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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, 1999
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)
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: $6,832,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 31, 1999, based on the closing price as reported by NASDAQ
was $70,410,000.
Number of shares outstanding as of May 31, 1999: Common Stock: 29,646,430
Documents Incorporated by Reference: None.
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TABLE OF CONTENTS
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Part I...................................................................................................3
Item 1. Business......................................................................................3
Description of Business.............................................................................3
The Market Opportunity..............................................................................3
Market Size.........................................................................................5
StarBase Strategy...................................................................................6
StarBase Product Line...............................................................................6
Competition.........................................................................................9
Sales and Marketing................................................................................11
Proprietary Rights.................................................................................12
Employees..........................................................................................13
Forward Looking Statements.........................................................................13
Risk Factors.......................................................................................13
Item 2. Properties...................................................................................14
Item 3. Legal Proceedings............................................................................14
Item 4. Submission of Matters to a Vote of Security Holders..........................................14
Part II.................................................................................................15
Item 5. Market for Registrant's Common Equity........................................................15
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations........15
Results of Operations..............................................................................15
Liquidity and Capital Resources....................................................................17
The Year 2000......................................................................................17
Item 7. Financial Statements.........................................................................20
Independent Auditors Report........................................................................21
Report of Independent Accountants..................................................................22
Balance Sheets.....................................................................................23
Statements of Operations...........................................................................24
Statements of Cash Flows...........................................................................25
Statements of Stockholders' Equity.................................................................27
Notes to Financial Statements......................................................................28
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......................................................................42
Item 11. Security Ownership of Certain Beneficial Owners and Management..............................42
Item 12. Certain Relationships and Related Transactions..............................................42
Part IV.................................................................................................43
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................43
(a) Exhibits.....................................................................................43
(b) Reports on From 8-K..........................................................................44
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PART I
ITEM 1. BUSINESS
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). The Company develops, markets and supports team-oriented
development software that targets the evolving needs of corporate information
technology (IT) structures which support projects requiring technical
collaboration on an enterprise level. The Company's current product line
consists of the recently launched products StarTeam(R) 4.0 and Enterprise Suite,
as well as StarSweeper, StarContent, RoundTable(R) and Versions(R). StarTeam 4.0
has been recognized in the industry as the only product to effectively integrate
the essential components of SCM tools in one easy-to-use and intuitive interface
built on top of a collaborative framework. The Company has chosen to focus on
technical collaboration and team productivity since the wide usage of the
Internet has created a tremendous potential market for distributed project teams
needing secure, remote access to projects. The Company has also practically
eliminated the barriers to entry for current users of other SCM tools by
inter-operating with the leading Windows based SCM products. Furthermore, the
Company's products utilize and are tightly integrated with various Microsoft
technologies, a market leader in technology software.
The Company's address is 4 Hutton Centre Drive, Suite 800, Santa Ana, CA 92707.
The Company's registered office is in the City of Wilmington, County of New
Castle, Delaware. The main telephone number is (714) 445-4400. The corporate Web
site is http://www.starbase.com. The Company's federal tax identification number
is 33-0567363.
THE MARKET OPPORTUNITY
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 application
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, Sybase PowerBuilder, Borland
Delphi, etc., the industry press has continued to report that the majority of
software projects still come in late and over budget.
Windows 95/98, Windows NT and UNIX Software Development
Industry research indicates that application development responsibility is
increasingly shared by the MIS organization and other operating divisions of
corporations that develop distributed applications with components running on
the de-facto desktop standard, Microsoft Windows. In response to this trend,
software companies are offering a new generation of object-oriented, client-side
development tools to address the desktop application development needs.
Current trends identified by leading industry research organizations also show
an increasing adoption of Windows NT as an application server. This trend,
together with the one described in the paragraph above, demonstrates that there
is a very sustained demand for tools that are highly integrated with the Windows
environment and which can also be accessed from other platforms.
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-
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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. Corporate initiatives such as
electronic commerce (e-commerce) and WEB development are creating a sustainable
model of groups such as illustrators, content providers, reviewers, outsourcers
and even clients actively participating intensely in the development, deployment
and maintenance of applications.
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 technical collaboration between team
members to resolve design issues, determine functional specifications or discuss
software defects, or integration of content providers into the development of
WEB-based applications. Automated workflow between team members to reduce cycle
time is also not addressed by these products. These are all critical team
productivity issues.
The StarTeam products augment and complement existing IDEs and are built on an
SCM foundation. The SCM component of StarTeam is also a stand-alone 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 and StarTeam as an integral component of
their IDE. StarTeam also extends SCM capabilities to other members of the
project team who do not use traditional application development tools.
Web site Content Production and Management, Quality Control and e-Commerce
Development
The increasing emphasis on e-commerce applications developed using the standard
Internet protocol HTTP (HyperText Transfer Protocol), and client standards such
as HTML, dHTML and XML, has brought about a growing need in the development
community for products that help developers and administrators control the
deployment of these applications. The Company is focused on delivering a line of
products that will support the development and administration of e-commerce
applications in a manner integrated with StarTeam 4.0's collaboration and SCM
features, while providing increased productivity and higher quality.
StarBase's upcoming product, code-named StarTeam.com, is designed to facilitate
a simple and effective relationship between web development team members, their
development and publishing processes, and StarTeam itself. At the heart of
StarTeam.com's functionality is its ability to provide management controls that
separate the development and testing stage of a web application, from the
production stage. StarTeam.com is based on a process-oriented solution that is
integrated with quality assurance tools, to assist web managers in maintaining a
clean production state. To achieve these objectives, StarTeam.com utilizes
pre-existing tools and processes, such that the benefits of configuration and
change management add value in terms of productivity, management, and control
for web managers.
The growth of the Internet and Intranet markets represent a new alternative to
enterprises that develop and disseminate internal and external information.
Currently most changes to a corporate web site must go through a webmaster or
web administrator, and usually come from employees spanning multiple
departments, all with different priorities. When considered as a team, it is
important to note that out of those diverse users (e.g., content providers,
designers, illustrators, JAVA and HTML developers, editors, technical & customer
support, sales & marketing personnel, etc.) only a minority are traditional
developers. 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 environment becomes critical. With tools such as
StarTeam.com, 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.com, these users can send information directly to a web
site, easing the burden for web administrators. Without a product such as
StarTeam.com, 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.
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Traditional Software Configuration Management (SCM)
The traditional SCM market has been defined as a technical, extremely
specialized and intrusive technology, targeted to large groups of developers,
concentrated both geographically and functionally. This market has gone through
significant changes created by newly emerging operating platforms (i.e.,
mainframe library managers, UNIX technical SCM tools and PC SCM tools) and
management philosophy (i.e., production control oriented on the mainframe,
process-management oriented on UNIX, and productivity-driven on the PC and Local
Area Network). These changes in platform and management strategies created
opportunity for several vendors to secure leading positions in each of those
segments. StarBase management believes that two powerful forces are creating new
disruptions in this market, which are creating opportunities for the Company's
products.
The first disruption is the globalization of the corporate IT structures of
today's competitive companies. Technical collaborators, tools and environments
that allow the corporate IT to deliver information services (i.e., the
"info-structure") are fast becoming global and distributed in nature. Therefore,
in today's fast paced corporate environment more people are working on a single
application or mission-critical project from multiple locations. This is a trend
that favors StarBase because the Company's products have, for the last two
years, supported fully and extensively distributed use across geographical
locations, and have been highly optimized for those scenarios. Other competing
SCM products are only now starting to deliver similar functionality, however,
they are impaired by outdated product architectures that are difficult to change
without sacrificing continuity for existing customers.
Secondly, IT info-structures are experiencing a diversification of the
development function in enterprise wide projects. Traditional SCM tools were
developed for highly specialized and technical groups of developers. In that
context, loss of productivity by the need to extensively train users and modify
existing processes was not significant. However, extensive training and
modification of existing processes can become roadblocks, as increased
collaboration among various departments of a company is required. Management
believes that customers will not accept losses in productivity for increased
collaboration with the development organization. Management also believes this
trend also favors the StarBase products, which have been consistently rated as
the easiest to use and implement in its product category, as demonstrated by the
large number of the product's users who are not traditional application
developers.
MARKET SIZE
According to a report by International Data Corporation (IDC), the market for
SCM is growing by roughly 25% and approaching $600 million in 1998. Management
believes that the SCM market is currently undergoing a dramatic transformation.
Corporations require support for globally distributed teams via the Internet,
standards-based integrations to leading technologies, and ease-of-use to allow
other users to collaborate in development projects, all of which are
comprehensively addressed by the currently available StarTeam products.
StarTeam products also include integrated tools from other markets such as
defect tracking and project management, thus bringing together not only software
developers but also technical collaborators (designers, documentation staff,
content providers, and so on) which historically have not participated in the
traditional SCM market. Thus, StarBase has the potential to secure market share
beyond traditional SCM. The precise market size and potential for StarBase
products beyond the scope of SCM have not been fully recognized, because the
Company's products transcend the traditional SCM market. Therefore, an
estimation of the true market for StarTeam is undetermined.
The new Web product line targets the rapidly growing market for Web site and
e-commerce application development solutions that help to support the explosion
in Internet commerce. It has been estimated by International Data Corporation
(IDC) that Internet commerce will more than double in 1999 to $68 billion, with
online spending to reach nearly $1 trillion by 2002. Furthermore, IDC estimates
that the worldwide
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market for Web professional development tools should grow to over $950 million
by 2002, this represents a three fold increase from today's market size. Again,
the exact market opportunity for current and upcoming StarBase Web products is
unclear at this time as the market is in its very early stages and precise
definitions and segmentations have not been made.
STARBASE STRATEGY
StarBase's strategy is to deliver technical collaboration solutions that
facilitate the effective management of mission-critical IT projects. 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 SCM product line that is
overall best-of-breed. The Company is striving to evolve the products so that
each major integrated component is best-of-breed and so that the architecture
also allows the integration of best-of-breed components from other companies.
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.
Achieving early market acceptance and awareness is a vital part of the Company's
overall strategy. In fiscal 1998 and 1999 the Company gained both
industry/customer awareness and credibility with the early 1998 product launch
of its flagship product StarTeam 3.0. By the end of calendar 1998, a solid
foundation of more than 1,500 customers was 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.
With the introduction of StarTeam 4.0 and Enterprise Suite in February of 1999
the Company sought to establish a unique market position. The Company believes
StarTeam 4.0 offers 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 4.0 suite of products. These products
represent a new class of software development tools, which should uniquely set
the Company apart from its competition.
The Company is furthermore leveraging its strengths in the SCM market to enter
the web site content management and e-commerce development market with unique
and competitive offerings. The Company believes that the emerging market of
e-commerce Web site development requires a solution grounded in advanced SCM,
that also optimizes team collaboration through ease-of-use to accommodate
non-programmers who have become an increasingly important and sizable part of
Web development teams. Leading industry analyst organizations like Hurwitz Group
point to this opportunity, "Managing web site production, development and
maintenance is a critical requirement for today's corporate IT departments.
Organizations must have reliability, audibility and predictability in their
applications in order to compete."
STARBASE PRODUCT LINE
The first SCM 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, offered enhanced
functionality, a combined server product (StarTeam VirtualTeam Server) and a
client product for small teams. StarTeam 3.0 Professional, released in February
1998, offered an advanced, visually oriented SCM functionality, and a high
performance client-server architecture for distributed, world-wide operation for
larger professional teams. StarTeam 4.0 and Enterprise Suite, released in
February of 1999, has built upon the successes of these prior
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products to deliver a more comprehensive and integrated solution for supporting
enterprise level corporate needs in application development.
StarTeam 4.0 and Enterprise Suite
StarTeam is a SCM solution designed to promote team collaboration while
enhancing overall project management and increasing developer productivity.
StarTeam enables project predictability, enhances control, increases visibility,
multiplies team productivity and accumulates knowledge to correct chronic
project problems. StarTeam seamlessly integrates with today's most popular
development environments, source code control systems and project management
solutions to provide a complete environment geared towards successful software
development projects.
StarTeam 4.0 delivers all the key functionality required to support team
development in today' widely distributed, multi-departmental corporate projects:
- - Collaborative infrastructure to enhance communication across all team
members.
- - Location independence such that all team members can access project
information, at any time, from anywhere.
- - Visual Configuration makes SCM easy, productive and efficient.
- - Task-driven development to implement process control without lost of
productivity.
- - Integrated Change Management controls the detection and resolution of
software defects and captures all critical data to maintain the context of
the work right alongside the source code.
- - Ease of use is facilitated through a highly integrated interface extends the
benefits of SCM across teams.
- - Component-based plug-in functionality achieved through open standard JAVA
and COM APIs.
- - Inter-operability with PVCS(TM) and SourceSafe(TM) allows StarTeam to
inter-operate across different source code control solutions, because team
productivity cannot be enhanced by requiring everybody to adopt new
standards or discard existing infrastructure.
The Company believes that the StarTeam Enterprise Suite is the first SCM
solution to provide the base for predictability and control of the application
delivery lifecycle and the foundation for continuous process improvement.
Enterprise Suite provides a unique, integrated set of customizable components,
task driven process management, Microsoft Project integration, and StarDisk, an
intuitive Windows Explorer client interface. StarTeam 4.0 and StarTeam
Enterprise Suite deliver enhanced enterprise team productivity that reduces
development time and lowers the cost of expensive application projects, while
improving quality and overall control of business-critical applications.
StarTeam Enterprise Suite adds to the StarTeam 4.0 product a number of
productivity components to take it well into the enterprise and to integrate
with the established work processes of mature development organizations. The
first delivery of StarTeam Enterprise Suite includes the following
functionality:
- - Task Management: This component provides the ability to implement process
management without compromising productivity. StarTeam's Task Component
enables both local and remote users to organize project plans, define tasks,
subtasks and milestones, monitor task duration and schedules, control
resource allocation and availability, create and view work records to
determine actual work completed or remaining, keep project management and
development workflow synchronized.
- - Microsoft Project Integration: Delivers a seamless integration with
Microsoft Project that allows project managers to automatically obtain
project status and updates via repository synchronization. This added
functionality interacts with the Task Component to allow the sharing of
information between StarTeam 4.0 and Microsoft Project 98. Project Managers
can export their MS Project tasks into StarTeam to create StarTeam tasks.
During the export process, MS Project resources will be mapped to StarTeam
team members. This allows the automatic creation of task and work
definitions
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for each team member. In addition, Project Managers can import StarTeam work
records into MS Project to allow the automatic status update for tracking
their projects.
- - Repository Customization: Allows technical organizations to tailor StarTeam
to fit their internal software configuration management system and existing
processes, thereby giving development organizations the means to achieve
their goals of reducing time-to-market and improving software quality. Users
can now modify values of the existing enumerated StarTeam fields and also
create custom fields to better represent information specific to their
environment. Project administrators can also determine which users have the
rights to perform repository customizations.
- - StarDisk: An advanced Windows Explorer interface that maps a virtual drive
to the StarTeam repository allowing users to view files and access certain
StarTeam functions, without running the StarTeam client application.
StarContent
StarContent delivers an environment geared for controlled and organized web
development. In one unified and easy to use product, Web site teams can get
everything they need to create, maintain and manage content and components of
their Intranet and Web development projects. StarContent delivers content
management and process control to webmasters together with an easy to use
environment for content contributors. StarContent allows all team members to
participate in the decision making process, while maintaining control over
history and evolution of the web project. StarContent also includes the most
advanced web quality control solution available today.
- - Intelligent Revision HistoryTM with project rollback
- - Flexible life-cycle and environment configuration
- - Parallel development with private and public views
- - Project rollback
- - Instant PublishingTM
- - Visual Differencing and file Merging
- - Concurrent and parallel development via project branches & views
- - Easy merge project branches
StarSweeper
StarSweeper is a quality control solution that assists Web professionals in
deploying operationally sound, consistent, and responsive Web sites, thereby
ensuring the highest level of user satisfaction. StarSweeper is a highly
configurable web tool that generates JAVA-enhanced HTML reports to help Web
professionals analyze site performance, layout and content on a daily basis.
StarSweeper Workstation and Enterprise Edition are the first in a series of web
oriented products being introduced by StarBase, leading up to the expected Fall
1999 release of the product code-named StarTeam.com, a total solution for Web
site and Web application management.
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, 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
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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 exclusively.
Roundtable TSMS is a comprehensive repository-based Total Software Management
System (TSMS) designed for and implemented in the Progress 4GL. Roundtable
integrates with the Progress development environment seamlessly and provides
programmers, quality assurance staff and managers with a wide range of powerful
tools to develop and manage the deployment of higher quality software
applications more predictably and at a lower cost.
COMPETITION
SCM Market
The market for configuration management solutions for application development,
like StarTeam, is intensely competitive. The major developers and competitors in
the lower-end SCM marketplace include Merant (PVCS), Microsoft (Visual
SourceSafe) and Mortice Kern Systems, Inc., "MKS", (Source Integrity), with
Continuus (Continuus/CM), Rational (ClearCase) and Computer Associates
(CCC/Harvest) products competing at the high-end of the software configuration
management market. At this time, the Company knows of no company that offers the
comprehensive set of integrated tools found in StarTeam, nor the Internet
management capabilities that are present in StarTeam VirtualTeam Server. Merant,
MKS, Microsoft, Rational 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.
Most of these companies have established greater market recognition and have
substantially greater financial, production and marketing resources than the
Company. The Company, however, is not currently aware that any of these
companies are developing advanced SCM solutions such as StarTeam that provide a
comprehensive set of collaborative 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 advanced SCM components.
An advanced SCM solution will incorporate a number of functional components
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. StarTeam currently integrates items 3 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) Software Component Analysis. There are currently specialized, individual
tools that analyze such things as test coverage and software code complexity.
The Company's products are planned to include
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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.
3) 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.
StarTeam 4.0 Enterprise products tracks 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.
4) Software Configuration Management. The primary competitors in this category
are Merant with PVCS, MKS with Source Integrity, and Microsoft with Visual
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
SCM functionality available in StarTeam competes favorably with these products
at both the user interface and feature level.
5) Process-oriented Software Configuration Management. Rational Corporation's
ClearCase and Computer Associate'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 from small development groups to complete
corporate enterprises.
6) Change Management with Defect Tracking. There is no dominant vendor in the
bug database (defect tracking) segment of the market today. Elsinore's Visual
Intercept and Merant'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, all
significant competitors offer tracking products. The Company believes that the
StarTeam 4.0 change management facilities with defect tracking offers features
that exceed those of existing bug database products, while offering integration
within the advanced SCM 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., Yahoo, 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. StarBase has delivered a
threaded conversation capability in StarTeam that is comparable to the features
offered in other commercially available products. However, StarTeam allows users
to retain the context of these conversations by 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.
8) Workflow Systems. Workflow 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 workflow into their messaging paradigms and numerous companies are delivering
market specific solutions. 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.
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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 awards
including Infoworld's "Best of the Test Center" in January of 1998.
Management believes there are significant barriers-to-entry into the Compay's
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.
Web Tools Market
The market for Web content management solutions that address the need to better
manage and control web objects is in its infancy with no clear market leaders at
this time. A few vendors that have notable name recognition include InterWoven,
Vignette and FutureTense. InterWoven targets the high end of web content
management and offers high cost products, while Vignette has its offerings
rooted in Relationship Management with subsets of functionality for content
management.
Smaller new entrants are anticipated in this segment as well as traditional SCM
vendors with large database vendors expected to introduce new products as well,
but will likely rely on smaller vendors to deliver the technology depth to cover
all the various aspects of web development. We believe that other SCM vendors
will be unsuccessful at penetrating this segment primarily due to their complex
architectures and obtrusive, process oriented tools. Web professionals demand
easy-to-use, intuitive solutions that deliver the necessary functionality. The
Company believes that adding a web interface to a product, which some
traditional SCM vendors are offering, will not provide a sufficient solution.
The Company believes that the StarTeam VirtualTeam Server and upcoming products
like StarTeam.com will be able to quickly attract further interest in our
solutions both from a product licensing arrangement as well as more strategic
opportunities. Early indications suggest that our new offerings provide
immediate value by offering key functionality combined with flexible interfaces
that help regain control of the evolving web lifecycle, thus helping to enhance
the on-line user experience when visiting a web site.
SALES AND MARKETING
During fiscal 1999, StarBase Corporation executed on the strategy of penetrating
our broad customer-base and selling StarTeam 3.0 on an enterprise level to
expand the implementation of StarTeam in existing and new accounts. With the
February 1999 release of StarTeam 4.0, the Company could expand its penetration
of the enterprise level corporate accounts, which are larger in dollar value as
well as the amount of licenses implemented. The shift in customer base came as a
result of the maturity of the product's capabilities and the direction
management has chosen in this marketplace. The Company has furthermore refined
its comprehensive, multi-channel sales organization that includes OEM sales,
direct sales group (Corporate Sales), domestic channel sales and an
international distribution network. Additionally, the marketing department has
sought to further increase industry and potential customer recognition though
various marketing programs.
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
11
<PAGE> 12
campaigns, trade show participation, seminars, and press relations. Since the
introduction of StarTeam in 1996 through March 1999, the corporate sales
organization has sold over 18,000 copies of StarTeam to over 1,400 corporate
customers. These clients includes consulting organizations (Booz Allen and
Hamilton, EDS, ABT Corporation, KPMG Peat Marwick, Anderson Consulting),
manufacturers (Boeing, Eaton, Westinghouse, GE, Lockheed Martin, Siemens),
software companies (Network Associates, Auto-Soft), electronics companies
(Intel, Fujitsu, Motorola, Xerox), financial institutions (Bank of America,
Chase Manhatten Global Services, Deutche Bank, Schwab), and the federal
government (IRS, Air Force, Navy, US Dept. of Labor and Commerce).
Progress Sales
In January of 1999, the Company renewed its agreement with Progress Software
that allows them to sell and distribute the Roundtable Total Software Management
System exclusively. The new agreement has created a cooperative sales and
marketing program between the two companies to facilitate the sale of Roundtable
products into the Progress customer base, and provide better service and support
to Progress customers. StarBase now works in conjunction with Progress to aid in
pre- and post-sales support services of Roundtable products to Progress
customers.
Domestic Channel Sales
In fiscal 1999, the Company continued the recruitment program for VAR's through
a program that offers packaged products and technical support. The StarPartner
Program is intended to expand the distribution channel to include SCM
consultants, value-added resellers, web site consultants, and system
integrators.
International Sales
In fiscal 1999, the Company continued to expand its reach into the international
market. The Company signed distribution agreements with several new
international distributors to sell, market, and support StarBase products to
end-users, corporations, resellers and VARs in their respective territories.
Some of the agreements mark the beginning of representation of StarBase products
into the respective countries. 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
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.
12
<PAGE> 13
EMPLOYEES
As of March 31, 1999, the Company had 90 full-time and 6 part-time employees. Of
these employees, 39 full-time and 2 part-time were in Research and Development,
15 full-time and 3 part-time were in Administration and 36 full-time and 1
part-time were in Sales and Marketing. The Company's workforce is not unionized
and management believes that the Company's relations with its employees are
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
History of Losses
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, 1999, the Company had an
accumulated deficit of $52,038,000. The Company anticipates incurring additional
losses until it can successfully market and distribute its existing 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 4.0 and Enterprise 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 the Company's software products is evolving.
There can 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.
13
<PAGE> 14
ITEM 2. PROPERTIES
In July 1998, the Company entered into a sub-lease for new office space located
at 4 Hutton Centre Drive, Santa Ana, CA 92707. The new offices consist of 17,000
square feet costing approximately $27,000 per month through February 22, 2000.
Simultaneously, the Company also entered into a lease agreement for 4,100
contiguous square feet beginning January 1999 through September 2003 at a rate
of approximately $8,000 per month. In addition, the Company entered into a lease
agreement for the 17,000 square feet beginning February 23, 2000 through
September 2003 at a rate of approximately $41,000 per month.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
The Company's Common Stock trades on the NASDAQ Stock Market under the symbol
"SBAS". 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.
<TABLE>
<CAPTION>
DATE HIGH LOW
---- ------ ------
<S> <C> <C>
FISCAL YEAR 1999
Quarter Ended March 31, 1999 $2.50 $0.62
Quarter Ended December 31, 1998 1.25 0.59
Quarter Ended September 30, 1998 2.13 0.66
Quarter Ended June 30, 1998 3.41 1.47
FISCAL YEAR 1998
Quarter Ended March 31, 1998 $3.75 $1.13
Quarter Ended December 31, 1997 2.00 1.00
Quarter Ended September 30, 1997 2.06 0.88
Quarter Ended June 30, 1997 1.75 0.53
</TABLE>
As of March 31, 1999, based on information received from the Company's transfer
agent on the Company's common stock, the number of shareholders of record were
634. There were nine holders of Series E Preferred Stock, seven holders of
Series H Preferred Stock and one holder of Series I Preferred Stock.
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, 1999, the Company's balance sheet reflected an accumulated deficit
of $52,038,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year ended March 31, 1999 compared to 1998
Total revenue increased $4,693,000 or 219%, to $6,832,000, from $2,139,000 in
fiscal 1998. This increase was substantially due to increased license and
maintenance revenue from the StarTeam product line. StarTeam 3.0 was released in
February 1998 and StarTeam 4.0 was released in February 1999.
StarTeam is marketed primarily to technical professionals. In the typical sales
cycle, the product is purchased as a pilot test program, installed and evaluated
on a smaller scale (10-20 seats), and, if the evaluation is satisfactory,
implemented on larger projects or throughout the company, possibly involving up
to hundreds of users. The time span from an initial test order to implementation
throughout the customer's
15
<PAGE> 16
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. The Company has observed this scenario with many of its
existing customers and is now seeing a substantial increase in revenues from
these customers.
Gross profit increased 220% to $6,324,000 in fiscal 1999 from $1,977,000 in
fiscal 1998, primarily due to the increased sales volume. Gross profit, as a
percentage of revenues, increased to 93% from 92% in fiscal 1998.
Cost of revenues 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.
Operating expenses increased by approximately $6,906,000 or 85% from fiscal
1998. This increase was substantially all due to increased labor costs necessary
to develop and market the new products.
The number of persons employed by the company at March 31, 1999 compared with
March 31, 1998:
<TABLE>
<CAPTION>
Department: 1999 1998
----------- ------ ----
<S> <C> <C>
Research & Development 40 31
Sales & Marketing 36.5 26
Administration 16.5 9
------ ----
Total 93 66
====== ====
</TABLE>
Part time employees are included in the count as one-half.
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.
Research and development expenses increased $1,675,000 from the prior year. The
majority of the increase was due to increased compensation-related expenses due
to a higher average number of employees during fiscal 1999 as compared to fiscal
1998. In addition, costs increased for outside contractors engaged for special
programming and testing.
Selling, general and administrative expenses
For the year ended March 31, 1999, selling, general & administrative expenses
increased approximately $5,231,000 over the prior year. This was substantially
all due to increased compensation related expenses due to a higher average
number of employees during fiscal 1999 as compared to fiscal 1998.
Income Taxes
The Company incurred minimal income taxes in the last two fiscal years due to
its cumulative losses. As of March 31, 1999, the Company has net operating loss
("NOL") carryforwards of approximately $36.8 million and $17.6 million for
federal and state income tax purposes. The NOL are available to offset future
taxable income at varying amounts through the year 2019. At March 31, 1999, a
100% valuation allowance has been provided on the net deferred tax assets since
the Company can not determine that such are "more likely than not" to be
realized.
New Accounting Pronouncements
In fiscal 2000, the Company plans to adopt SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This pronouncement is not
expected to have a significant impact on the Company's reported financial
position or results of operations.
16
<PAGE> 17
Inflation
Management believes that inflation has not had a material impact on the
Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of year-end were $1.4 million in fiscal 1999 and
$4.2 million in fiscal 1998. At March 31, 1999 the Company had working capital
of $2.3 million, compared to $3.6 million at March 31, 1998.
Proceeds from the issuance of equity securities represent the primary source of
funds for meeting the Company's requirements for operations. During fiscal 1999,
the Company generated $7.1million in cash from the sale of new Preferred Stock.
In addition, $0.6 million of capital was raised from the exercise of warrants
and $0.1 million was raised from the exercise of employee stock options.
During fiscal 1999, the Company used $9.4 million for operations, an increase of
approximately $3.8 million from the amount used for operations in the prior
year. The increase was primarily due to an increased loss from operations due to
investments in research and development and in sales and marketing
infrastructure and an increase of $2.2 million in accounts receivable. Capital
expenditures totaled $0.6 million, representing purchases primarily of computer
equipment and furniture. Capital expenditures in fiscal 1998 totaled $0.4
million.
Management projects that the Company will use approximately $18 million for
operating activities during the next fiscal year. Based upon these projections,
the Company's working capital is insufficient for the Company to maintain its
current level of operations through fiscal 2000. The Company is currently in the
process of arranging additional financing for fiscal 2000. The Company believes
that proceeds from the sale of debt and equity securities during fiscal 2000,
combined with operating revenues, will be sufficient to allow the Company to
conduct its operations during the fiscal year ending March 31, 2000. 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.
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:
- - The software products sold to customers;
- - Hardware and software systems used for internal operations, including
proprietary software systems as well as software supplied by third parties;
- - Communications networks such as the client/server Network, the Internet and
the internal intranet;
- - The hardware and software systems of our customers and suppliers;
- - Non-information technology systems and services, such as utilities,
telephone systems and building systems.
17
<PAGE> 18
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:
- - Assignment of responsibility for issues, such as systems, facilities,
equipment, software and legal audit;
- - Inventory of all aspects of the Company's operations and relationships
subject to the Year 2000 problem;
- - Communication as necessary with significant supplier to determine the
readiness of their products and systems;
- - Comprehensive analysis, including impact analysis and cost analysis of the
Company's Year 2000 readiness;
- - 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 centruy 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:
- - Delay or loss of revenue;
- - Cancellation of customer contracts;
- - Diversion of development resources;
- - Damage to the Company's reputation;
- - Increased customer support and warranty costs;
- - Litigation costs.
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.
18
<PAGE> 19
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 plans
to develop contingency plans for handling Year 2000 problems that are not
detected and corrected prior to their occurrence and are currently in the
process of developing such a plan.
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.
19
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS
Financial Statements of StarBase Corporation
<TABLE>
<S> <C>
Independent Auditors Reports 21
Balance Sheets at March 31, 1999 and 1998 23
Statements of Operations for the years ended March 31, 1999 and 1998 24
Statements of Cash Flows for the years ended March 31, 1999 and 1998 25
Statements of Stockholders' Equity for the years ended March 31, 1999 and 1998 27
Notes to Financial Statements 28
</TABLE>
20
<PAGE> 21
INDEPENDENT AUDITORS REPORT
To The Board of Directors and
Stockholders of StarBase Corporation
We have audited the accompanying consolidated balance sheet of StarBase
Corporation (the Company) as of March 31, 1999, and the related statement of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of StarBase Corporation at March 31, 1999, and
the results of its operations and cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's working capital is insufficient to support
the Company's projected operating needs. Additionally the Company has
experienced recurring losses from operations. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning this matter are described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Deloitte & Touche LLP
Costa Mesa, California
June 18, 1999
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and
Stockholders of StarBase Corporation
In our opinion, the balance sheet and the related statements of operations, of
stockholders' equity and of cash flows as of and for the year ended March 31,
1998 present fairly, in all material respects, the financial position, results
of operations and cash flows of StarBase Corporation as of and for the year
ended March 31, 1998, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PricewaterhouseCoopers LLP
Costa Mesa, California
June 26, 1998
22
<PAGE> 23
STARBASE CORPORATION
BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,363 $ 4,167
Restricted cash 39 --
Marketable securities 121 --
Accounts receivable, net of allowances of $155 (1999) and $89 (1998) 2,528 464
Notes and other receivables 9 45
Inventories 51 57
Prepaid expenses and other assets 214 113
-------- --------
Total current assets 4,325 4,846
Property and equipment, net 987 747
Developed technology, net 971 --
Note receivable from officer 94 76
Long-term restricted cash 79 --
Other non-current assets 149 13
-------- --------
Total assets $ 6,605 $ 5,682
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,264 $ 941
Deferred revenue 658 263
Current portion of long-term debt 95 10
-------- --------
Total current liabilities 2,017 1,214
Long-term liabilities:
Long-term debt, less current portion 116 38
Other long-term liabilities 10 --
-------- --------
Total long-term liabilities 126 38
-------- --------
Total liabilities 2,143 1,252
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, 588,993 and
3,772,952 shares issued and outstanding at March 31, 1999 and March 31, 1998;
liquidation preference of $4,916 (March 31, 1999) and $4,716 (March 31, 1998) 6 38
Common stock, $.01 par value; 50,000,000 shares authorized; 28,636,362 and
18,580,499 shares issued and outstanding at March 31, 1999 and March 31, 1998 286 186
Additional paid-in capital 56,208 46,287
Accumulated deficit (52,038) (42,081)
-------- --------
Total stockholders' equity 4,462 4,430
-------- --------
Total liabilities and stockholders' equity $ 6,605 $ 5,682
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE> 24
STARBASE CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years ended
March 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
License $ 5,262 $ 1,481
Maintenance, training and consulting 868 276
Royalty 702 382
-------- --------
Total revenues 6,832 2,139
Cost of Revenues:
Products, licenses and other 508 162
-------- --------
Gross margin 6,324 1,977
Operating Expenses:
Research and development 4,437 2,762
Selling, general and administrative 10,601 5,370
-------- --------
Total operating expenses 15,038 8,132
-------- --------
Operating loss (8,714) (6,155)
Total interest and other income expense 40 (877)
-------- --------
Loss before income taxes (8,682) (7,032)
Provision for income taxes 1 1
-------- --------
Net loss (8,683) (7,033)
Non-cash dividend and accretion of
beneficial conversion feature 1,277 2,832
-------- --------
Net loss applicable to
common stockholders $ (9,960) $ (9,865)
======== ========
Per share data:
Basic and diluted net loss per common
share $ (0.49) $ (0.70)
======== ========
Basic and diluted weighted average number
of common shares outstanding 20,526 14,126
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE> 25
STARBASE CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the years ended
March 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (8,683) $ (7,033)
Adjustments to reconcile net loss to
net cash used in operating activities:
Non-cash interest -- 933
Depreciation and amortization 386 238
Provision for doubtful accounts 66 24
Loss on disposition of property, equipment and
capital lease 7 --
Deferred revenue 397 160
Stock option compensation expense 177 --
Other adjustments -- 19
Changes in operating assets and liabilities:
Accounts receivable (2,130) (370)
Notes and other receivables 36 38
Inventories 6 (23)
Prepaid expenses 150 199
Other non- current assets (156) (6)
Accounts payable and accrued liabilities 314 159
-------- --------
Net cash used in operating activities (9,430) (5,662)
Cash Flows from Investing Activities:
Increase in restricted cash (118) --
Increase in marketable securities (121) --
Capital expenditures (600) (407)
-------- --------
Net cash used in investing activities (839) (407)
Cash Flows from Financing Activities:
Proceeds from sale of preferred stock 7,053 4,950
Proceeds from issuance of common stock:
Private placements 60 --
For payment of expenses 152 --
Exercise of options 61 181
Exercise of warrants 581
Proceeds from convertible debentures -- 3,100
Payment of financing related costs (358) (711)
Payments on capitalized lease obligations (84) (6)
-------- --------
Net cash provided from financing activities 7,465 7,514
-------- --------
Net increase in cash and cash equivalents (2,804) 1,445
Cash and cash equivalents, beginning of year 4,167 2,722
-------- --------
Cash and cash equivalents, end of year $ 1,363 $ 4,167
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE> 26
STARBASE CORPORATION
SUPPLEMENTAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
For the years ended
March 31,
--------------------
1999 1998
------ ------
<S> <C> <C>
Interest paid in cash $ 16 $ 11
====== ======
Income taxes paid $ 5 $ 1
====== ======
Non-cash investing and financing transactions:
Non-cash preferred stock and common stock dividends (Note 7) $1,277 $4,492
Conversion of preferred stock to
common stock (Note 7) 85 8
Conversion of debentures to equity (Note 7) -- 2,875
Conversion of warrants to
common stock (Note 7) -- 16
Capitalized lease financing 16 54
Capitalized insurance financing 252 --
Options for services provided -- 28
Issuance of common stock for developed technology (Note 7) 987 --
</TABLE>
26
<PAGE> 27
STARBASE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Common Additional Total
----------------- --------------- Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Subscribed Capital Deficit Equity
------ ------ ------ ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 25 $ -- 13,319 $133 $ -- $ 33,414 $(30,556) $ 2,991
Preferred stock conversion
to common (710) (7) 855 9 -- (2) -- --
Preferred stock issued - Series D 1,200 12 -- -- -- 1,347 -- 1,359
Preferred stock issued - Series E 2,873 29 -- -- -- 3,105 -- 3,134
Preferred stock issued - Series F 385 4 -- -- -- 477 -- 481
Warrants converted to common stock -- -- 1,581 16 -- (16) -- --
Debentures converted to common
stock -- -- 2,704 27 -- 3,263 -- 3,290
Stock options exercised -- -- 121 1 -- 179 -- 180
Options for services provided -- -- -- -- -- 28 -- 28
Non-cash dividend -- -- -- -- -- 4,492 (4,492) --
Net loss -- -- -- -- -- -- (7,033) (7,033)
------ ---- ------ ---- ---- -------- -------- -------
Balance at March 31, 1998 3,773 38 18,580 186 -- 46,287 (42,081) 4,430
------ ---- ------ ---- ---- -------- -------- -------
Preferred stock conversion to
common stock (3,191) (32) 8,500 85 -- (53) -- --
Preferred stock issued - Series D -- -- -- -- -- (8) -- (8)
Preferred stock issued - Series E -- -- -- -- -- (26) -- (26)
Preferred stock issued - Series F -- -- -- -- -- (4) -- (4)
Preferred stock issued - Series G 3 -- -- -- -- 2,866 -- 2,866
Preferred stock issued - Series H 3 -- -- -- -- 2,938 -- 2,938
Preferred stock issued - Series I 1 -- -- -- -- 884 -- 884
Options and warrants issued for -- -- -- -- -- 177 -- 177
services provided
Common stock issued:
Exercise of options -- -- 49 -- -- 61 -- 61
Exercise of warrants -- -- 688 7 -- 623 -- 630
Asset Purchase & Sale -- -- 625 6 -- 981 -- 987
Private Placement -- -- 38 -- -- 58 -- 58
Payment of liabilities -- -- 156 2 -- 150 -- 152
Non-cash dividend -- -- -- -- -- 1,277 (1,277) --
Net loss -- -- -- -- -- -- (8,683) (8,683)
------ ---- ------ ---- ---- -------- -------- -------
Balance at March 31, 1999 589 $ 6 28,636 $286 $ -- $ 56,208 $(52,038) $ 4,462
====== ==== ====== ==== ==== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE> 28
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
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). The Company develops, markets and supports team-oriented
development software that targets the evolving needs of corporate information
technology (IT) structures which support projects requiring technical
collaboration on an enterprise level. The Company's current product line
consists of the recently launched products StarTeam(R) 4.0 and Enterprise Suite,
as well as StarSweeper, StarContent, RoundTable(R) and Versions(R).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
RESTRICTED CASH
On September 17, 1998, the Company pledged $118,000 of cash for an irrevocable
letter of credit related to the lease of new office space that was classified as
restricted cash on the balance sheet. The letter of credit will be reduced by
33.33% each year and will expire on July 2, 2001.
ACCOUNTS RECEIVABLE
The Company sells its products worldwide. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses and those losses have
been within management's expectations. Allowance for product returns and price
protection are included in accounts receivable on the accompanying balance
sheets.
One customer represented 10% of total revenue for the year ended March 31, 1999,
and 18% of total revenue for the year ended March 31, 1998. At March 31, 1999
and March 31, 1998 no one customer comprised greater than 10% of outstanding
accounts receivable.
MARKETABLE SECURITIES
The Company accounts for marketable securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. This standard
requires the Company to classify and account for investments in equity
securities that have readily determinable fair values and all debt securities as
follows: (1) debt securities that the Company has the intent and the ability to
hold to maturity are classified as held-to-maturity securities and are reported
at amortized cost; (2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near-term are classified as
trading securities and are reported at fair value, with unrealized gains and
losses included in earnings; and (3) debt and equity securities not classified
as held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earning and reported as a separate component of
stockholders' equity.
INVENTORIES
Inventories consist of the Company's software products and packaging and are
stated at the lower of cost (first-in, first-out) or market.
28
<PAGE> 29
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. 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. At
March 31, 1999, and March 31, 1998, property and equipment included equipment
under capital lease, net of accumulated amortization, of $60,000 and $51,000
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for the impairment and disposition of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." In accordance with SFAS 121, long-lived assets to be held are
reviewed for events or changes in circumstances which indicate that their
carrying value may not be recoverable. The Company periodically reviews the
carrying value of long-lived assets to determine whether or not an impairment to
such value has occurred and has determined based on its most recent assessment
that there was no impairment at March 31, 1999.
DEVELOPED TECHNOLOGY
Developed technology (net of accumulated amortization of $16,500 at March 31,
1999) is amortized on a straight-line basis over 5 years.
REVENUE RECOGNITION
During October 1997, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which provides
guidance in recognizing revenue on software transactions. SOP 97-2 is effective
for transactions entered into in fiscal years beginning after December 15, 1997,
and supersedes SOP 91-1. The Company adopted this statement, as amended, during
the year ended March 31, 1999.
Software license revenue is recognized upon shipment of packaged products.
Software maintenance revenue is recorded as deferred revenue and recognized
ratably over the contractual maintenance period, generally twelve months.
Revenue from training, which is recognized after the related services have been
performed, totaled $72,000 for the year ended March 31, 1999 and $12,000 for the
year ended March 31, 1998. Royalty revenue pertains to sales of the Company's
Roundtable Total Software Management System licensed to a distributor for
resale. Such revenue is recorded at the time the distributor sells the licensed
product.
WARRANTIES AND RETURNS
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.
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.
29
<PAGE> 30
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
INCOME TAXES
The Company follows the provisions of 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. A valuation allowance is provided when it is more likely
than not that deferred tax assets will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of cash and cash equivalents,
marketable securities, accounts, notes and other receivables, accounts payable
and accrued liabilities, and capital lease obligation. The carrying amount of
the Company's capital lease obligation approximates fair market value based on
prevailing market rates. The Company's other financial instruments generally
approximate their fair values at March 31, 1999 and 1998 based on the short-term
nature of these instruments.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees."
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.
FOR THE YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
<S> <C> <C> <C>
BASIC AND DILUTED LOSS PER SHARE
Net loss $(8,683)
Non-cash dividend (1,277)
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE (9,960) 20,526 $(0.49)
======
Effect of Dilutive Securities -- --
------- ------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER SHARE $(9,960) 20,526 $(0.49)
======= ====== ======
</TABLE>
30
<PAGE> 31
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
<S> <C> <C> <C>
BASIC AND DILUTED LOSS PER SHARE
Net loss $(7,033)
Non-cash dividend (2,832)
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE (9,865) 14,126 $(0.70)
======
Effect of Dilutive Securities -- -
------ ------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER SHARE $(9,865) 14,126 $(0.70)
====== ====== ======
</TABLE>
Common stock equivalents, which consist of options to purchase 2,091,067 shares
of common stock at prices ranging from $0.625 to $3.44 per share, warrants to
purchase 2,984,388 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 year ended March 31, 1999. Common stock equivalents, which
consist of options to purchase 3,420,527 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 $1.80 per share, and 1,418,638
common shares held in escrow were not included in the computation of diluted
loss per share because such inclusion would have been antidilutive for the year
ended March 31, 1998.
REPORTING CURRENCY
The accompanying financial statements are reported in the currency of the United
States of America. Certain warrants are denominated in Canadian dollars and are
indicated as CDN$.
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.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income." This
statement established standards for the reporting of comprehensive income and
its components. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. For each of the years ended
March 31, 1999 and 1998, there was no difference between net loss and
comprehensive loss.
OPERATING SEGMENT
In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise
and related information, the Company has determined that it has one operating
segment which operates in North America.
31
<PAGE> 32
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
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.
2. BASIS OF PRESENTATION
Management believes based upon projected operating needs that the Company's
working capital is insufficient for the Company to maintain its current level of
operating activities through March 31, 2000. The Company has also experienced
recurring losses from operations. 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 additional financing through the private
placement of common and/or convertible Preferred stock. The Company believes
that proceeds from the sale of debt and equity securities during fiscal year
2000, combined with operating revenues, will be sufficient to allow the Company
to conduct its operations during the fiscal year ended March 31, 2000. While the
Company has successfully raised equity capital in the past, there can be no
assurance that the Company will be successful in their efforts to obtain
additional financing in the future.
3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
(In thousands) March 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Property and equipment:
Computer hardware $ 1,337 $ 1,110
Furniture and fixtures 315 255
Computer software 199 269
Leasehold improvements 198 40
------- -------
2,049 1,674
Less accumulated depreciation and
amortization (1,062) (927)
------- -------
$ 987 $ 747
======= =======
Accounts payable and accrued liabilities:
Trade accounts payable $ 640 $ 390
Accrued professional fees 86 255
Accrued wages and benefits 493 205
Other accrued expenses 45 91
------- -------
$ 1,264 $ 941
======= =======
</TABLE>
32
<PAGE> 33
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. MARKETABLE SECURITIES
At March 31, 1999, the Company's marketable securities represent
available-for-sale securities that have been recorded at fair value and are
comprised of one equity stock for which its fair value approximates its cost.
5. CAPITAL LEASE AND LONG-TERM OBLIGATIONS
The Company is the lessee of certain office equipment under capital leases that
expire in 2002 and 2003. The assets are depreciated over their estimated useful
life.
The future annual minimum lease payments under the capital leases are as
follows:
<TABLE>
<S> <C>
Years ending March 31: (in thousands)
2000 $ 21
2001 21
2002 20
2003 3
2004 2
-----
Total minimum lease payments 67
Less amount representing interest (15)
-----
Present value of minimum lease payments 52
Less current maturities (14)
-----
$ 38
=====
</TABLE>
33
<PAGE> 34
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
In September 1998, the Company financed the renewal of its commercial insurance
(1 year policy) and director's and officer's insurance (3 year policy). The
asset is amortized over the life of the policies and the amortization is
included in general and administrative expense.
The future annual minimum payments under the financing are as follows:
<TABLE>
<S> <C>
Years ending March 31: (in thousands)
2000 $ 92
2001 81
-----
Total minimum payments 173
Less amount representing interest (14)
-----
Present value of minimum payments 159
Less current maturities (81)
-----
$ 78
=====
</TABLE>
6. INCOME TAXES
The Company has recorded a valuation allowance equal to the current and deferred
provision for federal income tax benefit for all periods 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, 1999, the Company had net
operating loss carryforwards of approximately $36.8 million and $17.6 million
for federal and state income tax purposes, respectively, expiring in varying
amounts through the year 2019 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 ownership
changes.
34
<PAGE> 35
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Deferred tax assets (liabilities) consist of the following:
(In thousands)
<TABLE>
<CAPTION>
March 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards $ 14,451 $ 11,995
State taxes (711) --
Accounts and notes receivable allowances 34 28
Accrued expenses 188 26
Deferred income 289 109
Credits 990 --
Deferred tax asset valuation allowance (15,241) (12,158)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
7. 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, 584,808 shares of Series E, 3,185 shares of Series H and 1,000 shares of
Series I are outstanding at March 31, 1999.
The Company accounts for the beneficial conversion feature of convertible
preferred stock in accordance with Emerging Issues Task Force Topic No. D-60.
Under Topic No. D-60, the beneficial conversion feature of convertible preferred
stock is recognized as a dividend and additional paid-in capital. The amount of
the beneficial conversion feature is measured at the date of issue of the
convertible security as the difference between the conversion price and the
market value of the common stock into which the security is convertible. This
amount is recorded as a non-cash dividend, with a corresponding increase to
additional paid-in capital and is recognized over the period from issuance date
to the date the preferred stock is first convertible. Thus, there is non effect
on total stockholders' equity.
ACTIVITY FOR YEAR ENDED MARCH 31, 1999
During the year ending March 31, 1999, 900,000 shares of Series D Preferred
Stock, 2,288,145 shares of Series E Preferred Stock, and 3,100 shares of Series
G Preferred Stock were converted into 1,068,982, 2,288,145 and 5,142,550 shares
of common stock, respectively.
Effective July 31, 1998, the Company completed a private placement of 3,100
shares of Series G Preferred Stock for $3,000,000. The Series G Preferred Stock
is not redeemable and has a liquidation preference of $1,000 per share. The
holders of Series G 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. Each share of Series G Preferred Stock is convertible,
after 120 days, into the Company's common stock, at a conversion rate which is
determined by dividing $1,000 by the Conversion Price. The Conversion Price
shall be the lesser of (a) $1.66 or (b) 95% of the average closing bid price of
the three lowest bid prices of common stock as reported by Bloomberg, L.P. for
shares traded in the United States during the 22 consecutive trading days
preceding the conversion date. In conjunction, the Company issued 805,234
warrants related to the Series G Preferred Stock. Of these warrants, 635,034 are
exercisable for one share of common stock at $0.75 through August 31, 2000,
after which the warrants will expire and 170,200 warrants are exercisable for
one share of common stock at a range of $0.59 to $0.84, expiring from November
10, 2000 to January 4, 2001. The fair value of these warrants using the
Black-Scholes pricing model at the date of grant was $201,354 and was recorded
as a non-cash dividend at the time of issuance.
35
<PAGE> 36
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
During November 1998, the Company entered into agreements to complete a three
phase private placement consisting of 3,185 shares of Series H Preferred Stock
for $3,000,000. The first phase closed in November 1998, the second phase closed
in December 1998 and the third phase closed in February 1999. The Series H
Preferred Stock is not redeemable and has a liquidation preference of $1,000 per
share. The holders of Series H 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. Each share of Series H Preferred Stock is
convertible, after 120 days, into the Company's common stock, at a conversion
rate which is determined by dividing $1,000 by the Conversion Price. The
Conversion Price shall be the lesser of (a) 110% of the average of the closing
bid prices of the common stock for the five-day trading period on the trading
date immediately preceding each Closing Date (the "Closing Price") or (b) the
average of the two (2) lowest closing bid prices of the common stock during the
thirty (30) trading days preceding the conversion date. In conjunction, the
Company issued 323,025 warrants with the Series H Preferred Stock. One-third of
the warrants is exercisable for one share of common stock at $0.95 through
November 24, 2003, one-third of the warrants is exercisable for one share of
common stock at $0.73 through December 20, 2003, and one-third of the warrants
is exercisable for one share of common stock at $1.93 through February 8, 2004
after which the warrants will expire. The fair value of these warrants using the
Black-Scholes pricing model at the date of grant was $177,642.
Effective January 26, 1999, the Company completed a private placement of 37,736
shares of restricted Common Stock for $60,000 to Company executives. The Company
also issued 7,548 warrants to purchase shares of common stock at $1.59 through
January 26, 2001.
On January 19, 1999, the Company entered into an accounts receivable purchase
agreement with Silicon Valley Bank for up to $2,000,000 of receivables. In
conjunction with the agreement, the Company issued 55,452 warrants to purchase
shares of common stock at $1.08 exercisable through January 19, 2004. At March
31, 1999, the Company has not sold any of its receivables pursuant to this
agreement.
Effective March 16, 1999, the Company completed a private placement of 1,000
shares of Series I Preferred Stock for $1,000,000. The Series I Preferred Stock
is not redeemable and has a liquidation preference of $1,000 per share. The
holders of Series I 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. Each share of Series I Preferred Stock is convertible,
after 120 days, into the Company's common stock, at a conversion rate which is
determined by dividing $1,000 by the Conversion Price. The Conversion Price
shall be the lesser of (a) $1.50 or (b) 90% of the average closing bid price of
the two lowest closing bid prices of common stock during the thirty (30)
consecutive trading days preceding the conversion date. In conjunction, the
Company issued 253,333 warrants with the Series I Preferred Stock. Each warrant
is exercisable for one share of common stock at $1.50 through March 16, 2002,
after which the warrants will expire. The fair value of these warrants using the
Black-Scholes pricing model at the date of grant was $198,360.
On March 17, 1999, the Company completed the purchase of certain intangible
assets of Site Technologies, Inc. for 625,000 shares of restricted Common Stock
valued at $987,500. The purchase price was allocated to intangible assets. The
purchase provides for the exclusive ownership and distribution rights of Site
Technologies core technology assets including the SiteSweeper, SiteMaster,
QuickSite, WebTools and SiteMarks products and related assets. The technologies
will be integrated with the Company's StarTeam product line, to produce a
next-generation technical collaboration and content management solution for
e-commerce application development.
36
<PAGE> 37
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
ACTIVITY FOR THE YEAR ENDED MARCH 31, 1998
In June 1997, the Company offered to exchange its common stock for then all
outstanding warrants. Holders of 4,743,534 warrants tendered, thereby receiving
1,581,178 shares of Common Stock. Warrant holders received one share of common
stock for every three warrants. The differential value of the stock on the offer
date over the calculated value of the warrants, aggregated $1,660,000 and has
been reflected as a non-cash dividend, with a corresponding increase in
additional paid-in capital.
In August and September 1997, the Company issued $3,100,000 in convertible 6%
debentures. The conversion benefit applicable to the debentures, calculated at
$870,000, has been accounted for as a non-cash interest charge, with a
corresponding addition to additional paid-in capital. The sale of the debentures
included the issuance of an aggregate of 82,668 warrants to purchase the
Company's common stock. The warrants are exercisable into the Company's common
stock at prices ranging from $1.58 to $1.80 and expire after three years. The
estimated value of the warrants, utilizing the Black-Scholes Model, was $85,000
and is being amortized over the two-year life of the debentures as additional
interest. In conjunction, 117,167 warrants were issued as finders' fees to the
selling group on the same terms, valued at approximately $120,000. During the
year, holders of $2,630,000 debentures converted their debentures into 2,703,823
shares of the Company's common stock. When the debentures were converted, the
corresponding unamortized warrant value and debt issuance costs were offset to
additional paid-in capital.
The remaining holders of $470,000 debentures exchanged their debentures for
384,715 shares of Series F convertible preferred stock and warrants to acquire
12,533 shares of common stock at $1.25 per share for three years. The value of
the Series F preferred stock and warrants approximated the carrying value of the
convertible debentures on the date of the exchange. Additionally, the Series F
preferred stock had the same conversion terms as the convertible debentures. The
conversion benefit applicable to the Series F preferred stock was calculated at
$226,000 and has been amortized and accounted for as a non-cash dividend, with a
corresponding increase to additional paid-in capital as of March 31, 1998. The
Series F convertible preferred stock was subsequently converted into 411,019
shares of the Company's common stock.
During January and March 1998, the Company issued units consisting of 1,200,000
shares of Series D preferred stock and 500,000 warrants. The Series D preferred
stock is convertible into the Company's common stock over the two years after
the issuance date and is automatically converted upon the second anniversary of
the issuance date. The warrants are exercisable into common stock at $1.50 per
share for five years. During the year ended March 31, 1998, 300,000 preferred
shares were exchanged for 300,000 shares of common stock. The conversion benefit
applicable to the Series D preferred stock was calculated at $1,209,000 of which
$1,030,000 has been amortized and accounted for as a non-cash dividend, with a
corresponding increase to additional paid-in capital as of March 31, 1998.
In January and February 1998, the Company issued units consisting of 2,872,953
shares of Series E preferred stock and 1,436,686 warrants. This stock is
convertible into the Company's common stock. The conversion benefit applicable
to the Series E preferred stock was calculated at $1,576,000 and has been
amortized and accounted for as a non-cash dividend, with a corresponding
increase to additional paid-in capital as of March 31, 1998. The warrants are
exercisable at $1.80 per share during the first year and $2.00 per share through
the second year. If the twenty-day average close price of the common stock as
reported by Bloomberg, LP, is not at least $2.50 one year after issuance date,
then the exercise price will be reduced to $1.00. The warrants expire at the end
of the second year. At March 31, 1998, none of the shares had been converted.
37
<PAGE> 38
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
WARRANTS TO ACQUIRE COMMON STOCK
Warrant activity for the year ended March 31, 1998 and the year ended March 31,
1999 is as follows:
<TABLE>
<CAPTION>
Shares Warrant Price Per Share
----------- -----------------------
<S> <C> <C>
Outstanding at March 31, 1997 4,833,534
Issued in connection with stock and debenture offerings 2,177,722 US$1.25 - $1.80
Exchanged (4,743,534) US$2.50, CDN$8.22
Expired (90,000) US$2.50, CDN$8.22
----------
Outstanding at March 31, 1998 2,177,722
Issued in connection with stock offerings 1,494,592 US$0.59 - $3.25
Exercised (687,926) US$0.75 - $1.00
----------
Outstanding at March 31, 1999 2,984,388
==========
</TABLE>
8. EMPLOYEE BENEFIT PLAN
Effective April 1, 1992, the Company adopted a 401(k) savings plan covering all
employees. Employees who work for the Company are eligible for participation
after three months of service. Company contributions to the savings plan are
made at the discretion of the Company's Board of Directors. The Company made no
contributions for the fiscal periods ending March 31, 1998 and March 31, 1999.
9. STOCK OPTION PLANS
The Company's stock option plan (the "1996 Plan") provides for the grant of
non-qualified and incentive stock options to directors, officers and employees
of the Company. Options are granted at exercise prices equal to the fair market
value of the common stock on the date of grant. Generally, twenty-five percent
of the options are available for exercise at the end of one year, while the
remainder of the grant is exercisable ratably over the next thirty-six month
period, provided the optionee remains in service to the Company. The
weighted-average remaining contractual life of options outstanding at March 31,
1999 was nine years. A total of 2,833,333 shares of common stock have been
authorized under the 1996 Plan, of which 2,317,560 were outstanding at March 31,
1999. In addition, the Company has granted non-qualified stock options, of which
4,229,851 were outstanding at March 31, 1999.
38
<PAGE> 39
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Stock option activity for the year ended March 31, 1998 and the year ended March
31, 1999 is as follows:
<TABLE>
<CAPTION>
Number Option price
Of Shares Per share (US$)
--------- ---------------
<S> <C> <C>
Outstanding at March 31, 1997 2,082,042 1.43 - 5.46
Granted 2,045,827 0.84 - 3.44
Lapsed or canceled (586,552) 1.25 - 5.46
Exercised (120,790) 1.25 - 1.75
---------
Outstanding at March 31, 1998 3,420,527 0.84 - 3.44
Granted 3,873,160 0.625 - 3.24
Lapsed or canceled (696,747) 0.625 - 3.24
Exercised (49,529) 0.84 - 1.63
---------
Outstanding at March 31, 1999 6,547,411 0.625 - 3.44
=========
Exercisable at March 31, 1999 2,091,067
=========
</TABLE>
Of the options exercisable at March 31, 1999, weighted average prices of $0.7212
related to 358,491 options, $1.4029 related to 1,571,326 options, $2.1713
related to 158,750 options and $3.4400 related to 2,500 options.
In May 1997, the Board of Directors authorized a repricing of employee stock
options then outstanding, to $1.25, which was above market value.
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 and 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 effect of increasing the Company's net loss
applicable to common stockholders for the year ended March 31, 1999 and 1998 to
the pro forma amounts of $10,611,000 and $10,739,000, respectively, with a
corresponding pro forma net loss per common share of $0.52 and $0.76,
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 average of the Federal Reserve Board's 3
year and 5 year treasury constant maturity interest rate for the month of grant,
4 years expected life and an expected rate of volatility of 55.0% were applied
to all grants for the year ended March 31, 1998. Assumptions of no dividend
yield, the average of the Federal Reserve Board's 3 year and 5 year treasury
constant maturity interest rate for the month of grant, 4 years expected life
and an expected rate of volatility of 100.0% were applied to all grants for the
year ended March 31, 1999. The weighted-average fair value at grant date for the
options granted during the year ended March 31, 1999 and 1998 was $0.78 and
$0.53 per option, respectively.
10. COMMITMENTS AND CONTINGENCIES
In July 1998, the Company entered into a sub-lease for new office space. The new
offices consist of 17,000 square feet costing approximately $27,000 per month
through February 22, 2000. Simultaneously, the Company also entered into a lease
agreement for 4,100 contiguous square feet beginning January 1999 through
September 2003 at a rate of approximately $8,000 per month. In addition, the
Company entered into a lease agreement for the 17,000 square feet beginning
February 23, 2000 through September 2003 at a rate of approximately $41,000 per
month.
39
<PAGE> 40
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Minimum rental commitments under lease agreements at March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Non-cancelable
Year ending March 31, Operating Leases
- --------------------- ----------------
(In thousands)
<S> <C>
2000 $ 455
2001 599
2002 599
2003 594
2004 467
------
Total payments $2,714
======
</TABLE>
Rent expense for the year ended March 31, 1999 and 1998 totaled $387,710 and
$200,000, respectively.
11. RELATED PARTIES
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. Principal and
accrued interest aggregated $94,259 and $89,447, at March 31, 1999 and 1998,
respectively. The loan is evidenced by a promissory note and is collateralized
by shares of the Company's common stock, which are owned by Mr. Stow. The note
bears interest at a rate of 6.34% per annum, payable at maturity. The maturity
date was originally November 4, 1998, and during the year ended March 31, 1999,
the maturity date on the note was extended to November 4, 2000.
40
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 17, 1999, the Company dismissed PricewaterhouseCoopers LLP as its
independent accountants. There were no unresolved disagreements on any matter of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedures.
The decision to change accountants was approved by the Company's board of
directors. The Company has authorized PricewaterhouseCoopers LLP to respond
fully to the inquiries of the successor accountant, Deloitte & Touche LLP. The
principal accountant's report on the financial statements for the years ended
March 31, 1998 and 1997 contained a going concern modification.
41
<PAGE> 42
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is 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, 1999.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is 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, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is 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, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is 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, 1999.
42
<PAGE> 43
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 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>
3.1 Amended and Restated Certificate of Incorporation of the Company (F)
3.2 Amended and Restated Bylaws of the Company (G)
4.1 Form of Registration Rights Agreement (Series G Preferred Stock). (A)
4.2 Form of Registration Rights Agreement (Series H Preferred Stock). (B)
4.3 Form of Registration Rights Agreement (Series I Preferred Stock). (C)
10.1 Form of Securities Purchase Agreement (Series G Preferred Stock). (A)
10.2 Certificate of Designation (Series G Preferred Stock). (A)
10.2 Form of Warrant (Series G Preferred Stock). (A)
10.4 Form of Securities Purchase Agreement (Series H Preferred Stock). (B)
10.5 Certificate of Designation (Series H Preferred Stock). (B)
10.6 Form of Warrant (Series H Preferred Stock). (B)
10.7 Form of Securities Purchase Agreement (Series I Preferred Stock). (C)
10.8 Certificate of Designation (Series I Preferred Stock). (C)
10.9 Form of Warrant (Series I Preferred Stock). (C)
10.10 Asset Purchase and Sale Agreement (between StarBase Corporation and Site
Technologies, Inc.). (C)
10.11 First Amendment to Asset Purchase and Sale Agreement. (C)
16.1 Letter regarding change in certifying accountant (E)
23.1 Written consent of Deloitte & Touche LLP, Independent Accountants
23.2 Written consent of PricewaterhouseCoopers LLP, Independent Accountants
27 Financial data schedule
</TABLE>
- ----------
(A) Incorporated herein by reference to the Company's Form 8-K (file number
0-25612) filed with the Commission on August 17, 1998.
(B) Incorporated herein by reference to the Company's Form 10-QSB (file number
0-25612) filed with the Commission on February 12, 1998.
(C) Incorporated herein by reference to the Company's Form S-3 (file number
333-80615) filed with the Commission on June 14, 1999.
(D) Incorporated herein by reference to the Company's Form S-3 (file number
333-72833) filed with the Commission on February 23, 1999.
(E) Incorporated herein by reference to the Company's Form 8-K (file number
0-25612) filed with the Commission on March 23, 1999.
(F) 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.
(G) 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.
43
<PAGE> 44
(B) REPORTS ON FROM 8-K
In a report filed on Form 8-K, dated March 23, 1999, the Company reported a
change in certifying accountants.
44
<PAGE> 45
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 29th day of June,
1999.
STARBASE CORPORATION
By: /s/ Douglas S. Norman
------------------------------------
Douglas S. Norman
Director of Finance
Chief Accounting 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William R. Stow III Chairman of the Board, Chief June 29, 1999
- --------------------------------------- Executive Officer, and Director
William R. Stow III (principal executive officer)
/s/ Donald R. Farrow Vice Chairman and Director June 29, 1999
- ---------------------------------------
Donald R. Farrow
/s/ Phillip E. Pearce Director June 29, 1999
- ---------------------------------------
Phillip E. Pearce
/s/ Daniel P. Ginns Director June 29, 1999
- ---------------------------------------
Daniel P. Ginns
/s/ John R. Snedegar Director June 29, 1999
- ---------------------------------------
John R. Snedegar
/s/ Frank R. Caccamo Director June 29, 1999
- ---------------------------------------
Frank R. Caccamo
/s/ Barry W. Sullivan Director June 29, 1999
- ---------------------------------------
Barry W. Sullivan
/s/ Anders B. Vinberg Director June 29, 1999
- ---------------------------------------
Anders B. Vinberg
</TABLE>
45
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Of Document
------- -----------------------
<S> <C>
23.1 Written consent of Deloitte & Touche LLP, Independent Accountants
23.2 Written consent of PricewaterhouseCoopers LLP, Independent Accountants
27 Financial data schedule
</TABLE>
- --------------
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-45877, 333-35861, 333-63663, and 333-72833 of Starbase Corporation on Form
S-3 and in Registration Statement No. 333-04589 on form S-8 of our report dated
June 18, 1999, appearing in the Annual Report on Form 10-KSB of Starbase
Corporation for the year ended March 31, 1999.
DELOITTE & TOUCHE LLP
Costa Mesa, California
June 29, 1999
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference, in the Registration
Statements on Form S-3 (No. 333-63663, 333-59107, 333-45877 and 333-35861) of
StarBase Corporation of our report dated June 26, 1998 relating to the financial
statements, which appears in this Form 10-KSB.
PricewaterhouseCoopers LLP
Costa Mesa, California
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,363
<SECURITIES> 121
<RECEIVABLES> 2,683
<ALLOWANCES> 155
<INVENTORY> 51
<CURRENT-ASSETS> 4,325
<PP&E> 2,049
<DEPRECIATION> 1,062
<TOTAL-ASSETS> 6,605
<CURRENT-LIABILITIES> 2,017
<BONDS> 0
0
286
<COMMON> 6
<OTHER-SE> 4,170
<TOTAL-LIABILITY-AND-EQUITY> 6,605
<SALES> 5,262
<TOTAL-REVENUES> 6,832
<CGS> 508
<TOTAL-COSTS> 508
<OTHER-EXPENSES> 15,038
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> (8,682)
<INCOME-TAX> 1
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,683)
<EPS-BASIC> (.49)
<EPS-DILUTED> (.49)
</TABLE>
