<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1996
Commission File Number: 0-25612
STARBASE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 33-0567363
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
18872 MacArthur Boulevard
Irvine, California 92715
(Address of principal executive offices) (Zip code)
(714) 442-4400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS:
--------------------
Common Stock, $0.01 par value
Indicate by check mark whether the registrant has (1) 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) been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 31, 1996 was $90,301,000.
Number of shares outstanding
as of May 31, 1996: Common Stock: 12,178,259
Series C Preferred Stock: 250,000
Documents Incorporated by Reference: Proxy Statement for 1996 Annual
Shareholders' Meeting; Part III.
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<PAGE>
The purpose of this Amendment No. 1 to the Annual Report of StarBase
Corporation (the "Company"), a Delaware Corporation, on Form 10-K for the
fiscal year ended March 31, 1996 is to amend the following items: Part III
paragraph one to amend the date of the annual meeting of the shareholders;
Part IV, Item 14(a)(1) to amend Note 7 included in the Notes to Consolidated
Financial Statements; Part IV, Item 14(c) to add to the Exhibits the Written
Consent of Price Waterhouse LLP, Independent Auditors, as amended.
PART III, paragraph one is amended to read as follows:
The Company has omitted from Part III the information that will appear in the
Company's definitive proxy statement for its annual meeting of shareholders
to be held on September 25, 1996 (the "Proxy Statement"), which will be filed
within 120 days after the end of the Company's fiscal year pursuant to
Regulation 14A.
PART IV, ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K. (a)(1) FINANCIAL STATEMENTS, is amended to read as follows:
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and
Shareholders of StarBase Corporation
In our opinion, the consolidated financial statements listed in the index
appearing in Item 14(a)(1) present fairly, in all material respects, the
financial position of StarBase Corporation (a development stage company) and
its subsidiaries at March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1996 and for the period from September 6, 1991 (inception) to March
31, 1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
June 20, 1996, except for Note 7,
as to which the date is July 16, 1996.
2
<PAGE>
STARBASE CORPORATION
(a development stage company)
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and par values)
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,252 $ 1,972
Accounts receivable, net of allowances of $44 (1996) and $104 (1995) 3 725
Other receivable 10 81
Prepaid expenses and deferred charges 137 122
Inventories 14 36
-------- --------
Total current assets 1,416 2,936
Property and equipment, net 660 1,045
Note receivable from officer 76 126
Other non-current assets 21 40
-------- --------
Total assets $ 2,173 $ 4,147
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,375 $ 1,920
Due to director 280 -
Other current liabilities 111 109
Current portion of notes payable and capitalized lease obligations 186 52
Line of credit with bank - 664
-------- --------
Total current liabilities 1,952 2,745
Capitalized lease obligations, less current portion 153 45
-------- --------
Total liabilities 2,105 2,790
-------- --------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, $.01 par value; $4,456 (1996) and $2,750 (1995) liquidation
value; authorized 10,000,000; issued and outstanding
2,227,946 (1996) and 2,750,000 (1995) 22 2,710
Common stock, $.01 par value; authorized 50,000,000; issued 7,841,812 (1996)
and 5,553,758 (1995); outstanding 7,835,551 (1996) and 5,553,758 (1995) 78 56
Common stock pending authorization 27 -
Additional paid-in capital 18,185 10,921
Treasury stock, 6,261 common shares (1996) and 0 common shares(1995) (21) -
Deficit accumulated during development stage (18,223) (12,330)
-------- --------
Total shareholders' equity 68 1,357
-------- --------
Total liabilities and shareholders' equity $ 2,173 $ 4,147
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
STARBASE CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Sept. 6, 1991
For the year ended March 31, through
--------------------------------------- March 31, 1996
1996 1995 1994 (cumulative)
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
Revenues:
Consulting services $ 500 $ 2,576 $ 975 $ 4,430
Consulting services--related party - - 224 281
Products, licenses and other 491 959 211 1,661
--------- --------- --------- ---------
Total revenues 991 3,535 1,410 6,372
Cost of Sales:
Consulting services 624 2,666 1,033 4,716
Consulting services--related party - - 237 289
Products, licenses and other 82 182 67 331
--------- --------- --------- ---------
Total cost of sales 706 2,848 1,337 5,336
--------- --------- --------- ---------
Gross margin 285 687 73 1,036
Operating Expenses:
Research and development 2,466 3,145 1,370 7,435
Selling, general and administrative 3,759 5,312 2,244 11,988
--------- --------- --------- ---------
Total operating expenses 6,225 8,457 3,614 19,423
--------- --------- --------- ---------
Operating loss (5,940) (7,770) (3,541) (18,387)
Other income 48 52 62 172
--------- --------- --------- ---------
Loss before income taxes (5,892) (7,718) (3,479) (18,215)
Provision for income taxes 1 2 2 8
--------- --------- --------- ---------
Net loss $ (5,893) $ (7,720) $ (3,481) $ (18,223)
--------- --------- --------- ---------
--------- --------- --------- ---------
Per share data:
Loss per common share $ (0.81) $ (1.53) $ (0.81)
--------- --------- ---------
--------- --------- ---------
Weighted average number of
common shares outstanding 7,244 5,044 4,274
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
STARBASE CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Sept. 6, 1991
For the year ended March 31, through
-------------------------------------- March 31, 1996
1996 1995 1994 (cumulative)
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (5,893) $ (7,720) $ (3,481) $ (18,223)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 253 208 73 568
Loss on disposition of property, equipment
and capital lease 74 - - 74
Provision for doubtful accounts and sales
returns 130 - - 130
Gain on debt restructuring (138) - - (138)
Recognition of deferred income (235) - - (235)
Write-down of assets 50 - - 50
Other adjustments 75 - - 75
Changes in assets and liabilities, excluding
the effect of non-cash transactions:
Accounts receivable 593 (32) (565) (132)
Accounts and notes receivable-related party - 69 (42) -
Other receivables - (13) (68) (81)
Inventories 22 (35) 3 (14)
Prepaid expenses and deferred charges (15) (52) (61) (151)
Other assets 17 (26) (13) (41)
Accounts payable and accrued liabilities 118 1,422 446 2,105
--------- --------- --------- ---------
Net cash used by operations (4,949) (6,179) (3,708) (16,013)
Cash Flows from Investing Activities:
Proceeds from disposition of property and
equipment 4 - - 4
Capital expenditures (31) (627) (389) (1,245)
--------- --------- --------- ---------
Net cash used by investing activities (27) (627) (389) (1,241)
Cash Flows from Financing Activities:
Proceeds from reverse acquisition - - - 1,402
Proceeds from sale of preferred stock 3,563 2,710 - 6,273
Proceeds from issuance of common stock:
From stock purchase plan - - - 10
From public offering - - 4,063 4,063
From private placements 304 2,237 1,682 4,398
From exercise of options 103 - 28 266
From exercise of warrants - 875 73 1,024
Proceeds from convertible subordinated notes - - - 381
Proceeds from promissory notes 1,083 - - 1,083
Payments on promissory notes (163) - - (163)
Borrowings on line of credit - 664 - 664
Payments on line of credit (664) - - (664)
Payment of financing related costs (302) - - (405)
Payments on capitalized lease obligations (8) (32) - (40)
Loans from officers and directors 365 - - 365
Repayment of loans from officers and
directors (75) - (5) (75)
Repayment of (disbursement of) loan to
officer 50 (126) - (76)
--------- --------- --------- ---------
Net cash provided by financing activities 4,256 6,328 5,841 18,506
--------- --------- --------- ---------
Net increase (decrease) in cash (720) (478) 1,744 1,252
Cash and cash equivalents, beginning of period 1,972 2,450 706 -
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 1,252 $ 1,972 $ 2,450 $ 1,252
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
STARBASE CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Common Additional
------------------------ -------------------------- Stock Paid-in
Shares Amount Shares Amount Subscribed Capital
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
September 6, 1991 (inception) - $ - - $ - $ - $ -
Net loss - - - - - -
------- -------- -------- -------- -------- --------
Balance at March 31, 1992 - - - - - -
------- -------- -------- -------- -------- --------
Common stock issued:
Reverse acquisition transaction - - 2,975 30 - 1,183
For cash - - 323 3 - 7
Conversion of notes payable - - 226 2 - 379
Private placements - - 79 1 - 254
Exercise of stock options - - 76 1 - 134
For non-cash consideration - - 37 - - 1
Exercise of warrants - - 34 - - 76
Net loss - - - - - -
------- -------- -------- -------- -------- --------
Balance at March 31, 1993 - - 3,750 37 - 2,034
------- -------- -------- -------- -------- --------
Common stock issued:
Public offering - - 542 6 - 4,057
Private placements - - 399 4 - 1,597
Exercise of warrants - - 22 - - 73
Exercise of stock options - - 15 - - 28
Net loss - - - - - -
------- -------- -------- -------- -------- --------
Balance at March 31, 1994 - - 4,728 47 - 7,789
------- -------- -------- -------- -------- --------
Preferred stock issued 2,750 2,710 - - - -
Common stock issued:
Private placements - - 464 6 - 2,190
Exercise of warrants - - 236 2 - 873
Exercise of options - - 6 - - -
Finder's Fees - - 120 1 - 69
Net loss - - - - - -
------- -------- -------- -------- -------- --------
Balance at March 31, 1995 2,750 2,710 5,554 56 - 10,921
------- -------- -------- -------- -------- --------
Preferred stock
conversion to common (2,750) (2,710) 2,111 21 - 2,689
Preferred stock issued 2,228 22 - - - 4,131
Common stock pending
authorization - - - - 27 -
Common stock retired - - (6) - - -
Common stock issued:
Private placements - - 136 1 - 303
Exercise of options - - 28 - - 103
Finder's Fees - - 19 - - 39
Purchase of treasury shares - - - - - -
Pay-out of fractional - - - - - (1)
share interest
Net loss - - - - - -
------- -------- -------- -------- -------- --------
Balance at March 31, 1996 2,228 $ 22 7,842 $ 78 $ 27 $ 18,185
------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- --------
<CAPTION>
Stock Total
Accumulated Subscription Treasury Shareholders'
Deficit Receivable Stock Equity
----------- ------------ -------- -------------
<S> <C> <C> <C> <C>
September 6, 1991 (inception) $ - $ - $ - $ -
Net loss (8) - - (8)
------- -------- ------- --------
Balance at March 31, 1992 (8) - - (8)
------- -------- ------- --------
Common stock issued:
Reverse acquisition transaction - - - 1,213
For cash - - - 10
Conversion of notes payable - - - 381
Private placements - (81) - 174
Exercise of stock options - - - 135
For non-cash consideration - - - 1
Exercise of warrants - - - 76
Net loss (1,121) - - (1,121)
------- -------- ------- --------
Balance at March 31, 1993 (1,129) (81) - 861
------- -------- ------- --------
Common stock issued:
Public offering - - - 4,063
Private placements - 81 - 1,682
Exercise of warrants - - - 73
Exercise of stock options - - - 28
Net loss (3,481) - - (3,481)
------- -------- ------- --------
Balance at March 31, 1994 (4,610) - - 3,226
------- -------- ------- --------
Preferred stock issued - - - 2,710
Common stock issued:
Private placements - - - 2,196
Exercise of warrants - - - 875
Exercise of options - - - -
Finder's Fees - - - 70
Net loss (7,720) - - (7,720)
------- -------- ------- --------
Balance at March 31, 1995 (12,330) - - 1,357
------- -------- ------- --------
Preferred stock
conversion to common - - - -
Preferred stock issued - - - 4,153
Common stock pending
authorization - - - 27
Common stock retired - - - -
Common stock issued:
Private placements - - - 304
Exercise of options - - - 103
Finder's Fees - - - 39
Purchase of treasury shares - - (21) (21)
Pay-out of fractional
share interest - - - (1)
Net loss (5,893) - - (5,893)
------- -------- ------- --------
Balance at March 31, 1996 $(18,223) $ - $ (21) $ 68
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE>
STARBASE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
StarBase Corporation (the "Company"), a Delaware corporation, develops, markets
and supports team-oriented product development software that addresses the
evolving needs of personal computer users involved in projects requiring
substantial collaboration. StarBase was founded in 1991 to address the
inability of software development projects to deliver software products on time
and within budget, initially through the improvement of individual programmer
productivity tools. During 1993-1994, however, the Company began to believe
that a next generation of individual productivity tools would not be a lasting
solution to the software productivity problem. Based on focus group studies
and market research, StarBase decided to focus entirely on the development and
marketing of software designed to increase team productivity, rather than
individual programmer productivity. The Company was reorganized in fiscal 1996
to reflect this change in product and market focus. In line with the
reorganization, the 26 person Consulting Division was discontinued.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. During fiscal 1996, the
Company closed its remaining subsidiaries, thereby eliminating the need for
consolidation. The Company has retained "Consolidated" in the heading of its
financial statements to reflect activity in prior years.
USE OF ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the amounts and disclosures reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Major renewals and betterments are capitalized; minor maintenance
and repairs are charged to current operations. Depreciation and amortization
are calculated under the straight-line basis over the shorter of the estimated
useful lives of the respective assets, generally three to seven years, or the
related lease term.
REVENUE RECOGNITION
Consulting revenue is recognized ratably as services are provided based on a
fixed contract price or on negotiated hourly rates. Certain consulting
contracts are terminable by the customer upon thirty days written notice. In
the event contracts are terminated, the customer is only responsible to pay for
services and costs incurred through the termination date. Software revenue is
recognized upon delivery, provided that collection is probable, in compliance
with the provisions of the American Institute of Certified Public Accountants'
Statement of Position 91-1, "Software Revenue Recognition."
7
<PAGE>
STARBASE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTIES AND RETURNS
The Company warrants products against defects and has a policy permitting the
return of products under certain circumstances.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company is potentially subject to a concentration of credit risk from its
trade accounts and notes receivable; accounts and notes receivable generally
are not collateralized. The Company performs periodic credit reviews of its
customers and maintains reserves for potential losses for uncollectible
accounts. Such losses have historically been within management's expectations.
In fiscal 1996, a significant receivable write-off was recorded due to the
change in product and market emphasis caused by the reorganization.
Two customers represented 23% and 20% of total revenue for the year ended
March 31, 1996; three customers represented 29%, 16% and 13% of total revenue
for the year ended March 31, 1995; and two customers represented 43% and 16%
of total revenue for the year ended March 31, 1994. Amounts due from
customers, net of allowances, at March 31, 1996 was not material and two
customers at March 31, 1995 comprised 58% of outstanding accounts receivable.
INVENTORIES
Inventories consist of the Company's software products and packaging and are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
RESEARCH AND DEVELOPMENT
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," technological feasibility is typically established when a working
model is completed and its consistency with product design has been confirmed
by testing. As technological feasibility typically is established immediately
prior to first customer shipment, capitalizable research and development costs
are insignificant. Consequently research and development costs related to the
development of the Company's software systems are expensed as incurred.
INCOME TAXES
During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements and tax returns.
Deferred tax assets and liabilities are determined based upon the difference
between the financial statement and tax bases of assets and liabilities, using
the enacted tax rates in effect for the year in which the differences are
expected to reverse. Upon adoption of SFAS 109, the Company determined that
the cumulative effect on the financial statements was not material, due
principally to the operating loss carryforwards generated from operations
during the development stage combined with the inherent uncertainty in a
development stage enterprise's ability to ultimately recognize the benefits of
such carryforwards.
EARNINGS PER COMMON SHARE
Earnings per common share are calculated by dividing net income by the weighted
average shares of common stock outstanding. Common stock equivalents are
considered anti-dilutive and are excluded from this calculation. The average
number of common shares outstanding and earnings per common share amounts for
all periods presented have been restated to reflect the 1 for 3 reverse stock
split. (See Note 5 - "Equity transactions").
8
<PAGE>
STARBASE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORTING CURRENCY
The accompanying financial statements are reported in the currency of the
United States of America, except for certain equity transactions in these Notes
to the Consolidated Financial Statements which are denominated in Canadian
dollars and are indicated as CDN$.
2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
March 31,
---------------------
(In thousands) 1996 1995
-------- --------
<S> <C> <C>
PROPERTY AND EQUIPMENT
Computer hardware $ 869 $ 880
Furniture and fixtures 125 272
Computer software 115 104
Leasehold improvements 41 84
------- -------
1,150 1,340
Less accumulated depreciation and amortization (490) (295)
------- -------
$ 660 $ 1,045
------- -------
------- -------
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Trade accounts payable $ 910 $ 1,049
Accrued professional fees 135 167
Accrued wages and bonuses 70 443
Other accrued expenses 260 261
------- -------
$ 1,375 $ 1,920
------- -------
------- -------
ACCOUNTS RECEIVABLE
Trade accounts receivable $ 47 $ 641
Unbilled accounts receivable -- 188
------- -------
47 829
Less allowance for doubtful accounts (44) (104)
------- -------
$ 3 $ 725
------- -------
------- -------
</TABLE>
Unbilled accounts receivable represent time and materials incurred on
consulting contracts due to be billed based upon achievement of project
milestones.
3. LINE OF CREDIT WITH BANK
Under a line of credit agreement with the Company's primary bank, the Company
was required to meet financial covenants including certain financial ratios,
working capital balances, and a specified minimum tangible net worth. At March
31, 1995 the Company failed to meet certain of the financial covenants. As a
result, on July 28, 1995 the bank and the Company entered into a Forbearance
Agreement. Under the Agreement, the Company has repaid all principal and
interest due to the bank. At March 31, 1996 there is no balance due and no
further loans have been made under this line of credit.
4. INCOME TAXES
The Company has not recorded a current or deferred provision for federal income
taxes for any period to date, as a result of losses incurred since its
inception. The provision for income taxes represents the
9
<PAGE>
STARBASE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
minimum required for California franchise taxes. At March 31, 1996, the
Company had net operating loss carryforwards of approximately $17.6 million
and $8.8 million for federal and state income tax purposes, respectively,
expiring in varying amounts through the year 2011 which are available to
offset future federal and state taxable income. The ability of the
Company to utilize the federal and state net operating loss carryforwards
may be subject to annual limitations under certain provisions of the
Internal Revenue Code, as a result of the reverse acquisition, private
placements of common stock and issuance of stock options.
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
March 31,
--------------------------
(In thousands) 1996 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,082 $ 1,785
Accounts and notes receivable allowances 18 17
Accrued expenses 176 40
Deferred tax asset valuation allowance (2,276) (1,826)
--------- ---------
-- 16
Deferred tax liabilities:
Properties -- (16)
--------- ---------
Net deferred tax assets (liabilities): $ -- $ --
--------- ---------
--------- ---------
</TABLE>
5. EQUITY TRANSACTIONS
The Company has authorized 50,000,000 shares of common stock and 10,000,000
shares of preferred stock with a par value of $0.01 per share. Of the
preferred stock, 2,500,000 shares have been designated as Series B preferred
stock, of which 2,227,946 shares are issued and outstanding at March 31, 1996,
and 366,666 shares have been designated as Series C preferred stock, of which
no shares are outstanding at March 31, 1996. In fiscal 1995, the Company sold
2,750,000 shares of its Series A preferred stock to certain investors in a
private placement at a price of $1.00 per share. On June 30, 1995, the
Company's outstanding Series A preferred stock converted into 2,111,104 shares
of the Company's common stock. The conversion rate was determined on a pre-
negotiated formula based upon the Company's equity position.
On September 8, 1995, a private placement of common stock was completed. In
this private placement, 136,000 Units were issued, each Unit consisting of one
share of common stock and one non-transferable warrant to purchase one share of
common stock. The warrants are exercisable at $2.24 (CDN$3.05) per share
through September 8, 1996 and thereafter exercisable at $2.58 (CDN$3.51) per
share through September 8, 1997, after which date the warrants expire.
On January 31, 1996, the private placement of Series B preferred stock was
completed. In this private placement, 2,227,946 Units were issued, each Unit
consisting of one share of Series B preferred stock and one non-transferable
warrant to purchase one share of common stock. The warrants are exercisable at
$2.00 per share through January 31, 1997 and thereafter exercisable at $2.50
per share through January 31, 1998, after which date the warrants expire. (See
Note 11 - "Subsequent events.")
The preferred stock is not redeemable and has a liquidation preference of $2.00
per share. Dividends are payable on the preferred stock only as declared by
the Board of Directors and are cumulative. The holders of the preferred stock
have voting rights equal to one vote for each share of common stock into which
the preferred stock is convertible and were granted certain registration rights
as a part of the private placement.
10
<PAGE>
STARBASE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVERSE STOCK SPLIT
In January 1995, the shareholders of the Company approved a 1 for 3 reverse
stock split which was completed on April 6, 1995. In connection with the
reverse stock split 11,107,877 shares of common stock were retired. The stated
par value of $.01 per share was not changed. All references in the financial
statements to average number of common shares outstanding and per common share
amounts have been restated to reflect the 1 for 3 reverse stock split. All
disclosures related to sales of common stock, warrants, employee stock plans,
and other common stock transactions for prior periods presented have also been
restated to reflect the reverse stock split.
PRIVATE PLACEMENTS
In the last three fiscal years, the Company has sold 2,363,946 (1996);
3,213,716 (1995); and 378,103 (1994) Units in private placement transactions.
With the exception of the December 20,1994 private placement, each such Unit
consists of one share of the Company's preferred stock convertible into one
share of common stock, or one share of the Company's common stock and, in
either case, one warrant to purchase an additional share of common stock. Each
Unit sold in the December 20, 1994 private placement consisted of one share of
the Company's preferred stock, which converted into approximately .77 shares of
the Company's common stock on June 30, 1995. The warrants are generally
exercisable within two years of the original grant date. A summary of the
private placement transactions follows:
<TABLE>
<CAPTION>
Finder's
Shares Warrants Fees in
Closing Date Issued Price Per Share Issued Exercise Price Shares
- ----------------- --------- ------------------- ---------- --------------------- ----------
<S> <C> <C> <C> <C> <C>
March 9, 1993 56,632 CDN$3.96 56,632 CDN$3.96 (A) -
March 24, 1993 22,000 CDN$4.56 22,000 CDN$4.56 (A) 1,100
April 26, 1993 160,666 CDN$4.68 160,666 CDN$4.68 (B) 3,333
April 26, 1993 65,666 CDN$4.68 65,666 CDN$4.68 (B) -
May 11, 1993 16,000 CDN$6.24 16,000 CDN$6.24 (A) 1,569
July 8, 1993 40,533 $4.62 (CDN$5.88) 40,533 $4.62 (CDN$5.88) (A) 2,872
August 31, 1993 95,238 $5.25 (CDN$6.91) 100,008 $5.25 (CDN$6.91) (B) 4,770
December 19, 1994 208,716 $4.92 (CDN$6.60) 208,716 $4.92 (CDN$6.60) (A) 8,266
December 20, 1994 2,750,000 $1.00 0 N/A -
March 31, 1995 255,000 CDN$7.35 255,000 CDN$7.35 (A) -
September 8, 1995 136,000 $2.24 (CDN$3.05) 136,000 $2.24 (CDN$3.05) (A) -
January 31, 1996 2,227,946 $2.00 2,227,946 $2.00 (C) 19,445
</TABLE>
(A) Warrant exercise price in second year is equal to 115% of initial warrant
exercise price.
(B) Warrant term is one year.
(C) Warrant exercise price in second year is $2.50.
Finder's fees issued in connection with stock offerings were offset
against the related proceeds.
11
<PAGE>
STARBASE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTS
Warrant activity for the three years ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
Shares Warrant price per share
--------- -------------------------
<S> <C> <C>
Outstanding at March 31, 1993 78,632 CDN$3.96 - 5.25
Issued in connection with stock offerings 507,875 CDN$4.68 - 12.45
Issued in connection with fiscal agency agreement 50,000 CDN$7.05 - 8.10
Exercised (22,000) CDN$4.56
----------
Outstanding at March 31, 1994 614,507
Issued in connection with stock offerings 463,716 CDN$6.60 - 7.35
Issued in connection with loan agreement 7,182 CDN$8.22
Exercised (236,082) CDN$4.56 - 6.79
Expired (328,424) CDN$4.56 - 12.45
----------
Outstanding at March 31, 1995 520,899
Issued in connection with stock offerings 2,478,696 US $2.00, CDN$3.05
Exercised --
Expired (50,000) CDN$7.05 - 8.10
----------
Outstanding at March 31, 1996 2,949,595
----------
----------
</TABLE>
The Company entered into a contract with an agency in April 1993 to perform
certain market consultation and corporate finance services. In consideration
for the services to be performed by the agency, the Company granted the agency
a two-year non-transferable warrant to purchase 50,000 shares of common stock
which expired during the year.
CONVERSION OF NOTES PAYABLE
During fiscal 1996, investors converted notes payable with a face value of
$882,000, as well as interest accrued thereon, into Series B preferred stock at
a price of $2.00 per Unit. Each Unit consists of one share of Series B
preferred stock and one warrant to purchase one share of common stock. The
warrants are exercisable at $2.00 per share through January 31, 1997 and
thereafter exercisable at $2.50 per share through January 31, 1998, after which
date the warrants expire. Included in the notes which were converted into
Series B preferred stock were notes for $137,000 from two directors.
COMMON STOCK PENDING AUTHORIZATION
Common stock pending authorization represents common shares to be issued in
payment for consulting fees to an independent consultant.
TREASURY SHARES
In connection with the acquisition of Roundtable, Inc. in 1994, the Company
authorized a loan to the selling principal. On May 31, 1995, the Company
canceled the note receivable in the amount of $60,000 plus accrued interest, in
return for 6,261 shares of the Company's stock pursuant to the original loan
agreement. A portion of the receivable, $44,766, was written-off due to the
difference between the market price of the stock on that date and the stock
redemption price in the note.
12
<PAGE>
STARBASE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. EMPLOYEE BENEFIT PLAN
Effective April 1, 1992, the Company adopted a 401(k) savings plan covering all
employees. Employees who work for the Company are eligible for participation
after three months of service. Company contributions to the savings plan are
made at the discretion of the Company's Board of Directors. The Company
contributed $14,000 in 1994. The Company made no contributions in 1996 and
1995.
7. STOCK OPTION PLANS
The Company has stock option plans that provide for the grant of non-qualified
and incentive stock options to all directors, officers and employees of the
Company. These plans were originally established by the Company's
predecessors, NeuroStar and PNA, and have been adopted by the Company. Options
are granted at exercise prices equal to the fair market value of the common
stock on the date of grant. Generally, twenty-five percent of the options are
available for exercise at the end of one year, while the remainder of the grant
is exercisable ratably over the next thirty-six month period, provided the
optionee remains in service to the Company. A total of 1,333,333 shares of
common stock have been authorized for the grant of stock options (See Note 11 -
"Subsequent events").
Stock option activity is as follows:
<TABLE>
<CAPTION>
Number Option price
of Shares per share
(CDN$)
------------ --------------
<S> <C> <C>
Outstanding at March 31, 1992 --
Issued in connection with the reverse acquisition 93,333 $2.16 - 5.28
Granted 176,650 2.04 - 4.95
Lapsed or canceled (17,000) 2.16 - 5.28
Exercised (76,333) 2.16 - 3.12
-----------
Outstanding at March 31, 1993 176,650 2.04 - 4.95
Granted 777,166 3.00 - 13.44
Lapsed or canceled (111,667) 13.20 - 13.44
Exercised (14,814) 2.04
-----------
Outstanding at March 31, 1994 827,335 3.00 - 13.44
Granted 503,666 3.00 - 8.01
Lapsed or canceled (87,500) 4.95 - 13.44
Exercised (6,666) 4.95 - 6.30
-----------
Outstanding at March 31, 1995 1,236,835 4.95 - 8.22
Granted 1,900,347 3.00 - 7.97
Lapsed or canceled (1,471,560) 3.00 - 8.22
Exercised (28,172) 4.95
Adjustment for 1 for 3 reverse split (55)
-----------
Outstanding at March 31, 1996 1,637,395 3.00 - 13.44
-----------
-----------
Exercisable at March 31, 1996 531,457 $3.00 - 13.44
-----------
-----------
</TABLE>
The exchange rate for the Canadian dollar in effect at March 31, 1996 was
approximately US$0.74 to CDN$1.00.
13
<PAGE>
STARBASE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
The Company leases its office space as well as certain of its office equipment
under a non-cancelable operating lease expiring in February 1997. Minimum
rental commitments under lease agreements at March 31, 1996 are as follows:
(In thousands) Non-cancelable
Year ending March 31, Operating Leases
----------------
1997 $ 202
1998 7
1999 5
Thereafter --
---------
Total payments $ 214
---------
---------
Rent expense totaled $396,000 (1996); $282,000 (1995); and $127,000 (1994).
During fiscal 1996, accounts payable and accrued expenses increased
substantially due to a severe shortage of cash, which also caused the Company
to not meet its debts as they came due. The non-payment of obligations
resulted in a number of lawsuits filed against the Company. The Company has
entered into settlement agreements with respect to the lawsuits brought against
it and is presently current in all payments made under those settlement
agreements.
9. RELATED PARTIES
The Company borrowed 58,333 unrestricted shares of its common stock from three
directors. Of the total shares borrowed, 33,333 shares were sold in the open
market by the Company and the proceeds were used for general corporate purposes
and 25,000 shares were used as remuneration for a consultant. The three
directors have agreed to accept restricted shares in repayment, which shares
have not been issued as of March 31, 1996.
In fiscal 1995, the Board of Directors authorized the Company to loan William
Stow III, President and CEO of StarBase, the sum of $126,000. At March 31,
1996, the principal and accrued interest amounts were $76,153 and $3,286,
respectively. The loan is evidenced by a promissory note and is secured by a
deed of trust on real property owned by Mr. Stow. The note is payable on
November 4, 1998 and bears interest at a rate of 6.34% per annum, payable at
maturity.
The Company entered into a two year agreement with John Snedegar, a director,
which was terminated through mutual consent by the parties on March 31, 1996,
subject to payment of $280,000 to Mr. Snedegar for services performed by him.
As of March 31, 1996, Mr. Snedegar had received no payment connected with this
agreement. In anticipation of the payment to Mr. Snedegar, the Company has
accrued $280,000 (see Note 11 - "Subsequent events").
14
<PAGE>
STARBASE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------
(In thousands) 1996 1995 1994
- -------------- ------- ------ ------
<S> <C> <C> <C>
Interest paid $ 39 $ 6 $ --
Income taxes paid 1 2 2
Non-cash investing and financing transactions:
Conversion of Series A preferred stock to common stock
(Note 5) 2,170 -- --
Conversion of promissory notes to equity (Note 5) 745 -- --
Conversion of loans from officers to equity (Note 5) 137 -- --
Common stock issued as finder's fees 39 70 --
Acquisition of treasury shares with note receivable (Note 5) 21 -- --
Assets acquired through capital lease -- 69 66
Reduction in assets through termination of capital lease 75 -- --
</TABLE>
11. SUBSEQUENT EVENTS
On May 13, 1996, the Company completed a private placement of approximately
$6,300,000 for 2,099,833 equity Units, each Unit consisting of one share of
common stock and one non-transferable warrant to purchase one share of common
stock. The warrants are exercisable at $2.00 per share through January 31,
1997 and thereafter exercisable at $2.50 per share through January 31, 1998,
after which date the warrants expire.
The May 13, 1996 private placement, which resulted in gross proceeds to the
Company of approximately $6,300,000, caused the shares of Series B preferred
stock to automatically convert into common stock, on a one-for-one basis, in
accordance with the conversion rights and restrictions of that series.
The Company has offered in a private placement of up to 366,666 Units (the
"Regulation S Unit"), at $3.00 per Regulation S Unit, each Regulation S Unit
consisting of one share of Series C Preferred Stock which will be convertible
into one share of common stock and one non-transferable warrant to purchase one
share of common stock, pursuant to Regulation S under the Securities Act of
1933, as amended. Of the total proceeds, $1.1 million, approximately $1.025
million will be for cash and the remainder as an offset against notes payable.
At June 17, 1996, 250,000 Regulation S Units had been issued for which $750,000
has been received.
In connection with the Termination Agreement and General Release of Claims
entered into between the Company and Mr. Snedegar, the Company paid Mr.
Snedegar $75,000 on April 22, 1996, followed by $205,000 on June 6, 1996.
On May 6, 1996, the Board of Directors increased the number of common stock
shares authorized for the grant of stock options from 1,333,333 to 2,833,333
shares, subject to shareholder approval.
15
<PAGE>
PART IV, ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K. (c)EXHIBITS, add the following:
23.2 Written Consent of Price Waterhouse LLP, Independent Auditors, as amended.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 16th day of July,
1996.
STARBASE CORPORATION
By: /s/ ROBERT W. LEIMENA
------------------------------------
Robert W. Leimena
Chief Financial Officer
17
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of StarBase Corporation
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 of StarBase Corporation of our report dated June 20,
1996, except for Note 7, as to which the date is July 16, 1996, which appears
on page 2 of the March 31, 1996 Annual Report to Shareholders of StarBase
Corporation, which is incorporated by reference in StarBase Corporation's
Annual Report on Form 10-K/A for the year ended March 31, 1996.
PRICE WATERHOUSE LLP
Costa Mesa, CA
July 16, 1996
