UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days. Yes |X| No |_|
Number of shares outstanding as of October 31, 1997: Common Stock: 15,148,197
Transitional Small Business Disclosure Format: Yes |_| No |X|
<PAGE>
STARBASE CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets at September 30, 1997 (Unaudited)
and March 31, 1997 3
Statements of Operations (Unaudited) for the six month
period ended September 30, 1997 and 1996 4
Statements of Cash Flows (Unaudited) for the six month
period ended September 30, 1997 and 1996 5
Notes to Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 14
2
<PAGE>
PART I
ITEM 1
FINANCIAL STATEMENTS
STARBASE CORPORATION
(a development stage company)
BALANCE SHEETS
(in thousands, except number of shares and par values)
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,924 $ 2,722
Accounts receivable, net of allowances of $52 and $65 206 118
Notes and other receivables 57 83
Prepaid expenses and deferred charges 285 312
Inventories 23 34
--------------- ---------------
Total current assets 3,495 3,269
Property and equipment, net 550 524
Note receivable from officer 76 76
Other non-current assets 275 7
--------------- ---------------
Total assets $ 4,396 $ 3,876
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,010 $ 885
Current portion of capital lease obligation 8 -
--------------- ---------------
Total current liabilities 1,018 885
Long-term debt:
Capitalized lease obligation, less current portion 43 -
6% Convertible Debentures, net of discount of $615 2,485 -
--------------- ---------------
Total long-term debt 2,528 -
Total liabilities 3,546 885
Shareholders' equity:
Preferred stock, $.01 par value; $0 (September 30, 1997) and $75 (March
31, 1997) liquidation value; authorized 10,000,000; issued
and outstanding -0- shares (September 30, 1997) and 25,000 (March - -
31, 1997)
Common stock, $.01 par value; authorized 50,000,000; issued and
outstanding 15,054,608 (September 30, 1997) and 13,319,487 (March 150 133
31, 1997)
Additional paid-in capital 27,751 26,805
Deficit accumulated during development stage (27,051) (23,947)
--------------- ---------------
Total shareholders' equity 850 2,991
--------------- ---------------
Total liabilities and shareholders' equity $ 4,396 $ 3,876
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
STARBASE CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Sept. 6, 1991
Three months ended Six months ended through
September 30, September 30, September 30,
-------------------------- -------------------------- 1997
1997 1996 1997 1996 (CUMULATIVE)
------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Consulting services $ - $ - $ - $ - $ 4,430
Consulting services-related party - - - - 281
Products 330 69 598 149 2,556
License and royalty 36 103 106 232 784
Other - - - - 64
------------- ------------ ------------ ------------ ------------
Total revenues 366 172 704 381 8,115
Cost of Sales:
Consulting services - - - - 4,716
Consulting services-related party - - - - 289
Products, licenses and other 23 27 55 28 482
------------- ------------ ------------ ------------ ------------
Total cost of sales 23 27 55 28 5,487
------------- ------------ ------------ ------------ ------------
Gross margin 343 145 649 353 2,628
Operating Expenses:
Research and development 515 355 1,013 687 10,069
Selling, general and administrative 1,249 1,242 2,413 2,355 19,621
------------- ------------ ------------ ------------ ------------
Total operating expenses 1,764 1,597 3,426 3,042 29,690
------------- ------------ ------------ ------------ ------------
Operating loss (1,421) (1,452) (2,777) (2,689) (27,062)
Interest income 24 79 49 122 438
Interest expense (360) 5 (361) (4) (446)
Other income and expense (14) 1 (14) (5) 52
------------- ------------ ------------ ------------ ------------
Total interest and other income (350) 85 (326) 113 44
and expense
Loss before income taxes (1,771) (1,367) (3,103) (2,576) (27,018)
Provision for income taxes 1 - 1 1 12
------------- ------------ ------------ ------------ ------------
Net loss $ (1,772) $ (1,367) $ (3,104) $ (2,577) $(27,030)
============= ============ ============ ============ ============
Per share data:
Loss per common share $ (0.13) $ (0.12) $ (0.24) $ (0.26)
============= ============ ============ ============
Weighted average number of
common shares outstanding 13,629 11,296 12,820 10,053
============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE>
STARBASE CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Sept. 6, 1991
Six months ended through
September 30, September 30,
------------------------------- 1997
1997 1996 (cumulative)
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (3,104) $ (2,577) $ (27,030)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 107 117 911
Provision for doubtful accounts and sales 58 34 285
returns
Loss on disposition of property, equipment and
capital lease - 6 99
Write-down of assets - - 50
Gain on debt restructuring - - (138)
Recognition of deferred income - (66) (370)
Amortization of financing costs 13 - 13
Amortization of debt discount 340 - 340
Other adjustments - - 87
Changes in assets and liabilities, excluding
the effect of Non-cash transactions:
Accounts receivable (146) (88) (490)
Notes and other receivables 26 (132) (128)
Inventories 11 (9) (23)
Prepaid expenses and deferred charges 14 (24) (249)
Other assets (1) 11 (32)
Accounts payable and accrued liabilities 125 (979) 1,599
--------------- --------------- ---------------
Net cash used by operations (2,557) (3,707) (25,076)
Cash Flows from Investing Activities:
Proceeds from disposition of property and
equipment - - 7
Capital expenditures (64) (39) (1,433)
--------------- --------------- ---------------
Net cash used by investing activities (64) (39) (1,426)
Cash Flows from Financing Activities:
Proceeds from reverse acquisition - - 1,402
Proceeds from sale of preferred stock - 1,021 7,294
Proceeds from sale of convertible debentures 3,100 - 3,100
Proceeds from issuance of common stock:
From stock purchase plan - - 10
From public offering - - 4,063
From private placements - 6,300 10,698
From exercise of options 12 282 560
From exercise of warrants - 1,555 2,654
Proceeds from convertible subordinated notes - - 381
Proceeds from promissory notes - - 1,083
Payments on promissory notes - (111) (274)
Borrowings on line of credit - - 664
Payments on line of credit - - (664)
Payment of financing related costs (286) (974) (1,716)
Payments on capitalized lease obligations (3) - (43)
Loans from officers/directors - - 365
Repayment of loans from officers/directors - - (75)
Repayment of (disbursement of) loan to officer - - (76)
--------------- --------------- ---------------
Net cash provided (used) by financing activities 2,823 8,073 29,426
--------------- --------------- ---------------
Net increase (decrease) in cash 202 4,327 2,924
Cash and cash equivalents, beginning of period 2,722 1,252 -
--------------- --------------- ---------------
Cash and cash equivalents, end of period $ 2,924 $ 5,579 $ 2,924
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
STARBASE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. 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.
2. BASIS OF PRESENTATION
The unaudited interim financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have not been presented. The accompanying unaudited financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the StarBase Corporation report to the Securities and Exchange
Commission on Form 10-KSB, for the year ended March 31, 1997.
The interim financial statements reflect all normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
period presented. Certain prior period balances have been reclassified to
conform to current period classifications. The results of operations for the six
months ended September 30, 1997 are not necessarily indicative of the operating
results for a full year.
LOSS PER COMMON SHARE
Earnings per common share is calculated by dividing the net loss by the weighted
average shares of common stock outstanding excluding 1,418,638 outstanding
common shares held in escrow. Common stock equivalents are considered
anti-dilutive and are excluded from this calculation.
In February 1997, the Financial Accounting Standard 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.
6
<PAGE>
STARBASE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
(In thousands) September 30, March 31,
1997 1997
-------------- ------------
ACCOUNTS RECEIVABLE
Trade accounts receivable $ 258 $ 183
Less allowance for doubtful accounts (52) (65)
-------------- ------------
$ 206 $ 118
============== ============
PROPERTY AND EQUIPMENT
Computer hardware $ 909 $ 888
Furniture and fixtures 237 164
Computer software 170 132
Leasehold improvements 29 29
-------------- ------------
1,345 1,213
Less accumulated depreciation and
amortization (795) (689)
-------------- ------------
$ 550 $ 524
============== ============
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Trade accounts payable $ 424 $ 431
Accrued professional fees 211 179
Accrued wages and bonuses 151 139
Other accrued expenses 224 136
-------------- ------------
$ 1,010 $ 885
============== ============
4. LONG-TERM DEBT
CONVERTIBLE DEBENTURES
In August and September of 1997, the Company issued, in the aggregate, $3.1
million of its 6% Convertible Debentures, $1.5 million of which is due August
18, 1999 and $1.6 million is due September 5, 1999. In addition to the
Debentures, the purchasers received non-transferable warrants to purchase a
total of 82,667 shares of the Company's common stock, 40,000 of which are
exercisable at $1.58 per share through August 18, 2000 and the remainder at
$1.80 per share through September 5, 2000, after which dates the warrants will
expire. The holders of the Debentures may convert, at their option, at any time
after October 6, 1997, the effective date of the Registration Statement filed
pursuant to the Registration Rights Agreement, at a conversion price for each
share of common stock equal to the lesser of (a) 100% of the Market Price on the
Issuance Date; and (b)(i) 84% of the Market Price on the Conversion Date if such
date is between 90 and 120 days from the Issuance Date; (ii) 80% of the Market
Price if the date is between 121 days and 150 days from the Issuance Date, or
(iii) 78% of the Market Price thereafter. The Market Price shall be the average
closing bid price of the common stock on the 5 trading days immediately
preceding the Issuance Date or Conversion Date, as may be applicable, as
reported by the NASD, or the closing bid price on the over-the-counter market on
such date or, in the event the common stock is listed on a stock exchange, the
Market Price shall be the closing price on the exchange on such date, as
reported in the Wall Street Journal. The holders of 6% Convertible Debentures
are not entitled to receive any dividends nor receive notice as a shareholder in
respect of any meeting of shareholders or any rights whatsoever as a shareholder
of the Company, unless and to the extent converted in accordance with the terms
of the Debenture.
7
<PAGE>
STARBASE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The unamortized debt discount, consists of the estimated value of the conversion
feature of the Debentures, which is the difference between the fair market value
at issuance and the conversion price which is most favorable to the investor,
$870 thousand, and the estimated value of the warrants, utilizing the Black
Sholes Model, $85 thousand, net of the related amortization to date, $340
thousand. The debt discount related to the conversion feature and warrant value
is being amortized as interest expense over a 90-day period and two-year period,
respectively, which commenced on the issuance date of the respective debentures.
The face value of the 6% Convertible Debentures and unamortized debt discount at
September 30, 1997 are as follows:
Unamortized
(in thousands) Principal Discount
----------- -----------
6% Convertible Debentures (due August 18, 1999) $ 1,500 $ 257
6% Convertible Debentures (due September 5, 1999) 1,600 358
----------- -----------
Total $ 3,100 $ 615
=========== ===========
5. EQUITY TRANSACTIONS
PRIVATE PLACEMENTS
The Company has authorized 50,000,000 shares of common stock and 10,000,000
shares of preferred stock with a par value of $0.01 per share. Of the preferred
stock, 2,500,000 shares have been designated as Series B Preferred Stock, of
which no shares are issued and outstanding at September 30, 1997, and 366,666
shares have been designated as Series C Preferred Stock, of which no shares are
outstanding at September 30, 1997.
During 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 are 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 Series C Preferred Stock are not entitled to
receive any dividends nor, except as provided by law, vote upon any matter
relating to the business or affairs of the Company or for any other purpose.
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 September 30, 1997, all 365,496 shares of
Series C Preferred Stock issued had been converted into 572,851 shares of common
stock.
WARRANT CONVERSION
In June 1997, the Company offered, to the holders of the Company's outstanding
warrants, to exchange all 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, would
receive one share of common stock for every three warrants held. The warrants
which remain unexchanged subsequent to the expiration date of the offer will
continue under the original terms of each warrant. At June 30, 1997, 4,734,534
warrants were converted and 1,581,150 common shares had been issued upon
conversion of such warrants.
8
<PAGE>
STARBASE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
WARRANTS
Warrant activity for the six month period ended September 30, 1997 is as
follows:
Warrant Price
Shares Per Share
----------------- ---------------
Outstanding at March 31, 1997 4,833,534
Granted 199,835 US$1.58-
$1.80
Exercised (converted) (4,743,534) CDN$2.51-
US$2.00
Expired (10,000) CDN$3.51
-----------------
Outstanding at September 30, 1997 279,835
=================
5. SUPPLEMENTAL CASH FLOW INFORMATION
Six months
Ended September 30,
----------------------------
(In thousands) 1997 1996
------------ -------------
Interest paid $ 4 $ 20
Income taxes paid 1 1
Non-cash investing and financing transactions:
Conversion of Series B Preferred Stock to
common stock - 22
Conversion of Series C Preferred Stock to
common stock (Note 5) 2 3
Conversion of promissory notes to Series C
Preferred Stock - 75
Common stock issued in 3-for-1 warrant
conversion (Note 5) 15 -
Common stock issued for non-cash consideration - 28
Equipment purchased under capitalized lease 54 -
6. COMMITMENTS AND CONTINGENCIES
There have been no other significant subsequent developments relating to the
commitments and contingencies reported on the Company's most recent Form 10-KSB.
7. SUBSEQUENT EVENTS
On October 31,1997 and November 5, 1997, an investor converted $100 thousand and
$750 thousand face value of the 6% Convertible Debentures plus accrued interest
into 93,589 and 716,398 shares, respectively, of the Company's common stock.
9
<PAGE>
PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue increased in the six month period ended September 30, 1997
$323,000 or 85%, to $704,000, from $381,000 in the same six month period of the
previous year. Product revenue increased $449,000 or 301%, which was offset by
the decrease in license and royalty revenue from the Company's Roundtable
product, $126,000 or 54%. The increase in product revenue has been favorably
affected by the April 1997 release of the StarTeam 2.1 family of products, which
include enhanced security, encryption capability across the Internet and
advanced configuration management.
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 StarTeam 1.0
marketing and sales program. The StarTeam 1.0 marketing strategy was therefore
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 marketing and sales program for StarTeam 2.0 that focused on seeding
the market by targeting several hundred companies for intial sales of StarTeam.
Commercial shipments of StarTeam 2.0 and StarTeam 2.1 began in the final week of
August 1996 and April 1997, respectively. 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, testers, etc.). 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 in the second quarter of fiscal 1998 $198,000 or 137%, to
$343,000, from $145,000 in the same quarter of the previous year chiefly due to
the increase in product sales. Product cost of sales, as a percentage of
revenues, decreased from the same period in the prior year due to an increase in
the average revenue per seat for StarTeam Workstation 2.1 and StarTeam Pro
Edition 2.1 over StarTeam 2.0, from which product revenue was derived in the
prior year.
Cost of products consists primarily of manufacturing and related costs such as
media, documentation, product assembly and third party royalties. The Company
out-sources manufacturing for all software products, with the exception of the
Company's Roundtable product.
There was no consulting service revenue or cost of service revenue during the
six months ended September 30, 1997 or for the same period in the previous year
due to the discontinuation of the Company's Consulting Division.
Operating expenses increased by approximately $167 thousand or 10% from the same
quarter in the previous year. This increase was primarily due to increased
research & development efforts, as well as increased product sales efforts
related to the market introduction of the StarTeam 2.1 family of products (the
ITE product line). Early in the fiscal year that ended March 31, 1997, 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 September 30, 1996, the Company had 36 employees, which consisted
of 11 in sales & marketing, 17 in research & development and 8 in general &
administrative. At September 30, 1997, the Company had 48 employees, which
consisted of 15 in sales & marketing, 24 in research & development and 9 in
general & administrative.
10
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. 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
increased $160 thousand or 45% of the total research & development expenses for
the same quarter in the prior year as a result of the increase in development
staff. For the six month period, research and development expenses increased
$326 thousand or 47% over the same period in the prior year. Research &
development staff increased from 17 at September 30, 1996 to 24 at September 30,
1997. As a result, compensation related expenses and recruiting costs increased
approximately $263 thousand and $23 thousand, respectively, from the six month
period ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general & administrative
expenses for the three and six months ended September 30, 1997 increased
approximately $58 thousand or 2% and $7 thousand or 1%, respectively, over the
same period in the prior year which was mainly the result of the increase in
sales and marketing personnel coupled with commissions paid on increased product
sales offset by a decrease in marketing expenses. Marketing expenses include
advertising, trade shows and other promotional expenses.
INTEREST INCOME
Interest income for Q2 1998 decreased by $55 thousand or 70% from quarter that
ended September 30, 1996 due to a decrease in the amount of cash available for
investment.
INTEREST EXPENSE
Interest expense for Q2 1998 increased significantly from the same quarter in
the prior year due to the 6% Convertible Debenture debt discount amortization,
$340 thousand, and interest accrued on the 6% Convertible Debentures, $17
thousand.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of the amortization of financing
costs. The costs of issuing the 6% Convertible Debentures during the quarter are
being amortized over the two-year term of the Debentures.
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.
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY EFFECT FUTURE RESULTS
The following discussion contains forward-looking statements within the meaning
of Sections 21E and 27A of the Securities Exchange Act of 1934. These forward
looking statements are subject to risks and uncertainties. There are several
important factors that could cause actual results to differ materially from
those anticipated by the forward-looking statements contained in the following
discussion. Such factors include, but are not limited to, the growth rates of
certain market segments, the timing of software product introductions, market
acceptance of product introductions, the positioning of the Company's products
in those segments, price pressures and the rapidly changing competitive
environment in the software industry, success in technological advances and
their implementation, business conditions and the general economy, the Company's
ability to manage its business in its evolution from a development stage
company, and the Company's ability to establish strategic alliances. Additional
information on these and other risk factors which could affect the Company's
financial results is included in the Company's Annual Report for the fiscal year
ended March 31, 1997 on Form 10-KSB on file with the Securities and Exchange
Commission.
11
<PAGE>
The Company continues its efforts to gain broad market exposure and, in turn,
revenue opportunities through, among others, OEM bundling agreements, licensing
agreements, and value added reseller ("VAR") and distribution agreements.
Management believes that in doing so, the Company will be provided the
opportunity to leverage off the market strength of its partners at both the
entry level and high end of the market, while selling to the rest of the market
through its direct and existing channel sales organizations. During the current
quarter the Company signed bundling agreements for Versions 2.0, its entry level
product, with Allaire Corporation and PowerBASIC, Inc. as well as several VAR
and sales referral agreements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents on hand as of September 30, 1997 totaled $2.9 million
and $5.6 million as of September 30, 1996. At September 30, 1997 the Company had
positive working capital of $2.5 million, compared to $5.3 million at September
30, 1996. During the six months ended September 30, 1997, the Company generated
$2.8 million from financing activities, including net proceeds of $2.8 million
from the private placement of 6% Convertible Debentures and $12 thousand from
the exercise of stock options.
During the six months ended September 30, 1997, the Company used $2.6 million
for operations, a decrease of approximately $1.1 million over the amount used
for operations in the prior year. The decrease was primarily due to the pay down
of accounts payable during the six months ended September 30, 1996, which had
accumulated in the prior year. Capital expenditures were approximately $64
thousand and $39 thousand during the six months ended September 30,1997 and
September 30, 1996, respectively.
StarBase's distributors and direct purchasers are generally permitted a 30-day
right to return the software purchased by them. 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 $52,000 at September 30, 1997 for future returns and other
collection issues.
The Company anticipates raising additional funds, between $3 million and $5
million, during the third and fourth quarter of the fiscal year that ends March
31, 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 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.
12
<PAGE>
PART II
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of stockholders on September 24, 1997.
(b) Pursuant to the election of the eight directors listed under Item 4 (c)
(i), Messrs. Farrow, Ginns, Pearce, Sexton, Snedegar and Stow were
elected to hold office until the next annual meeting and until their
successors are elected and qualified.
(c) The Company's stockholders voted on the following matters:
(i)Election of six directors. All six directors nominated were elected.
--------------------- -------------------- --------------------
Number of Number of
Name of Nominee Votes For Votes Withheld
--------------------- -------------------- --------------------
Donald R. Farrow 9,871,907 31,074
--------------------- -------------------- --------------------
Daniel P. Ginns 9,826,539 76,442
--------------------- -------------------- --------------------
Phillip E. Pearce 9,877,457 25,524
--------------------- -------------------- --------------------
Kenneth A. Sexton 9,877,457 25,524
--------------------- -------------------- --------------------
John R. Snedegar 9,877,457 25,524
--------------------- -------------------- --------------------
William R. Stow III 9,877,457 25,524
--------------------- -------------------- --------------------
(ii)Approval of the selection of Price Waterhouse LLP as the Company's
independent auditors for the year ended March 31, 1998. A total of
9,863,132 votes were voted for the selection; 4,516 votes were voted
against; and 35,333 votes were withheld.
ITEM 5
OTHER INFORMATION
On October 6, 1997, a registration statement on Form S-3 filed by the Company
was declared effective by the Securities and Exchange Commission. The
registration statement covered 3,104,233 shares of common stock of the Company
(including 279,835 shares issuable under outstanding warrants held by the
investors) which were issued to investors in eligible private placements. The
Company did not receive any of the proceeds from the sale of the shares of
common stock by the investors.
13
<PAGE>
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<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)
4.6 Registration Rights Agreement dated August 18, 1997 (I)
4.7 Registration Rights Agreement dated September 5, 1997 (I)
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 1996 Stock Option Plan, as amended. (*) (G)
10.5 Form of Restricted Stock Issuance Agreement. (A)
10.6 Form of Restricted Stock Purchase Agreement. (A)
10.7 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)
10.8 Forms of Common Stock Subscription Agreement and Warrants used in November 1994
Private Placement. (B)
10.9 Forms of Common Stock Subscription Agreement and Warrants used in March 1995 Private
Placement. (C)
10.10 Regional Prototype Defined Contribution Plan and Trust of the Company. (*) (A)
10.11 Fiscal Agency Agreement between the Company and Canaccord Capital Corporation. (B)
10.12 Secured Promissory Note dated July 1, 1995 from William R. Stow III. (E)
10.13 Forms of Preferred Stock Subscription Agreements and Warrants used in January 1996
Private Placement, together with a list of equity investors. (E)
10.14 Forms of Common Stock Subscription Agreement and Warrants used in July 1995 Private
Placement, together with a list of equity investors. (E)
10.15 Form of Warrant used in the May 13, 1996 Private Placement. (D)
10.16 Form of Subscription Agreement used in the May 13, 1996 Private Placement. (D)
10.17 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)
10.18 Lease dated November 22, 1996 between The Provider Fund and StarBase Corporation,
for the Company's Irvine, California facilities. (H)
10.19 Form of Warrant dated August 18, 1997. (I)
10.20 Form of Debenture dated August 18, 1997. (I)
10.21 Form of Warrant dated September 5, 1997. (I)
10.22 Form of Debenture dated September 5, 1997. (I)
27 Financial data schedule 16
- -------------------------
14
<PAGE>
<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-KSB
(file number 0-25612) filed with the Commission on June 30, 1997.
(I) Incorporated herein by reference to the Company's Form 8-K (file
number 0-25612) filed with the Commission on September 16, 1997.
* Denotes a management contract or compensatory plan or arrangement.
</FN>
</TABLE>
(b) Reports on Form 8-K
In a report filed on Form 8-K dated August 19, 1997, the Company reported the
closing of private placements offering of its 6% Convertible Debentures with an
several investors. In addition, the Company reported the completion of a
previously announced warrant exchange offer whereby each holder received one
share of common stock for every three warrants tendered.
15
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
STARBASE CORPORATION
(Registrant)
NOVEMBER 12, 1997 /S/ DONALD R. FARROW
- ------------------ -----------------------
Date Donald R. Farrow
President and
Chief Operating Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
STARBASE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE
SIX MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-END> Sep-30-1997
<CASH> 2,924
<SECURITIES> 0
<RECEIVABLES> 258
<ALLOWANCES> (52)
<INVENTORY> 23
<CURRENT-ASSETS> 3,495
<PP&E> 1,345
<DEPRECIATION> (795)
<TOTAL-ASSETS> 4,396
<CURRENT-LIABILITIES> 1,018
<BONDS> 0
0
0
<COMMON> 150
<OTHER-SE> 700
<TOTAL-LIABILITY-AND-EQUITY> 4,396
<SALES> 598
<TOTAL-REVENUES> 704
<CGS> 55
<TOTAL-COSTS> 55
<OTHER-EXPENSES> 3,426
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 361
<INCOME-PRETAX> (3,104)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,104)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
16
</TABLE>
