<PAGE> 1
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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, 1999
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)
4 Hutton Centre Drive, Suite 800
Santa Ana, California 92707
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip code)
(714) 445-4400
- --------------------------------------------------------------------------------
(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, 1999: Common Stock: 33,227,908
Preferred Stock: 423,940
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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<PAGE> 2
STARBASE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets at September 30, 1999 (Unaudited) and March 31, 1998 3
Statements of Operations (Unaudited) for the three and six month
periods ended September 30, 1999 and 1998 4
Statements of Cash Flows (Unaudited) for the six month
periods ended September 30, 1999 and 1998 5
Notes to Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II. OTHER INFORMATION
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE> 3
STARBASE CORPORATION
PART I
ITEM 1
FINANCIAL STATEMENTS
BALANCE SHEETS
(in thousands, except number of shares and par values)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,185 $ 1,363
Restricted cash 39 39
Marketable securities 121 121
Accounts receivable, net of allowances of $84 at
September 30, 1999 and $155 at March 31, 1999 2,237 2,528
Notes and other receivables, net of reserve of $647 at
September 30, 1999 0 9
Inventories 58 51
Prepaid expenses and other assets 310 214
-------- --------
Total current assets 8,950 4,325
Property and equipment, net 976 987
Developed technology, net 872 971
Note receivable from officer 97 94
Long-term restricted cash 39 79
Other non-current assets 305 149
-------- --------
Total assets $ 11,239 $ 6,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,657 $ 1,264
Deferred revenue 1,300 658
Current portion of capital lease obligation 137 95
-------- --------
Total current liabilities 3,094 2,017
Long-term liabilities:
Long-term debt, less current portion 103 116
Other long-term liabilities 742 10
-------- --------
Total long-term liabilities 845 126
-------- --------
Total liabilities 3,933 2,143
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized, 424,638 and 588,993 shares issued and
outstanding at September 30, 1999 and March 31, 1999;
liquidation preference of $3,957 (September 30, 1999)
and $4,916 (March 31, 1999) 4 6
Common stock, $.01 par value; 80,000,000 authorized;
32,557,783 and 28,636,362 shares issued and outstanding
at September 30, 1999 and March 31, 1999 326 286
Additional paid-in capital 61,429 56,208
Accumulated deficit (54,459) (52,038)
-------- --------
Total stockholders' equity 7,300 4,462
-------- --------
Total liabilities and stockholders' equity $ 11,239 $ 6,605
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE> 4
STARBASE CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License $ 2,928 $ 1,371 $ 5,724 $ 2,264
Maintenance, training and consulting 593 187 1,112 339
Royalty 191 86 369 195
-------- -------- -------- --------
Total revenues 3,712 1,644 7,205 2,798
Cost of Revenues:
Products, licenses and other 788 97 1,234 336
-------- -------- -------- --------
Gross margin 2,924 1,547 5,971 2,462
Operating Expenses:
Research and development 966 1,085 1,943 2,138
Selling, general and administrative 2,904 3,096 5,684 5,277
-------- -------- -------- --------
Total operating expenses 3,870 4,181 7,627 7,415
-------- -------- -------- --------
Operating loss (946) (2,634) (1,656) (4,953)
Interest and other income 32 5 35 44
Equity in loss from investee (250) 0 (250) 0
-------- -------- -------- --------
Loss before income taxes (1,164) (2,629) (1,871) (4,909)
Provision for income taxes 1 2 1 2
-------- -------- -------- --------
Net loss (1,165) (2,631) (1,872) (4,911)
Non-cash dividend and accretion of beneficial
conversion feature (47) 178 549 334
-------- -------- -------- --------
Net loss applicable to common stockholders $ (1,118) $ (2,809) $ (2,421) $ (5,245)
======== ======== ======== ========
Per share data:
Basic and diluted loss per common share $ (0.04) $ (0.15) $ (0.08) $ (0.29)
======== ======== ======== ========
Basic and diluted weighted average number of
common shares outstanding 30,355 18,378 29,146 17,932
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 5
STARBASE CORPORATION
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six months ended
September 30,
-----------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,872) $(4,911)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 288 166
Provision for doubtful accounts and sales returns 576 44
Loss on disposition of property, equipment and
capital lease 41 3
Deferred revenue 1,384 142
Stock option compensation (recovery) expense (10) 130
Equity in loss from investee 250 --
Changes in operating assets and liabilities:
Accounts receivable 362 (1,130)
Notes and other receivables (638) 31
Inventories (7) (16)
Prepaid expenses (70) (280)
Other non-current assets (159) (50)
Accounts payable and accrued liabilities 383 611
------- -------
Net cash provided (used) by operations 528 (5,260)
Cash Flows from Investing Activities:
Decrease (increase) in restricted cash 40 (118)
Investment in equity affiliates (250) --
Capital expenditures (155) (547)
------- -------
Net cash used by investing activities (365) (665)
Cash Flows from Financing Activities:
Proceeds from sale of preferred stock -- 3,000
Proceeds from issuance of common stock:
From private placements 4,225 92
Exercise of options 615 23
Exercise of warrants 394 --
Payment of financing related costs (514) (48)
Payments on capitalized lease obligations (61) (23)
------- -------
Net cash provided by financing activities 4,659 3,045
------- -------
Net increase (decrease) in cash 4,822 (2,880)
Cash and cash equivalents, beginning of period 1,363 4,167
------- -------
Cash and cash equivalents, end of period $ 6,185 $ 1,287
======= =======
Supplemental Cash Flow Information:
Interest paid in cash $ 18 $ 6
======= =======
Income taxes paid $ 1 $ 2
======= =======
Non-cash investing and financing transactions:
Non-cash preferred stock and common stock dividends $ 549 $ 334
======= =======
Conversion of preferred stock to common stock (Note 5) $ 6 $ 22
======= =======
Capitalized lease and insurance financing $ 90 $ 0
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 6
STARBASE CORPORATION
Notes to Financial Statements
1. Description of business
StarBase Corporation, a Delaware corporation (the "Company"), is a leading
provider of advanced Internet and intranet based technical collaboration
products for web site application production and software configuration
management (SCM) tools. The Company develops, markets, and supports
team-oriented development software that targets the evolving needs of corporate
information technology (IT) structures that support projects requiring technical
collaboration on an enterprise level. The Company's current product line
consists of StarTeam(R) 4.1 and Enterprise Suite as well as StarSweeper(TM),
RoundTable(R) and Versions(R).
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, 1999.
The interim financial statements reflect all normal recurring adjustments that
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. The results of operations for the six months ended September
30, 1999 are not necessarily indicative of the operating results for a full
year.
Net loss per share
Basic loss per share applicable to common stockholders is computed using the
weighted average number of common shares outstanding during the periods
presented. Diluted loss per share applicable to common stockholders is computed
using the weighted average number of common and common equivalent shares
outstanding during the periods presented assuming the exercise of the Company's
stock options, warrants, and potential shares (Escrow Shares). Common equivalent
shares have not been included where inclusion would be antidilutive. Escrow
Shares can be released to the founders upon attaining certain defined cash flow
requirements. The release of the Escrow Shares will be deemed compensatory and,
accordingly, will result in charges to earnings equal to the fair market value
of these shares recorded ratably over the period beginning on the date when
management determines that the cash flow requirements are probable of being met
and ending on the date when the goal is attained, causing the Escrow Shares to
be released. At the time a goal is attained, previously unrecognized
compensation expense will be adjusted by a one-time charge based on the then
fair market value of the shares released from escrow. Such charges could
substantially reduce the Company's net income or increase the Company's loss for
financial reporting purposes in the periods such charges are recorded. Based
upon historical results, the attainment of the goal is not probable at this
time. However, this does not preclude the attainment of the goal with future
results.
6
<PAGE> 7
STARBASE CORPORATION
Notes to Financial Statements
<TABLE>
<CAPTION>
For the three months ended September 30, 1999
(in thousands except per-share amounts)
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and Diluted Loss per Share
Net loss $(1,165)
Non-cash dividend 47
-------
Basic Loss to Common Stockholders per share (1,118) 30,355 $(0.04)
======
Effect of Dilutive Securities -- --
------- -------
Dilutive Loss to Common Stockholders per share $(1,118) 30,355 $(0.04)
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended September 30, 1998
(in thousands except per-share amounts)
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and Diluted Loss per Share
Net loss $(2,631)
Non-cash dividend (178)
-------
Basic Loss to Common Stockholders per share (2,809) 18,378 $(0.15)
======
Effect of Dilutive Securities -- --
------- -------
Dilutive Loss to Common Stockholders per share $(2,809) 18,378 $(0.15)
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
For the six months ended September 30, 1999
(in thousands except per-share amounts)
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and Diluted Loss per Share
Net loss $(1,872)
Non-cash dividend (549)
-------
Basic Loss to Common Stockholders per share (2,421) 29,146 $(0.08)
======
Effect of Dilutive Securities -- --
------- -------
Dilutive Loss to Common Stockholders per share $(2,421) 29,146 $(0.08)
======= ======= ======
</TABLE>
7
<PAGE> 8
STARBASE CORPORATION
Notes to Financial Statements
<TABLE>
<CAPTION>
For the six months ended September 30, 1998
(in thousands except per-share amounts)
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and Diluted Loss per Share
Net loss $(4,911)
Non-cash dividend (334)
-------
Basic Loss to Common Stockholders per share (5,245) 17,932 $(0.29)
======
Effect of Dilutive Securities -- --
------- -------
Dilutive Loss to Common Stockholders per share $(5,245) 17,932 $(0.29)
======= ======= ======
</TABLE>
Common stock equivalents, which consist of options to purchase 2,460,750 shares
of common stock at prices ranging from $0.625 to $3.44 per share, warrants to
purchase 4,526,668 shares of common stock at prices ranging from $0.59 to $3.25
per share, and 1,418,638 common shares held in escrow were not included in the
computation of diluted loss per share because such inclusion would have been
antidilutive for the three and six month periods ended September 30, 1999.
Common stock equivalents, which consist of options to purchase 1,214,473 shares
of common stock at prices ranging from $0.84 to $3.44 per share, warrants to
purchase 2,177,722 shares of common stock at prices ranging from $1.25 to $1.80
per share, and 1,418,638 common shares held in escrow were not included in the
computation of diluted loss per share because such inclusion would have been
antidilutive for the six month period ended September 30, 1998.
3. Composition of certain balance sheet captions
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
Property and equipment:
Computer hardware $ 1,470 $ 1,337
Furniture and fixtures 315 315
Computer software 199 199
Leasehold improvements 233 198
------- -------
2,217 2,049
Less accumulated depreciation and amortization (1,241) (1,062)
------- -------
$ 976 $ 987
======= =======
Accounts payable and accrued liabilities:
Trade accounts payable $ 766 $ 640
Accrued professional fees 26 86
Accrued wages and bonuses 543 493
Other accrued expenses 322 45
------- -------
$ 1,657 $ 1,264
======= =======
</TABLE>
8
<PAGE> 9
STARBASE CORPORATION
Notes to Financial Statements
4. Investment in OpenAvenue Inc.
During the quarter ending September 30, 1999, the Company invested $250,000 for
900,000 shares of common stock, or 47%, of OpenAvenue Inc ("OpenAvenue").
OpenAvenue is an internet portal company for open-source knowledge and effort
sharing over the internet providing a meeting and work place for virtual
development teams acting in concert on distributed projects. The Company is
accounting for this ownership under the equity method because the Company does
not have control over OpenAvenue.
A condensed summary of the assets and liabilities of OpenAvenue and the results
of its operation follows:
<TABLE>
<CAPTION>
September 30,
1999
-------------
(In thousands)
<S> <C>
ASSETS
Current assets $ 344
Property and equipment, net 185
Other assets 10
-----
Total assets $ 539
=====
LIABILITIES
Short-term debt and current portion of long-term debt $ 681
Other current liabilities 41
-----
Total current liabilities 722
Long-term debt, less current portion 81
-----
Total liabilities $ 803
=====
Net equity $(264)
=====
</TABLE>
<TABLE>
<CAPTION>
Three months ended
September 30, 1999
------------------
(In thousands)
<S> <C>
Revenue $ --
Operating expenses 846
-----
Net loss $(846)
=====
</TABLE>
In addition, the Company agreed to loan OpenAvenue up to $750,000 on a
short-term basis until OpenAvenue's first round of financing is completed. At
the time of the financing, the Company will have the option of converting the
loan into common stock of OpenAvenue at the financing per share rate. As of
September 30, 1999, the amount loaned is $646,560. This amount has been fully
reserved for and is included in selling, general and administrative expense for
the three month period ended September 30, 1999.
9
<PAGE> 10
STARBASE CORPORATION
Notes to Financial Statements
5. Equity transactions
During the quarter ending September 30, 1999, 20,000 shares of Series E
Preferred Stock were converted into 20,000 shares of common stock.
During July 1999, the Company entered into agreements to complete a three
tranche private placement consisting of 2,503,877 shares of Common Stock for
$4,225,000. The first tranche closed on July 15, 1999, the second tranche closed
on July 30, 1999, and the third tranche closed on September 2, 1999. In
addition, the Company issued warrants to purchase 1,407,948 shares of common
stock of which warrants to purchase 1,061,541 shares are exercisable at $2.68
per share and expire on July 15, 2002, warrants to purchase 770,537 shares are
exercisable at $2.11 per share and expire on July 29, 2002 and warrants to
purchase 115,830 shares are exercisable to $2.09 per share and expired on
September 1, 2002. The fair value of these warrants using the Black-Scholes
model at the date of grant was $2,749,637.
During September 1999, the Company bought back 36 shares of Series H Preferred
Stock for $118,500. The shares were originally issued in lieu of cash for
finder's fees relating to the Series H Preferred Stock private placement.
As of September 30, 1999, 421,208 shares of Series E Preferred Stock, 2,430
shares of Series H Preferred Stock, and 1,000 shares of Series I Preferred Stock
were outstanding.
Warrants
Warrant activity for the six month period ended September 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Warrant Price
Shares Per Share
--------- -------------
<S> <C> <C>
Outstanding at March 31, 1999 2,984,388 $0.59-$3.25
Granted 1,948,011 $2.08-$2.68
Exercised (405,731) $0.75-$1.80
---------
Outstanding at September 30, 1999 4,526,668 $0.59-$3.25
=========
</TABLE>
10
<PAGE> 11
STARBASE CORPORATION
Notes to Financial Statements
6. Stock option plan
The Company's stock option plan (the "1996 Plan") provides for the grant of
non-qualified and incentive stock options to directors, officers and employees
of 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 September
30, 1999 was eight years. A total of 2,833,333 shares of common stock have been
authorized under the 1996 Plan, of which 2,116,994 were outstanding at September
30, 1999. In addition, the Company has granted non-qualified stock options, of
which 4,136,980 were outstanding at September 30, 1999.
Stock option activity for the six month period ended September 30, 1999 is as
follows:
Weighted-Average
Shares Exercise Price
--------- ---------------
Outstanding at March 31, 1999 6,547,411 $1.23
Granted 452,500 $2.15
Lapsed or canceled (355,548) $1.68
Exercised (390,389) $1.58
---------
Outstanding at September 30, 1999 6,253,974 $1.25
=========
Exercisable at September 30, 1999 2,460,750 $1.35
=========
Stock option summary information at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------
Range of Weighted-Average
Exercise Remaining Weighted-Average Weighted-Average
Prices Shares Contractual Life Exercise Price Shares Exercise Price
- ----------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.50-$1.00 2,462,202 9.1 years $0.68 494,110 $0.72
$1.01-$1.50 1,434,622 7.0 years $1.26 1,006,299 $1.26
$1.51-$2.00 1,708,150 8.3 years $1.65 742,989 $1.64
$2.01-$2.50 451,000 9.7 years $2.11 159,528 $2.06
$2.51-$3.00 178,000 8.8 years $2.62 50,534 $2.62
$3.01-$3.50 20,000 8.5 years $3.34 7,290 $3.34
--------- ---------
6,253,974 2,460,750
========= =========
</TABLE>
11
<PAGE> 12
STARBASE CORPORATION
Notes to Financial Statements
7. Operating segment information
The Company's reportable operating segments include software licenses and
services. The software licenses operating segment develops and markets the
Company's web site application production and software configuration management
products. The services segment provides after-sale support for software products
and fee-based training and consulting services related to the Company products.
The Company does not allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of revenues and gross margin.
Operating segment data for the three and six month periods ended September 30,
1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Software
licenses Services Total
-------- -------- ------
(In thousands)
<S> <C> <C> <C>
Three months ended September 30, 1999:
Revenues $2,928 $ 784 $3,712
Cost of revenues 509 279 788
------ ------ ------
Gross margin $2,419 $ 505 $2,924
====== ====== ======
Three months ended September 30, 1998:
Revenues $1,371 $ 273 $1,644
Cost of revenues 97 0 97
------ ------ ------
Gross margin $1,274 $ 273 $1,547
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Software
licenses Services Total
-------- -------- ------
(In thousands)
<S> <C> <C> <C>
Six months ended September 30, 1999:
Revenues $5,724 $1,481 $7,205
Cost of revenues 673 561 1,234
------ ------ ------
Gross margin $5,051 $ 920 $5,971
====== ====== ======
Six months ended September 30, 1998:
Revenues $2,264 $ 534 $2,798
Cost of revenues 336 0 336
------ ------ ------
Gross margin $1,928 $ 534 $2,462
====== ====== ======
</TABLE>
8. Subsequent events
On November 4, 1999, the Company signed a definitive agreement to acquire
ObjectShare, Inc. ("ObjectShare"), a leading provider of object-oriented and
eBusiness professional services, in a merger transaction. The Company will issue
its stock in exchange for ObjectShare stock at an anticipated enterprise value
of $7.5 million, with a minimum of $6.15 million and a maximum of $8.85 million
based upon the average trading price of StarBase stock prior to the closing. The
transaction, which is subject to ObjectShare stockholders' approval and certain
other conditions, is expected to be completed in early 2000. In addition, the
Company will provide ObjectShare with a $500,000 line of credit under the terms
of a credit agreement. The line of credit will be secured by all of the accounts
receivable and other assets of ObjectShare.
12
<PAGE> 13
PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Total revenue increased in the three month period ended September 30, 1999 by
$2,068,000 or 126%, to $3,712,000, from $1,644,000 in the same three month
period of the previous year due to the increase in license revenue, $1,557,000,
combined with the increase in maintenance, training and consulting revenue,
$406,000, and royalty revenue $105,000. Total revenue for the six month period
ended September 30, 1999, increased to $7,205,000 from $2,798,000 in the same
period of the prior year. The increase in product revenue was a result of the
continued acceptance of the StarTeam 4.1 family of products.
Cost of revenues consists primarily of manufacturing and related costs such as
media, documentation, product assembly and costs related to the training and
consulting revenue. The Company out-sources manufacturing for all software
products, with the exception of the Company's Roundtable product. Cost of
revenues increased to $788,000 from $97,000 in the three month period ended
September 30, 1999 over the same quarter of the previous year due to the
increase in training and consulting costs, $279,000, along with costs for an
exchange of technology, $471,000. For the six month period ended September 30,
1999 cost of revenues increased to $1,234,000 from $336,000 due to the increase
in training and consulting costs, $561,000, along with costs for an exchange of
technology, $471,000.
Operating expenses in the three month period ended September 30, 1999 decreased
to $3,870,000 from $4,181,000 in the same quarter of the previous year. The
decrease was primarily due to the reduced headcount. At September 30, 1999, the
Company had 89 full-time employees, which consisted of 40 in sales and
marketing, 34 in research and development and 15 in general and administrative.
At September 30, 1998, the Company had 101 employees, which consisted of 36 in
sales and marketing, 42 in research and development and 9 in general and
administrative. For the six month period ended September 30, 1999, operating
expenses increased to $7,627,000 from $7,415,000. The increase was primarily due
to the continued building of the sales and marketing infrastructure to support
the increased level of sales.
Research and development expenses. Research and development expenses include
personnel and other direct and overhead expenses incurred in the development of
the Company's products. StarBase continues to make significant investments in
research and development intended to bring its products to market and to support
existing products. In the three month period ended September 30, 1999 overall
research and development expenses decreased to $966,000 compared to $1,085,000
for the same period in the prior year and for the six month period ended
September 30, 1999 decreased to $1,943,000 from $2,138,000 for the same period
in the prior year. The decreases are a result of the decrease in the development
staff.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended September 30, 1999 decreased
approximately $192,000 over the same period in the prior year. For the six month
period ended September 30, 1999 selling, general and administrative expenses
increased to $5,684,000 from $5,277,000 in the corresponding period of the prior
year. The increase was mainly the result of additional sales and marketing
personnel coupled with the advertising and promotion programs to support the
StarTeam 4.1 family of products.
Interest Income/Expense
Interest income for the three month period ended September 30, 1999 increased to
$43,000 compared to $11,000 for the same period in the prior year due to more
cash being available to invest. For the six month period ended September 30,
1999, interest income was $53,000, unchanged from the same period in the prior
year.
Interest expense for the three month period ended September 30, 1999 increased
to $11,000 compared to $3,000 for the same period in the prior year due to the
increase in lease equipment. For the six month period ended September 30, 1999,
interest expense increase to $18,000 from $5,000 for the same period in the
prior year.
13
<PAGE> 14
Equity in loss from investee
Equity in loss from investee for the three month and six month periods ended
September 30, 1999 was $250,000. This amount is the Company's portion, 47%, of
the operating results of OpenAvenue Inc. limited to the total amount invested,
$250,000.
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. Any provision for income taxes represents the minimum required for
state taxes.
Non-Cash Dividend and Accretion of Beneficial Conversion Feature
Non-cash dividend and accretion of beneficial conversion feature for the three
month period ended September 30, 1999 was $(47,000) due to the beneficial
conversion feature reversed from the redemption of the Series H Preferred Stock.
Non-cash dividend and accretion of beneficial conversion feature for the three
month period ended September 30, 1998 was $178,000. For the six month period
ended September 30, 1999, non-cash dividend and accretion of beneficial
conversion feature was $549,000 compared to $334,000 for the same period in the
prior year.
Liquidity and Capital Resources
Cash and cash equivalents as of September 30, 1999 were $6,185,000 and
$1,363,000 as of March 31, 1999. At September 30, 1999 the Company had working
capital of $5,856,000, compared to $2,308,000 at March 31, 1999.
Net cash provided by operating activities was $528,000 and $(5,260,000) for the
six month periods ended September 30, 1999 and September 30, 1998, respectively.
The improvement was primarily due to the reduced net loss from operations,
increase in deferred revenue and improved account receivable collection.
Investing activities have consisted of purchases of property and equipment,
investment in equity affiliates, and restricted cash. Capital expenditures were
approximately $155,000 and $547,000 during the six months ended September 30,
1999 and September 30, 1998, respectively. Investment in equity affiliates was
$250,000 for the six month period ended September 30, 1999. Restricted cash
decreased $40,000 in the six month period ended September 30, 1999 and increased
$118,000 for the six month period ended September 30, 1998.
Financing activities provided $4,659,000 for the six month period ended
September 30, 1999, compared to $3,045,000 in the same period of the prior year.
In July 1999, the Company raised $4,225,000 through a private placement of
common stock. See note 5 of the notes to the financial statements. Exercise of
options provided $615,000 and exercise of warrants provided $394,000 for the six
month period ended September 30, 1999.
The Company believes that the net proceeds from this offering, it's existing
cash balances and cash equivalents and cash from operations will be sufficient
to finance it's operations through at least the next 12 months. If additional
financing is needed, there can be no assurance that such financing will be
available to the Company on commercially reasonable terms or at all.
The Company warrants products against defects for 90 days and has a policy
permitting the return of products within 30 days. Warranty costs and returns,
which are not significant, have historically been within management's
expectations. The Company has reserved approximately $84,000 at September 30,
1999 for future returns and other collection issues, down from $155,000 at March
31, 1999.
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
14
<PAGE> 15
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, 1999 on Form 10-KSB on file
with the Securities and Exchange Commission.
The Year 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the
calendar year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced to comply with
such "Year 2000" requirements.
State of Readiness
The Company is dependent on the operation of numerous systems that could
potentially be affected by Year 2000 related problems. Those systems include,
among others:
o The software products sold to customers;
o Hardware and software systems used for internal operations, including
proprietary software systems as well as software supplied by third parties;
o Communications networks such as the client/server Network, the Internet and
the internal intranet;
o The hardware and software systems of our customers and suppliers;
o Non-information technology systems and services, such as utilities,
telephone systems and building systems.
The Company has completed a Year 2000 review program for the hardware, software
and systems the Company depends on to run its operation. The phases of the Year
2000 program consist of:
o Assignment of responsibility for issues, such as systems, facilities,
equipment, software and legal audit;
o Inventory of all aspects of the Company's operations and relationships
subject to the Year 2000 problem;
o Communication as necessary with significant supplier to determine the
readiness of their products and systems;
o Comprehensive analysis, including impact analysis and cost analysis of the
Company's Year 2000 readiness;
o Testing and remediation.
To date, the Company has not encountered any material Year 2000 problems with
the hardware and software systems in its operations. In the event that any such
third parties' products, services or systems do not meet the Year 2000
requirements on a timely basis, the Company could be materially adversely
affected.
Based on the Company's review of the use of dates within its products, each
version of its products was found to be Year 2000 compliant - that is, they are
capable of adequately distinguishing the 21st century dates from the 20th
century dates when used in accordance with the related documentation, and used
in conjunction with the Company's products.
Risks
Year 2000 related errors or defects that affect the operation of the Company's
software could result in:
o Delay or loss of revenue;
o Cancellation of customer contracts;
o Diversion of development resources;
o Damage to the Company's reputation;
o Increased customer support and warranty costs;
o Litigation costs.
15
<PAGE> 16
Success of the Company's Year 2000 compliance efforts may also depend on the
success of its customers in dealing with their Year 2000 issues. The Company's
products are generally integrated into enterprise systems involving
sophisticated hardware and complex software products which may not be Year 2000
compliant. In addition, third party applications in which the Company's products
are embedded, or for which the Company's products are separately licensed, may
not comply with Year 2000 requirements, which may have an adverse impact on
software, while compatible with earlier, non Year 2000 compliant versions of
other software providers. While the Company does not believe they have any
obligation under these circumstances given that these customers are using older
versions of the Company's software products, there can be no assurance that the
Company will not be subject to claims or complaints by its customers.
In addition, the Company believes that purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or upgrade their current software systems for
Year 2000 compliance or defer additional software purchases until after 2000. As
a result, some customers and potential customers may have more limited budgets
available to purchase software products such as those offered by the Company,
and others may choose to refrain from changes in their information technology
environment until after 2000. Still other companies are accelerating purchases
of software products prior to 2000, causing an increase in short-term demand
which may, in turn, cause a corresponding decrease in long-term demand for
software products. To the extent Year 2000 issues cause significant change in,
delay in, or cancellation of, the decision to purchase the Company's products or
services, the Company's business could be materially adversely affected.
Contingency Plan
The Company could experience material adverse effects in its business if it
fails to identify all Year 2000 dependencies in its systems and the systems of
is suppliers, customers and financial institutions. Therefore, the Company has
developed a plan for handling Year 2000 problems that are not detected and
corrected prior to their occurrence.
Costs
To date, the Company has not incurred any material costs directly associated
with its Year 2000 compliance efforts, except for compensation expense
associated with its salaried employees who have devoted some time to its Year
2000 assessment and remediation efforts. The Company does not expect the total
cost of Year 2000 problems to be material to its business, financial condition
and operating results. The Company will continue to evaluate its products,
software provided by third parties and infrastructure systems that it relies on.
Despite its efforts, the Company may not identify and remediate all significant
Year 2000 problems on a timely basis, remediation efforts may involve
significant time and expense, and unremeditated problems may have a material
adverse effect on its business.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which the Company
is required to adopt effective in its fiscal year 2000. SFAS No. 133 will
require the Company to record all derivatives on the balance sheet at fair
value. The Company does not currently engage in hedging activities but will
continue to evaluate the effect of adopting SFAS No. 133. The Company will adopt
SFAS No. 133 in its fiscal year 2000.
16
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PART II
ITEM 5
OTHER INFORMATION
None.
17
<PAGE> 18
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Ref./
Number Description Of Document Page
------- -------------------------------------------------- -----
27 Financial data schedule
(b) Reports on Form 8-K
None.
18
<PAGE> 19
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 15, 1999 /s/ Douglas S. Norman
- ----------------- -------------------------------------
Date Douglas S. Norman
Chief Accounting Officer
19
<PAGE> 20
EXHIBIT INDEX
Exhibit Ref./
Number Description Page
------- ----------- ----
27 Financial Data Schedule
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