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, 1999
[ ] 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.
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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. None.
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.) $58,488, based on the closing price of $0.03
for the common stock on June 30, 1999.
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, 1999, there
were 19,949,580 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
HISTORY OF THE COMPANY
StarTronix International Inc., a Delaware corporation, was incorporated in
June 1984 as Gold Express Communications, Inc., and was originally engaged in
the business of mining and natural resources. Beginning in 1993, the Company
began divesting its mining assets and instead focused on technology sectors. In
April 1994, the Company acquired all of the outstanding stock of StarTronix,
Inc., a Delaware corporation, which was developing products and services for
accessing the Internet using a screen-based telephone, a product line that
eventually became the StarScreen System.
In 1997, the Company was unable to continue the implementation of its
business plan due to inadequate capital resources, and suspended all operations
until 1999.
SUBSIDIARIES
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. StarTronix Inc. was
sold in September 1999.
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. StarTronix Marketing N.A. Inc. was
dissolved in June 2000.
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.
StarTronix TelCom Inc. was dissolved in March 1999.
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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 On-Line Inc. was dissolved in March 1999.
STARTRONIX.COM, INC. StarTronix.com, Inc. was formed in October 1999, and
is a wholly-owned subsidiary of the Company. The subsidiary was formed to
market the upgraded StarScreen.
STARTRONIX ESOLUTIONS INC. StarTronix eSolutions Inc. was formed in
December 1999, and is a wholly-owned subsidiary of the Company. The subsidiary
was formed to design, develop, and support the technology for the StarScreen.
OVERVIEW
The Company's mission is to develop the world's first integrated Computing
and Communications hardware and software platform or "Personal Internet
Platform" for the Home PC and the Small Office Home Office (SOHO) marketplace.
The StarScreen System is an "Internet Platform" that will be used by the
Company's direct marketing Internet Resellers and their customers to provide
one-button push access to the Internet for the user, (many of whom might be
first time users of computers as well as the Internet). In addition, the
StarScreen System is designed to become a tool for the development of new OEM
and Private Label opportunities in the marketplace. StarTronix eSolutions will
develop custom vertical markets where the StarScreen System will be the anchor
technology solution for a competitive local exchange company, a home-health care
services company, etc.
The StarScreen System is a technology product line being developed by
StarTronix eSolutions that seamlessly integrates a desktop computer and either
fixed or wireless telephones and intelligent handsets into a complete computing
and communications solution for the home PC and small business user. The
StarScreen System features a pre-organized Internet menu system enabling on-line
banking, bill paying, e-mail, home shopping, video conferencing and many other
value added services. All are available at the press of a single button, or a
few mouse clicks from the StarTronix eSolutions personalized StarPortal web-site
that can be tailored and customized by each user. Some of the targeted
applications might include the following:
- Small Business Credit Card Solution.
Merchant banks and card clearing companies who service the small business
marketplace with credit card merchant services. The StarScreen System can be
loaded with industry-specific software for merchants to handle customers credit
card transactions using the built-in credit card, smart card, and debit card
reader. In addition, other value added business functions can be addressed to
enhance their business such as inventory management, (using bar codes), shipping
and receiving software to interface with package shipping companies, and other
operating and accounting software solutions that can be targeted to small
business vertical markets.
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- ILEC's Serving the Residential Apartments and Condominium Marketplace.
A new class of service provider called an "ILEC" (Independent Local Exchange
Company) is now developing new vertical market bundled solutions to what might
be described as "Affinity Groups". These are customers who share a geographic
area, affinity, club, etc that might want bundled services. The StarScreen
System can be used as an enticement or option to renters whereby the renter
could access local retailers to order products, groceries, movie tickets, etc.
Also, the landowner or ILEC can provision various information services that are
geared toward this user group and provide billing and payment services for rent
and other ILEC bundled services like Pay TV, etc.
- In-Home Health-Care Service Providers.
In this area, the StarScreen System can operate like a multifunction medical
device monitoring and communications system that can become a development
platform for the creation of unique "plug-and-processes" for heart,
blood-pressure, and other vital sign monitoring for in-home medical patients.
The patients would be able to effectively transmit their readings to local
doctors over a secure and dependable Internet link to the local medial clinic or
hospital, or to a specialist in another state, or another country. Through
specialized API, (Applications Programming Interfaces) and hardware adapters,
that might work with the USB bus or the PCMCIA card slot, StarTronix eSolutions
will be able to offer these unique services through our strategic OEM/Private
Label Partners .
The strategy of the Company is to bring to the marketplace the StarScreen
System, the world's first integrated, Internet screen-phone system that
seamlessly integrates both communications and computing functions, (telephone,
PC, FAX, answering machine, etc.) into a simple but powerful platform. It will
be targeted to a large customer marketplace of both U.S. and International based
consumers that may or may not yet have a PC in their home or small business.
The Company can best be described as an integrated "Next Generation
Provider" in that the Company is offering a unique "bundled" Internet access and
value-added services program that is provisioned using the StarScreen System
(Personal Internet Screen-Phone Platform). The services offered include:
unlimited Internet dial-up accessed to either 56Kbps direct dial-up or through
ADSL or cable access (where available) in the marketplace and provisioned by the
Company through our partners, e-mail access, web-site solutions, customized
on-line shopping, electronic-banking, bill-paying services, custom IP-telephony
communications services and value-added content and entertainment programs. The
StarScreen System is provided to the users who simply pay a monthly system fee
depending on the type of services desired and the speed of the access service
chosen. The target markets are the first time Home PC user who might be
purchasing a computer for the first time, as well as the Small Office Home
Office (SOHO) customer that wants to acquire an "all-in-one" telephony and
computer appliance that is better suited to their small business needs.
The Company markets the bundled services through two primary distribution
channels:
- Internet Resellers and OEM/Private Label partners. Internet Resellers
sell directly to home PC users and the SOHO marketplace. The Company, through
its wholly-owned subsidiary StarTronix.com Inc. ("StarTronix.com") is a unique
Internet marketing, sales and customer-support company responsible for
building-up and supporting independent Internet Reselling Distributors.
StarTronix.com develops "Internet Resellers" through a marketing, promotion,
recruiting and customer support model, while utilizing an integrated on-line
services-oriented Internet Site and Services strategy developed by StarTronix
eSolutions (see below) for the support of its distributors and the provisioning
of standard Internet dial-up access and premium information and entertainment
services for its customers.
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- OEM and Private Label alliance partners who develop custom hardware and
software solutions that are targeted to niche marketplaces where they will
bundle value added hardware and software to sell an "integrated" solution. The
Company through its second wholly-owned subsidiary, StarTronix eSolutions Inc.
("StarTronix eSolutions"), is a business development, and Internet services
provisioning company that is responsible for designing, developing, and
supporting the technology for the StarScreen System and creating value-added
Internet service programs that are promoted by the Company and its other
subsidiaries. StarTronix eSolutions is actively involved in the design,
manufacturing liaison, and operational development of the StarScreen System
product and is overseeing the creation of the web-based e-commerce, on-line
Internet and service support initiatives The company is also responsible for
the management of the strategic alliances and key partners who will work with
the Company.
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STARTRONIX.COM INC.
StarTronix.com Inc., a Delaware Corporation founded in October 1999, is a
wholly-owned subsidiary of StarTronix International Inc. Headquartered in
Irvine, California, StarTronix.com was formed by StarTronix International to
market the upgraded StarScreen System.
StarTronix.com is a national marketing organization which will include
independent distributors trained as Internet Resellers who market a new
dimension of on-line services and personal/home communication products never
before found within a single system. These services combined with user-friendly
products, re-define the way information and communications can be accessed for
the home-based business.
PRODUCTS AND SERVICES
The StarScreen System is the first user-friendly "Internet Platform" based
on advanced telephony and computing technology that offers first-time PC
computer users and home-based business owners a cost-effective integrated
telephone communications and computer platform. It is uniquely designed into a
compact and stylish consumer-electronics-class desktop appliance. The
StarScreen System is equipped with a powerful Windows-based computing platform
that has a built-in growth path for expanding computing power as well as
adapting to external peripherals, storage and communications devices that
consumers have come to expect due to the fast-pace and changing technology
marketplace. The StarScreen System users will be able to accomplish a wide
variety of desktop computing and communications functions. These functions
include on-line Internet access, e-mail, bill paying, home banking, home
shopping, faxing and many other interactive services that StarTronix.com will be
providing in concert with its strategic service providers. In addition, the
StarScreen System also provides for a number of communications facilities
utilizing its built-in telephony sub-system, whose features include: 2-line
phone, digital answering machine, voice mailboxes for home users, faxing
terminal, and various caller ID feature sets (available as optional services
from the phone company) which can be accessed from the computer via software
utilities.
The StarScreen System has been developed by Western Global
Telecommunications, Inc. (WTG) utilizing technology and sub-components that are
capable of being upgraded as technology advances. Major changes in the
functionality can be facilitated in software or accomplished in hardware with
minimal effort in overall manufacturing or product design. This allows
continuous offerings for planned future options.
The StarScreen System includes the latest in Pentium processor technology,
significant local memory to run specialty applications, an externally adapted
CD-ROM drive for upgrading or adding applications, as well as a complete
modem/fax/voice-mail system. Unlike other Internet access-only devices that
simply provide a "thin-client" software platform through either a black and
white monochrome screen, or a television set, the StarScreen System includes a
complete PC with a compliment of external connectivity options including RS-232
serial port, parallel port, game port, PCMCIA Ports, sound inputs/outputs and
Universal Serial Bus (USB) ports, as well as an integrated 10/100T Ethernet
network interface.
Standard Services
Management hopes that the no fee group of standard services provided to
end-users and Internet Resellers will make StarTronix.com a favorite destination
for our users increasing the value of our on-line display banner advertising.
Many of these areas represent an opportunity to provide additional premium
services that generate additional revenue for StarTronix.com.
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The standard services include the following:
- On-Line Shopping: The StarTronix.com Store will provide the typical
accessories ordered by our users including printers, scanners and high speed
connection devices. The Internet Reseller will be able to complete their sales
here and also order support materials for their business. All users and
visitors to the site will be able to shop from main categories including books,
music, software and auctions.
- Training: Training the Internet Resellers to be effective in sales and
operations of their business and basic StarScreen System use and operations is
provided. The interactive support area will handle the most common user
questions to allow StarTronix.com to maximize our dedicated customer support
team.
- e-Mail: StarTronix.com e-mail is outsourced to our ISP partner or
strategic e-mail vendor and we will provide up to 10 e-mail accounts per
StarScreen System depending on the plan chosen by the customer. StarTronix.com
is investigating a number of user-friendly e-mail packages on the marketplace
today to provide a standard e-mail client that is compatible with any SMTP/POP3
e-mail server.
- e-Fax: The multi-functional capabilities of the StarScreen System allow
it to directly receive faxes with local storage. The StarScreen System is also
a full-featured faxing solution with the integrated fax software. A scanner can
be ordered from StarTronix.com to allow the user to send paper source documents.
Users can also choose an Internet faxing solution through a third party
electronic faxing supplier where a free phone number is provided and all faxed
documents are automatically sent to the user as an e-mail attachment.
- Search Portal: StarTronix.com will be developing alliances with a wide
variety of search engine providers and portals on the Internet to provide a
comprehensive set of Internet searching solutions that will "mine" all the
leading search engines on the Internet to provide an aggregated search result
list for subscribers. In addition a rich base of personalized Internet
calendars, schedules, address book and other collaborative software services
will be provided to the subscribers through alliances with some of the leading
application services providers on the Internet.
- Customized Advertisements: Special advertising opportunities are possible
by leveraging the StarTronix.com Independent Internet Reseller channels whereby
local advertisers can be solicited directly to include advertising on the
StarTronix.com web-site targeted to StarScreen System users by location. Data
can be maintained in the master user database so local ads can be delivered by
local companies and provide specialized offers tailored to the users lifestyles.
This represents an interesting "localized" revenue stream model for both
StarTronix.com and its Internet Resellers.
- Bill Paying: Through alliances with both regional and national Internet
banking companies, StarTronix.com will be able to provide its users the ability
to pay their phone, electric and other monthly bills on-line through credit or
bank debit cards. This can also be extended to other payment entities such as
grocery bills, and small business oriented vendors and suppliers.
StarTronix.com is also exploring the use of Smart Card technology for the
StarScreen System which will encrypted and authenticated security services in
concert with the financial bill paying and banking services.
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- Local Information: Local events and activities including movie theater
listings, concerts and sporting events including ticket-purchasing links are
provided from existing regional portals that are aggregating this information
today and will be tied into the StarTronix.com web site through special alliance
relationships. Other local information including weather, TV listings and
merchant specials is provided and is customized to their user-defined profile.
- Financial and Investment Information: Again, through alliances with
leading brokerage and financial planning service companies that are operating on
the web today, StarTronix.com users will be able to manage their complete
investment and financial needs over the Internet using the StarScreen System.
Premium Services
Premium services represent a significant additional revenue opportunity for
StarTronix.com with services available to Internet Resellers and their
customers. StarTronix.com will be developing a comprehensive set of packaged
communications and computing solutions to enable the Company to expand the
number of distribution channels it can access. StarTronix.com will also be able
to attract a number of developers to market the commercial platform for the
provisioning of services to the Home PC marketplace as well as the SOHO business
owners. The Internet is providing many new avenues for income from new and
traditional services, which are more effectively delivered on-line, using new
hardware and software interfaces.
- Home Security Services: Several revenue opportunities are available to
StarTronix.com through the integration of home security devices into the
StarScreen System. User interface and management as well as on-line alarm
notification and the automatic request of emergency services will be available
through the provision of an "alarm seizure jack" in the StarScreen System to
various alarm systems. This area will include special API (Applications
Programming Interface) kits that will be made available to our OEM/Private Label
partners to develop solutions for the StarScreen System. These new services
will then be available through our partner alliances as well as through
StarTronix.com.
- Multi-site Video and Audio Conferencing: This premium service solution
will be provided to StarTronix.com from a third party alliance partner that will
provision a multi-site audio bridging or multi-site video conferencing facility
where more than one person can participate in an audio or video conference.
These services provide for a fully collaborative environment where multiple
users can share files and a common whiteboard during an audio or video
conference. A USB video camera can be ordered from StarTronix.com to support
the video functionality.
- Internet Phone: Allows phone calls to be placed through the Internet to
other Internet phone users. Partners and Software Solutions are available from
a variety of vendors, and StarTronix.com is already in discussions with a number
of candidate alliance partners in this area.
- Home Automation and Networking: The StarScreen System can act as a "Home
Server" for other Internet appliances and thin clients. The future wireless
StarScreen System can become the network hub or server for the entire home or
office.
- Health & Lifestyle Information: Partnerships with Dr. Koop, WebMD,
eDiets, iVilliage and others are planned to allow users to improve their
lifestyle through managed and tailored diet, meal, shopping and exercise plans.
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- Subscription Intranets: To support the small home office user,
StarTronix.com is developing partnerships with a wide variety of web-based
intranet and remote office services companies to provide a complete web based
corporate Intranet for small and network-based business. Services include a
company portal, company news, HR, procurement, bulletin boards, conferencing,
document storage, group calendars and related services will result in a
recurring revenue stream for StarTronix.com.
STRATEGIC PARTNERS
Western Global Communications, Inc. (WGT), an Irvine, California company,
has been contracted by StarTronix International Inc. to manage the design
upgrade of the existing StarScreen System previously sold by StarTronix. WGT is
working closely with StarTronix.com on the design configuration, module
procurement, assembly, testing, and fulfillment strategies to assure that a
high-level of quality control is maintained. The StarScreen System prototype
has been developed and the pre-production unit is currently being tested and
evaluated.
All warehousing, distribution, shipping, and fulfillment of the product
will be performed by a key third party fulfillment house under a long-term
outsourcing contract. StarTronix.com has evaluated a number of proposals from
both small and large fulfillment houses and is currently in the final stages of
decision making to determine the most appropriate fulfillment house for the
Company. One of these companies is currently providing nationwide PC
fulfillment services for two of the largest PC manufacturers in the United
States.
On-line web development, Screen-Phone firmware & operating system
integration, connectivity issues, screen instructions and configuration software
will be overseen by StarTronix eSolutions. Outside support and third party
development services will be provided by key strategic development partners
located in Atlanta, Georgia and Southern California. A number of web-site
hosting, software development and integration specialists have been contacted
and various request for proposals and specifications for work have already been
submitted and are under final review by the Company. In addition, a number of
new "Friction-Free" advertiser supported content and service models have
recently been launched in the Internet marketplace that StarTronix.com will be
able to utilize.
Other strategic partners that StarTronix.com is in various stages of
discussion with include: video conferencing companies, long distance providers,
local telcos, CLEC's, on-line shopping companies, search engines, software
companies, advertising management companies, ISP's, etc.
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STARTRONIX ESOLUTIONS INC.
INTERNET SERVICES DEVELOPMENT
StarTronix eSolutions Inc., a Delaware Corporation founded in December
1999, is a wholly owned subsidiary of StarTronix International Inc.
Headquartered in Atlanta, Georgia, StarTronix eSolutions is a business
development and Internet services provisioning company that is responsible for
designing, developing, and supporting the technology for the StarTronix.com
StarScreen System and creating value-added Internet service programs that are
promoted by the Company and its other subsidiaries.
StarTronix eSolutions is actively involved in the design, manufacturing
liaison, and operational development of the StarScreen System product and is
overseeing the creation of the StarTronix.com web-based e-commerce, on-line
Internet and service support initiatives, and the management of the strategic
alliances and key partners who will work with StarTronix.com.
StarTronix eSolutions will be responsible for the development of or third
party licensing and OEM outsourcing of the following hardware and software
solutions: (Not a complete listingY)
1. Integrated StarScreen System Software Solution Set which includes:
a. Operating System Software (Windows or other screen-phone friendly
OS)
b. Integrated Communications Software for Voice, Data, Fax and Multimedia,
(Audio, Video)
c. Credit, Debit, and Smart Card Reader Services (for the integrated Hybrid
Reader).
d. Value-Added Hardware and Software Solutions the StarScreen System (With
Third Party OEM clients)
2. On-line Dial-up Access Services for the StarScreen System:
a. National US and Canada POP-dial-up access.
b. Internet E-Mail solutions for Users and Groups
c. Internet Banking, Bill Paying and Financial Support Services
d. Web-Hosting Solutions for home and small business users
e. e-Commerce Solutions for small business users.
f. The StarTronix.com StarPortal Access, Search, and Value Added Services
3. Complete Applications Software Suite, (Word Processing, Spreadsheet,
Presentation, etc).
a. Fully integrated productivity environment: spreadsheet, word processor,
presentation, graphics, database, event planning, e-mail, and news
reader applications.
b. For The Millenium StarScreen System the Software bundle will be Windows
98 and Microsoft Works 2000 which is an integrated entry-level Word
Processing, Spreadsheet, Database and Communications Solution.
c. Runs natively Intel platforms, Windows 95, Windows 98, and Windows NT,
OS/2, and will also operate on Linux.
d. Supports open protocols, open file formats, and industry standards.
The StarScreen System Applications Software Suite, as described above, is
being outsourced from a well known hardware and software supplier and contains
the following features, advantages, and benefits for the StarScreen System user:
EMPLOYEES
As of June 30, 1999 due to the suspension of operations by the Company,
there were no employees other than Greg Gilbert, President. His prior
employment agreement was cancelled when operations were suspended in 1997. He
has agreed to waive any salary until such time as adequate funding is available
to revive operations. In September 1999, he signed a new employment contract.
Also in September 1999, the Company executed an employment contract with Lloyd
Adams which made him Chairman and Co-Chief Executive Officer of the Company.
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ITEM 2 - DESCRIPTION OF PROPERTY
As of June 30, 1999, as the Company was in the early stages of resuming
operations, it is maintaining minimal office space free of charge from an entity
controlled by one of the officers and directors. It is anticipated that the
Company will obtain its own office space in the future.
ITEM 3 - LEGAL PROCEEDINGS
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 StarTronix' 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.
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.
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.
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business.
In 1996, the Company was unable to continue the implementation of its
business plan due to inadequate capital resources, and ceased all operations
until 1999. See "The Company." The Company currently has the following
material outstanding legal matters, all of which arose during the aforementioned
period:
- Jack Dignan v. StarTronix International Inc., et al. A judgment was
entered against the Company in June 1998 in an amount, including interest
through September 1999 of over $76,000. The Company is in negotiations to
settle the matter for an unknown amount.
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- Marketing Direct v. StarTronix International Inc. A judgment was entered
against the Company in November 1997 in an amount, including interest through
August 1999 of over $95,000. The Company is in negotiations to settle the
matter for an unknown amount.
- Gesher Trading, Ltd., et al. v. StarTronix International Inc. The sole
remaining Series C Preferred Stock holder, Cygni, S.A., remains a party to this
lawsuit against the Company. The amount of the original investment was
$500,000. In May 2000, the Company settled this dispute with Cygni and agreed
to issue them an aggregate of 2,000,000 shares of common stock.
- Canon Financial Services, Inc. v. StarTronix International Inc. A
judgment was entered against the Company in 1998 in an amount, including
interest through February 2000 of over $26,000. The Company is in negotiations
to settle the matter for an unknown amount.
- Kimco Services, Inc. v. StarTronix International Inc., et al. A judgment
was entered against the Company in November 1997 in an amount, including
interest through February 2000 of over $54,000. The Company is in negotiations
to settle the matter for an unknown amount.
- FNF Capital, Inc. The Company has been notified of two claims against it,
one for approximately $5,630 and the other for approximately $51,900, arising
out of unpaid business leases from 1996. The Company is in negotiations to
settle the matter for an unknown amount.
The Company is currently negotiating a settlement in each of the above
referenced matters.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In May 1999, the holders of a majority of the Company's Common and
Preferred Stock approved a proposal to amend (the "Amendment") the Certificate
of Incorporation of the Company to (i) increase the authorized capital stock to
110,000,000 shares from 60,000,000 shares, which will include an increase of the
authorized shares of common stock, par value $0.001 per share, to 100,000,000
shares from 50,000,000 shares, and (ii) effectuate a 20-for-1 reverse stock
split of the presently issued and outstanding shares of common stock. A
Definitive Information Statement was filed with the Securities and Exchange
Commission on April 30, 1999.
13
<PAGE>
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 NASD 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
1999 First Quarter .01 .01
Second Quarter .81 .01
1998 First Quarter .03 .02
Second Quarter .02 .02
Third Quarter. .02 .01
Fourth Quarter .01 .01
1997 First Quarter .68 .23
Second Quarter .65 .16
Third Quarter .21 .08
Fourth Quarter .08 .01
1996 First Quarter 2.50 0.44
Second Quarter 2.16 1.09
Third Quarter. 1.50 0.81
Fourth Quarter 1.25 .45
</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, 1999 was approximately 975. Many of the
shares of the Company's common stock are held in "street name" and consequently
reflect numerous additional beneficial owners.
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.
14
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
Prior to the 20-for-1 Reverse Stock Split
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.
From August through October 1997, pursuant to a settlement agreement
entered into with the holders of the Series "C" Preferred Stock, an aggregate of
11,699,095 shares of common stock were issued upon surrender of the Preferred
Stock for conversion.
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.
In March 1999, an aggregate of 9,000,001 shares of Series D Convertible
Preferred Stock was issued to three shareholders in exchange for services. The
Series D Convertible Preferred Stock was subsequently converted into 18,000,002
(adjusted to reflect a 20-for-1 reverse stock split effective on May 21, 1999)
shares of common stock. The issuance of the Series D Convertible Preferred
Stock was exempt under Rule 4(2) of the Securities Act of 1933.
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, 1999, the Company reported revenues of zero
and a net loss of $671,217 compared to revenues of zero and a net loss of
$787,813 for the year ended June 30, 1998.
15
<PAGE>
During the year ended June 30, 1999, the Company incurred operating
expenses of $918,275, resulting in an operating loss of $918,275, compared with
operating expenses and loss of $757,813 and $757,813, respectively, for the year
ended June 30, 1998. This represents an increase of over 20% in both instances.
Included within the operating expenses is $727,981 in other selling, general and
administrative expenses, which includes for $646,000 in reserves for settlement
of outstanding claims. Also included in operating expenses is $177,188 in
development costs, which was paid to a related party for the design and
development of the StarScreen product.
During the year ended June 30, 1999, the Company had other income of
$247,058, primarily due to a $277,058 gain which represents a waiver of past due
salary and expenses due to some of the officers of the Company, including
$140,000 to the current President, Greg Gilbert. The gain was offset by
interest expense of $30,000.
As a result of the above, the Company incurred a net loss of $671,217 for the
year ended June 30, 1999, as compared to $787,813 for the year ended June 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended June 30, 1999, cash used in operating activities
was equal to $772,383, as compared to $7,975 for the year ended June 30, 1998.
Of this amount in 1999, $967,669 was accounts payable and due to related
parties, while $866,503 was accrued expenses and other liabilities.
At June 30, 1999, 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 $56,500 representing a deposit held in connection with a joint
venture. This is compared to total assets of $56,500 at June 30, 1998.
At June 30, 1999, total liabilities were equal to $5,209,698 as compared to
$5,310,864 at June 30, 1998. The amount due to related parties decreased from
$719,719 at June 30,1998 to $20,108 at June 30, 1999 as a result of the
settlement of disputes. The amount due to officers and directors decreased from
$277,058 at June 30, 1998 to zero at June 30, 1999 as a result of the waiver of
past due salaries due from officers and directors, including $140,000 that was
due to Greg Gilbert. These decreases were offset by an increase in accrued
expenses, including interest from $1,822,926 at June 30, 1998 to $2,689,429 at
June 30, 1999 as a result of reserves for potential litigation claims arising
out of the Company's previous suspension of operations and suspension of
conversions on their preferred stock.
As a result of the above, total stockholders equity went from a deficit of
$5,254,364 at June 30, 1998 to a deficit of $5,153,198 at June 30, 1999.
The Company's independent certifified public accountants' report on the
June 30, 1999 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).
16
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
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, 1999, 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:
Name Age Positions
---- --- ---------
Greg Gilbert 58 President and Chief Executive Officer
Gabriel Nassar 55 Secretary and Director
E.G. (Gene) Abbadessa 57 Treasurer and Director
GREG GILBERT has more than 35 years experience advising and participating
in the development of more than a dozen start-up public and private companies.
As a founder of US Homes, Inc., Mr. Gilbert was involved in a wide range of real
estate investment and development stage companies prior to founding Gilbert &
Associates in 1971. Since the divestiture of AT&T in 1984, Mr. Gilbert has
concentrated his efforts primarily within the telecommunications industry. Mr.
Gilbert is the Founding Chairman and President of the California Payphone
Association, Founding Chairman of the Children's Wildlife Fund, and Founding
Director of the Pacific Rim Investment and Trade Association, in which Mr.
Gilbert served as Chairman of its Executive Committee between 1992 and 1996.
GABRIEL NASSAR has been involved in start-up business ventures for several
years. He is currently the Chairman of Western Global Telecommunications, Inc.
which is involved in international telecommunications projects. Mr. Nassar
served on the Congressional Advisor Commission for Congressman Mervyn Dymally
for twelve years. Mr. Nassar was a Founding Director of the Pacific Rim
Investment & Trade Association. Mr. Nassar attended Michigan State University
where he studied Business Administration.
18
<PAGE>
E.G. (GENE) ABBADESSA is a graduate of California State University at Long
Beach in Industrial Technology. Mr. Abbadessa brings more than 30 years of
Business and Technical experience to the Company. Mr. Abbadessa has worked in
management of both large and small corporations such as Xerox, General
Automation and most recently for 12 years as Vice President of Hughes
Electronics Manufacturing Service Company. Mr. Abbadessa is a licensed
California General Contractor and has owned his own construction company for
over 4 years. He has attended Pepperdine University School of Management where
he studied for his MBA in Business Management.
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 six
19
<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, 1996,
1997, and 1998. Other than as set forth herein, no executive officer's salary
and bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the number
of stock options granted and certain other compensation, if any, whether paid or
deferred. Note that all employment contracts were cancelled and all employees
terminated, except for the President, Greg Gilbert, with the suspension of
operations in 1997. Additionally, Greg Gilbert, President, agreed to waive any
salary until such time as adequate funding was found to revive operations. In
September 1999, the Company executed a new employment contract with Greg
Gilbert, President.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------------
Awards Payouts
------------- --------------
Securities
Other Annual Restricted Underlying LTIP All Other
Name and Principal Salary Bonus Compensation Stock Awards Options Payouts ($) Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Position Year ($) ($) ($) ($) SARs(#) ($)
Greg Gilbert 1999 $120,000 -0- -0- -0- -0- -0- -0-
(President, CEO)
1998 $120,000 -0- -0- -0- -0- -0- -0-
1997 $120,000 -0- -0- -0- -0- -0- -0-
Gabriel Nassar 1999 -0- -0- -0- -0- -0- -0- -0-
A.B. (Gene) 1999 -0- -0- -0- -0- -0- -0- -0-
Abbadessa
James Valle (2) 1999 $82,500 -0- -0- -0- -0- -0- -0-
CFO
1998 $110,000 -0- -0- -0- -0- -0- -0-
1997 $110,000 -0- -0- -0- -0- -0- -0-
Gerald Fritch(3)1999 $90,000 -0- -0- -0- -0- -0- -0-
COO
1998 $120,000 -0- -0- -0- -0- -0- -0-
1997 $120,000 -0- -0- -0- -0- -0- -0-
Norman M. Shink 1999 $108,000 -0- -0- -0- -0- -0- -0-
(4)
1998 $144,000 -0- -0- -0- -0- -0- -0-
1997 $144,000 -0- -0- -0- -0- -0- -0-
J. Michael 1999 $90,000 -0- -0- -0- -0- -0- -0-
Sellards (5)
1998 $120,000 -0- -0- -0- -0- -0- -0-
1997 $120,000 -0- -0- -0- -0- -0- -0-
Christopher Reid 1999 $76,500 -0- -0- -0- -0- -0- -0-
(6)
1998 $102,000 -0- -0- -0- -0- -0- -0-
1997 $102,000 -0- -0- -0- -0- -0- -0-
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S GRANTED EXERCISE OF
OPTIONS/SAR'S GRANTED TO EMPLOYEES IN FISCAL BASE PRICE
NAME (#) YEAR ($/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 ($)
Acquired On Value Options/SARs At FY-End Exercisable/
Name Exercise (#) Realized ($) Exercisable/Unexercisable Unexercisable
---- ----------- ------------- -------------------------- ----------------
<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.
(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. The
contract was terminated effective March 31, 1999.
(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. The contract was terminated effective March 31,
1999.
(4) Pursuant to a five year employment agreement, which expires on
February 28, 2001, between the Company and Norman M. Shink, Mr. Shink is
entitled 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 be entitled to
severance pay under the employment agreement of up to one half of his annual
base salary. The contract was terminated effective March 31, 1999.
21
<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 entitled
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 devoted 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. The contract was terminated effective March 31, 1999.
(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. The contract was terminated effective March 31, 1999.
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.
22
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June30, 1999, 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class
------------------------ -------------------------- ------------------------ ----------
Common Stock Greg Gilbert (2) 8,884,118 44.5%
Common Stock Gabriel Nassar 496,208 2.5%
Common Stock E.G. (Gene) Abbadessa 496,208 2.5%
All Officers and Directors
as a Group (3 Persons) 9.876,534 49.5%
============== ======
</TABLE>
(1) Unless otherwise noted, the address of the shareholder is the same
as the address of the Company.
(2) Includes 8,860,586 shares held by the Gilfam Trust as to which Mr.
Gilbert claims voting and investment control.
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.
23
<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.
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.
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
24
<PAGE>
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
10.8 Consulting Agreement between the Company
and Western Global Telecommunications,
Inc. dated May 26, 1999.
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.
25
<PAGE>
(7) Form 8-K, dated August 27, 1997 and filed with the Commission on
August 27, 1997, reporting the engagement of Kelly & Company to audit the
Company's financial statements. Kelly & Company did not perform the audit. In
October 1999, the Company re-engaged Strabala, Ramirez & Associates, Inc. as the
Company's independent auditors. No Form 8-K was filed to reflect the
re-engagement of Strabala, Ramirez & Associates, Inc.
26
<PAGE>
STARTRONIX INTERNATIONAL INC.
(A DELAWARE CORPORATION)
INDEPENDENT AUDITORS' REPORT
AND FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
JUNE 30, 1998 AND 1999
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 6-12
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, 1998 and 1999 and the
related statements of operations, stockholders' equity (deficit) 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, 1998 and 1999 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>
6/30/98 6/30/99
------------- -------------
ASSETS
Deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,500 $ 56,500
------------- -------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . $ 56,500 $ 56,500
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable - trade . . . . . . . . . . . . . . . . . $ 2,091,161 $ 2,091,161
Due to related parties . . . . . . . . . . . . . . . . . . 719,719 29,108
Due to officers and directors. . . . . . . . . . . . . . . 277,058 -
Accrued expenses, including interest . . . . . . . . . . . 1,822,926 2,689,429
Related party notes payable. . . . . . . . . . . . . . . . 400,000 400,000
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . 5,310,864 5,209,698
Commitments and contingencies (See Note 9) . . . . . . . . . - -
Stockholders' equity (deficit) :
Preferred stock, $.01 par value, 10,000,000 authorized:
Series "C" Convertible Preferred Stock, $.01 par value,
65,000 shares issued and outstanding at
June 30, 1998 and June 30, 1999 . . . . . . . . . . . . 650 650
Common stock, $.001 par value; 50,000,00 shares
authorized; 47,216,393 and 19,949,580 shares issued and
outstanding at June 30, 1998 and June 30, 1999. . . . . . 47,216 19,949
Additional paid-in capital . . . . . . . . . . . . . . . . 23,504,319 24,303,969
Accumulated deficit. . . . . . . . . . . . . . . . . . . . (28,806,549) (29,477,766)
------------- -------------
Total stockholders' equity (deficit) . . . . . . . . . . (5,254,364) (5,153,198)
------------- -------------
Total Liabilities and Stockholders' Equity (Deficit) . . . . $ 56,500 $ 56,500
============= =============
</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
------------
6/30/98 6/30/99
------------ ------------
Sales . . . . . . . . . . . . . . . . . . . . . $ - $ -
------------ ------------
Operating expenses:
Professional services and consulting. . . . . 118,927 13,106
Development costs . . . . . . . . . . . . . . - 177,188
Other selling, general and administrative . . 638,886 727,981
------------ ------------
Total operating expenses. . . . . . . . . . 757,813 918,275
Operating loss. . . . . . . . . . . . . . . . . (757,813) (918,275)
------------ ------------
Other (income) expense:
Interest expense. . . . . . . . . . . . . . . 30,000 30,000
Gain on settlement of amounts due to officers - (277,058)
------------ ------------
Total other (income) expense . . . . . . . . 30,000 (247,058)
Net loss. . . . . . . . . . . . . . . . . . . . $ (787,813) $ (671,217)
============ ============
Net loss per share. . . . . . . . . . . . . . . $ (0.02) $ (0.02)
============ ============
Weighted average shares outstanding . . . . . . 45,280,458 42,207,896
============ ============
</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
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS "C" CLASS "D" ADDITIONAL
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PAID-IN
SHARES. . . AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
BALANCE AT JUNE 30, 1997. . . . . . . 38,517,298 $ 38,517 395,500 $ 3,955 $ - $ - $23,512,713
Preferred "C" stock settlement. . 1,169,902 1,170 - - - - (1,170)
Preferred "C" stock settlement. . 8,774,279 8,774 (330,500) (3,305) - - (5,469)
Cancellation of shares. . . . . . (3,000,000) (3,000) - - - - -
Preferred "C" stock settlement. . 1,754,914 1,755 - - - - (1,755)
Net loss. . . . . . . . . . . . . . - - - - - - -
------------ --------- --------- -------- ------------ --------- ------------
BALANCE AT JUNE 30, 1998. . . . . . . 47,216,393 $ 47,216 65,000 $ 650 - $ - $23,504,319
Cancellation of shares. . . . . . (8,227,608) (8,228) - - - - -
Convertible preferred stock
for services ($.001 per . . . . . - - - - 9,000,001 90,000 -
share, par value)
Reverse split; 20:1 . . . . . . . (37,039,207) (37,039) - - - - 37,039
Conversion of preferred stock . . 18,000,002 18,000 - - (9,000,001) (90,000) 72,000
Payment of company debt
through officers personal shares. - - - - - - 690,611
Net loss. . . . . . . . . . . . . . - - - - - - -
------------ --------- --------- -------- ------------ --------- ------------
BALANCE AT JUNE 30, 1999. . . . . . . 19,949,580 $ 19,949 65,000 $ 650 - $ - $24,303,969
============ ========= ========= ======== ============ ========= ============
<S> <C> <C>
ACCUMULATED TOTAL
DEFICIT
BALANCE AT JUNE 30, 1997. . . . . . . $(28,018,736) $(4,463,551)
Preferred "C" stock settlement. . - -
Preferred "C" stock settlement. . - -
Cancellation of shares. . . . . . - (3,000)
Preferred "C" stock settlement. . - -
Net loss. . . . . . . . . . . . . . (787,813) (787,813)
------------- ------------
BALANCE AT JUNE 30, 1998. . . . . . . $(28,806,549) $(5,254,364)
Cancellation of shares. . . . . . - (8,228)
Convertible preferred stock
for services ($.001 per . . . . . - 90,000
share, par value)
Reverse split; 20:1 . . . . . . . - -
Conversion of preferred stock . . - -
Payment of company debt
through officers personal shares. - 690,611
Net loss. . . . . . . . . . . . . . (671,217) (671,217)
------------- ------------
BALANCE AT JUNE 30, 1999. . . . . . . $(29,477,766) $(5,153,198)
============= ============
</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>
6/30/98 6/30/99
------------ ----------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (787,813) $(671,217)
Changes in assets and liabilities:
Accounts payable and due to related parties. . . . . . . . . . . . . . . . . . . . - (967,669)
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . - 866,503
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779,838 -
------------ ----------
Cash used in operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,975) (772,383)
------------ ----------
Cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
------------ ----------
Cash flows from financing activities:
Retirement of Preferred "C" Shares . . . . . . . . . . . . . . . . . . . . . . . . . . (3,305) -
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,699 -
Retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (27,267)
Receipt of Additional Paid-In-Capital. . . . . . . . . . . . . . . . . . . . . . . . . (8,394) 799,650
------------ ----------
Cash (used in) provided by financing activities. . . . . . . . . . . . . . . . . . . . . (3,000) 772,383
------------ ----------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,975) -
Cash, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,975 -
------------ ----------
Cash, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
============ ==========
Supplemental information: No amounts were paid for interest or taxes during the periods.
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
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 utilizes 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. The Company is in the process of reviving
operations and expects to be fully operational in fiscal 2000.
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 on 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.
F-9
<PAGE>
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.
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.
F-10
<PAGE>
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.
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.
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. 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.
F-11
<PAGE>
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
common 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.
5. 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.
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.
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.
6. 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.
CONVERSION OF PREFERRED STOCK. (See note 7.)
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 did 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.
F-12
<PAGE>
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.
7. PREFERRED STOCK
----------------
GENERAL. The Company has authorized 10,000,000 shares of $0.01 par value
preferred 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 an additional 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 market irregularities in the
trading of the Company's common stock, which management believed was 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.
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 wherein the Company
honored the holders' conversions. In August 1999 and May 2000 a settlement was
reached with the final two shareholders who converted their Series "C" Preferred
Stock into 1,250,000 and 2,000,000 shares of common stock, respectively,
resulting in $620,000 in additional reserves.
F-13
<PAGE>
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,
1998 and 1999, accrued dividends on preferred stock were not material.
8. 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.
9. 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 $310,000 was accrued for
potential losses as of June 1998 and 1999. 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 levels 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, the Company had established approximately $680,000 in reserves
for potential losses as of June 1998; during 1999, the Company's president
settled the amount outstanding with shares of his personal stock in the Company.
F-14
<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.
