Beneficial Ownership Class
------------------------ -------------------------- ------------------------ ----------
Common Stock Greg Gilbert 2,800,000 7.3%
Common Stock James Valle (2) 100,000 less than 1%
Common Stock Gerald Fitch 250,000 less than 1%
Common Stock Norman M. Shink (2) 250,000 less than 1%
Common Stock J. Michael Sellards 200,000 less than 1%
Common Stock Christopher Reid - -
Common Stock Rana Investment (3) 3,750,000 9.7%
Common Stock Joseph D'Avanzo (3)(4) 3,000,000 7.8%
Common Stock Spectrum Business Resources (3)(4) 8,227,608 21.4%
All Officers and Directors
as a Group (6 Persons) 3,600,000 9.3%
============== ======
</TABLE>
(1) Unless otherwise noted, the address of the shareholder is the same
as the address of the Company.
(2) Includes options to acquire 100,000 shares of common stock awarded
by the Company and unexercised by Mr. Shink and Mr. Valle.
(3) Address Unknown.
(4) The shares issued to Mr. D'Avanzo and to Spectrum Business
Resources were issued as a "pool" for the settlement of a lawsuit brought by
certain Series "C" Convertible Preferred Stock holders. These shares were
subsequently retired.
18
<PAGE>
SERIES "C" PREFERRED STOCK
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner (1) Beneficial Ownership Class
------------------------ -------------------------- ------------------------ ----------
Series C Preferred Income Partnership of America (1) 25,000 6.3%
Series C Preferred Euro Factors International, Inc. (1) 25,000 6.3%
Series C Preferred Joseph Chitrik (1) 30,000 7.5%
Series C Preferred Mark Parks 26,250 6.6%
Alexander Westcott Securities
63 Wall Street
New York, NY 10005
Series C Preferred Loimo Holding Ltd. (2) 30,000 7.5%
Series C Preferred Futures Brokerage Inc. (1) 20,000 5.0%
Series C Preferred Inglewood Holdings, Ltd. (2) 25,000 6.3%
Series C Preferred UFH Endowment Ltd. 31,750 8.0%
c/o Ethel Schwartz
1510 51st Street
Brooklyn, NY 11219
Series C Preferred Tula Business, Inc. (1) 40,000 10.1%
Series C Preferred Cygni, S.A. (1) 50,000 12.6%
</TABLE>
(1) Address is c/o Summers & Schneider LLP, 600 Old Country Road, Garden
City, NY 11530.
(2) Address is c/o Eilenberg & Zivian, 666 Third Avenue, 30th Floor, New
York, NY 10017.
The Company believes that the beneficial owners of securities listed above,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable. Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with respect to
securities. Shares of stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for purposes
of computing the percentage of the person holding such options or warrants, but
are not deemed outstanding for purposes of computing the percentage of any other
person.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 1995, the Company borrowed $400,000 from Phoenix Environmental
Group for working capital, in the form of two notes bearing interest at 7.5%.
The notes are secured by stock in StarTronix International Inc., owned by
Pacific Horizons and the Company's Chief Executive Officer. Originally due July
1995, the notes were extended to December 1996. The Company was unable to pay
the notes and the related accrued interest when due. In December 1999, the
Company settled in full by issuing 700,000 shares of restricted common stock
valued at $983,500. Additionally, the Company granted Phoenix options to
purchase 300,000 shares of free trading stock at $1.50 per share.
19
<PAGE>
In fiscal 1996, the Company executed a consulting agreement with U.S.
Corporate Development Group, Inc. (USCDG) to (a) assist in the development of a
long range business strategy, (b) identify and negotiate with potential
merger/acquisition candidates, (c) assist in the identification and hiring of
key personnel, and (d) assume other activities as mutually agreed upon. In
fiscal 1996, the Company paid USCDG $327,500 in the form of cash and common
stock; $4,556 was accrued. In fiscal 1997, USCDG provided consulting services
totaling $686,055. The full amount was accrued along with the balance remaining
from fiscal 1996. In June 1999, the President of the Company transferred 1.1
million of his personal shares of common stock to USCDG to settle the full
$690,611. In fiscal 2000, the Company successfully executed an employment
contract with the owner of USCDG to become the Chairman of the Company's Board
of Directors.
During 1996, the Company accrued $27,500 in interest expense for two notes
payable to Phoenix of which none was paid. In addition, the Company issued
100,000 shares of its restricted common stock in satisfaction of $33,000 loaned
to the Company by Phoenix. The Company accrued an additional $29,000 to Phoenix
for certain services related to Global TelCom, Inc. All amounts were paid in
fiscal 1997.
During fiscal 1996, the Company issued 1,600,000 shares of its common stock
to T. Davis Capital for stock promotion services, taking a total charge to
income of $2,103,750 and carrying a prepaid of $21,250 in the consolidated
financial statements. Of the 1,600,000 shares issued, 1,100,000 and 500,000
were issued at $1.25 and $1.50, respectively.
During fiscal 1996, Mr. Kurtis Jones, a consultant to the Company,
exercised 2,000,000 warrants for $1,400,000 to purchase 2,000,000 shares of the
Company's common stock.
In September 1995, the Company issued 1,500,000 shares of its common stock
to AmWest Environmental Group, receiving in return 1,500,000 shares of the
restricted Rule 144 common stock of AmWest. This investment was written off in
June 1997.
Pacific Horizons, owned by a personal friend of the President and CEO, and
a company in which he was formerly a V.P. and director, provided working capital
to the Company through the purchase of 350,000 shares of common stock for
$175,000. Additionally, Pacific Horizons, jointly with the Company's CEO
secured the notes payable to Phoenix.
This company, belonging to Robert Sterling, a former officer and
director, and a shareholder of the Company, maintains the bank account
through which the interest on the subordinated debentures is received and
the interest on the Degerstrom notes is paid. Administrative expenses of
$6,000 were charged during fiscal 1996 and paid in fiscal 1997.
Historically, the Company entered into financing, stock and stock option
agreements with N.A. Degerstrom, a shareholder, to borrow money to finance the
Company's operations. The Degerstrom notes were satisfied during fiscal 1996 in
conjunction with an agreement involving Alta Gold Inc.
In 1999, the Company entered into an understanding with Western Global to
provide services to the Company. To demonstrate its appreciation for the
services rendered by the President and to demonstrate its commitment to utilize
the services of Western Global, the Company issued the President of the Company
and the two owners of Western Global in total 9,000,001 shares of convertible
preferred "D" stock valued at $90,000. The consulting contract, executed in May
1999, required Western Global to provide consulting services for improvement to
the design and development of the StarScreen including its hardware and
software. The 1-year contract compensated Western Global with 2,100,000 shares
of restricted common stock valued at $850,500 using 50% of the market price of
free trading stock on the date the contract was executed.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
------------ -----------
3.1 (1) Articles of Incorporation and Articles as
amended
3.2 (2) By-laws as amended and restated
4.1 (2) Stock Options -- Norman Shink
4.2 (2) Warrants to D.J. Limited
4.3 (2) Warrants to Stock Works USA, Inc.
4.4 (2) Certificate of Determination for Series "B"
Preferred Stock
4.5 (2) Certificate of Determination for Series "C"
Preferred Stock
10.1 (1) Employment Agreement of John King dated
April 23, 1990
10.1(a) (2) Employment Agreement of Greg Gilbert dated
July 1, 1995
10.1(b) (2) Employment Agreement of Gerald Fitch dated
October 1, 1995
10.1(c) (2) Employment Agreement of Norman Shink dated
March 1, 1996
10.1(d) (2) Employment Agreement of J. Michael Sellards
dated June 1, 1996
10.1(e) (2) Employment Agreement of James Valle dated
August 15, 1996
10.1(f) (2) Employment Agreement of Christopher Reid
dated September 5, 1996
10.2 (1) 1987 Incentive Stock Option Plan
10.3 (1) Royalty Agreement
10.4 (1) Copper Flat Sales Agreement
10.5 (2) Golden Source Electronics Ltd.
10.6 (2) Settlement agreement and Release John R.
King
10.7 (2) Alta Gold Co. Settlement Agreement
11 (2) Statement re-computation of per share
earnings
18 (1) Letter Regarding Change in Accounting
Principles
21 (2) Subsidiaries of the Registrant
27 Financial Data Schedule
__________
(1) Incorporated by reference from Registrant's Annual Report on Form
10-K for the period ended June 30, 1993.
(2) Incorporated by reference from Registrant's Annual Report on Form
10-K for the period ended June 30, 1996.
(B) REPORTS ON FORM 8-K
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) Form 8-K, dated February 11, 1997 and filed with the Commission on
March 10, 1997, reporting on the resignation of Gerald Fitch, as a member of the
Board of Directors.
20
<PAGE>
STARTRONIX INTERNATIONAL INC.
(A DELAWARE CORPORATION)
INDEPENDENT AUDITORS' REPORT
AND FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
JUNE 30, 1996 AND 1997
F-1
<PAGE>
STARTRONIX INTERNATIONAL INC.
(A DELAWARE CORPORATION)
TABLE OF CONTENTS
Independent Auditors' Report 1
Audited Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity (Deficit) 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6-16
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To: The Board of Directors of
STARTRONIX INTERNATIONAL INC.
We have audited the accompanying consolidated balance sheets of STARTRONIX
INTERNATIONAL INC. (a Delaware corporation) as of June 30, 1996 and 1997 and the
related statements of operations, stockholders' equity and cash flows for the
years then ended. These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of STARTRONIX INTERNATIONAL INC.
as of June 30, 1996 and 1997 and the results of its operations and cash flows
for the periods then ended, in conformity with generally accepted accounting
principles.
The accompanying statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 3 to the financial statement,
the Company has minimal capital resources presently available to meet
obligations that normally can be expected to be incurred by similar companies.
To carry out its planned activities, the Company requires additional capital
infusion. These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also
are described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Strabala Ramirez & Associates, Inc.
STRABALA, RAMIREZ & ASSOCIATES, INC.
July 21, 2000
Irvine, California
F-3
<PAGE>
STARTRONIX INTERNATIONAL INC.
(A DELAWARE CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
6/30/96 6/30/97
------------- -------------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,355 $ 10,975
Accounts receivable, net . . . . . . . . . . . . . . . . . 1,628 -
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . 84,533 -
Deposits, purchase of inventory. . . . . . . . . . . . . . 293,065 -
Prepaid expenses and other . . . . . . . . . . . . . . . . 197,149 -
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . 578,730 10,975
------------- -------------
Property, plant and equipment, net . . . . . . . . . . . . . 376,052 -
------------- -------------
Other Assets:
Prepaid production costs. . . . . . . . . . . . . . . . . . 300,000 -
Investments . . . . . . . . . . . . . . . . . . . . . . . . 900,000 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,855 56,500
Subordinated debentures receivable. . . . . . . . . . . . . 1,427,750 -
------------- -------------
Total other assets . . . . . . . . . . . . . . . . . . . 2,640,605 56,500
------------- -------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,595,387 $ 67,475
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable - trade . . . . . . . . . . . . . . . . . $ 443,292 $ 2,032,234
Due to related parties . . . . . . . . . . . . . . . . . . - 659,719
Due to officers and directors. . . . . . . . . . . . . . . - 277,058
Accrued expenses, including interest . . . . . . . . . . . 1,029,007 1,162,015
Related party notes payable. . . . . . . . . . . . . . . . 400,000 400,000
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . 1,872,299 4,531,026
------------- -------------
Commitments and contingencies (See Note 14). . . . . . . . . - -
Stockholders' equity :
Preferred stock, $.01 par value, 10,000,000 authorized:
Series "B" Convertible Preferred Stock, $.01 par value,
90,000 shares issued and outstanding at June 30, 1996 . 900 -
Series "C" Convertible Preferred Stock, $.01 par value,
15,000 and 395,500 shares issued and outstanding at
June 30, 1996 and June 30, 1997 . . . . . . . . . . . . 150 3,955
Common stock, $.001 par value; 50,000,00 shares
authorized; 15,475,277 and 38,517,298 shares issued and
outstanding at June 30, 1996 and June 30, 1997. . . . . . 15,475 38,517
Additional paid-in capital . . . . . . . . . . . . . . . . 15,553,068 23,512,713
Unrealized holding gains (losses), net . . . . . . . . . . (1,166,250) -
Accumulated deficit. . . . . . . . . . . . . . . . . . . . (12,680,255) (28,018,736)
------------- -------------
Total stockholders' equity (deficit) . . . . . . . . . . 1,723,088 (4,463,551)
------------- -------------
Total Liabilities and Stockholders' Equity (Deficit). . . . . $ 3,595,387 $ 67,475
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
STARTRONIX INTERNATIONAL INC.
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED
6/30/96 6/30/97
------------ -------------
Sales . . . . . . . . . . . . . . . . . . . $ 97,654 $ 1,846,772
Cost of sales . . . . . . . . . . . . . . . 95,417 976,082
------------ -------------
Gross profit. . . . . . . . . . . . . . . 2,237 870,690
Operating expenses:
Professional services and consulting. . . - 1,785,742
Financial marketing services. . . . . . . - 1,292,160
Distributor commission and fees . . . . . - 668,992
Start up and development costs. . . . . . - 586,404
Advertising . . . . . . . . . . . . . . . - 613,122
Salary expenses . . . . . . . . . . . . . - 2,450,132
Write down of impaired assets . . . . . . 655,911 5,386,591
Depreciation and amortization . . . . . . 27,321 173,692
Other selling, general and administrative 5,105,925 1,157,661
------------ -------------
Total operating expenses. . . . . . . . 5,789,157 14,114,496
Operating loss. . . . . . . . . . . . . . . (5,786,920) (13,243,806)
------------ -------------
Other (income) expense:
Interest income . . . . . . . . . . . . . (297,887) (111,381)
Interest expense. . . . . . . . . . . . . 194,918 30,000
Loss on investments . . . . . . . . . . . - 2,066,250
Litigation settlement . . . . . . . . . . 103,882 -
Loss on liquidation of debt . . . . . . . 234,065 -
Other expense . . . . . . . . . . . . . . - 109,806
------------ -------------
Total other (income) expense . . . . . . 234,978 2,094,675
Net loss. . . . . . . . . . . . . . . . . . $(6,021,898) $(15,338,481)
============ =============
Net loss per share. . . . . . . . . . . . . $ (0.48) $ (0.61)
============ =============
Weighted average shares outstanding . . . . 12,629,279 24,963,189
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
STARTRONIX INTERNATIONAL INC.
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CLASS "B"
COMMON STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------ -------
BALANCE AT JUNE 30, 1995 . . . . . . . . . . . . . . . . . 8,864,282 $8,864 - $ -
Issuance of common stock for:
Payment of services ($1.25 per share). . . . . . . . . 1,100,000 1,100 - -
Payment of services ($.50 per share) . . . . . . . . . 790,000 790 - -
Payment of services ($1.00 per share). . . . . . . . . 600,000 600 - -
Payment of services ($1.50 per share). . . . . . . . . 500,000 500 - -
Conversion of stock warrants ($1.00 per share) . . . . 500,000 500 - -
Conversion of stock warrants ($1.50 per share) . . . . 1,000,000 1,000 - -
Conversion of stock warrants ($.80 per share). . . . . 500,000 500 - -
Acquisition of 1,500,000 shares of AmWest
Environmental Group. . . . . . . . . . . . . . . . . . 1,500,000 1,500 - -
Repayment of debt ($.33 per share) . . . . . . . . . . 100,000 100 - -
Repayment of debt ($1.00 per share). . . . . . . . . . 20,995 21 - -
Convertible preferred stock for working capital
($10.00 per share, net of issue costs) . . . . . . . . - - 90,000 900
Net loss . . . . . . . . . . . . . . . . . . . . . . . . - - - -
Unrealized holding loss (SFAS 115) on 1,500,000
Shares of AmWest Environmental Group . . . . . . . . . - - - -
------------- ------------- ------------ -------
BALANCE AT JUNE 30, 1996. . . . . . . . . . . . . . . . . . 15,475,277 $ 15,475 90,000 $ 900
Issuance of common stock for:
Payment of services ($1.50 per share) . . . . . . . . . 600,000 600 - -
Payment of services ($1.00 per share) . . . . . . . . . 215,800 216 - -
Conversion of preferred "B" stock ($0.97 per share) . . 259,352 260 (25,000) (250)
Dividends on preferred "B" stock. . . . . . . . . . . . 3,420 3 - -
Convertible preferred stock for working capital
($10.00 per share, net of issue costs). . . . . . . . . - - - -
Conversion of preferred "C" stock ($0.60 per share) . . 2,138,296 2,138 - -
Dividends on preferred "C" stock. . . . . . . . . . . . 24,001 24 - -
Unrealized holding loss (SFAS 115) on 1,500,000
Shares of AmWest Envirnomental Group. . . . . . . . . . - - - -
Debt settlement, with former officer ($0.695 per share) 110,000 110 - -
Conversion of preferred "B" stock ($0.97 per share) . . 668,899 669 (65,000) (650)
Dividends on preferred "B" stock. . . . . . . . . . . . 21,176 21 - -
Unrealized holding loss (SFAS 115) on 1,500,000
Shares of AmWest Envirnomental Group. . . . . . . . . . - - - -
Convertible preferred stock for working capital
($10.00 per share, net of issue costs). . . . . . . . . - - - -
Conversion of preferred "C" stock ($0.45 per share) . . 3,946,182 3,946 - -
Dividends on preferred "C" stock. . . . . . . . . . . . 13,287 13 - -
Sale of common stock for working capital ($.40 per
share net of costs) . . . . . . . . . . . . . . . . . . 3,750,000 3,750 - -
Sale of common stock for working capital ($.50 per
share net of costs) . . . . . . . . . . . . . . . . . . 64,000 64 - -
Realized loss on 1,500,000 shares of AmWest
Environmental Group . . . . . . . . . . . . . . . . . . - - - -
"Pool" to settle lawsuit. . . . . . . . . . . . . . . . 3,000,000 3,000 - -
"Pool" to settle lawsuit. . . . . . . . . . . . . . . . 8,227,608 8,228 - -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . - - - -
------------- ------------- ---------------- -----------
BALANCE AT JUNE 30, 1997. . . . . . . . . . . . . . . . . . 38,517,298 $ 38,517 - $ -
</TABLE>
<TABLE>
<CAPTION>
<BTB>
<S> <C> <C> <C> <C>
CLASS "C" ADDITIONAL UNREALIZED
PREFERRED STOCK PAID IN HOLDING
SHARES AMOUNT CAPITAL GAINS(LOSSES)
------------- ----------- ----------- ---------
BALANCE AT JUNE 30, 1995 . . . . . . . . . . . . . . . . . - - 7,979,501 $ -
Issuance of common stock for:
Payment of services ($1.25 per share). . . . . . . . . - - 1,373,900 -
Payment of services ($.50 per share) . . . . . . . . . - - 399,210 -
Payment of services ($1.00 per share). . . . . . . . . - - 599,400 -
Payment of services ($1.50 per share). . . . . . . . . - - 749,500 -
Conversion of stock warrants ($1.00 per share) . . . . - - 499,500 -
Conversion of stock warrants ($1.50 per share) . . . . - - 499,000 -
Conversion of stock warrants ($.80 per share). . . . . - - 399,500 -
Acquisition of 1,500,000 shares of AmWest
Environmental Group. . . . . . . . . . . . . . . . . . - - 2,064,750 -
Repayment of debt ($.33 per share) . . . . . . . . . . - - 32,900 -
Repayment of debt ($1.00 per share). . . . . . . . . . - - 20,974 -
Convertible preferred stock for working capital
($10.00 per share, net of issue costs) . . . . . . . . 15,000 150 934,933 -
Net loss . . . . . . . . . . . . . . . . . . . . . . . . - - - -
Unrealized holding loss (SFAS 115) on 1,500,000
Shares of AmWest Environmental Group . . . . . . . . . - - - $(1,166,250)
------------- ----------- ----------- ---------
BALANCE AT JUNE 30, 1996. . . . . . . . . . . . . . . . . . 15,000 150 $15,553,068 $(1,155,250)
Issuance of common stock for:
Payment of services ($1.50 per share) . . . . . . . . . - - 899,400 -
Payment of services ($1.00 per share) . . . . . . . . . - - 215,584 -
Conversion of preferred "B" stock ($0.97 per share) . . - - (10) -
Dividends on preferred "B" stock. . . . . . . . . . . . - - (3) -
Convertible preferred stock for working capital
($10.00 per share, net of issue costs). . . . . . . . . 443,250 4,433 3,971,532 -
Conversion of preferred "C" stock ($0.60 per share) . . (127,500) (1,275) (863) -
Dividends on preferred "C" stock. . . . . . . . . . . . - - (24) -
Unrealized holding loss (SFAS 115) on 1,500,000
Shares of AmWest Envirnomental Group. . . . . . . . . . - - - (255,000)
Debt settlement, with former officer ($0.695 per share) - - 76,304 -
Conversion of preferred "B" stock ($0.97 per share) . . - - (19) -
Dividends on preferred "B" stock. . . . . . . . . . . . - - (21) -
Unrealized holding loss (SFAS 115) on 1,500,000
Shares of AmWest Envirnomental Group. . . . . . . . . . - - - (645,000)
Convertible preferred stock for working capital
($10.00 per share, net of issue costs). . . . . . . . . 191,750 1,917 1,272,268 -
Conversion of preferred "C" stock ($0.45 per share) . . (127,000) (1,270) (2,676) -
Dividends on preferred "C" stock. . . . . . . . . . . . - - (13) -
Sale of common stock for working capital ($.40 per
share net of costs) . . . . . . . . . . . . . . . . . . - - 1,496,250 -
Sale of common stock for working capital ($.50 per
share net of costs) . . . . . . . . . . . . . . . . . . - - 31,936 -
Realized loss on 1,500,000 shares of AmWest
Environmental Group . . . . . . . . . . . . . . . . . . - - - 2,066,250
"Pool" to settle lawsuit. . . . . . . . . . . . . . . . - - - -
"Pool" to settle lawsuit. . . . . . . . . . . . . . . . - - - -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . - - - -
------------- ------------- ---------------- -----------
BALANCE AT JUNE 30, 1997. . . . . . . . . . . . . . . . . . 395,500 $ 3,955 $23,512,713 $ -
</TABLE>
<TABLE>
<CAPTION>
<BTB>
<S> <C> <C>
ACCUMULATED TOTAL
DEFICIT
------------- -----------------
BALANCE AT JUNE 30, 1995 . . . . . . . . . . . . . . . . . $(6,658,357) $1,330,008
Issuance of common stock for:
Payment of services ($1.25 per share). . . . . . . . . - 1,375,000
Payment of services ($.50 per share) . . . . . . . . . - 400,000
Payment of services ($1.00 per share). . . . . . . . . - 600,000
Payment of services ($1.50 per share). . . . . . . . . - 750,000
Conversion of stock warrants ($1.00 per share) . . . . - 500,000
Conversion of stock warrants ($1.50 per share) . . . . - 500,000
Conversion of stock warrants ($.80 per share). . . . . - 400,000
Acquisition of 1,500,000 shares of AmWest
Environmental Group. . . . . . . . . . . . . . . . . . - 2,066,250
Repayment of debt ($.33 per share) . . . . . . . . . . - 33,000
Repayment of debt ($1.00 per share). . . . . . . . . . - 20,995
Convertible preferred stock for working capital
($10.00 per share, net of issue costs) . . . . . . . . - 935,983
Net loss . . . . . . . . . . . . . . . . . . . . . . . . (6,021,898) (6,021,898)
Unrealized holding loss (SFAS 115) on 1,500,000
Shares of AmWest Environmental Group . . . . . . . . . - (1,166,250)
------------- -----------------
BALANCE AT JUNE 30, 1996. . . . . . . . . . . . . . . . . . $(12,680,255) $1,723,088
Issuance of common stock for:
Payment of services ($1.50 per share) . . . . . . . . . - 900,000
Payment of services ($1.00 per share) . . . . . . . . . - 215,800
Conversion of preferred "B" stock ($0.97 per share) . . - -
Dividends on preferred "B" stock. . . . . . . . . . . . - -
Convertible preferred stock for working capital
($10.00 per share, net of issue costs). . . . . . . . . - 3,975,965
Conversion of preferred "C" stock ($0.60 per share) . . - -
Dividends on preferred "C" stock. . . . . . . . . . . . - -
Unrealized holding loss (SFAS 115) on 1,500,000
Shares of AmWest Envirnomental Group. . . . . . . . . . - (255,000)
Debt settlement, with former officer ($0.695 per share) - 76,414
Conversion of preferred "B" stock ($0.97 per share) . . - -
Dividends on preferred "B" stock. . . . . . . . . . . . - -
Unrealized holding loss (SFAS 115) on 1,500,000
Shares of AmWest Envirnomental Group. . . . . . . . . . - (645,000)
Convertible preferred stock for working capital
($10.00 per share, net of issue costs). . . . . . . . . - 1,274,185
Conversion of preferred "C" stock ($0.45 per share) . . - -
Dividends on preferred "C" stock. . . . . . . . . . . . - -
Sale of common stock for working capital ($.40 per
share net of costs) . . . . . . . . . . . . . . . . . . - 1,500,000
Sale of common stock for working capital ($.50 per
share net of costs) . . . . . . . . . . . . . . . . . . - 32,000
Realized loss on 1,500,000 shares of AmWest
Environmental Group . . . . . . . . . . . . . . . . . . - 2,066,250
"Pool" to settle lawsuit. . . . . . . . . . . . . . . . - 3,000
"Pool" to settle lawsuit. . . . . . . . . . . . . . . . - 8,228
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . (15,338,481) (15,338,481)
------------- -----------------
BALANCE AT JUNE 30, 1997. . . . . . . . . . . . . . . . . . (28,018,736) $ (4,463,551)
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
STARTRONIX INTERNATIONAL INC.
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
<S> <C> <C>
6/30/96 6/30/97
------------ -------------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,021,898) $(15,338,481)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write off of abandoned assets and investments . . . . . . . . . . . . . . . . . . . 805,444 5,133,759
Issuance of common stock for payment of debt. . . . . . . . . . . . . . . . . . . . 53,995 -
Issuance of common stock for fees & services. . . . . . . . . . . . . . . . . . . . 3,125,000 1,203,442
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,321 173,692
Accretion of zero coupon bond discount. . . . . . . . . . . . . . . . . . . . . . . (117,888) -
Changes in assets and liabilities:
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (502,369) 60,027
Subordinated debentures receivable. . . . . . . . . . . . . . . . . . . . . . . . . - 717,002
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 667,789 2,658,727
------------ -------------
Cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,962,606) (5,391,832)
------------ -------------
Cash flows from investing activities:
Acquisition of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (340,302) (915,642)
Payment for deposits to vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,869) -
Investment of joint venture (Canadian Trust Account). . . . . . . . . . . . . . . . . . (30,000) (43,645)
------------ -------------
Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (377,171) (959,287)
------------ -------------
Cash flows from financing activities:
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,335,982 1,532,000
Issuance of Preferred "C" Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4,827,739
------------ -------------
Cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,335,982 6,359,739
------------ -------------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,795) 8,620
Cash, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,150 2,355
------------ -------------
Cash, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,355 $ 10,975
============ =============
Supplemental information: No amounts were paid for interest or taxes during the periods.
</TABLE>
F-7
<PAGE>
STARTRONIX INTERNATIONAL INC.
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STARTRONIX INTERNATIONAL INC.
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES
-------------------------------------------------
NATURE OF OPERATIONS. Prior to fiscal 1997, StarTronix International Inc. (the
Company) was a development stage entity. Developed exclusively for the Company,
the StarScreen is a combination telephone and Internet access portal. The
Company obtained Federal Communications Commission ("FCC") approval for the
StarScreen, its primary product, in January 1997. To minimize costs, the
Company outsourced its manufacturing. Immediately after obtaining FCC approval,
the Company initiated sales through its wholly owned subsidiary, StarTronix,
Inc.
StarTronix International utilized network marketing to sell its products. The
Company solicits individuals to be independent distributors to sell the
StarScreen and to solicit other individuals to become distributors. To become a
distributor, an individual must purchase a "Starter Kit" which contains
marketing material that describes the products available and explains the
distributor's compensation package. Distributors do not earn commission on
sales of starter kits; however, they do earn commission on sales of the
products. Additionally, they earn commission when any of their downstream
distributors sell products.
Because of the Company's inability to secure adequate resources in March 1997,
the Company suspended its normal operating activity and focused its efforts on
the search for equity financing.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions are eliminated.
CASH AND CASH EQUIVALENTS. The Company includes cash on deposit and short-term
investments with original maturities less than 90 days as cash and cash
equivalents.
INVENTORY. Inventories are at the lower of cost, using first-in first-out or
"FIFO" methodology, or market.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is provided over the estimated useful lives of the respective
assets, using the straight-line method.
PREPAID PRODUCTION COSTS (INFOMERCIAL). Under SOP 93-7, "Reporting on
Advertising Costs," all costs incurred to produce the infomercial are
capitalized, to the extent the amounts are believed to be realizable, and then
expensed when the infomercial airs for the first time.
INVESTMENT. The Company considers all investments, other than investments in
mineral properties, "available-for-sale" under the rules set forth in Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."
INCOME TAXES. The Company has made no provision for income taxes because of
financial statement and tax losses since its inception. A valuation allowance
has been used to offset the recognition of any deferred tax assets due to the
uncertainty of future realization.
STOCK-BASED COMPENSATION. The Company follows Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related
interpretations in accounting for its employee stock option plans. Under APB
25, if the exercise price of the Company's employee stock options equals or
exceeds the fair value of the underlying stock on the date of grant, no
compensation is recognized.
SHARES ISSUED IN EXCHANGE FOR GOODS OR SERVICES. The fair value of shares
issued in exchange for services rendered to the Company is determined by fair
market value of the shares at the date of grant.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company considers all marketable
securities to be "available for sale." They are recorded at market using the
specific identification method; unrealized gains and losses are reflected in
other comprehensive income. The Company has no financial instruments.
F-8
<PAGE>
NET LOSS PER COMMON SHARE. Basic loss per common share (Basic EPS) excludes
dilution and is computed by dividing net loss available to common shareholders
(the numerator) by the weighted average number of common shares outstanding (the
denominator) during the period. Diluted loss per common share (Diluted EPS) is
similar to the computation of Basic EPS except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. In
addition, in computing the dilutive effect of convertible securities, the
numerator is adjusted to add back the after-tax amount of interest recognized in
the period associated with any convertible debt. The computation of Diluted EPS
does not assume exercise or conversion of securities that would have an
anti-dilutive effect on net loss per share. All potential common shares are
anti-dilutive; therefore, Basic EPS equals Diluted EPS.
ACCOUNTING ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
RECLASSIFICATIONS. Certain amounts in the prior period financial statements
have been reclassified to be comparable with classifications used in the current
period financial statements.
2. HISTORY OF THE COMPANY
-------------------------
THE COMPANY. At inception, in September 1983, StarTronix International Inc. was
known as Eagle Claw Mining Company, Inc. (Eagle Claw). In March 1994, Gold
Express Corporation (Gold Express) acquired Eagle Claw. In August 1995, Gold
Express acquired SmartCom International, Inc. (SmartCom). In August 1995,
StarTronix International Inc. was formed and incorporated in Delaware as a
wholly owned subsidiary of Gold Express. StarTronix International Inc.
authorized capital of: 50,000,000 shares of common stock and 10,000,000 shares
of preferred stock. On September 30, 1995, StarTronix International Inc.
absorbed Gold Express; StarTronix International is the surviving corporation.
In fiscal 1996, the Company began enlisting distributors to sell the StarScreen.
By December 1996, over 19,000 people had purchased "starter kits" to sell the
StarScreen. Sales of the StarScreen continued until March 1997, when the
Company's cash flow was inadequate and management was unsuccessful in securing
sufficient capital to carry on its operations. All normal operations were
suspended in March 1997, as the Company focused its efforts locating financing.
In fiscal 1999, management began to revive the Company.
EAGLE CLAW MINING COMPANY, INC. Eagle Claw incorporated in Idaho on September
16, 1983 (the "date" of StarTronix' legal inception). Eagle Claw hoped to form
joint ventures or to acquire various mining properties. In March 1994, Eagle
Claw was acquired by Gold Express Corporation and became a wholly owned
subsidiary of Gold Express. In December 1996, Eagle Claw was legally dissolved.
GOLD EXPRESS COMMUNICATIONS, INC. (FORMERLY GOLD EXPRESS CORPORATION). Gold
Express Corporation incorporated in Washington on June 26, 1984 for the purposes
of exploring and developing mineral properties. Gold Express and its wholly
owned subsidiary, Eagle Claw, engaged in mining activities. In 1993, management
began liquidation and divestiture of the mining assets. In April 1994, Gold
Express merged with SmartCom. In May 1995, Gold Express Corporation changed its
name to Gold Express Communications, Inc. to better market itself in
telecommunications. Gold Express has no operations.
STARTRONIX, INC. (FORMERLY SMARTCOM INTERNATIONAL, INC.) SmartCom was
incorporated in Delaware in January 1994. In April 1994, pursuant to a Plan and
Agreement of Reorganization, Gold Express issued 2,800,000 shares of its common
stock to the sole shareholder of SmartCom in exchange for all of the outstanding
shares of common stock of SmartCom, making the Investor a 43.25% shareholder of
Gold Express. The effect of the transaction shifted the control of the Company.
In August 1995, SmartCom changed its name to StarTronix USA Inc., before
changing its name again in May 1996, to StarTronix Inc. In fiscal 1996 and
1997, StarTronix Inc. was the operating entity of the Company, engaged in
enlisting independent distributors as well as marketing and selling the Company
's products.
F-9
<PAGE>
On September 20, 1999, the Company agreed to sell StarTronix Inc. for $100,000,
to RunTec, Inc., a company owned by a former officer of StarTronix Inc. The
Company accepted a $100,000 promissory note, bearing interest at 12%, and due on
or before September 20, 2000, along with any accrued interest. The Company
recognized a $2,151,067 gain on the sale of StarTronix Inc. in the 3rd quarter
of fiscal 2000, and established a reserve for the entire balance of the note.
GLOBAL TELCOM INC. (FORMERLY GLOBAL LONG DISTANCE COMPANY, INC.). In December
1994, the Company issued 500,000 shares of its common stock in exchange for all
the outstanding shares of common stock of Global TelCom Inc. (formerly Global
Long Distance Company, Inc.). Global TelCom was a provider of products and
services relating to long distance telephone and debit card services.
The cost in excess of the net assets acquired of $500,959 has been recorded as
goodwill under the purchase method of accounting. Amortization expense in 1995
was $25,048. During 1996, the Company determined that the goodwill would not
provide any future benefit and wrote off the remaining balance of $475,911.
Additionally during fiscal 1996, all activity was suspended; therefore,
management shut down and established a reserve of $424,581 for contingent
liabilities. In April 1997, Global Telecom was legally voided and the $424,581
reserve was written off.
STARTRONIX TELCOM INC. (FORMERLY GOLDTONE COMMUNICATIONS, INC.). In August
1995, the Company formed, and incorporated in Delaware, a wholly owned
subsidiary, GoldTone Communications, Inc. GoldTone was established to provide
specialized long distance telephone and debit card services. In November 1995,
GoldTone Communications, Inc. changed its name to StarTronix TelCom Inc.
StarTronix TelCom never operated and was legally dissolved in March 1999.
STARTRONIX MARKETING N.A. INC. In June 1996, the Company established a new
wholly owned subsidiary, StarTronix Marketing N.A. Inc, an Ontario, Canada
corporation, to provide access to Canadian markets for the Company's
telecommunications products and services. StarTronix Marketing has had no
operations.
STARTRONIX ON-LINE, INC. In August 1996, the Company established and
incorporated this wholly owned subsidiary, in Delaware, to provide access to the
Internet for users of the Company's telecommunication products and services.
StarTronix Online had no operations and was legally dissolved in March 1999.
STARTRONIX.COM, INC. In October 1999, the Company established and incorporated
this wholly owned subsidiary in Delaware. In February 2000, StarTronix.com
acquired certain furniture and fixtures, software, inventory and a website from
two majority owners of Lancer International, Inc., a network marketing company,
for $50,000 and 362,114 shares of the Company's common stock. In conjunction
with the acquisition, the Company executed employment agreements with the two
majority owners, establishing one as StarTronix.com's President and the other as
its VP of Marketing. The acquisition included goodwill of $314,070, which will
be amortized over 5 years.
StarTronix.com, operating in Irvine, California, utilizes network marketing to
sell its products; it solicits individuals to be independent distributors
selling the StarScreen and soliciting other individuals to become distributors.
STARTRONIX ESOLUTIONS, INC. The Company established and incorporated this
wholly owned subsidiary in Delaware on October 1, 1999. eSolutions, located in
Atlanta Georgia, is a business development and Internet services provisioning
company; operations have not yet begun.
F-10
<PAGE>
3. GOING CONCERN
--------------
The Company began sales of its primary product, the StarScreen in January 1997;
however, because of higher than expected upfront costs, the Company found itself
with insufficient financing to continue as a going concern. In March 1997, the
Company was unable to meet its commitment to purchase StarScreen inventory and
forfeited the deposits it had placed with its manufacturer, Golden Source
Electronics Ltd., which is recorded as a loss in the accompanying financial
statements. Also in March 1997, the Company negotiated settlements with some of
its vendors, laid-off its employees, wrote-off all its assets, abandoned its
lease and suspended all operations except for the search for additional
financing. The Company recorded a loss in fiscal 1997, made up of the following
components:
<TABLE>
<CAPTION>
<S> <C>
6/30/97
---------
Abandoned property and equipment $ 1,118,001
Subordinated debenture receivable settlement 788,560
Write-off of Starter Kit and other inventory 962,044
Lost deposit on Starscreen inventory 1,607,570
Write-off of prepaid production costs 300,000
Write-off of other current assets 610,416
-------------
Loss on the write downs and write-offs $ 5,386,591
=============
</TABLE>
In 1999, the President successfully negotiated a consulting contract with
Western Global Telecommunications, Inc. to upgrade the StarScreen to current
technological standards, to add certain new features to attract a wider customer
base, and to secure a manufacturer to supply the product. Between August 1999
and June 2000, the Company has raised approximately $1 million in cash and
received approximately $250,000 in services for common stock; the Company has
negotiated employment contracts with the Chairman, the President, and the CFO,
in addition to employment contracts with officers of its wholly owned
subsidiary, StarTronix.com.
Additionally, the Company has developed a business plan and is currently talking
with various vendors, manufacturers, and fulfillment houses to provide services
to manufacture, supply, and fulfill orders for an upgraded StarScreen. FCC
approval for the upgrades is in process. The management of StarTronix.com has
begun to develop market awareness for the re-launch of the improved StarScreen
and expects to begin enlisting independent distributors by October 2000. The
Chairman and President are meeting with various existing and potential investors
and expect sufficient commitments so that the Company may continue as a going
concern. Additionally, management has rejected certain offers with the belief
that the deals they are currently negotiating will better fit the Company's
business plan. However, the Company has minimal capital resources presently
available to meet obligations that are normally required by similar companies,
and with which to carry out its planned activities. And, the Company does not
have "firm" commitments for financing. These factors raise doubt about the
Company's ability to continue as a going concern. While management believes
actions currently being taken to obtain financing provide the opportunity for
the Company to continue as a going concern, there is no assurance that the
Company will be able successful in doing so.
The accompanying consolidated financial statements have been prepared on a going
concern basis that contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company continues to rely
on its capital raising efforts to fund continuing operations. These conditions
raise substantial doubt as to the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amount of liabilities that might be necessary if the Company is
unable to continue as a going concern.
4. DEPOSITS FOR INVENTORY PURCHASES, INVENTORY AND SALES
-----------------------------------------------------------
The Company's inventory and sales are made up of two categories: "Starter Kits"
and products. The primary product is the StarScreen and other products include
nutritional and body products. The Company does not manufacture inventory; it
purchases finished goods ready for resale. As of June 30, 1996, the Company's
inventory included only "Starter Kits." These kits are the marketing material
and informational package provided to individuals who have agreed to become
distributors.
In April 1996, the Company placed a deposit with its vendors to cover tooling
costs and to secure delivery of inventory, primarily the StarScreen. The
Company received its first shipment in the 2nd quarter of fiscal 1997 and
forwarded additional deposits for the next shipment of the StarScreen. After
receiving FCC approval on the StarScreen in January 1997, the Company
immediately began selling the StarScreen. Gross sales is made up of the
following:
<TABLE>
<CAPTION>
June 30,
---------------------------
1996 1997
--------- ----------
<S> <C> <C>
Starter Kit Sales $ 97,654 $1,304,850
StarScreen Sales - 502,233
Other - 39,689
--------- ----------
Total Sales $ 97,654 $1,846,772
========= ==========
</TABLE>
(See note 3 for discussion of events surrounding the loss of deposits paid for
StarScreen inventory, and the write-off of Starter Kit and other inventory that
occurred in fiscal 1997.)
F-11
<PAGE>
5. PROPERTY AND EQUIPMENT
------------------------
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
---------------------------
1996 1997
----------- ----------
<S> <C> <C>
Computer equipment and peripherals $ 241,524 $ -
Office furniture and equipment 118,521 -
Leasehold improvements 51,809 -
----------- ----------
411,854 -
Less accumulated depreciation (35,802) -
----------- ----------
Property and equipment, net $ 376,052 $ -
=========== ==========
</TABLE>
Depreciation expense totaled $27,321 for the year ended June 30, 1996 and
$173,692 for 1997. Additionally, as of June 30, 1996, computer equipment and
peripherals, with a cost of $79,355, were idle or nonproductive pending returns
under product warranties. (See note 3 for discussion of events surrounding the
abandonment of property and equipment that occurred in fiscal 1997.)
F-12
<PAGE>
6. PREPAID PRODUCTION COSTS
--------------------------
PREPAID PRODUCTION COSTS (INFOMERCIAL). In October 1994, the Company contracted
with a related party, U.S. Corporate Development Group, Inc. (USCDG) to produce
a 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. The $300,000 was capitalized as prepaid production
costs.
As of June 30, 1996, production of the infomercial had been delayed as no
product was available and the Company's direct sales marketing was just
beginning. The infomercial was scheduled to air in January 1997. During 1997,
the Company encountered financing shortages and sales of the StarScreen product
were suspended. Therefore, the $300,000 was written off in March 1997.
7. INVESTMENTS IN MINERAL PROPERTIES
------------------------------------
VULCAN/GOLD DIKE. In March 1989, the Company and N.A. Degerstrom, Inc.
(Degerstrom), entered into a 50/50 joint interest agreement to purchase assets
and claims from Vulcan Mtn., Inc. Pursuant to this agreement, the Company and
Degerstrom purchased certain real property, personal property and mining claims
located in Ferry County, Washington for an aggregate purchase price of
$1,100,000. During fiscal 1993, the Company wrote down its investment in the
joint venture to $350,000 because of metallurgical studies performed on the
property that indicated lower recoverability rates than those previously
estimated. During fiscal 1995, the Company wrote off the remaining balance and
entered into an agreement to sell its interest to an unrelated party for $1 and
indemnification from any potential environmental liability. In January 1996,
the Company completed the transfer of title and was released of future liability
for environmental clean up.
COPPER FLAT. In April 1990, the Company purchased the Copper Flat property from
an unrelated party for $1,299,925. In connection with the acquisition, the
Company borrowed funds from several individuals who were partially satisfied
with the issuance of 240,000 shares of the Company's common stock. Through
fiscal 1994, the Company incurred an additional $4,035,488 in purchase and
development costs which were capitalized to the property. During fiscal 1994,
the Company sold its interest in the Copper Flat property to Alta Gold Co.
(Alta), an unrelated party. Consideration received by the Company consisted of
$601,000 in option payments, $800,000 cash at closing, two 6% convertible
subordinated debentures, each having a principal balance of $1,500,000, and a
subordinated zero coupon debenture with a $4,000,000 redemption price. In
fiscal 1997, the Company accepted $750,000 as payment in full and wrote off the
remaining balance.
8. OTHER INVESTMENTS
------------------
AMWEST ENVIRONMENTAL GROUP, INC. (AMWEST). 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. The investment
was classified as "available for sale" and carried at fair value, net of
unrealized holding gains/losses, which are excluded from earnings and reported
separately in shareholders' equity.
At June 30, 1996, the Company valued this investment at $900,000 based on no
market value, a $0.75 per share quoted market price at June 28, 1996 and 20%
discount for the restriction. Also on June 30, 1996, the net unrealized loss
carried in shareholders' equity is $1,166,250. The restriction on the AmWest
common stock was lifted in September 1996. However, due to management's belief
that the carrying value of the asset could not be realized, the Company wrote
off the investment, recognizing a loss of $2,066,250.
F-13
<PAGE>
OTC EMERGING GROWTH FUND (OTC). During June 1995, the Company entered into an
agreement to purchase 30,000 shares of common stock and 30,000 shares of
preferred stock of OTC Emerging Growth Fund (OTC) in exchange for 200,000 shares
of the restricted Rule 144 common stock of the Company for a total investment of
$150,000. As of June 30, 1996, the Company wrote off this investment following
notification by OTC that it would not continue as a going concern. The total
charge to income for fiscal 1996 was $150,000.
IPO NETWORK. During fiscal 1996, the Company advanced $30,000 to IPO Network,
an unrelated company, pursuant to a proposed asset purchase agreement. The
Company abandoned the acquisition following disagreements with IPO Network
management and wrote-off the $30,000 in June 1996.
9. SUBORDINATED DEBENTURES RECEIVABLE
------------------------------------
In June 1995, the Company received notification that it was not in compliance
with certain terms of the sale of the Copper Flat property. In June 1996, the
Company entered into an agreement with Alta, and concurrently with N.A.
Degerstrom, Inc. (Degerstrom) to cancel two of the three convertible debentures,
in exchange for cancellation of the notes and other debts payable to Degerstrom
and relinquishment of certain claimed rights to certain properties related to
the original sale of the Copper Flat property. As a result of this transaction,
the Company recognized a loss of $234,065 in fiscal 1996.
The remaining debenture was to mature in June 2008, and is presented in the
consolidated balance sheet as of June 30, 1996, net of an unamortized discount
based on an imputed interest rate of 8.75%. In May 1997, the Company accepted
$750,000 as payment in full of the balance outstanding and wrote off $788,560.
10. RELATED PARTY NOTE PAYABLE
-----------------------------
In fiscal 1995, the Company borrowed $400,000 from Phoenix Environmental Group
for working capital, in the form of two notes bearing interest at 7.5%. The
notes are secured by stock in StarTronix International Inc., owned by Pacific
Horizons and the Company's Chief Executive Officer. Originally due July 1995,
the notes were extended to December 1996. Total accrued interest expense was
$27,500 in fiscal 1996 and $30,000 in fiscal 1997. The Company was unable to
pay the notes and the related accrued interest when due.
In December 1999, the Company settled in full by issuing 700,000 shares of
restricted common stock valued at $983,500, discounted 50% for the restriction.
Additionally, the Company granted Phoenix options to purchase 300,000 shares of
free trading stock at $1.50 per share. In December 1999, the balance
outstanding totaled $531,358, including accrued interest of $128,750. The
difference between the settlement and the balance outstanding has been recorded
as a $452,142 gain.
11. RELATED PARTY TRANSACTIONS
----------------------------
DUE TO OFFICERS AND DIRECTORS. During fiscal 1996, the Company's officers were
not paid their full salaries. In fiscal 1999, the officers waived the amounts
due.
U.S. CORPORATE DEVELOPMENT GROUP. In fiscal 1996, the Company executed a
consulting agreement with U.S. Corporate Development Group, Inc. (USCDG) to (a)
assist in the development of a long range business strategy, (b) identify and
negotiate with potential merger/acquisition candidates, (c) assist in the
identification and hiring of key personnel, and (d) assume other activities as
mutually agreed upon. In fiscal 1996, the Company paid USCDG $327,500 in the
form of cash and common stock; $4,556 was accrued. In fiscal 1997, USCDG
provided consulting services totaling $686,055. The full amount was accrued
along with the balance remaining from fiscal 1996.
F-14
<PAGE>
In June 1999, the President of the Company transferred 1.1 million of his
personal shares of common stock to USCDG to settle the full $690,611. In
accordance with Staff Accounting Bulletin 79, Topic 5T, the Company reduced the
liability and increased additional paid in capital.
In fiscal 2000, the Company successfully executed an employment contract with
the owner of USCDG to become the Chairman of the Company's Board of Directors.
PHOENIX ENVIRONMENTAL GROUP. During 1996, the Company accrued $27,500 in
interest expense for two notes payable to Phoenix of which none was paid. In
addition, the Company issued 100,000 shares of its restricted common stock in
satisfaction of $33,000 loaned to the Company by Phoenix. The Company accrued
an additional $29,000 to Phoenix for certain services related to Global TelCom,
Inc. All amounts were paid in fiscal 1997.
T. DAVIS CAPITAL. During fiscal 1996, the Company issued 1,600,000 shares of its
common stock to T. Davis Capital for stock promotion services, taking a total
charge to income of $2,103,750 and carrying a prepaid of $21,250 in the
consolidated financial statements. Of the 1,600,000 shares issued, 1,100,000
and 500,000 were issued at $1.25 and $1.50, respectively.
MR. KURTIS JONES. During fiscal 1996, Mr. Kurtis Jones, a consultant to the
Company, exercised 2,000,000 warrants for $1,400,000 to purchase 2,000,000
shares of the Company's common stock.
AMWEST ENVIRONMENTAL GROUP. In September 1995, the Company issued 1,500,000
shares of its common stock to AmWest Environmental Group, receiving in return
1,500,000 shares of the restricted Rule 144 common stock of AmWest. This
investment was written off in June 1997.
PACIFIC HORIZONS, INC. Pacific Horizons, owned by a personal friend of the
President and CEO, and a company in which he was formerly a V.P. and director,
provided working capital to the Company through the purchase of 350,000 shares
of common stock for $175,000. Additionally, Pacific Horizons, jointly with the
Company's CEO secured the notes payable to Phoenix.
ROBERT STERLING ENTERPRISES. This company, belonging to Robert Sterling, a
former officer and director, and a shareholder of the Company, maintains the
bank account through which the interest on the subordinated debentures is
received and the interest on the Degerstrom notes is paid. Administrative
expenses of $6,000 were charged during fiscal 1996 and paid in fiscal 1997.
DEGERSTROM NOTES PAYABLE. Historically, the Company entered into financing,
stock and stock option agreements with N.A. Degerstrom, a shareholder, to borrow
money to finance the Company's operations. The Degerstrom notes were satisfied
during fiscal 1996 in conjunction with an agreement involving Alta Gold Inc.
WESTERN GLOBAL TELECOMMUNICATIONS, INC. In 1999, the company entered into an
understanding with Western Global to provide services to the Company. To
demonstrate its appreciation for the services rendered by the President and to
demonstrate its commitment to utilize the services of Western Global, the
Company issued the President of the Company and the two owners of Western Global
in total 9,000,001 shares of convertible preferred "D" stock valued at $90,000.
The consulting contract, executed in May 1999, required Western Global to
provide consulting services for improvement to the design and development of the
StarScreen including its hardware and software. The 1-year contract compensated
Western Global with 2,100,000 shares of restricted common stock valued at
$850,500 using 50% of the market price of free trading stock on the date the
contract was executed.
12. COMMON STOCK
-------------
REVERSE STOCK SPLIT. On April 5, 1999, the Board of Directors authorized a
20-for-1 reverse stock split, thereby decreasing the number of issued and
outstanding shares to 1,949,439 and maintaining the par value of each share to
$.001. All references in the accompanying consolidated financial statements to
the number of common shares and per-share amounts have been restated to reflect
the reverse stock split.
F-15
<PAGE>
CONVERSION OF PREFERRED STOCK.
STOCK OPTIONS. The Company has not had an employee-based stock option plan
since fiscal 1994. However, during the fiscal year ended June 30, 1996, the
Company granted an officer of the Company 100,000 options to purchase an equal
number of shares of common stock for $1.50 per share; the market price was $1.60
at the time of grant. None of the options were converted by the expiration
date, May 28, 1997. No other options have been granted.
STOCK WARRANTS. The Company issued warrants to the following companies,
advisors, and consultants.
<TABLE>
<CAPTION>
Exercise Price Expiration
Company Warrants Per Share Issue Date Date
<S> <C> <C> <C> <C>
Phoenix Environmental Services 30,000 $1.50 11/11/99 11/11/00
Phoenix Environmental Services 1,500,000 $2 to $7.50 1/31/00 2/1/02
Guru Financial Corporation 800,000 $0.75 4/18/00 7/18/00
</TABLE>
These warrants have no voting rights but are feely transferable. However, none
of the warrants have been converted into common stock.
13. PREFERRED STOCK
----------------
GENERAL. The Company has authorized 10,000,000 shares of $0.01 par value
preferred stock.
SERIES "B" CONVERTIBLE PREFERRED 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, the Company had issued 90,000
shares for $900,000, less $90,000 in issue costs. 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. During the first and second quarters of
fiscal 1997, all 90,000 shares and accrued dividends were converted to 952,847
shares of common stock.
SERIES "C" CONVERTIBLE PREFERRED STOCK. 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. As of June 30, 1997, the
Company had issued 635,000 shares for $6,350,000 less $938,075 in issue costs.
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 fiscal 1997, 244,500 shares and the related accrued dividends were
converted to 6,121,766 shares of common stock. During fiscal 1998, 330,500
shares and the related accrued dividends were converted to 11,227,608 shares of
common stock pursuant to a litigation settlement. See LITIGATION ON SERIES "C"
CONVERTIBLE PREFERRED STOCK below, for discussion.
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 8-K
filed with the SEC on October 25, 1996.
F-16
<PAGE>
LITIGATION ON SERIES "C" CONVERTIBLE PREFERRED STOCK. Subsequent to the Company
suspending the conversion of the Series "C" Preferred Stock, a shareholder group
filed an action against the Company in the United States District Court in New
York. The shareholders sought 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 shareholder's original investment in the amount of
$1,337,500.
In December 1996, a second shareholder group filed an action against the Company
in the United States District Court in California. The shareholders sought 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
shareholder's original investment in the amount of $2,367,500, plus interest and
punitive damages.
As of June 1997, the Company had established a $500,000 reserve for potential
losses related to these 2 cases. In August 1997, the Company reached a
settlement with all but two of the Series "C" shareholders. In August 1999 and
May 2000 a settlement was reached with the final two shareholders who converted
1,250,000 and 2,000,000 shares to common stock resulting in $620,000 in
additional reserves.
SERIES "D" CONVERTIBLE PREFERRED STOCK. During March 1999, the Company made a
private placement offering of 9,000,001 shares of its Series "D" $0.01 par value
convertible preferred stock. As of June 30, 1999, all Series "D" Preferred
Stock shares had been converted to shares of common stock for services valued at
$90,000.
DIVIDENDS ON PREFERRED STOCK. Both series of preferred stock pay dividends at a
rate of $0.60 per share per year. These dividends are cumulative and shall
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. As of June 30,
1996 and 1997, accrued dividends on preferred stock were not material.
14. INCOME TAXES
-------------
Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standard #109 (FAS 109), "Accounting for
Income Taxes." Under FAS 109, 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 yearend. The
Company's net operating loss carryforwards expire in varying amounts through
2015. However, since inception, the Company has reported losses for income
taxes and financial reporting purposes, accordingly, no provisions for Federal
or State income taxes were provided. A 100% valuation allowance was provided
each year since management could not determine that it was more likely than not
the net deferred tax asset would be realized.
15. COMMITMENTS AND CONTINGENCIES
-------------------------------
GOING CONCERN CONTINGENCY. See note 3.
OFFICE LEASE. The Company leased office space in Irvine, California under a
3-year lease, beginning in April 15, 1996 and continuing through April 14, 1999.
Additionally, the Company leased certain equipment and automobiles with varying
terms between 3 and 5 years. The Company vacated the premises and stopped
payment on all leases in conjunction with the cessation of operations in March
1997; the equipment and automobiles were returned to the lessor. The Company
believes it honored the leases to the best of its ability and used its best
efforts to settle the commitments. In 1997, the Company had certain UCC filings
against it related to these leases. While the Company plans to vigorously
defend itself against these claims, approximately $110,000 was accrued for
potential losses as of June 1997 and an additional $200,000 was accrued as of
June 1998. Through June 2000, no judgments have been obtained against the
Company related to the UCC filings.
EMPLOYMENT AGREEMENTS. During fiscal 1996 and 1997, the Company entered into
5-year employment agreements with each of its and its subsidiaries' officers.
Each agreement provided for cash bonuses and stock based incentives based on
predetermined formulas related to the future profitability of the Company. All
the agreements included a clause that the agreement terminated with the
termination of the Company's business; all contracts were terminated in 1997.
In fiscal 2000, the Company entered into new employment agreements with its
officers. Both the Chairman and the President gave 5-year commitments, and both
officers of StarTronix.com gave 3-year commitments. Each of these contracts
provide for bonuses if certain level in sales are achieved.
CONTINGENCY RESERVES. In addition to the reserves related to the leases
discussed in this footnote above, and the reserves established for the Preferred
"C" litigation (see note 11), the Company has established approximately $400,000
in reserves for potential losses related to the suspension of its operations in
June 1997.
F-17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 4, 2000 STARTRONIX INTERNATIONAL, INC.
/s/ Greg Gilbert
______________________________
By: Greg Gilbert
Its: President
Dated: August 4, 2000 /s/Robert Hart
______________________________
By: Robert Hart (1)
Its: Chief Financial Officer
(1) Mr. Hart joined the Company subsequent to June 30, 1999, and as
such his biographical information is not included in this filing. His complete
biographical information will be included in the Company's Form 10-KSB for the
year ended June 30, 2000.
