Another's perspective.
Subject: Reflections on Star Technologies/Annual Meeting
Date: 5/26/98 9:30 AM Pacific Daylight Time
From: DTBXX
Message-id: <1998052616301400.MAA24188@ladder01.news.aol.com>
REFLECTIONS ON STAR TECHNOLOGIES AND THE
ANNUAL SHAREHOLDERS MEETING
I am posting on this board for the first time so I would like to introduce myself. I have
worked in the field of economic development for a large northern city for nearly 30 years.
My role is to help small manufacturing companies (50-500 employees) obtain financing
and other assistance necessary for expansion projects.
I have also been an investor for nearly 25 years, specializing in small cap companies with
good long-term growth prospects. My tools include both fundamental and technical
analysis. I have been a Star shareholder since May of 1997.
Results of the Annual Shareholders Meeting
I would like to first make a few general comments on the annual shareholders meeting. I
attended the meeting, asked many questions, talked with most of the members of the
management team after the meeting, and toured Star's new headquarters and the
PowerScan facility.
My objective was to gather information and broaden my understanding of the company's
technology, assess the quality of the company's management, clarify the company's
business plan, and define the prospects for the company's success in implementing this plan and achieving profitability. I also hoped that information obtained during the meeting and subsequent conversations would be helpful in understanding the performance of the
company's stock.
I have read the other posts on this board regarding the shareholders meeting and will try
not to repeat information unless I feel that repetition is necessary. The reports you have
so far received have been excellent and represent a very good summary of the comments
of management and assessment of their significance.
The nature and quality of Star's technology has been thoroughly described in company
reports and publications and discussed extensively on this and other boards. I will,
therefore, limit my comments to an assessment of management and the company's business plan, the results of my PowerScan tour, and issues of significance related to stock performance. If you would like more information on the technology, contact the company and request the investor information package which contains some very descriptive material.
Management
The three top members of Star's management team are Robert Compton, Chairman,
President and Chief Executive Officer, Carol Curran, Executive Vice President of Star and
President of the Curran Data Technologies subsidiary, and Curtis Abel, Vice President of
Star and President of its PowerScan subsidiary.
Compton, Curran and Abel all appear to be very competent and professional executives
who have a clear understanding of their mission and are committed to making Star's
development process a success. They also appear to have the creativity and courage to
implement the organizational changes necessary to achieve this objective. They all
referred, at one time or another, to expanding stock ownership by the officers and
directors of the company as evidence of management's commitment to and confidence in
the future of Star.
Business Plan
Robert Compton's description of Star's business plan focused on areas of growth for the
company. He characterized 1997 as the year of acquisitions, 1998 as the year of
transition, and 1999 and beyond as the period of reward. He explained that actions being
taken during the current year are designed to increase revenues, cut operating costs and
create a solid base for future profitability.
The company's business plan is designed to achieve profitability through the effective
marketing of its technology and services. The company is focused on providing quality
products with the highest quality service. It seeks to establish relationships with the
manufacturers of scanners and the distributors of these scanners who are responsible for
recommending appropriate software to the purchasers of the scanners.
The company is primarily concerned at this point with securing contracts with key
customers which result in long-term marketing relationships and lead to more visibility for
the company's products and services as well as to more contracts and marketing
relationships. As the company's technology and services are recognized and accepted by a broadening customer base, the company hopes that its business will increase on a
parabolic curve. The key to growing revenues, therefore, is effective marketing of quality
products with the highest quality service. Star management is totally committed to this
approach.
Star management believes that the key to insuring profitability is streamlining the
organization and reducing operating costs to an absolute minimum. The employee base is being reduced and consolidated into a core group which will grow in the future based on
the growth of revenues.
Robert Compton's reluctance to be too specific about the employment numbers at the
shareholders meeting was probably the result of the consolidations and many other staff
changes which are currently being made in the organizational structure. When the staff of
an organization is being restructured, the employment issue must be handled discretely.
As soon as this process is complete, I'm sure he will provide precise numbers.
While Mr. Compton and the other company officers were reluctant to specify when they
felt that Star would be profitable, the sense that I got from talking with Carol Curran was
that it could be within the next year.
Tour of Star's New Headquarters and PowerScan
The day following the shareholders meeting, I toured Star's new headquarters and the
PowerScan facility in Potomac, Maryland. The company leases 27,000 square feet on the second floor of an attractive building which has the proper image for a growing publicly-
owned high technology company. Their neighbor is MCI. PowerScan currently operates
out of this building. Star is planning to move its administrative staff here from Shaw Road
in Sterling, Virginia later this week.
The building is located between Rockville, Maryland and Washington, D.C. and is in an
area which has one of the largest concentrations of high technology companies in the
nation. In addition, it is within a short distance of one of the biggest markets for
document scanning in the world. Star will not go unnoticed here. This appears to be the
ideal location for its business.
Curtis Abel and I walked through the entire facility. The front section consists of fairly
typical but attractive office space where the Star and PowerScan administrative staffs will
be located. The production area consists of two sections: the cubicles of the PowerScan
computer technicians and a large area devoted to sales and marketing presentations. This area is surrounded by various types of scanners made by different manufacturers which are used in demonstrations. It is obvious that the company will be using the new building as a key location for its sales and marketing efforts. There is room for expansion without leasing more space. There are no frills here, only what is necessary to get the job done.
I spent nearly an hour with one of the company's sales representatives who demonstrated
the PowerScan and StageWorks technologies. He was very impressive and
knowledgeable and explained that he had been with PowerScan since it was established
during Desert Storm in 1990/91. He cited the quality of Star's technology and customer
service as the primary reasons why the company would be successful.
Curtis Abel, who joined PowerScan just six weeks ago, discussed frankly and in detail the actions he is taking to reshape the subsidiary in the areas of mission, marketing,
advertising, pricing, staffing and operations. He explained that he is transforming
PowerScan into a small but dynamic team of about 20 specialists based on the principles
of total quality management where each staff person becomes an integral element in the
organizational structure. This team will grow with revenues.
Mr. Abel is also redirecting advertising toward the internet which has generated
substantial business for the company and away from magazines and other media which
have been less productive.
Mr. Abel explained that he is committed to making PowerScan a very profitable business
and will do whatever is necessary to grow revenues and cut costs. He demonstrated the
creativity and determination that will be necessary to make the hard decisions required to
achieve these objectives. He cautioned, however, that the process will take time.
Mr. Abel was also very optimistic about the success of this effort. He explained that
much progress has already been made and that "the business has turned the corner" and
that he firmly believes that the development process "will be successful."
Stock Performance
Unfortunately, we do not have the benefit of commentary from many professional
technical analysts since Star is a small company and still has probably not even been
noticed by most of them. So we have to do our best to apply the basic principles of
technical analysis to the performance of this stock in an effort to understand what is
happening and where it may be headed.
My basic assumption is that all stocks of both large and small companies have similar
technical patterns. The companies they represent have life cycles. They are born with a
new proudct or technology, adjust to their environment by developing an organizational
structure which can deliver this product or technology profitably, and then hopefully grow
to maturity reaping the rewards of skillful management and a lot of luck.
The stocks of these companies also go through cycles which reflect the stages of
corporate development including an initial rally based on the introduction of the new
product or technology, the inevitable profit taking associated with development of realistic
expectations and the shift of shareholder ownership from weak to strong hands, and a
period of sustainable long-term growth based on improving profitability.
Phase 1: The Initial Rally
The stock of a company which successfully develops a new product or purchases an
exciting new technology often has an initial sharp and violent rally which is usually based
on overly optimistic and unrealistic expectations for company prospects and profits. This
phase is dominated by stock traders seeking a quick buck and investors hoping the new
business will generate quick profits and that the stock will soar indefinitely in response.
Star's stock action in the fall of last year was an excellent example of this performance.
After Star announced the acquisition of the PowerScan technology and other
restructurings, the stock rose 1,000 percent in less than two weeks from a low of 3/8 to an intraday high of 3 5/8 on massive volume.
Phase 2: Reality Check
Unfortunately, these early celebrations usually do not last long as those who bought with
wild expectations during the buying frenzy do their homework and discover what will
actually be required to deliver the new product or technology profitably. This phase is
characterized by periods of profit taking and consolidation which can last many months
during which the stock traders and investors with short-term orientations become
disillusioned after they realize how much time will be required to achieve the level of
profitability they had originally expected.
This phase frequently ends with a selling climax in the stock when the traders and short-
term investors who remain take their losses and sell their shares "at any price" irrespective of the relationship between this price and the future prospects of the company. The selling climax, furthermore, often involves the sale of a large block of stock at a deep discount. The stock price usually recovers quickly in the trading sessions immediately following this sale. The selling climax, furthermore, frequently tests a previous major
consolidation area and establishes a new higher support range.
Star's stock performance over the past eight months seems to fit this scenario. After the
initial profit taking in November and December, the stock rallied to a secondary high of 1 1/2 in January and remained near this level for nearly two months. It then began a decline which represented a second testing of the December low. This decline lasted over two months and involved periods of heavy selling by disillusioned traders and investors who were unable or unwilling to hold through a second test of the lows especially with rumors of
delisting and reverse stock splits circulating.
By the middle of May, the stock appeared to have found support around 3/4 where it
would be expected. The trading pattern also showed signs of a developing selling climax
characterized by a sharp sell-off under 1 on increasing but not yet heavy volume followed
by a sharp one day rally when volume approached 1 million shares. What was missing
here to complete the selling climax was the high volume thrust on the downside.
The downside thrust came last Tuesday and Wednesday when the stock plunged from 3/4 to 3/8 on two-day volume exceeding 1 million shares. This trading also involved a large block sale at deep discount which is often associated with a selling climax. It was 500,000 sharers traded at 3/8 on Wednesday. This sale, furthermore, tested the top of the long consolidation area below 1/2 which formed during the period from 1995 through 1997. The stock
proceeded to rise sharply after the sale and to hold its gains through the
remainder to the week closing at its high on Friday of 5/8 and on heavy volume of nearly
200,000 shares. This performance was particularly noteworthy because Friday preceded a three day holiday weekend and volume for the day was low with many stocks not even
opening for trading.
The opportunity for this climatic sell-off was created last week because most potential
buyers were probably reluctant to buy prior to the shareholders meeting on Thursday.
This created a technical vacuum in which the sellers were panicking to sell at any price
while most potential buyers were waiting to hear the results of the meeting before making
their commitments. The price plunge last week, therefore, appears to have been technical in nature caused by the large block transaction and related selling as well as the short-term absence of buyers.
If this was, in fact, a selling climax, then the technical sell-off last week would actually be
a very positive event because it would represent the end of the decline and the final
purging of the stock traders and investors with short-term orientations. If the buyer of the
large block turns out to be an insider or officer of the company, furthermore, the event
could prove even more bullish since it would exemplify the shift of stock ownership from
weak to strong hands.
Phase 3: Long-term Investment
The third phase is characterized by long-term investors accumulating shares based on
realistic expectations for a company's growth and profitability. It begins with the
formation of a strong base for the stock and then become a gradual advance interrupted by occasional corrections. This advance is usually sustainable and can continue for years. It also can result in percentage appreciation far in excess of the initial rally, especially for those who are fortunate enough to buy at the deeply discounted prices associated with the selling climax. The rapidity of the advance will be determined by the speed with which
the company makes its transition from an operating loss to an operating profit and investor's expectations regarding the future growth potential of its products and services.
Star appears to be entering this phase. The company has purchased and is developing
products and services which appear to have great potential and is in the process of making the transition to profitability. While I am not recommending buying, selling or holding this stock, it may be worth considering by a small cap investor who likes to buy at depressed prices and needs a long-term capital gain of at least 12 months. Be sure to consult your investment advisor regarding the risks and rewards before taking any action.
Delisting
This is old news. Over the past two months, anyone who wanted to sell Star's stock
because of the possibility of delisting from the NASDAQ National Market is probably out.
So much selling has occurred because of this possibility, furthermore, that the fact of
delisting may actually result in a rally. I recently watched a stock which was delisted by
NASDAQ rise by over 50 percent shortly after the actual delisting.
Star's management made the decision to buy PowerScan and Curran Data Technologies
even though these acquisitions significantly reduced the net tangible asset value of the
company which is currently below the level required by the NASDAQ National Market for
listing. This is one of the inevitable consequences of such high technology acquisitions
which involve substantial good will. The net tangible asset value has to be rebuilt through
future profits. If a stock is temporarily delisted because of technical requirements, then
that is the price that often must be paid to build a new high technology company.
Listing of Star's stock on the NASDAQ National Market is not essential for the successful
implementation of Star's business plan. The benefits of the national market listing would
obviously facilitate this process; however, there are many companies whose stocks do not trade on the major exchanges which are very successful. I have owned some of these
stocks, and I, for one, am not concerned about the prospect of delisting. The key to
success will not be the exchange where Star's stock is traded but the company's success in marketing its technology and generating profits.
Reverse Stock Split
Over the past two months, rumors have circulated regarding the possibility of a reverse
stock split. I asked Robert Compton about this possibility after the shareholders meeting.
He indicated that he had researched the subject and had concluded that a reverse stock
split usually leads to lower stock prices. He had told the shareholders earlier that he
recently acquired a subtantial number of shares in the company and did not appear
interested in doing anything that would result in a lower stock price. I mentioned that Star
appeared to have a reasonable number of shares outstanding (21 million) relative to the
profits which could be expected in future years and that there did not seem to be any
apparent reason for reverse splitting the stock.
In summary, Mr. Compton's comments on the subject of a reverse stock split left me with
the impression that the only way the company would consider a reverse split is if it was
part of a broader plan to enhance shareholder value. If a reverse split is done at the time a company becomes profitable in order to increase recognition or ownership by institutions, for example, it can actually enhance shareholder value. It might also be necessary to secure a listing on an exchange or in conjunction with obtaining new equity financing. Both possibilities could be a significant benefit to shareholders.
With only 21 million shares outstanding at the present time, however, there is not much
room to reduce the number of shares without making the float too small and
compromising the benefits of a reverse stock split. After the meeting, another shareholder told me about a stock which she owned that reverse split from 3 to 9 and then proceeded to rise to 80 over next several years. So if done for the right reasons at the right time, a reverse stock split does not necessarily have to lead to lower stock prices. But let's hope its not necessary in Star's case.
Concluding Comments
If Star's technology and quality services are as good as the company claims and others
attest, then Star Technologies should have a bright future. Management certainly has a
clear vision for the company and is putting in place all the right mechanisms to achieve
success. It remains to be seen how quickly the company can become profitable, but
management is committed to this objective and is confident that it will be achieved.
In any event, I will be watching and will report back whenever I have worthwhile
information.
Wolfman008
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