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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 March 31, 1997
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 92612
(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 registrant's revenues for its most recent fiscal year: $1,039,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 31, 1997, based on the closing price as reported by NASDAQ
was $ 10,847,821.
Number of shares outstanding as of May 31, 1997: Common Stock: 13,463,717
Documents Incorporated by Reference: Proxy Statement for 1997 Annual
Shareholders' Meeting; Part III.
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TABLE OF CONTENTS
Part I........................................................................3
Item 1. Business...........................................................3
Company Formation and Acquisition........................................3
Company and Product History..............................................3
Market Background for ITE Products.......................................4
The Market Opportunity...................................................5
Industry Background......................................................6
StarBase Strategy........................................................8
StarBase ITE Products....................................................9
Competition.............................................................12
Marketing and Sales.....................................................14
Proprietary Rights......................................................16
Employees...............................................................17
Forward Looking Statements..............................................17
Risk Factors............................................................17
Item 2. Properties........................................................18
Item 3. Legal Proceedings.................................................18
Item 4. Submission of Matters to a Vote of Security Holders...............18
Part II......................................................................19
Item 5. Market for Registrant's Common Equity.............................19
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................19
Results of Operations...................................................19
Factors That May Effect Future Results..................................21
Liquidity and Capital Resources.........................................23
New Accounting Standards................................................24
Item 7. Financial Statements..............................................25
Report of Independent Accountants.......................................26
Consolidated Balance Sheets.............................................27
Consolidated Statements of Operations...................................28
Consolidated Statements of Cash Flows...................................29
Consolidated Statements of Shareholders' Equity.........................30
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................41
Part III.....................................................................42
Item 9. Directors and Executive Officers of The Registrant................42
Item 10. Executive Compensation...........................................43
Item 11. Security Ownership of Certain Beneficial Owners and Management...43
Item 12. Certain Relationships and Related Transactions...................43
Part IV......................................................................44
Item 13. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.........................................................44
(a) (3) Exhibits With Each Management Contract or Compensatory
Plan or Arrangement Required to be Filed Identified.........44
(b) Reports on Form 8-K.............................................44
(c) Exhibits........................................................44
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PART I
ITEM 1. BUSINESS
COMPANY FORMATION AND ACQUISITION
StarBase Corporation (the "Company" or "StarBase") was incorporated in
California on September 6, 1991 as NeuroStar Corporation ("NeuroStar"). In 1992,
the shareholders of NeuroStar entered into a plan of reorganization and a share
exchange agreement (the "Reorganization") with Pacific National Seafarms Ltd.
("PNA"), a company incorporated in British Columbia and listed on the Vancouver
Stock Exchange ("VSE"). Subsequently PNA merged into a wholly-owned subsidiary
("StarBase Delaware") incorporated in the State of Delaware, with StarBase
Delaware surviving the merger under the name StarBase Corporation.
In June 1996, the Company began trading on the NASDAQ Over The Counter
Electronic Bulletin Board under the symbol "SBAS". Subsequently, the Company
voluntarily delisted from the VSE and began trading on The NASDAQ SmallCap
Market in September 1996.
The Company's address is 18872 MacArthur Boulevard, Irvine, California 92612.
The Company's registered office is in the City of Wilmington, County of New
Castle, Delaware. Its telephone number is (714) 442-4400. The Company's federal
tax identification number is 33-0567363.
COMPANY AND PRODUCT HISTORY
StarBase was founded to solve a critical business problem that has plagued the
software industry for the past two decades, namely the inability of software
development projects to deliver software products on time and within budget. The
industry solution to this problem has been to improve the development tools for
programmers and, most recently, Integrated Development Environments ("IDE") for
programmers. Although the industry's major software companies have made
significant improvements in IDE product offerings, i.e., Microsoft Visual C++,
Microsoft Visual Basic, Powersoft PowerBuilder, Borland Delphi, etc., the
industry press has continued to report that the majority of software projects
continue to come in late and over budget.
The StarBase business plan was initially based on the proposition that the
software development productivity problem was intrinsic to the architecture of
the industry's IDE product offerings. The solution to this problem and the
Company's operating premise was that proper architecture and additional product
features were required. Thus, the Company started development of a
next-generation, object-oriented IDE that included a database component, a
high-level language, language tools, graphical design tools and a team
development environment. Part of this decision was based on the fact that
competitive IDEs were neither completely object-oriented nor integrated all the
components necessary to build complete applications. By 1993, the Company had
made significant progress toward the creation of the StarBase object-oriented
IDE and had formed a consulting organization that was capable of building
proof-of-concept applications for Fortune 1000 companies.
During 1993 and 1994, however, the Company concluded, based on market research,
that a next generation IDE would not be a lasting solution to the software
development productivity problem. During 1994, marketing feedback on the
Company's initial products, Versions and TSMS, indicated that the critical
problem was no longer code production by programmers, but rather the team
processes of collaboration, work flow and project management. Even though
neither Versions nor TSMS was a complete team-oriented product, they contained
many critical elements of such a product. In addition, industry work flow
research began to indicate that task completion such as programming represented
only 10-30% of the productivity problem and that process cycle time from team
processes represented approximately 70-90% of the problem. The Company concluded
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that the big productivity payoff was no longer in IDE improvement, but in
developing a complementary Integrated Team Environment ("ITE") family of
products. Thus, the Company decided to transition from concentrating on the less
important problem of code production, to focusing on the development of ITEs
that improve collaboration, work flow and project management.
The development of StarBase ITE products was, to a large measure, simplified by
the fact that the partially developed StarBase IDE contained many important
elements of the new ITE concept. The Company also concluded that if the ITE
component was separated from the StarBase IDE, it could not only function as a
stand-alone product, but could be used to complement IDEs offered by many of the
largest software companies. Thus, the technology base under development during
the first two years was refocused entirely on the production of a complete ITE
product line, resulting in the shipping of StarTeam 1.0 in January 1996.
In addition, management concluded that the StarBase ITE products would find a
much larger customer base if they could be broadened to encompass
non-programming professionals. The Company's long term marketing plan was
therefore redirected toward enterprise product development teams, including
teams involved in the development of architectural drawings, product design,
complex document creation, software programming, etc. At this time, the Company
is not aware of products that adequately address these needs and believes that
an extended ITE product line based on StarTeam may provide a solution.
The Company has not presently begun such development.
During 1995, the Company was restructured to support the new product and
marketing plans for the StarBase ITE product line. In addition, the Company
began to recruit new marketing and sales personnel in early 1996 to implement
the market introduction of the ITE product line.
MARKET BACKGROUND FOR ITE PRODUCTS
Currently, software development teams have difficulty building quality
application software on time and within budget. Management believes that more
than half of the software development projects initiated by large companies will
cost significantly more than estimated, and will be delivered much later than
originally committed. The software industry has thus far addressed this problem
by offering more programmer development tools which are easier to use.
Programmer development tools are used to create software applications and
include programming languages (traditional and 4GL), database management systems
(relational and object-oriented), computer-aided software engineering ("CASE"),
artificial intelligence ("AI"), expert systems, and other object-oriented
technologies. Microsoft, PowerSoft, Oracle, Sybase, and IBM are leading vendors
within the current market.
Programmer development tools have evolved from single tools, such as a database
or a programming language, to sets of interrelated tools that are designed to
work together in a single work environment. This advanced programmer development
tool, called an IDE, provides significant programmer productivity improvement by
seamlessly combining several inter-related programming tools into a single
productivity enhancing product. Typically, an IDE will combine a programming
language, with an editor, compiler, debugger, graphical user interface design
tool and database access. IDEs such as Microsoft's Visual C++ and Visual Basic,
Borland's Delphi, Borland's C++, Symantec's C++, and PowerSoft's PowerBuilder
are the programmer development tools unit sales leaders. Despite significant
progress in programmer productivity tools in the industry, the majority of
software projects continued to come in late and over budget. Based on focus
group studies and market research conducted by the Company, management concluded
that most delays, cost overruns and required redesigns are related to
inefficiencies in collaboration, work flow and project management rather than to
individual programmer productivity.
Team tools for personal computers such as software configuration management
("SCM") for the management of team programming code, collaboration tools that
provided electronic discussion facilities, project management, work flow and
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defect tracking began to appear in the 1980s. It was becoming widely recognized
that team process tools offered significant productivity improvements. Work flow
studies began to show that team productivity is primarily dependent on the rapid
transfer of information and work between team members. Admittedly, the reduction
of task time in a software project through individual programmer productivity
improvements incrementally reduces the overall process time, but improvements by
orders of magnitude can be attained through team process improvements. Thus, the
Company concluded that team-oriented development tools, and in particular, ITEs
that reduce the time to transfer information and facilitate workflow between
team members, are an important solution to the software development productivity
problem.
THE MARKET OPPORTUNITY
WINDOWS95,WINDOWS NT AND UNIX SOFTWARE DEVELOPMENT.
Management believes that there is a significant backlog of new software
application development within the Fortune 1000. As a result, management
believes that application development responsibility is migrating out of the MIS
organization and into the operating divisions of these corporations. In response
to this trend, software companies are offering a new generation of
object-oriented, client-side development tools to satisfy these departmental
desktop application development needs.
Moreover, the movement of application development to corporate operating
divisions, in combination with the tools that enable the rapid development and
deployment of applications, has resulted in smaller, multi-disciplinary teams.
These teams not only include programmers and testers, but individuals from the
operating segment who develop the requirements for an application or, in the
end, are the actual users.
SCM products address one aspect of team productivity focused on the software
developer, the check-in and check-out of software code and documents and the
maintenance of these in a secure repository. SCM products are used to manage and
to maintain the software code and documents during the development of software
applications. However, neither IDE nor SCM tools were designed to address
critical team productivity issues such as electronic collaboration between team
members to resolve design issues, determine functional specifications or discuss
software defects. Automated work flow between team members to reduce cycle time
is also not addressed by these products. Yet, these are all critical team
productivity issues.
The StarBase ITE products called StarTeam augment and complement existing IDEs
and are built on an SCM foundation. The SCM component of StarTeam is also a
standalone product called Versions. StarBase is significantly participating in
the IDE market through strategic alliances and OEM license agreements with many
of the major IDE vendors, offering Versions 2.0 as an integral component of
their IDE. StarBase expects the IDE integrated Versions 2.0, offered to such
major vendors, to create upsell and market pull-through for the more complete
StarTeam product. StarTeam also extends SCM and ITE capabilities to other
members of the project team who do not use professional application development
tools. A more detailed description of the OEM strategy and specific contracts
can be found in the Marketing and Sales section of this document.
INTERNET DEVELOPMENT
In the latter half of 1996, StarBase introduced an add-on product, StarTeam
Web Connect, that extended StarTeam 2.0 for use with Internet and intranet
servers; intranet is the use of Internet technology inside a company but not
being connected to the Internet. In April 1997 StarTeam Web Connect was combined
with StarTeam Server to create one product named StarTeam VirtualTeam Server.
StarTeam VirtualTeam Server builds on all the integrated capabilities of
StarTeam and adds a set of features aimed specifically at web content developers
and web site managers. Through StarTeam VirtualTeam Server, web content authors,
web masters, graphic artists and other contributors can manage their web page
development files into a StarTeam project and easily control the publishing of
their web pages. Web site visitors are able to directly report problems and hold
electronic conversations about each file published.
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The growth of the Internet and intranet markets represent a new alternative in
the manner that enterprises develop and disseminate internal and external
information. Currently most changes to a corporate web site must go through a
web master or web administrator. As more companies find themselves communicating
and doing business over the Internet or corporate intranets, the need for tools
to support this unique type of development becomes critical. With tools such as
StarTeam VirtualTeam Server, authorized users can access detailed audit trails
of development, check files in and out for editing, and retrieve past versions
of web site files. Using StarTeam VirtualTeam Server, these users can send
information directly to a web site, easing the burden for web administrators.
Without a product such as StarTeam VirtualTeam Server, it is difficult to
control the configuration of a web site, leading to invalid hyperlinks and
inconsistent information. Additionally, as web pages are constantly undergoing
change and updates, maintaining version control of web page information prevents
potentially costly information errors.
Market size and, consequently, revenue potential cannot be determined at this
time as the Company believes that StarTeam and its extensions represent new
market opportunities. The market for Software Configuration Management has been
estimated to exceed $300 million in 1997. StarTeam also integrates tools from
other markets such as defect tracking and collaboration into SCM. Market size
information for web site development and white collar professional development
teams is not available. The Company believes that these new markets are
potentially much larger than the SCM market.
INDUSTRY BACKGROUND
The software industry is undergoing a shift in product needs. The widespread
availability of faster and more powerful computer hardware and peripherals at
relatively lower prices has created demand for computers as an integral part of
business operations. Moreover, users are demanding more and better access to
information. As a result, computer needs are shifting from a host-oriented
mainframe and minicomputer architecture to a client/server and network computing
architecture. The industry's goal is to quickly and efficiently deliver
information to the point of need at a lower cost. In a client/server application
environment, corporate data typically resides on dedicated processors, which can
be accessed directly by networked personal computers, known as clients, and
manipulated by most users within the organization.
The Company believes that the growing demand for client/server applications has
created a large backlog for new, unique, unwritten applications. Despite the
advent of a variety of new software technologies (CASE, relational database
management systems and 4GL), cost overruns, abandoned projects and
ill-performing systems continue to plague information system managers.
Even though programmers worldwide are estimated to produce twice as much code
today as in 1970, the process of application development has not changed
appreciably for almost three decades. For the most part, applications remain
complex, hand-crafted works built by expert programmers, one line of code after
another. Each program must be tested, debugged and tested again in order to
produce a reliable application. The resulting application is typically too
inflexible to accommodate the inevitable modifications needed to reflect the
changing needs of business, thus requiring the whole cycle to start over again.
Currently, programmer tools are very complex, and require a high degree of
specialized knowledge to use. To build effective software applications,
programmers must work in teams with people from other professional disciplines.
Programmers, technical writers, test engineers, and end-user representatives are
expected to work together to build applications, yet the nature of their work
requires them to work in relative isolation. As a result, software projects are
very time-consuming and error-prone, requiring extensive testing of applications
which is an inherently expensive process. Often, more time is spent reconciling
incompatibilities between pieces of software code written by different
developers than is actually spent in developing the code.
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Programmer development tools do not resolve this issue. Current tools lack the
attributes of ITE products that automate communication, allow for programmer
collaboration and optimize the flow of work. StarBase believes object-oriented
ITEs provide an important solution to the problem by providing an integrated
environment that surrounds the currently disparate development tools such as
relational database management systems ("RDBMS"), 4GL, and graphical user
interface ("GUI") builders.
OBJECT-ORIENTED IDES ADDRESS PART OF THE PROBLEM
Object-oriented technology advances a new, more effective approach to developing
software applications. This technology allows programmers to represent business
models in software applications that closely correspond to real-world business
relationships. Object-oriented programming is based on constructing software in
terms of building blocks called objects. These objects, which may be simple or
complex, can be defined and modified independently, used as-is in new
applications or extended to create new functionality. As a result,
object-oriented technology offers substantial productivity gains for developers.
Many major vendors have initiated research and development efforts in the
object-oriented technology arena, and there has been substantial investment in
start-up companies promising to deliver tools that directly address these
issues. Furthermore, the key to improved application development productivity
lies in the construction of applications from re-usable parts. The Company
believes that application development utilizing component construction
techniques will yield significant improvement in the development and maintenance
of new applications.
Management believes that applications built on a foundation of both
object-oriented software and team-oriented development tools are generally
developed faster and more reliably than their monolithic (non-object oriented)
counterparts. They are generally more flexible and more easily modified than the
non-object oriented counterparts, are more easily distributed throughout a
network to the point of work, and take advantage of the economics of
client/server computer platforms.
ITE PRODUCTS COMPLETE THE SOLUTION
Object-oriented software development methods have substantially changed the
manner in which development teams operate. Team members now utilize re-usable
components rather than develop code from the ground up. Teams are now typically
smaller in size and require better communication among their members. Teams are
often formed on an as-needed basis to produce applications that directly address
the defined business needs.
Many vendors are delivering object-oriented or hybrid tools that provide
enhanced individual programmer productivity. They are focused on traditional
enabling technologies, such as C++ compilers, debuggers, browsers, RDBMS, 4GL,
and cross-platform development tools, among others. By contrast, the Company is
focused on products that enable multiple programmers to increase productivity
within a team environment. The Company believes that its new approach to Windows
and Internet application development has created a new product category with a
focus on integrating the team into a collaborative, efficient work flow
environment. Furthermore, StarBase's ITE products bind together many of the
individual object oriented and hybrid tools into a collectively more powerful
application development environment.
The most important attribute for an effective team-oriented tool is that it be
unobtrusive. That is, it needs to deliver only the work that needs to be acted
upon. Programmer productivity is significantly reduced when concentration is
interrupted by team administrative tasks or meetings. None the less, programmers
need to share information in order to collaborate effectively. At the same time,
managers need to know the status of work-in-process in order to make decisions.
StarBase products are intended to enable uninterrupted programmer productivity
by offering electronic collaboration, automatic work flow routing and on-line
access to project status.
The Company believes that ITEs that integrate into an IDE as a component are
more effective than using non-integrated tools in combination. In particular,
the Company believes users achieve greater functionality and programmer
productivity using an ITE that is fully integrated into the IDE environment than
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can be achieved with separate, non-integrated ITE components such as version
control, defect tracking and electronic mail. As evidenced by Visual Basic,
Visual C++, Delphi, PowerBuilder, and others, the software industry is quickly
moving toward IDEs that offer integrated development tools within the
programmers environment. StarTeam complements the industry's direction through
the high level of integration of its ITEs into the leading IDE. StarTeam
components are intended to extend the tool set found within industry leading
IDEs. To date, the Company is not aware of any other vendor that has achieved
this level of integration in its product.
STARBASE STRATEGY
StarBase's strategy is to develop, market, and support an ITE product line that
addresses the evolving needs of a wide range of computer users. The Company
seeks to develop products that are easy to use, offer "best-of-breed"
functionality at attractive prices, feature familiar user interfaces, and
deliver a high degree of integration. In developing its products, the Company
relies on a combination of internal product development efforts, complementary
technologies and products from third parties.
The Company believes that it is first to market with an ITE product line that is
overall "best-of-breed". The Company is striving to evolve the products so that
each major integrated component is also "best-of-breed". The Company believes it
can thereby establish and maintain significant market share, achieve
profitability without sacrificing long-term growth opportunities and deliver
products that offer significant real value to the customer by containing the
cost of development.
The key elements of the Company's strategy are to:
ACHIEVE EARLY MARKET ACCEPTANCE AND AWARENESS. A vital part of the
Company's overall strategy in 1996 involved achieving both
industry/customer awareness and credibility in preparation for the
Company's 1997 product launch of its StarTeam 3.0 ITE platform. A solid
foundation within the team-oriented target market for the next phase of
the Company's strategy has been established through the introduction of
the initial StarTeam product line, product recognition awards from the
industry, and the successful expansion of the reseller, direct, OEM
and international channels.
ESTABLISH A UNIQUE MARKET POSITION WITH THE INTRODUCTION OF STARTEAM
3.0. The Company believes StarTeam 3.0 will offer improvements over
other available products unmatched by any individual competitor. The
Company is not aware of any commercially available team-oriented
product with the capability, integration, and local and wide area
communications represented by the StarTeam 3.0 suite of products. These
products represent a new class of software development tools which
should uniquely set the Company apart from its competition.
EXPAND MARKET ACCESS THROUGH THE INTERNET, PARTNERSHIPS AND INDUSTRY
ALLIANCES. The Company is expanding the market access for its ITE
products by aggressively pursuing partnerships and alliances with
industry leading vendors. As a result, Versions 2.0 is bundled as a
component into several IDE products from the leading software vendors.
The Company has thus far announced eight bundling agreements with IDE
vendors. A more detailed description of the OEM strategy and specific
contracts can be found in the Sales and Marketing section of this
document.
EXPAND ITES THROUGHOUT THE ENTERPRISE. The Company believes its
team-oriented technology that was initially designed for software
development collaboration, can be adapted to encompass generic,
collaborative work flow throughout the enterprise. StarBase intends to
leverage its existing technology to other functional areas within the
enterprise that will result in new market opportunities for the Company
outside the software development segment. The initial targets are web
site development and white collar professional product development. The
Company believes that the extension of ITE capabilities from software
development to web site and white collar office product development
will offer significant market expansion to the Company.
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STARBASE ITE PRODUCTS
StarBase Corporation develops, markets and supports computer software defined as
ITE product development tools that address the evolving needs of a wide range of
personal computer users. These products are designed for computers running
Windows, Windows NT, Windows 95 and UNIX operating systems within a
client/server environment. The Company's products are used in a variety of
personal computer environments, including desktop, laptop and notebook
computers, as well as local and wide area networks ("LAN" and "WAN").
Product capabilities for StarTeam, the Company's flagship product, currently
include configuration management, threaded conversations (a specialized form of
collaboration management), defect tracking (providing elements of both
collaboration and work flow), and change control auditing (a component of
project management). Team administration commonly found in configuration
management systems such as version control, branching, merging, and archiving is
also included. The first ITE product, StarTeam 1.0, was released in January 1996
and gained critical acclaim from the industry press and independent testing
laboratories. StarTeam 2.0, released in August 1996, included StarTeam Server
and StarTeam Web Connect which added Internet and intranet access as well as
improved performance. StarTeam 2.1, released in April 1997, offers enhanced
functionality, a combined server product (StarTeam VirtualTeam Server) and
scalable workstation products (StarTeam Workstation, for small teams, and
StarTeam Workstation Professional, for larger geographically distributed teams).
STARTEAM 2.1
StarTeam integrates into IDEs, and supports all popular file-based development
environments and applications including C++, Java, Delphi, Visual Basic,
Developer/2000, HAHTsite, HTML and more. StarTeam is designed from the ground up
for Windows 95 and NT, tightly integrating into each to provide an unparalleled
level of power and intuitive ease-of-use. StarTeam is a family of products
designed to help teams of application and web developers work together more
efficiently. Because there is a wide range of user requirements, StarBase offers
a range of scalable StarTeam SCM solutions. For first time SCM users, smaller
teams and LAN users, StarTeam Workstation offers a easy-to-use solution. For
advanced, Internet or client/server needs, StarBase offers StarTeam Workstation
Professional and StarTeam VirtualTeam Server. A team can migrate to the more
advanced StarTeam product as their needs grow.
StarTeam Workstation is a tightly integrated suite of SCM tools including
version control, visual differencing, defect tracking with process management,
threaded conversation, project status reports and charts, build and milestone
management, an audit log and an advanced project repository. StarTeam
Workstation Professional extends the SCM functionality found in StarTeam
Workstation and includes client/server connectivity to the StarTeam VirtualTeam
Server.
StarTeam VirtualTeam Server allows all team members using StarTeam Workstation
Professional to access projects via the Internet, intranet, WAN and dial-up
connectivity. This allows secure, flexible and dynamic teams to easily be
created to complete even the most ambitious projects by removing limits on where
team members are located or the time they work. In addition, StarTeam
VirtualTeam Server utilizes client/server technology to greatly increase
performance while reducing network traffic to provide a secure scalable solution
that serves the needs of even the largest teams.
StarTeam VirtualTeam Server also provides access to application and web projects
via a web browser. It allows a wide range of users to participate in the
development process in an easy, organized, cost effective and secure way. As
part of an application development project, it provides a way for beta users,
testers, consultants and others to interact, provide feedback and other
information. As part of a web project, it allows the webmaster to create a
framework to interact with everyone involved with content, graphics, testing and
user input.
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STARTEAM 3
REPOSITORY-BASED CLIENT/SERVER ARCHITECTURE
StarTeam 3 maintains its data in a secure, database-independent repository
compatible with Microsoft Access, Oracle, SQL Server and many other Open
Database Connectivity ("ODBC") databases. The efficient client/server
architecture provides a language and protocol-independent connection to a
variety of clients including a Windows-based Graphical User Interface ("GUI"), a
portable Java-based command line interface and a virtual device driver
interface. This architecture is designed to accommodate additional clients, such
as a graphical Java-based, universal client. Such a client, capable of operating
wherever a Java virtual machine is available, is planned for release by late
1997.
VIEW-BASED PROJECTS
The core of StarTeam's software configuration management ("SCM") functionality
is based on the concept of a "View". Views provide an intuitive mechanism for
maintaining multiple configurations of a given software development effort. For
example, a team might be well into the development of version 2.0 of a product
when a need arises to create a maintenance release based on the currently
shipping version 1.0. With Views, the StarTeam user can "roll-back" the project
to the state it was in when version 1.0 was released and create a variant
specifically to address the maintenance issue. The Company believes the ability
to graphically create and manipulate such Views is unique to StarTeam 3.
PROGRAMMABILITY, CUSTOMIZABILITY
No off-the-shelf product can meet the needs of all teams in all situations. To
address the necessity for tailorable solutions, StarTeam provides
industry-standard interfaces based on Microsoft's Component Object Model
("COM"). Support of COM allows any external application, for example a compiler,
editor or project management tool, to programmatically drive StarTeam 3. Within
the StarTeam environment itself, users are provided with the ability to
customize the behavior of the application through the incorporation of
Microsoft's Visual Basic for Applications ("VBA").
TASK MANAGEMENT
As software development projects get more complex, many teams find that the most
efficient way to work is to organize all changes to their project around the
notion of a task. StarTeam 3 allows users to create "Tasks", a higher-level
construct than is typically available in competing products. Through Tasks, a
user defines all the file changes necessary to complete a single task.
Typically, no changes can be made to any files unless those changes are assigned
to a specific task. This provides managers with the level of control they need
for large, complex projects.
INTEGRATION WITH WINDOWS EXPLORER
Most products with which StarTeam competes provide a GUI designed expressly for
the purpose of facilitating the many tasks facing software development teams.
While StarTeam 3 also provides such a GUI, many users, particularly
non-technical users, are unenthusiastic about having to learn yet another
application program, even though they would benefit substantially from the
features StarTeam 3 offers. To address this issue and to provide greater
flexibility for technical users, StarTeam 3 includes a mechanism for
"projecting" StarTeam Views directly into Microsoft Explorer. Once defined, a
View appears as a new storage device, similar to a disk drive, in Explorer. The
user then interacts with files under version control in StarTeam through the
familiar Explorer interface without ever starting the StarTeam GUI.
DESIGNED TO PROVIDE HIGH PERFORMANCE FOR TODAY'S INTERNET/INTRANET TEAMS
Increasingly software development teams rely on outside contractors,
telecommuters and other remote team members. StarTeam 3 incorporates numerous
features to support the low-speed connections (dial-up lines, WANs, Internet)
typically available to such remote team members. The architecture has been
designed to minimize data traveling across the client/server connection. For
example, whenever a client requests a file from the server, this request is
routed through a local file cache. Whereas most competitive products send all
such requests to their repositories, in StarTeam 3 any request that can be
fulfilled by the cache is not sent to the server. Moreover, this local cache is
used to dramatically reduce the data sent to the server in a file "check-in"
process. Because the cache "knows" the state of a file prior to any
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modifications, only the modifications are sent across the connection to the
server. The Company estimates that network traffic from this type of operation
is reduced between one and two orders of magnitude through this mechanism.
CONCURRENT HOSTING OF PVCS AND SOURCESAFE ARCHIVES
Many organizations employ multiple SCM tools, with the tool varying by
department or team. The inability to standardize on a single tool because of
file format incompatibilities decreases collaboration and code reuse and
increases costs. StarTeam 3 takes a unique approach: it supports foreign file
formats as though they were native to StarTeam. This open approach allows
StarTeam to read and write existing SCM archives from Intersolv's PVCS and
Microsoft's SourceSafe in place, without the need for an import operation. For
those users with existing investments in these products, StarTeam provides
significant benefits beyond the tool they currently use. In fact, virtually all
the facilities available in StarTeam become available to them. For example, PVCS
users could access their files securely across the Internet and SourceSafe users
could integrate defect tracking directly to their projects.
STARTEAM 3.0 DELIVERY SCHEDULE
StarTeam 3 is currently in a late Alpha phase, being used internally by the
Company to build StarTeam 3, a process known as self-hosting. The StarTeam 3
project itself consists of over 2,000 separate modules and the development team
is distributed, with several developers in remote locations connecting to the
project across the Internet. Beta deliveries are expected in July 1997, with
commercial shipment expected by late Fall of 1997. Although management fully
expects to meet these scheduled dates, there can be no assurance that this
development process will not encounter unanticipated delays.
VERSIONS 2.0
StarTeam was built around a version control component and called Versions.
Versions can also operate as a standalone product or integrate into IDEs as a
component, supporting popular file-based development environments and
applications including C++, Java, Delphi, Visual Basic, Developer/2000,
HAHTsite, HTML and others. Versions is designed from the ground up for Windows
95 and NT, tightly integrating into each to provide revision control power and
intuitive ease-of-use. Versions provides version control, visual differencing,
build and milestone management, audit logs, security and an advanced project
repository for individuals and groups of application and web site developers on
a local area network. The Company believes Versions provides a unique blend of
power and intuitive ease-of-use unparalleled in other version control products.
ROUNDTABLE TOTAL SOFTWARE MANAGEMENT SYSTEM FOR PROGRESS SOFTWARE
StarBase also offers Roundtable Total Software Management System ("TSMS") for
Progress, which is sold by Progress Software and by StarBase Corporation. TSMS
seamlessly integrates with the Progress ProVision application development
environment to provide team development support, release management and
distributed development capabilities.
TSMS includes extensive version control for source code and database schema,
task management and reporting, automated promotions among workgroups, customer
release management, customized systems management and a variety of powerful
tools that give programmers, testers, managers and customers immediate and
complete information about the content of a software system. TSMS supports
Windows 3.1, Windows 95, Windows NT and any UNIX platform supported by Progress
Software.
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COMPETITION
The market for application-development system software products is intensely
competitive. The major developers and competitors of the SCM component of
StarTeam include Intersolv, Inc. (PVCS), Microsoft (SourceSafe) and Mortice Kern
Systems, Inc., "MKS", (Source Integrity). Pure Atria's ClearCase and Platinum's
CCC/Harvest products compete with TSMS at the high end of the configuration
management market. At this time, the Company knows of no company that offers the
comprehensive ITE tools found in StarTeam, nor the Internet management
capabilities that are present in StarTeam VirtualTeam Server. Intersolv, Inc.,
MKS, Microsoft, Pure Atria and others offer SCM capabilities that are similar to
those offered by StarTeam. MKS and others have introduced configuration
management products for the Web that offer some features that are included in
StarTeam VirtualTeam Server. MKS has entered into an OEM agreement with Netscape
for its web configuration management product.
Most of these companies have established greater market recognition and have
substantially greater financial, technological, production and marketing
resources than the Company. The Company, however, is not currently aware that
any of these companies are developing ITEs such as StarTeam that provide a
comprehensive set of ITE capabilities that go beyond SCM to include tightly
integrated change requests, defect tracking, decision management and threaded
conversations, as components that integrate with one another and within the
leading IDEs. StarBase believes that this level of integration is complementary
to the industry direction of providing an increasing number of development tools
as integral parts of an IDE. StarTeam accomplishes this by simply extending the
number of programmer development tools available in an IDE to include ITE
components.
The market for the Company's products has different competitive characteristics
by category of product and target market:
SOFTWARE CONFIGURATION MANAGEMENT ("SCM") -- STARBASE ROUNDTABLE TSMS.
Roundtable TSMS is a high-end configuration management system designed
specifically for Progress Software's ADE (ProVision) and utilizes the
Progress 4GL as its implementation language. Intersolv, Inc.'s PVCS,
Pure Atria Corporation's ClearCase and Platinum's CCC/Harvest, although
leading SCM vendors in the high-end market, are not designed
specifically for the Progress environment. These competitive products
offer comprehensive version control, high performance, efficient
workspace management, accurate and automatic build processes, and scale
to the enterprise level.
ITE - STARTEAM. A full service ITE will incorporate a number of
software categories including on-line decision management, project
status, software component analysis, version control, software
configuration management, change management including defect tracking,
conversation management and work flow with role management. The Company
plans to integrate these eight functional areas into a new category or
class of product, an ITE. Although StarTeam currently integrates only
items 4 through 8, below, at this point in time, the Company knows of
no other vendor attempting to integrate these software categories into
a complete solution. However, several of these categories have vendors
with dominant market positions. A detailed discussion of the eight
functional areas is as follows:
1) DECISION MANAGEMENT. Decision management is an on-line
facility for identifying and tracking management and technical
decisions as they are made on-line, during collaborative team
discussions or through notification by the team leaders. The
Company is unaware of a competitive or planned product with
these features.
2) PROJECT STATUS. There are currently several project management
products, such as Symantec's Timeline and Microsoft's Project,
that provide project status. However, project task information
must be entered manually into these products. The Company's
current plans call for its ITEs to track task information
on-line as work is performed by programmers. The Company knows
of no products that provide on-line project scheduling and
modeling information that is derived directly from a
programmer's day-to-day work activities.
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3) SOFTWARE COMPONENT ANALYSIS. There are currently specialized,
individual tools that analyze such things as test coverage and
software code complexity. The Company's ITEs are planned to
include these as well as more advanced capabilities such as
pattern recognition analysis of software code errors and
programmer error rate forecasting. The Company is currently
unaware of a competitive or planned product offering with
these features.
4) VERSION CONTROL. The primary competitors in this category are
Intersolv, Inc. with PVCS, MKS with Source Integrity, and
Microsoft with SourceSafe. All three vendors offer robust
administrative capabilities (multi-user support, project
branching, file/project merging, and multiple directory
support), a graphical user interface for ease-of-use, and
report generators. All three vendors integrate with the
leading development platforms including Microsoft's Visual
Basic and Visual C++. The Company believes that the version
control functionality available in StarTeam competes favorably
with these products at both the user interface and feature
level.
5) SOFTWARE CONFIGURATION MANAGEMENT. Pure Atria Corporation's
ClearCase and Platinum's CCC/Harvest are the two leading SCM
products on the market. Both of these products are high-end
tools offering comprehensive version control, high
performance, efficient work space management, accurate and
automatic build processes, and scale to the enterprise level.
StarTeam offers competitive SCM features applicable to
small-to-large size development groups and will scale to the
enterprise level in StarTeam 3.
6) CHANGE MANAGEMENT WITH DEFECT TRACKING. There is no dominant
vendor in the bug database (defect tracking) segment of the
market today. Archimedes Software's BugBase and Intersolv,
Inc.'s Tracker are two of the more popular products and offer
equivalent functionality including bug identification and
disposition, responsibility routing, security and reporting.
Currently, bug database products typically operate in a
stand-alone fashion and do not integrate well with existing
version control and configuration management products.
However, both Intersolv, Inc. and MKS have recently begun
offering defect tracking products, and over time other version
control vendors are expected to evolve their products to
include defect tracking. The Company believes that the
StarTeam 3 change management with defect tracking offers
features that exceed those of existing bug database products,
while offering integration within the ITE environment.
7) CONVERSATION MANAGEMENT. There are a number of products on the
market today that allow software developers to communicate
electronically, including electronic mail systems (e.g.,
Microsoft Mail and Lotus cc: Mail), commercial bulletin board
services (e.g., CompuServe and America Online), and workgroup
systems such as Lotus Notes. All these systems offer an
effective mechanism to share information with others
electronically. However, keeping the conversations on a
focused topic over a sustained period of time has proven to be
difficult and time-consuming. These problems have resulted in
a new messaging paradigm referred to as threaded
conversations. Collabra Software Inc.'s Share 1.0, released in
December of 1994, successfully implemented threaded
conversations and was recognized as one of the most innovative
products in 1994 by PC Magazine, receiving the Editor's Choice
Award. StarBase has delivered a threaded conversation
capability in the initial version of StarTeam that is
comparable to the features offered in Share 1.0. However,
StarTeam is integrated into the software development process
yielding focused conversations on defects, project status, and
code modules, as well as links to E-mail and electronic
forums.
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8) WORK FLOW SYSTEMS. Work flow concepts are beginning to appear
in personal computing. Vendors who provide the electronic
backbone for information sharing (Novell Netware and Microsoft
EMS) are now beginning to incorporate the notion of work flow
into their messaging paradigms and numerous companies are
delivering market specific solutions (such as FileNet's
document imaging and Delrina FormsFlow forms routing).
Although there are numerous vendors addressing workflow, at
this time the Company knows of no vendor designing workflow
concepts into a team-oriented software development tool.
StarTeam plans, in future releases, to include a software
development life-cycle feature that allows flexible model
definition (e.g., changes in variables including work flow
process, the definition and assignment of roles and
responsibilities, and their effect on the project development
life cycle) for a particular software development and
maintenance process.
The Company believes that StarTeam's integration of on-line decision management,
project status, version control, software configuration management, defect
tracking, threaded conversations, work flow, security, administration, software
component analysis and reporting features into one user-friendly product is
unique within this segment of the industry. StarTeam has won several major
industry awards, including selection as one of PC Week's Products of the Year
for 1995, the same publication's 1996 award for excellence in design,
implementation and addressing the needs of corporate information technology
professionals, as well as the 1996 PC Week Analyst's Choice.
Management believes there are significant barriers-to-entry into the ITE market
inhibiting an immediate response by competitors. This is due to the high level
of integration and functionality necessary to provide workflow automation and
information sharing. The Company believes that its competitors will need to
re-engineer their software offerings to deliver a truly competitive product.
Over time, as the Company integrates more functionality and performance
enhancements, management believes that this differentiation is likely to
increase.
MARKETING AND SALES
StarBase Corporation focused much of fiscal 1997 building a comprehensive,
multi-channel sales organization that includes OEM sales, a direct sales group
(Corporate Sales), domestic channel sales and an international distribution
network.
OEM SALES OF VERSIONS
A major element of the OEM program is the Versions 2.0 bundling strategy.
StarBase's management believes that this strategy will present significant
market exposure and revenue opportunities due to the strong market acceptance
and broad distribution of the partners' products and the complementary
relationship of Versions 2.0 to the partners' products.
Management believes that including lite versions of software in larger packages
is very effective when there is a natural relationship between the two products.
Several companies have employed bundling to popularize their products including
WinFAX by Delrina (now Symantec), Crystal Reports by Seagate and Caere optical
character recognition software. The anticipation is for the customer to install
and use the lite product, recognize an increase in productivity, and see the
benefits to be gained from upgrading to the entire StarTeam package.
StarBase has announced agreements to bundle the Company's Versions 2.0 product
with product offerings from Oracle (Developer/2000), Symantec (Visual Cafe Pro),
Asymetrix (SuperCede Java/ActiveX Edition & SuperCede Database Edition), Haht
Software (HAHTsite), SoftQuad (HoTMetaL PRO), Visix (Vibe), and Aonix (ObjectAda
for Windows). In addition, Corel (VENTURA and WordPerfect Office) is an OEM
customer. The Company believes these agreements will uniquely position the
Company for revenue growth and market acceptance. There are three primary
reasons for this:
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1) The Company expects more than 1 million software developers to receive
Versions 2.0 bundled with products from StarBase partners during the
next 18 months, and for every 1% who upgrade from Versions 2.0 to the
Company's StarTeam product family, the Company could realize up to $2
million in revenue;
2) Versions 2.0 bundling creates the potential for the product becoming
a standard brand for revision management and version control;
3) Planned inclusion of StarTeam collateral-marketing materials with each
bundled product is expected to create broad-based market exposure for
StarBase products.
VERSIONS 2.0 TARGET MARKETS
StarBase has targeted four markets for branding Versions 2.0 as the standard
and, as of May 31, 1997, the Company has entered into bundling agreements with
companies in each of these market segments:
1) TRADITIONAL APPLICATION DEVELOPMENT - Most applications in use today were
created with these tools. Tools range from simple single developer
environments to multiple team members across an enterprise working on
mission critical applications. StarBase has entered into agreements with
Oracle, Progress, Aonix and Metrowerks to reach customers in this segment.
2) EMERGING JAVA DEVELOPMENT - This market segment is only two years old and
represents the fastest growing segment in application development today.
Because this is a new market, there is little established brand loyalty and
customers are exploring many new options. It is comprised of a mix of new
and established key vendors. StarBase has entered into agreements with
Symantec, Asymetrix, and Visix to reach customers in this segment.
3) EMERGING WEB DEVELOPMENT - The proliferation of Internet and intranet
websites has created a new market segment for new revision management
solutions. The demand for HTML authoring tools has been growing rapidly
with a host of new and established vendors leading the way. StarBase has
entered into agreements with SoftQuad and Haht Software to reach customers
in this segment. In addition, Corel (VENTURA) is an OEM customer.
4) "WHITE COLLAR" PROFESSIONAL - This is a new revision control segment that
includes word processors, spreadsheets and other productivity applications.
Microsoft introduced limited version control functionality to the products
in Office97 and has therefore created a need for the same or more
functionality from the competition. In this segment, Corel (WordPerfect
Office) is an OEM customer.
StarBase's management believes that the bundling of Versions 2.0 with the most
popular programmer development products and authoring tools is unique in the
industry and provides the foundation for Versions 2.0 becoming the standard
brand for revision management and version control.
OEM SALES OF STARTEAM
The Company is pursuing StarTeam licensing agreements with SCM companies, such
as Intersolv, and with test tool companies. Intersolv, Inc., whose PVCS product
is commonly accepted as the SCM industry standard for PC networks, has made both
an investment in StarBase and entered into a cross licensing agreement. The
cross licensing agreement licenses PVCS to StarBase for use in its products
and provides rights for Intersolv, Inc. to utilize certain StarBase technology
in its products. StarBase and Intersolv, Inc. are currently negotiating a
potential expansion of the existing agreement. It is management's belief that
it would be beneficial for the Company to secure an OEM relationship with
Intersolv (or another established leader) to market it's soon to be released
enterprise level product. In doing so, the Company can leverage off of the
market strength of it's Versions bundling partners at the entry level, and of
an industry leader at the high end of the market, while selling to the rest of
the market through it's direct and channel sales organizations. There can be no
assurance, however, that Intersolv, or any other company, will enter into
such an agreement with StarBase.
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PROGRESS SALES
StarBase Corporation currently has a nonexclusive contract with Progress that
allows Progress to resell the Roundtable Total Software Management System. This
current contract is due to expire in July 1997. The companies are currently
negotiating a revised contract to extend the relationship. Although it is likely
that both companies will sell the Roundtable Total Software Management System,
there can be no assurance that such a contract extension will be agreed upon.
CORPORATE SALES
The Company has established a corporate sales organization that is predominately
telephone based to respond to customer leads and to proactively sell product to
corporate end-user customers. Leads are generated through a number of marketing
programs, including focused advertisements, direct mail campaigns, trade show
participation, seminars, and press relations. Since the introduction of StarTeam
in January 1996, the corporate sales organization has sold over 4,000 copies of
StarTeam to over 400 corporate customers, including consulting organizations
(Coopers and Lybrand, KPMG Peat Marwick, Anderson Consulting), manufacturers
(Westinghouse, Eaton, GE), software companies (McAfee, Lotus), electronics
companies (Intel, Fujitsu), financial institutions (Deutche Bank, Schwab), and
the federal government (IRS, Air Force, Navy). Although many of the StarTeam 2
sales were made to address the needs of departmental groups, it is management's
belief that the current installed base will be of significant benefit in selling
StarTeam 3, which addresses enterprise level needs.
DOMESTIC CHANNEL SALES
The domestic channel organization through fiscal 1997 focused primarily on
specialty catalogue sales companies, such as Programmers Paradise, Programmers
SuperShop, and Provantage, with marginal success. Only a small portion of the
fiscal 1997 sales came from this channel. In fiscal 1998, the Company has begun
a recruitment program for VAR's. The StarPartner Program is intended to expand
the channel to include SCM consultants, value added resellers, web site
developers, integrators, and traditional computer product retailers. The Company
plans to route the majority of the business generated by these new resellers
through two-step distribution. The Company currently has a two-step distribution
agreement with DistribuPro.
INTERNATIONAL SALES
In fiscal 1997, StarBase Corporation signed distribution agreements with several
new international distributors to distribute, market, and support StarBase
products to end-users, corporations, resellers, VARs and mail-order catalogs in
their respective territories. The agreements mark the beginning of
representation of StarBase products in each respective country. International
distributors include Contemporary Software in the United Kingdom and Ireland;
NSAB (Nordic Software) in Sweden, Norway, Denmark and Iceland; Boss Information
in Finland, Estonia, Lithuania, Latvia and Russia; Software Technology Resources
in France; Questar in Italy; and LoadPlan in Australia and New Zealand.
Each distributor actively markets StarBase products in a number of ways
including telesales, direct mail, trade shows and exhibits, magazine and catalog
advertising, public relations and the Internet. In addition, each provides
comprehensive technical support, consulting and training services.
PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary software
technology. The Company does not currently have any patents and relies upon a
combination of copyright, trademark and trade secret laws, as well as license,
proprietary rights, non-disclosure and other contractual agreements to protect
the proprietary rights to its technology. The Company generally enters into
proprietary information and inventions agreements with its employees. The
Company also routinely limits access to its software, documentation and other
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proprietary information. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology. In addition, such
protections may not preclude competitors from developing products with features
similar to the Company's products. Although the Company believes its products
will not infringe upon the proprietary rights of third parties, there can be no
assurance that infringement claims will not be brought against the Company in
the future. Any such claims could result in costly litigation or have a material
adverse effect on the Company's business, operating results and financial
condition.
EMPLOYEES
As of March 31, 1997, the Company had 46 full-time employees. Of these
employees, 25 were in Research and Development, seven were in Administration and
14 were in Sales and Marketing. The Company's workforce is not unionized and
management believes that the Company's relations with its employees is good.
FORWARD LOOKING STATEMENTS
Certain information contained in this Annual Report on Form 10-KSB, including,
without limitation, statements made under this Part I, Item 1, "Business" which
are not historical facts, may include forward looking statements. In reviewing
such information, it should be kept in mind that the Company's actual results
may differ materially from those set forth in such forward looking statements.
The Company assumes no obligation to update these forward looking statements to
reflect actual results or changes in factors or assumptions affecting such
forward looking statements.
RISK FACTORS
EARLY STAGE OF DEVELOPMENT; HISTORY OF LOSSES
The Company is a development stage company and is subject to all of the risks
inherent in a development stage company. There can be no assurance that the
Company's product development efforts will result in a commercially viable
business or that the Company will be able to generate significant revenues or
operate profitably. Since its inception, the Company has had a history of losses
and as of March 31, 1997, the Company had a consolidated accumulated deficit of
$23,947,000. To date a substantial portion of the Company's revenues have been
derived from the activities of its Consulting Division, which was discontinued
in fiscal 1996, and from sales of products that have been de-emphasized. The
Company anticipates incurring additional losses until it can successfully market
and distribute its existing ITE products, as well as successfully develop,
market, and distribute its planned future products. The development of software
products is difficult and time consuming, requiring the coordinated
participation of various technical and marketing personnel and, at times,
independent third-party suppliers. This development process often encounters
unanticipated delays and expenses. The likelihood of the success of the
Company's business must be considered in light of the problems, expenses,
difficulties, complications, and unforeseen delays frequently encountered in
connection with the development of new technologies.
PRODUCT LINES UNDER DEVELOPMENT; DEVELOPING MARKET
The Company's success will be dependent in large part upon its ability to market
its StarTeam 2 and 3 product lines and to quickly introduce and market
additional products. While the Company is in various stages of developing
additional products, there can be no assurance that such additional products
will be completed or successfully marketed. User preferences for software
products are difficult to predict and, historically, only a limited number of
software products have achieved sustained market acceptance. Demand for software
products is subject to a number of variables, including user preferences and the
size of the installed base of personal computers capable of running the
products. Further, the market for ITE software products is evolving. There can
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be no assurance that the products introduced by the Company will achieve
acceptance, or that other software vendors will not develop and market products
which render the Company's products obsolete or less competitive. Failure to
obtain significant customer satisfaction or market share for the Company's
products would have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Company's executive offices consist of approximately 12,000 square feet in
an office building leased by the Company, in Irvine, California. The office
lease expires in February 1998. The property and equipment of the Company
consist principally of office furniture, equipment and personal computers.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 1997, the Company is a party to the following lawsuit:
On January 5, 1995, the Company obtained a judgment for non-payment on a
promissory note against Dr. James Parker in Los Angeles Superior Court, case #BC
090 584, entitled StarBase Corporation vs. James Parker, in the amount of
$311,822.88, together with interest of $86.62 per day until the judgment has
been paid. Collection efforts were temporarily halted by a stay order in U.S.
Bankruptcy case #LA 94-1079ER; however, the stay order has now expired and
collection efforts are in process. As of March 31, 1997, a total of $40,000 has
been collected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
The Company's Common Stock is traded on the NASDAQ SmallCap Marketthe under the
symbol "SBAS." Prior to the Company's listing on the NASDAQ SmallCap Market
on September 4, 1996, the Company's common stock had traded on the NASDAQ's Over
The Counter Electronic Bulletin Board, which commenced January 5, 1996, and
the Vancouver Stock Exchange ("VSE"). The following table sets out the high and
low sales prices of the Company's Common Stock for each quarter within the last
two fiscal years. For fiscal 1997, quotation are bid and ask prices and may not
necessarily reflect actual transactions. For fiscal 1996, quotations are
presented in Canadian dollars, as reflected on the VSE, and converted to US
dollars for comparison purposes.
US$ CDN$ US$ CDN$
DATE HIGH HIGH LOW LOW
FISCAL YEAR 1997
Quarter Ended March 31, 1997 $ 2.81 $ 1.25
Quarter Ended December 31, 1996 4.56 1.47
Quarter Ended September 30, 1996 6.50 2.50
Quarter Ended June 30, 1996 10.50 3.25
FISCAL YEAR 1996
Quarter Ended March 31, 1996 $ 4.76 $ 6.50 $ 2.57 $ 3.50
Quarter Ended December 31, 1995 3.55 4.85 2.01 2.75
Quarter Ended September 30, 1995 3.72 5.00 1.60 2.15
Quarter Ended June 30, 1995 6.10 8.38 2.25 3.10
As of March 31, 1997, based on information received from the Company's transfer
agent on the Company's common stock, the number of shareholders of record were
584, who the Company believes, held for in excess of 4,000 beneficial holders.
Of the Company's Series C preferred stock, there was one shareholder of record.
The Company has never declared a cash dividend on its Common Stock or Preferred
Stock. The Board of Directors presently intends to retain all earnings for use
in the Company's business and therefore does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. Payment of dividends on
Common Stock, if any, would be subject to the discretion of the Board of
Directors, which may consider factors such as the Company's results of
operations, financial condition, capital needs and acquisition strategy, among
others. In addition, under the corporate law of Delaware, the Company is
prohibited from paying dividends except out of the Company's surplus (retained
earnings) or, if there is no surplus, out of the Company's net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
At March 31, 1997, the Company's balance sheet reflected an accumulated deficit
of approximately $23,947,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1997 COMPARED TO 1996
Total revenue increased $48,000 or 5%, to $1,039,000, from $991,000 in fiscal
1996. This increase was due principally to increased product revenue and
license/royalty revenue, $342,000 or 134%, and $217,000 or 97%, respectively,
offset by the decrease in consulting revenue to none from $500,000 in fiscal
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1996, due to the discontinuation of the Company's Consulting Division in fiscal
1996. The elimination of the Consulting division was based on the Company's
decision to focus entirely on the development and marketing of software to
increase team productivity, rather than individual productivity. The Company was
reorganized in fiscal 1996 to reflect this change in product and market focus.
The increase in product revenue was favorably affected by the release of the
StarTeam 2.0 family of products in August 1996, which utilizes client/server
technology and allows mobile team members access to projects remotely through
the Internet, intranet, WAN or dial-up connectivity. License and royalty revenue
was favorably affected by the increase in license fee and royalty revenue
generated from the Company's Roundtable product.
Product revenue to date has been limited by a number of factors, including the
introductory cycle for new software development tools such as StarTeam. StarTeam
1.0 was introduced in January 1996, followed by StarTeam 2.0 in late August of
1996. Sufficient working capital was not available to support a major StarTeam
1.0 marketing and sales program. Therefore, the StarTeam 1.0 marketing strategy
was to sell the product to strategic customers, who, with a successful initial
experience, had the potential to generate significant additional business. In
June 1996, sufficient working capital was raised through a private placement to
support a major marketing and sales program for StarTeam 2.0, which began
shipping in the final week of August 1996. In addition, Versions 2.0 sales
commenced during the final week of December 1996.
StarTeam is a new software product line whose target market consists of
technical software professionals (developers). Marketing to technical
professionals is an educational process. In the typical sales cycle, the product
is purchased as a pilot test program, installed and evaluated on a small scale
(3-10 seats), and, if the evaluation is satisfactory, implemented on a larger
project which may involve 10 to 25 developers. Successful implementation in the
project may lead to broader acceptance within the organization. The time span
from an initial test order to implementation throughout the customer's
organization varies depending on the organization and the level of
standardization within the individual company, but in very large companies, may
take 6 months to a year.
Gross profit increased 230% to $943,000 in fiscal 1997 from $285,000 in fiscal
1996, primarily due to the elimination of the Consulting Division during fiscal
1996, which represented approximately 88% or $624,000 of the prior year's cost
of sales. In fiscal 1996, the Company's Consulting Division incurred a negative
gross margin as a result of losses on certain fixed-price contracts, combined
with the cost of discontinuing the division. Product cost of sales, as a
percentage of revenues, decreased from the prior year due to the write-down of
obsolete inventory during fiscal 1996. Gross profit, as a percentage of
revenues, increased to 91% from 29% in fiscal 1996.
Cost of products consists primarily of manufacturing and related costs such as
media, documentation, product assembly and third party royalties. The Company
outsources manufacturing for all software products, except Roundtable.
1997 1996
-------- --------
Cost of services as a percentage of service revenues - 125%
Cost of products as a percentage of product revenues 16% 32%
Operating expenses increased by approximately $616,000 or 10% from fiscal 1996.
This increase was primarily due to increased product marketing and sales efforts
related to the market introduction of the StarTeam 2.0 family of products (the
ITE product line) and the release of Versions 2.0, offset by the decrease in
research and development expenses. During fiscal 1996, the Company experienced a
severe cash shortage, which resulted in a dramatic cut-back in operating
expenses, including personnel reductions. The Company commenced fiscal 1996 with
approximately 86 employees and ended the year with 32 employees. In early fiscal
1997, when additional working capital became available, the Company focused on
strengthening its sales and marketing efforts, which included filling key
marketing and sales positions as well as increased promotional activities. At
March 31, 1997, the Company had 46 employees, the increases being in sales &
20
<PAGE>
marketing and research & development. During fiscal 1997, the Company increased
its sales & marketing staff from eight at the end of fiscal 1996, to 14 at March
31, 1997. Research & development staff increased from 16 at the end of fiscal
1996 to 25 at March 31, 1997.
RESEARCH AND DEVELOPMENT EXPENSES
Although StarBase continues to make significant investments in research
and development intended to bring its products to market and to support
existing products, overall research and development expenses have been reduced.
Research & development expenses decreased $845,000 from the prior year. During
fiscal 1997, the Company changed the way it allocated certain insurance and
facility expenses. In prior yeas, a portion of these expenses were allocated to
research & development from selling, general & administrative expenses.
Approximately $486,000 of the decrease in the division's overall expenses was
result of this change. Compensation related expenses also decreased by
approximately $436,000, mainly due to a lower average number of employees during
fiscal 1997 as compare to fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the year ended March 31, 1997, selling, general & administrative expenses
increased approximately $1.5 million over the prior year. This was chiefly
due to the increase in promotional activities, $674,000; the increase in
sales and marketing personnel coupled with commissions paid on increased
product sales, $342,000; combined with the affect of the change in allocating
certain facilities expenses, $486,000. Sales & marketing expenses include
advertising, trade shows and other promotional expenses, compensation an
sales commissions, public relations, travel, and certain facilities expenses.
INCOME TAXES
The Company incurred minimal income taxes in the last two fiscal years due to
its cumulative losses. The Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") in fiscal 1994.
SFAS 109 requires that deferred taxes be calculated using an asset and liability
approach at currently enacted tax rates. SFAS 109 also requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets. Upon adoption of SFAS 109, the Company did not record a
net benefit from income taxes resulting from net operating loss carryforwards; a
valuation allowance of equal amount was provided for the deferred tax asset
which would have been otherwise recorded.
INFLATION
Management believes that inflation has not had a material impact on the
Company's results of operations.
FACTORS THAT MAY EFFECT FUTURE RESULTS
SALES STRATEGY
The Company has established a multi-channel sales organization that includes OEM
sales, a direct sales group (Corporate Sales), domestic channel sales and an
international distribution network. In doing so, the Company can leverage off of
the market strength of partners at both the entry level and high end of the
market, while selling to the rest of the market through it's direct and channel
sales organizations. (See Part I - "Marketing and Sales")
21
<PAGE>
OEM SALES OF VERSIONS
A major element of the OEM program is bundling Versions 2.0 with industry
leading products. Management believes that this strategy will present broad
market exposure and revenue opportunities due to the success and distribution of
the bundling partners' products, as well as the complementary relationship of
Versions 2.0 with such products. There are three primary reasons for this:
1) More than 1 million software developers are expected to receive Versions 2.0
over the next 18 months, providing up to $2 million in revenue potential for
every 1% who upgrade to the StarTeam product family;
2) Such exposure creates the potential for Versions 2.0 to become a standard for
revision management and version control;
3) Marketing materials, included with the bundled products, and other
activities are expected to create significant exposure for StarBase
products.
There can be no assurance, however, of increased revenues as a result of these
bundling agreements.
VERSIONS 2.0 TARGET MARKETS
The Company has targeted four markets for the bundling strategy and as of May
31, 1997, has agreements with companies in each of these market segments:
1) Traditional Application Development - Companies include Oracle, Progress
Aonix and Metrowerks.
2) Emerging Java Development - Companies include Symantec, Asymetrix,and
Visix.
3) Emerging Web Development - Companies include SoftQuad and Haht Software
In addition, Corel (VENTURA) is an OEM customer.
4) "White Collar" Professional - Corel(WordPerfect Office)is an OEM customer.
Management believes that the bundling of Versions 2.0 with the most popular
programmer development products and authoring tools is unique in the industry
and provides the foundation for Versions 2.0 becoming the standard brand for
revision management and version control.
OEM SALES OF STARTEAM
Management believes that it would be beneficial to secure an OEM relationship
with an established leader in the SCM or test tool market to support sales of
the StarTeam product family. The Company presently has a cross licensing
agreement with Intersolv and both companies are negotiating a potential
extension of that contract. The Company is also discussing StarTeam licensing
agreements with other SCM and test tool companies. There can be no assurance,
however, that any company will enter into such an agreement with StarBase.
PROGRESS SALES
StarBase Corporation currently has a nonexclusive contract with Progress that
allows Progress to resell the Roundtable Total Software Management System. This
current contract is due to expire in July 1997. The companies are currently
negotiating a revised contract to extend the relationship.
CORPORATE SALES
The Company created a corporate sales organization to sell directly to corporate
end-user customers. Leads are generated through a number of marketing programs,
including focused advertisements, direct mail campaigns, trade show
participation, seminars and press relations. Since the introduction of StarTeam
in January 1996, the corporate sales organization has sold over 4,000 copies of
StarTeam to over 400 customers. Management believes that the current installed
base, consisting mostly of departmental groups, will be of significant benefit
in selling StarTeam 3.0, which addresses enterprise level needs.
22
<PAGE>
DOMESTIC CHANNEL SALES
In addition to specialty catalogue companies, which have provided marginal
success, the Company has begun a recruitment program for VAR's. The StarPartner
Program is intended to expand the channel to include SCM consultants, value
added resellers, web site developers, integrators and traditional computer
product retailers. In addition, the Company currently has a two-step
distribution agreement with Distribupro.
INTERNATIONAL SALES
In fiscal 1997, StarBase Corporation signed distribution agreements, covering
over 15 countries, with several new international distributors, to distribute,
market and support StarBase products to end-users, corporations, resellers,
VARs and mail-order catalogs. Each distributor actively markets StarBase
products in a number of ways including telesales, direct mail, trade shows and
exhibits, magazine and catalog advertising, public relations and the Internet.
In addition, each provides comprehensive technical support, consulting and
training services.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents on hand as of year-end totaled $2.7 million in fiscal
1997 and $1.3 million in fiscal 1996. At March 31, 1997 the Company had positive
working capital of $2.4 million, compared to negative working capital of $0.5
million at March 31, 1996.
Proceeds from the issuance of equity securities represent the primary source of
funds for meeting the Company's requirements for operations. During fiscal 1997,
the Company generated $8.1 million (net) in cash from financing activities,
including $8.2 million (net) from the sale of additional equity. The Company
completed a private placement of common stock for net proceeds of approximately
$5.4 million, a private placement of preferred stock for net proceeds of
approximately $0.9 million, warrant exercises for $1.6 million, and option
exercises for $0.3 million. Offsetting the proceeds from financings, the Company
made payments on financing related costs of $1.0 million and on promissory notes
of approximately $0.1 million.
During fiscal 1996, the Company received $3.9 million from the proceeds of
private placements of equity. The Company also received promissory notes
totaling $1.1 million in fiscal 1996, of which $0.9 million was subsequently
converted into equity.
During fiscal 1997, the Company used $6.5 million for operations, an increase of
approximately $1.6 million over the amount used for operations in the prior
year. The increase was primarily due to the pay down of accounts payable, which
had accumulated in the prior year due to a cash shortage. Capital expenditures
totaled $0.1 million, representing purchases primarily of computer equipment and
furniture. Capital expenditures in fiscal 1996 were not significant.
StarBase's distributors and direct purchasers are generally permitted a 30-day
right of return for software purchased. The Company may, on occasion, grant more
liberal rights of return to its distributors, particularly where new products or
major upgrades are introduced and sales do not meet expectations. Although such
returns are generally exchanged for other products or credited against future
orders, StarBase may be required to accept major product returns for cash or a
credit against accounts receivable. The Company has reserved approximately
$65,000 at March 31, 1997 for future returns and other collection issues.
The Company is currently in the process of negotiating approximately $2.5
million of financing and anticipates raising an additional $2.5 million of
financing in the third quarter of fiscal 1998, through a combination of debt and
equity securities. The Company believes that proceeds from the sale of debt and
equity securities during fiscal 1998, combined with operating revenues, will be
23
<PAGE>
sufficient to allow the Company to conduct its operations during the fiscal year
that ends March 31, 1998. Continuing operations thereafter will depend on cash
flow from operations or the Company's ability to raise additional funds through
equity, debt, or other financing. There can be no assurance, however, that such
funds will be available.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 establishes standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. It also requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Diluted EPS is computed similarly to fully diluted
EPS pursuant to Accounting Principles Board Opinion No. 15. This statement is
effective for the Company beginning with its quarterly period ended December 31,
1997, earlier adoption is not permitted. Since the Company is considered a
simple capital structure for reporting EPS, the adoption of this principle is
not expected to have a material impact on reported EPS.
24
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Consolidated Financial Statements of StarBase Corporation
Report of Independent Accountants 26
Consolidated Balance Sheets at March 31, 1997 and 1996 27
Consolidated Statements of Operations for the years ended
March 31, 1997 and 1996 and for the period from
September 6, 1991 (inception) to March 31, 1997 28
Consolidated Statements of Cash Flows for the years ended
March 31, 1997 and 1996 and for the period from
September 6, 1991 (inception) to March 31, 1997 29
Consolidated Statements of Shareholders' Equity for the
years ended March 31,1997, 1996, 1995, 1994,
and 1993, and for the period from September 6, 1991
(inception) to March 31, 1992 30
Notes to Consolidated Financial Statements 31
25
<PAGE>
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 7 present fairly, in all material respects, the financial
position of StarBase Corporation (a development stage company) and its
subsidiaries at March 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the two years in the period ended March 31, 1997
and for the period from September 6, 1991 (inception) to March 31, 1997, 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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The conslidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of calculating loss per common share in the year ended March
31, 1997 to exclude escrow shares. The consolidated financial statements for the
year ended March 31, 1996 have been restated to reflect retroactive application
of the change.
PRICE WATERHOUSE LLP
Costa Mesa, California
June 20, 1997
26
<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,
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,722 $ 1,252
Accounts receivable, net of allowances of $65 (1997) and $44 (1996) 118 3
Other receivables 83 10
Prepaid expenses 312 137
Inventories 34 14
--------------- ---------------
Total current assets 3,269 1,416
Property and equipment, net 524 660
Note receivable from officer 76 76
Other non-current assets 7 21
--------------- ---------------
Total assets $ 3,876 $ 2,173
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 885 $ 1,375
Due to director - 280
Other current liabilities - 111
Current portion of notes payable and capitalized lease obligations - 186
--------------- ---------------
Total current liabilities 885 1,952
Capitalized lease obligations, less current portion - 153
--------------- ---------------
Total liabilities 885 2,105
--------------- ---------------
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, $.01 par value; $75 (1997) and $4,456 (1996) liquidation
value; authorized 10,000,000; issued and outstanding 25,000 (1997) and
2,227,946 (1996) - 22
Common stock, $.01 par value; authorized 50,000,000; issued 13,319,487
(1997) and 7,841,812 (1996); outstanding 13,319,487 (1997) and
7,835,551 (1996) 133 78
Common stock pending authorization - 27
Additional paid-in capital 26,805 18,185
Treasury stock, 0 commons shares (1997) and 6,261 common shares (1996) - (21)
Deficit accumulated during development stage (23,947) (18,223)
--------------- ---------------
Total shareholders' equity 2,991 68
--------------- ---------------
Total liabilities and shareholders' equity $ 3,876 $ 2,173
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
27
<PAGE>
STARBASE CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Sept. 6, 1991
For the years ended March 31, through
------------------------------- March 31, 1997
1997 1996 (cumulative)
--------------- --------------- -----------------
<S> <C> <C> <C>
Revenues:
Consulting services $ - $ 500 $ 4,430
Consulting services--related party - - 281
Products 598 256 1,958
License and royalty 441 224 678
Other - 11 64
--------------- --------------- -----------------
Total revenues 1,039 991 7,411
Cost of Sales:
Consulting services - 624 4,716
Consulting services--related party - - 289
Products, licenses and other 96 82 427
--------------- --------------- -----------------
Total cost of sales 96 706 5,432
--------------- --------------- -----------------
Gross margin 943 285 1,979
Operating Expenses:
Research and development 1,621 2,466 9,056
Selling, general and administrative 5,220 3,759 17,208
--------------- --------------- ----------------
Total operating expenses 6,841 6,225 26,264
--------------- --------------- ----------------
Operating loss (5,898) (5,940) (24,285)
Interest income 228 42 389
Other income and expense (30) 6 (19)
--------------- --------------- ----------------
Total interest and other income
and expense 198 48 370
--------------- --------------- ----------------
Loss before income taxes (5,700) (5,892) (23,915)
Provision for income taxes 3 1 11
--------------- --------------- ----------------
Net loss $ (5,703) $ (5,893) $ (23,926)
=============== =============== ================
Per share data:
Loss per common share $ (0.52) $ (1.01)
=============== ===============
Weighted average number of
common shares outstanding 10,938 5,825
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
28
<PAGE>
STARBASE CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Sept. 6, 1991
Through
For the years ended March 31, March 31, 1997
------------------------------- ---------------
1997 1996 (cumulative)
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (5,703) $ (5,893) $ (23,926)
Adjustments to reconcile net loss to
netcash used in operating activities:
Depreciation and amortization 236 253 804
Loss on disposition of property, equipment
and capital lease 25 74 99
Provision for doubtful accounts and sales
returns 97 130 227
Gain on debt restructuring - (138) (138)
Recognition of deferred income (135) (235) (370)
Write-down of assets - 50 50
Other adjustments 12 75 87
Changes in assets and liabilities,
excluding the effect of non-cash
transactions:
Accounts receivable (212) 593 (344)
Other receivables (73) - (154)
Inventories (20) 22 (34)
Prepaid expenses (112) (15) (263)
Other assets 10 17 (31)
Accounts payable and accrued liabilities (631) 118 1,474
--------------- -------------- ---------------
Net cash used in operating activities (6,506) (4,949) (22,519)
Cash Flows from Investing Activities:
Proceeds from disposition of property and
equipment 3 4 7
Capital expenditures (124) (31) (1,369)
--------------- -------------- ---------------
Net cash used in investing activities (121) (27) (1,362)
Cash Flows from Financing Activities:
Proceeds from reverse acquisition - - 1,402
Proceeds from sale of preferred stock 1,021 3,563 7,294
Proceeds from issuance of common stock:
From stock purchase plan - - 10
From public offering - - 4,063
From private placements 6,300 304 10,698
From exercise of options 282 103 548
From exercise of warrants 1,630 - 2,654
Proceeds from convertible subordinated notes - - 381
Proceeds from promissory notes - 1,083 1,083
Payments on promissory notes (111) (163) (274)
Borrowings on line of credit - - 664
Payments on line of credit - (664) (664)
Payment of financing related costs (1,025) (302) (1,430)
Payments on capitalized lease obligations - (8) (40)
Loans from officers and directors - 365 365
Repayment of loans from officers and directors - (75) (75)
Repayment of (disbursement of) loan to officer - 50 (76)
------------- --------------- ---------------
Net cash provided from financing activities 8,097 4,256 26,603
------------- --------------- ---------------
Net increase (decrease) in cash 1,470 (720) 2,722
Cash and cash equivalents, beginning of period 1,252 1,972 -
------------- --------------- ---------------
Cash and cash equivalents, end of period $ 2,722 $ 1,252 $ 2,722
============= =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
29
<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
share interest - - - - - (1)
Net loss - - - - - -
------------ ----------- ----------- ------------- ------------ ------------
Balance at March 31, 1996 2,228 22 7,842 78 27 18,185
------------ ----------- ----------- ------------- ------------ ------------
Preferred stock conversion
to common (2,568) (25) 2,656 26 - (1)
Preferred stock issued 365 3 - - - 975
Common stock issued:
Private placements - - 2,100 21 - 5,468
Exercise of options - - 127 1 - 280
Exercise of warrants - - 441 5 - 1,625
Payment of liabilities - - 159 2 (27) 277
Costs of commons stock
registration - - - - - (56)
Options for services
provided - - - - - 52
Retirement of 6,261
treasury shares - - (6) - - -
Net loss - - - - - -
============ =========== =========== ============= ============ ============
Balance at March 31, 1997 25 $ - 13,319 $ 133 - $ 26,805
============ =========== =========== ============= ============ ============
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
----------- ------------ ------------ -------------
Preferred stock conversion
to common - - - -
Preferred stock issued - - - 978
Common stock issued:
Private placements - - - 5,489
Exercise of options - - - 281
Exercise of warrants - - - 1,630
Payment of liabilities - - - 252
Costs of common stock
registration - - - (56)
Options for services
provided - - - 52
Retirement of 6,261
treasury shares (21) - 21 -
Net loss (5,703) - - (5,703)
=========== ============ ============ =============
Balance at March 31, 1997 $(23,947) $ - $ - $ 2,991
=========== ============ ============ =============
The accompanying notes are an integral partof the consolidated financial statements.
</TABLE>
30
<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 fiscal 1994, however, the Company determined 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of cash and cash equivalents;
accounts, notes and other receivables; accounts payable and accrued liabilities;
long-term debt and capital leases. The carrying amount of the Company's
long-term debt approximates fair market value based on prevailing market rates.
The Company's other financial instruments generally approximate their fair
values at March 31, 1997 and 1996 based on the short-term nature of these
instruments.
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.
REPORTING CURRENCY
The accompanying financial statements are reported in the currency of the United
States of America, except for certain equity transactions disclosed in these
Notes to the Consolidated Financial Statements which are denominated in Canadian
dollars and are indicated as CDN$. The exchange reate for the Canadian dollar
in effect at March 31, 1997 was approximately US$0.73 to CDN$1.00.
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.
31
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121 establishes accounting
standards for the impairment of long-lived assets to be reviewed whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Under the provisions of SFAS 121, the Company reviews the
recoverability of long-lived assets and intangible assets by comparing cash
flows on an undiscounted basis to the net book value of the assets. In the event
the projected undiscounted cash flows are less than the net book value of the
assets, the carrying values of the assets are written down to their fair value,
less cost to sell. In addition, SFAS 121 requires that assets to be disposed of
be measured at the lower of cost or fair value, less cost to sell. Adopting SFAS
121 had no effect on the Company's financial statements.
REVENUE RECOGNITION
Software revenue is recognized upon shipment of the product, provided that
collection is probable. Software maintenance revenue is recorded as deferred
revenue and recognized ratably over the contractual maintenance period,
generally twelve months. Consulting revenue is recognized ratably as service
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.
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, which are generally not collateralized, and notes receivable.
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.
One customer represented 43% of total revenue for the year ended March 31, 1997;
two customers represented 23% and 20% of total revenue for the year ended March
31, 1996. At March 31, 1997 no one customer comprised greater than 8% of
outstanding accounts receivable, net of allowances, and one account comprised
54% of Other Receivables. At March 31, 1996, the accounts receivable balance was
not significant.
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.
32
<PAGE>
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.
LOSS PER COMMON SHARE
Loss per common share is calculated by dividing net loss by the weighted average
shares of common stock outstanding excluding outstanding common shares held in
escrow (the "Escrow Shares"), Notes 3 and 6. Common stock equivalents are
considered anti-dilutive and are excluded from the calculation.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 establishes standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. It also requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Diluted EPS is computed similarly to fully diluted
EPS pursuant to Accounting Principles Board Opinion No. 15. This statement is
effective for the Company beginning with its quarterly period ended December 31,
1997, earlier adoption is not permitted. Since the Company is considered a
simple capital structure for reporting EPS, the adoption of this principle is
not expected to have a material impact on reported EPS.
2. LIQUIDITY
Management projects that the Company will use approximately $4.8 million for
operating activities during the next fiscal year. Based on these projections,
the Company's cash position is insufficient for the Company to maintain its
current level of operating activities through the end of fiscal 1998. These
factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern. The Company is currently in the process of
negotiating approximately $2.5 million of financing through the private
placement of convertible debentures and/or stock. In addition, the Company
anticipates raising an additional $2.5 million from the private placement of
common and preferred stock during the third quarter of fiscal 1998. There can be
no assurance that the Company will be successful in either such attempt to
obtain additional financing.
3. RESTATEMENT OF LOSS PER SHARE
During the year ended March 31, 1997, the Company changed its method of
calculating loss per common share to exclude the 1,418,638 outstanding common
shares held in escrow, which are considereed contingent shares. In prior years,
the shares held in escrow were included in the calculation of loss per common
share as management believed they would be able to have the shares automatically
released from escrow by amending the agreement. As of march 31, 1997, the
agreement amendment is pending the approval of regulatory authorities, thus
these are considered contingent shares should not be included in the calculation
of losses per common share.
33
<PAGE>
The effects of the above change applied retroactively to the year ended March
31, 1996 are as follows:
Weighted Average
Loss per common number of common
share shares outstanding
------------------- -------------------
As previously reported $ (0.81) 7,244
Effect of retroactive change (0.20) (1,419)
=================== ===================
As adjusted $ (1.01) 5,825
=================== ===================
4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
(In thousands) March 31,
------------------------------------
1997 1996
------------------ -----------------
PROPERTY AND EQUIPMENT
Computer hardware $ 888 869
Furniture and fixtures 164 125
Computer software 132 115
Leasehold improvements 29 41
------------------ -----------------
1,213 1,150
Less accumulated depreciation
and amortization (689) (490)
------------------ -----------------
$ 524 $ 660
================== =================
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Trade accounts payable $ 431 910
Accrued professional fees 179 135
Accrued wages and bonuses 139 70
Other accrued expenses 136 260
------------------ -----------------
$ 885 1,375
================== =================
ACCOUNTS RECEIVABLE
Trade accounts receivable $ 183 47
Less allowance for doubtful accounts (65) (44)
------------------ -----------------
$ 118 3
================== =================
5. 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 minimum required for
state taxes. At March 31, 1997, the Company had net operating loss carryforwards
of approximately $23.4 million and $11.6 million for federal and state income
tax purposes, respectively, expiring in varying amounts through the year 2012
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.
34
<PAGE>
Deferred tax assets (liabilities) consist of the following:
(In thousands) March 31,
-------------------------
1997 1996
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 9,285 7,004
Accounts and notes receivable allowances 26 18
Accrued expenses 14 176
Deferred income 41 -
Deferred tax asset valuation allowance (9,366) (7,198)
------------ ------------
- -
Deferred tax liabilities - -
------------ ------------
Net deferred tax assets (liabilities): $ - -
============ ============
6. 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 have been designated as Series B preferred stock, of which no
shares are issued and outstanding at March 31, 1997, and 366,666 shares have
been designated as Series C preferred stock, of which 25,000 shares are
outstanding at March 31, 1997.
On May 13, 1996, a private placement of common stock was completed. In this
private placement, 2,099,832 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 were exercisable at $2.00 per share through January
31, 1997, which date was subsequently amended to April 30, 1997, and thereafter
exercisable at $2.50 per share through January 31, 1998, after which date the
warrants expire.
As a result of the May 13, 1996 private placement of common stock, the 2,227,946
shares of the Company's Series B preferred stock, issued in a fiscal 1996
private placement, automatically converted into 2,227,946 shares of the
Company's common stock.
In June 1996, the private placement of Series C preferred stock was completed.
In this private placement, 365,496 Units were issued, each Unit consisting of
one share of Series C preferred stock and one non-transferable warrant to
purchase one share of common stock. The warrants were exercisable at $2.00 per
share through January 31, 1997, which date was subsequently amended to April 30,
1997, and thereafter exercisable at $2.50 per share through January 31, 1998,
after which date the warrants expire.
The Series C preferred stock is not redeemable and has a liquidation preference
of $3.00 per share. The holders of the Series C preferred stock are not entitled
to receive any dividends nor, except as otherwise provided by law, are they
entitled to vote upon any matter relating to the business or affairs of the
Corporation or for any other purpose. The holders were also granted certain
registration rights as a part of the private placement. Each share of Series C
preferred stock is convertible, at the option of the holder, at any time into
the Company's common stock, of which the conversion rate will be determined by
dividing $3.00 by the Conversion Price. The Conversion Price shall be the lesser
of (a) $3.00 per share or (b) 80% of the average closing bid price of the common
stock as reported by Bloomberg, L.P. for shares traded in the United States for
the five consecutive trading days preceding the conversion date. At March 31,
1997, 340,496 of the Series C preferred stock had been converted into 428,621
shares of common stock.
PRIVATE PLACEMENTS
In the last two fiscal years, the Company has sold 2,465,328 (1997) and
2,363,946 (1996) Units in private placement transactions. With the exception of
the June 27, 1996 private placement, each such Unit consists of one share of the
35
<PAGE>
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 June 27, 1996 private
placement consisted of one share of the Company's preferred stock, convertible
into shares of the Company's common stock at any time, at the option of the
holder, using a predetermined formula. 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
May 13, 1996 2,099,832 $3.00 2,099,832 $2.00 (C) -
June 27, 1996 365,496 $3.00 365,496 $2.00 (C) -
<FN>
(A) Warrant exercise price in second year is equal to 115% of initial warrant
exercise price.
(B) One year warrant term.
(C) Warrant exercise price after January 31, 1997, subsequently amended to
April 30, 1997, is $2.50 and expires after January 31, 1998.
Finder's fees issued in connection with stock offerings were offset against the
related proceeds.
</FN>
</TABLE>
WARRANTS
Warrant activity for the two years ended March 31, 1997 is as follows:
Warrant Price
Shares Per Share
-------------- --------------------
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
Issued in connection with stock offerings 2,585,328 US$2.00
Exercised (441,383) US$2.00 - 5.67
Expired (260,006) US$5.67, CDN$8.46
================
Outstanding at March 31, 1997 4,833,534
================
36
<PAGE>
CONVERSION OF NOTES PAYABLE
During fiscal 1997, investors converted notes payable with an aggregate face
value of $227,583 into 58,333 and 25,000 shares of the Company's common stock
and Series C preferred stock, respectively. The notes converted into common
stock had a face value of $152,583 and were from three directors. The note
payable converted, by an investor, into Series C preferred stock had a face
value of $75,000 and was converted at a price of $3.00 per Unit. Each Unit
consisted of one share of Series C preferred stock and one warrant to purchase
one share of common stock. The warrants are currently exercisable at $2.00 per
share through April 30, 1997 and $2.50 per share through January 31, 1998, after
which date the warrants expire.
COMMON STOCK PENDING AUTHORIZATION
Common stock pending authorization at March 31, 1996 represented common shares
to be issued in payment for consulting fees to an independent consultant. Such
issuance occurred in September 1996.
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. On November 8, 1996 the treasury shares were
retired.
ESCROW SHARES
At March 31, 1997, 1,418,638 common shares are held in escrow subject to a
performance escrow agreement dated October 15, 1992. These shares will be
released upon the Company's attainment of certain cash flow requirements or
returned to the Company for cancellation on October 21, 2002, whichever occurs
first. The Company is attempting to modify the agreement to result in an
automatic release provision back to the shareholders rather than the Company.
7. 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 made no
contributions in 1997 and 1996.
8. STOCK OPTION PLANS
The Company has stock a option plan that provide for the grant of non-qualified
and incentive stock options to all directors, officers and employees of the
Company. This plan was originally established by the Company's predecessors,
NeuroStar and PNA, and has been amended and restated 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. The weighted-average remaining contractual
life of options outstanding at March 31, 1997 was nine years. A total of
2,833,333 shares of common stock have been authorized for the grant of stock
options.
37
<PAGE>
Stock option activity for the two years ended March 31, 1997 is as follows:
Number Option price
Of Shares per share (US$)
------------- -----------------
Outstanding at March 31, 1995 1,236,835 3.90 - 10.10
Granted 1,900,347 2.21 - 5.80
Lapsed or canceled (1,471,560) 2.21 - 6.09
Exercised (28,172) 3.90
Adjustment for 1 for 3 reverse split (55)
-------------
Outstanding at March 31, 1996 1,637,395 2.21 - 10.10
Granted 1,345,280 1.43 - 4.44
Lapsed or canceled (773,795) 2.21 - 10.10
Exercised (126,838) 2.21 - 2.42
-------------
Outstanding at March 31, 1997 2,082,042 1.43 - 5.46
=============
Exercisable at March 31, 1997 717,803 1.74 - 5.46
=============
ACCOUNTING FOR STOCK-BASED COMPENSATION
Pursuant to SFAS no. 123, "Accounting for Stock-Based Compensation", the Company
is required to disclose the effects on the net (loss) per share data as if the
Company had elected to use the fair value approach to account for all its
employee stock-based compensation plans. Had the compensation cost for the
Company's plan been determined using the fair value method, the compensation
expense would have had the effects of increasing the Company's net (loss) for
the years ended March 31, 1997 and 1996 to the pro forma amounts of $5,946,000
and $6,472,000, respectively, with a corresponding pro forma loss per share of
$0.54 and $1.11, respectively. These pro forma amounts were determined
estimating the fair value of each option on its grant date using the
Black-Scholes option-pricing model. Assumptions of no dividend yield, the
Federal Reserve Board's 5 year treasury constant maturity interest rate for the
month of grant, 5 years expected life and an expected rate of volatility of
45.8% were applied to all grants for each year presented. The weighted-average
fair value at grant date for the options granted during 1997 and 1996 was $1.38
and $1.10 per option, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its office space, under a non-cancelable operating lease
expiring in February 1998, as well as certain of its office equipment. Minimum
rental commitments under lease agreements at March 31, 1998 are as follows:
Non-cancelable
Year ending March 31, Operating Leases
-------------------
(In thousands)
1998 $ 190
1999 20
2000 16
2001 16
2002 16
-------------------
Total payments $ 258
===================
Rent expense totaled $245,000 (1997); $424,000 (1996); $282,000 (1995).
During fiscal 1997, accounts payable and accrued expenses decreased
substantially as a result of cash made available through an equity transaction
during the last quarter of fiscal year 1996, which allowed the Company to begin
paying down its liabilities. As of March 31, 1997, the related past due amounts
have been paid.
38
<PAGE>
10. RELATED PARTIES
During fiscal 1996, 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 agreed to accept restricted shares in repayment,
which were issued September 5, 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, 1997,
the principal and accrued interest amounts were $76,153 and $8,466,
respectively. The loan is evidenced by a promissory note and is secured by
shares of the Company's common stock, which are 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.
The Company paid Mr. Snedegar in the first quarter of fiscal 1997.
On January 11, 1997, the Company entered into consulting agreements with Mr.
Alan M. Davis, former President and CEO, and Mr. Robert W. Leimena, former Chief
Financial Officer of the Company. Amounts paid were $85,000 and $75,000,
respectively.
11. SUPPLEMENTAL CASH FLOWS INFORMATION
Year ended March 31,
------------------------
(IN THOUSANDS) 1997 1996
- --------------
---------- ----------
Interest paid $ 21 $ 39
Income taxes paid 3 1
Non-cash investing and financing transactions:
Conversion of Series A preferred stock to
common stock - 2,710
Conversion of Series B preferred stock to
common stock (Note 6) 22 -
Conversion of Series C preferred stock to
common stock (Note 6) 4 -
Conversion of promissory notes to equity (Note 6) 75 745
Conversion of loans from officers to equity (Note 6) 153 137
Common stock issued as finder's fees 40 39
Retirement of treasury shares (Note 6) 21 21
Reduction in assets through termination of
capital lease - 75
Common stock Issued for services 127 -
Options for services provided 51 -
39
<PAGE>
12. SUBSEQUENT EVENTS
In June 1997, the Company offered, to the holders of the Company's outstanding
warrants, to exchange all the issued and outstanding warrants for shares of the
Company's common stock. Each warrant holder accepting the offer by midnight,
Pacific Standard Time, on June 30, 1997, the expiration date of the offer, will
receive one share of common stock for every three warrants held. The warrants
which remain unexchanged subsequent to the offer expiry date will continue under
the original terms of each warrant.
40
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
41
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as set forth below, the information required by this Item is hereby
incorporated by reference to the Company's definitive proxy statement to be
filed within 120 days after the end of the Company's fiscal year ended March 31,
1997.
The following table sets forth certain information concerning the Company's
directors and executive officers as of March 31, 1997. The members of the Board
of Directors (the "Board") are elected to one year terms and are to serve until
the next annual meeting of stockholders or until their successors are elected
and qualified.
NAME AGE POSITION
--------------------- ---- ------------------------------------------------
William R. Stow III 52 Chief Executive Officer, Chairman of the Board,
Member of Compensation and Stock Option
Committees
Donald R. Farrow 51 President, Chief Operating Officer and Director
Daniel P. Ginns 47 Director and Member of Compensation and Stock
Option Committees
Alan D. Kucheck 45 Vice President, Engineering
Phillip E. Pearce 68 Director and Member of Compensation and
Nominating Committees
Kenneth A. Sexton 42 Director and Member of Audit and Stock Option
Committees
John R. Snedegar 48 Director and Member of Audit and Nominating
Committees
WILLIAM R. STOW III has served as Chief Executive Officer of the Company since
September 1991, exclusive of the period from August 1996 to January 1997. Mr.
Stow also served as President of the Company from September 1991 to August 1996,
exclusive of the period from April 1994 through July 1995. Mr. Stow has served
as a Director of the Company since September 1991, Co-Chairman of the Board from
October 1994 to August 1996 and Chairman of the Board since August 1996. From
February 1986 to October 1991, Mr. Stow held various senior-level positions at
Ashton-Tate Corporation, including Vice President of Advanced Development.
DONALD R. FARROW has served as President of the Company since January 1997 and
Chief Operating Officer and Director of the Company since February 1997. Mr.
Farrow had been Vice President, Sales and Marketing since August 1996; Vice
President, Sales since May 1996; and a consultant to the Company since March
1996. Prior to that, Mr. Farrow had been an independent consultant as well as
being Vice President of Sales and Marketing from December 1993 to December 1994
at CommVision Corporation, a leading provider of server solutions and Regional
Sales Manager from 1987 to 1993 for Novell Corporation, the world leader in
network software.
DANIEL P. GINNS has served as a Director of the Company since January 1997.
Since October 1996, Mr. Ginns has been Chairman of the Board and Chief Executive
Officer of Datametrics Corporation, a reporting company which designs, develops
and manufactures printers and computers. From 1989 to 1996, Mr. Ginns was
President of Belmont Capital, Inc., a management and financial advisory firm.
42
<PAGE>
ALAN D. KUCHECK has served as Vice President, Engineering since January 1995.
From July 1993 to January 1995, Mr. Kucheck served as a Project Director for the
Company. From August 1990 to March 1993, Mr. Kucheck was Manager, Software
Development for IMI, Inc., a software development company. Prior to that time,
Mr. Kucheck held various management positions with several other software
development companies.
PHILLIP E. PEARCE is the owner of Phil Pearce & Associates since 1986. Prior to
that, he was Senior Vice President and a member of the Board of Directors of
E.F. Hutton & Co., from 1971 through 1983, a member of the Board of Governors of
the New York Stock Exchange, and Chairman of the Board of governors of the NASD.
Mr. Pearce is a member of the Board of RX Medical Services Corporation, a
reporting company.
KENNETH A. SEXTON is Vice President, Finance and Administration of Intersolv,
Inc., a leading provider of open client/server solutions. Prior to joining
Intersolv, Inc. in 1991, Mr. Sexton held several senior level positions at Life
Technologies Inc., a biotechnology company, and Coopers & Lybrand, a big six
accounting firm.
JOHN R. SNEDEGAR has served as a Director of the Company since December 1991.
Since May 1990, Mr. Snedegar has served as President, Director and Chief
Executive Officer of United Digital Network Inc., a diversified
telecommunications provider based in Irving, Texas. From March 1981 to May
1992, Mr. Snedegar served as President and Chief Executive Officer of AmeriTel
Management, Inc., currently known as WCT Communications, Inc. Mr. Snedegar
is also a member of the Board of Star Telecommunications, a reporting company.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is hereby incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is hereby incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended March 31, 1997.
43
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (3) EXHIBITS WITH EACH MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR
ARRANGEMENT REQUIRED TO BE FILED IDENTIFIED
See paragraph (c) below.
(B) REPORTS ON FORM 8-K
In a report filed on Form 8-K, dated January 27, 1997, the Company reported a
press release announcing the resignation of certain directors and officers of
the Company effective January 11, 1997; the naming of Mr. Don Farrow, the
Company's Vice President of Sales and Marketing, as President; and the addition
of Daniel Ginns, Chairman and CEO of Datametrics Corporation, to the Board of
Directors.
(C) EXHIBITS
Certain exhibits have been previously filed with the Commission and are
incorporated herein by reference.
<TABLE>
<CAPTION>
Exhibit Ref./
Number Description Of Document Page
- ---------- -------------------------------------------------------------------------------------------- -------
<S> <C> <C>
1.1 Underwriting Agreement between the Company and Dabney/ Resnick, Inc. (F)
3.1 Amended and Restated Certificate of Incorporation of the Company. (B)
3.2 Amended and Restated Bylaws of the Company. (A)
3.3 Certificate of Designation, Series C Preferred Stock. (F)
3.4 Certificate of Amendment of Certificate of Designation, Series C Preferred Stock. (F)
4.1 Investor's Rights Agreement date September 16, 1994 among the Company and
certain investors. (B)
4.2 Registration Rights Agreement dated December 15, 1994. (B)
4.3 Registration Rights Agreement dated December 1995. (E)
4.4 Registration Rights Agreement dated May 1996. (D)
4.5 Registration Rights Agreement dated June 1996. (F)
10.1 Form of Indemnity Agreement for Directors. (A)
10.2 Form of Indemnity Agreement for Officers. (A)
10.3 Performance Share Escrow Agreement, as amended, among the Company, Montreal Trust
Company of Canada as Escrow Agent, and certain of the Company's stockholders. (A)
10.4 Sublease dated December 2, 1993 between McDonnell Douglas Travel Company and
StarBase Corporation, for the Company's Irvine, California facilities. (B)
10.5 1996 Stock Option Plan, as amended. (*) (G)
10.6 Form of Restricted Stock Issuance Agreement. (A)
10.7 Form of Restricted Stock Purchase Agreement. (A)
10.8 Forms of Common Stock Subscription Agreements and Warrants used from time to time
between the Company and certain of its stockholders in connection with certain
equity financings, together with a list of equity investors. (A)
44
<PAGE>
10.9 Forms of Common Stock Subscription Agreement and Warrants used in November 1994
Private Placement. (B)
10.10 Forms of Common Stock Subscription Agreement and Warrants used in March 1995 Private
Placement. (C)
10.11 Regional Prototype Defined Contribution Plan and Trust of the Company. (*) (A)
10.12 Fiscal Agency Agreement between the Company and Canaccord Capital Corporation. (B)
10.13 Form of Agents' Warrant. (B)
10.14 Silicon Valley Bank Warrant dated December 15, 1994. (B)
10.15 Secured Promissory Note dated July 1, 1995 from William R. Stow III. (E)
10.16 Forms of Preferred Stock Subscription Agreements and Warrants used in January 1996
Private Placement, together with a list of equity investors. (E)
10.17 Amendment No. 1 to the Sublease dated December 1, 1994 between McDonnell Douglas
Travel Company and StarBase Corporation, for the Company's Irvine, California
facilities. (E)
10.18 Amendment No. 2 to the Sublease dated September 1, 1995 between McDonnell Douglas
Travel Company and StarBase Corporation, for the Company's Irvine, California
facilities. (E)
10.19 Forms of Common Stock Subscription Agreement and Warrants used in July 1995 Private
Placement, together with a list of equity investors. (E)
10.20 Form of Warrant used in the May 13, 1996 Private Placement. (D)
10.21 Form of Subscription Agreement used in the May 13, 1996 Private Placement. (D)
10.22 Form of Preferred Stock Subscription Agreement and Warrant used in the June 1996
Private Placement, together with a list of equity investors and placement agent. (F)
10.23 Lease dated November 22, 1996 between The Provider Fund and StarBase Corporation,
for the Company's Irvine, California facilities. (H)
23.1 Written consent of Price Waterhouse LLP, Independent Auditors. 47
27 Financial data schedule 48
- -------------------------
<FN>
(A) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2 (file number 33-68228) filed with the
Commission on November 2, 1993.
(B) Incorporated herein by reference to the Company's Registration
Statement on Form 10 (file number 0-25612) filed with the Commission
on February 23, 1995.
(C) Incorporated herein by reference to the Company's Form 10-K (file
number 0-25612) filed with the Commission on July 14, 1995.
(D) Incorporated herein by reference to the Company's Form 8-K (file
number 0-25612) filed with the Commission on May 16, 1996.
(E) Incorporated herein by reference to the Company's Form 10-K, as
amended, (file number 0-25612) filed with the Commission on July 1,
1996.
(F) Incorporated herein by reference to the Company's Form 10-QSB (file
number 0-25612) filed with the Commission on August 14, 1996.
(G) Incorporated herein by reference to the Company's Definitive Proxy
Statement (file number 0-25612) filed with the Commission on July 29,
1996.
(H) Incorporated herein by reference to the Company's Form 10-QSB (file
number 0-25612) filed with the Commission on February 11, 1997.
* Denotes a management contract or compensatory plan or arrangement.
</FN>
45
<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 30th day of June,
1997.
STARBASE CORPORATION
By: /S/ DONALD R. FARROW
-----------------------------------
Donald R. Farrow
President and
Chief Operating Officer
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, in
the capacities and dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William R. Stow III Chairman of the Board, Chief June 30, 1997
- ------------------------------------- Executive Officer, and Director
William R. Stow III (principal executive officer)
/s/ Donald R. Farrow President, Chief Operating Officer, June 30, 1997
- ------------------------------------- and Director
Donald R. Farrow
/s/ Phillip E. Pearce Director June 30, 1997
- -------------------------------------
Phillip E. Pearce
/s/ Daniel P. Ginns Director June 30, 1997
- -------------------------------------
Daniel P. Ginns
/s/ John R. Snedegar Director June 30, 1997
- -------------------------------------
John R. Snedegar
/s/ Kenneth A. Sexton Director June 30, 1997
- -------------------------------------
Kenneth A. Sexton
46
<PAGE>
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement of StarBase Corporation on Form S-8, Registration No. 333-04589, of
our report dated June 20, 1997, appearing on page 26 of this Form 10-KSB.
PRICE WATEHOUSE
Costa Mesa, California
June 30, 1997
47
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTRED FROM
STARBASE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE
YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> 03-31-97
<PERIOD-END> 03-31-97
<CASH> 2,722
<SECURITIES> 0
<RECEIVABLES> 183
<ALLOWANCES> (65)
<INVENTORY> 34
<CURRENT-ASSETS> 3,269
<PP&E> 1,213
<DEPRECIATION> (689)
<TOTAL-ASSETS> 3,876
<CURRENT-LIABILITIES> 885
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 2,858
<TOTAL-LIABILITY-AND-EQUITY> 3,876
<SALES> 658
<TOTAL-REVENUES> 1,039
<CGS> 96
<TOTAL-COSTS> 96
<OTHER-EXPENSES> 6,841
<LOSS-PROVISION> 19
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (5,700)
<INCOME-TAX> 3
<INCOME-CONTINUING> (5,703)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,703)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
48
<PAGE>
</TABLE>
