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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number: 0-2562
STARBASE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 33-0567363
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Hutton Centre Drive, Suite 800
Santa Ana, California 92707
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(714) 445-4400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares outstanding as of July 31, 1999: Common Stock: 32,136,958
Preferred Stock: 444,757
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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STARBASE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets at June 30, 1999 (Unaudited) and March 31, 1998 3
Statements of Operations (Unaudited) for the three month
periods ended June 30, 1999 and 1998 4
Statements of Cash Flows (Unaudited) for the three month
periods ended June 30, 1999 and 1998 5
Notes to Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
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PART I
ITEM 1
FINANCIAL STATEMENTS
STARBASE CORPORATION
BALANCE SHEETS
(in thousands, except number of shares and par values)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 836 $ 1,363
Restricted cash 39 39
Marketable securities 121 121
Accounts receivable, net of allowances of $155 at
June 30, 1999 and Mar 31, 1999 4,245 2,528
Notes and other receivables 4 9
Inventories 34 51
Prepaid expenses and other assets 186 214
-------- --------
Total current assets 5,465 4,325
Property and equipment, net 1,004 987
Developed technology, net 922 971
Note receivable from officer 95 94
Long-term restricted cash 79 79
Other non-current assets 128 149
-------- --------
Total assets $ 7,693 $ 6,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,425 $ 1,264
Deferred revenue 930 658
Current portion of capital lease obligation 112 95
-------- --------
Total current liabilities 2,467 2,017
Long-term liabilities:
Long-term debt, less current portion 135 116
Other long-term liabilities 606 10
-------- --------
Total long-term liabilities 741 126
-------- --------
Total liabilities 3,208 2,143
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized,
444,793 and 588,993 shares issued and outstanding at
June 30, 1999 and March 31, 1999; liquidation
preference of $4,137 (June 30, 1999) and $4,916
(March 31, 1999) 4 6
Common stock, $.01 par value; 50,000,000 authorized; 29,762,680
and 28,636,362 shares issued and outstanding at June 30, 1999
and March 31, 1999 298 286
Additional paid-in capital 57,523 56,208
Accumulated deficit (53,340) (52,038)
-------- --------
Total stockholders' equity 4,485 4,462
-------- --------
Total liabilities and stockholders' equity $ 7,693 $ 6,605
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
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STARBASE CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------------
1999 1998
----------- ---------
(Unaudited)
<S> <C> <C>
Revenues:
License $ 2,794 $ 892
Maintenance, training and consulting 521 153
Royalty 178 108
-------- --------
Total revenues 3,493 1,153
Cost of Revenues:
Products, licenses and other 446 239
-------- --------
Gross margin 3,047 914
Operating Expenses:
Research and development 975 1,053
Selling, general and administrative 2,780 2,182
-------- --------
Total operating expenses 3,755 3,235
-------- --------
Operating loss (708) (2,321)
Interest and other income (expense) 3 40
-------- --------
Loss before income taxes (705) (2,281)
Provision for income taxes -- --
-------- --------
Net loss (705) (2,281)
Non-cash dividend and accretion of beneficial
conversion feature 596 156
-------- --------
Net loss applicable to common stockholders $ (1,301) $ (2,437)
======== ========
Per share data:
Basic and diluted loss per common share $ (0.05) $ (0.14)
======== ========
Basic and diluted weighted average number of
common shares outstanding 27,924 17,476
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
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STARBASE CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
June 30,
---------------------
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (705) $(2,281)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 138 90
Provision for doubtful accounts and sales returns -- 44
Deferred revenue 868 43
Stock option compensation expense 9 --
Changes in operating assets and liabilities:
Accounts receivable (1,717) (638)
Notes and other receivables 5 (14)
Inventories 17 (26)
Prepaid expenses 28 (30)
Other non-current assets 19 (12)
Accounts payable and accrued liabilities 161 491
------- -------
Net cash used by operations (1,177) (2,333)
Cash Flows from Investing Activities:
Capital expenditures (43) (187)
------- -------
Net cash used by investing activities (43) (187)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock:
Exercise of options 447 23
Exercise of warrants 294 --
Payment of financing related costs (21) --
Payments on capitalized lease obligations (27) (5)
------- -------
Net cash provided by financing activities 693 18
------- -------
Net decrease in cash (527) (2,502)
Cash and cash equivalents, beginning of period 1,363 4,167
------- -------
Cash and cash equivalents, end of period $ 836 $ 1,665
======= =======
Supplemental Cash Flow Information:
Interest paid in cash $ 7 $ 6
======= =======
Income taxes paid $ 0 $ 0
======= =======
Non-cash investing and financing transactions:
Non-cash preferred stock and common stock dividends $ 16 $ 156
======= =======
Conversion of preferred stock to common stock (Note 4) $ 7 $ 0
======= =======
Capitalized lease financing $ 63 $ 0
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements
5
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STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
StarBase Corporation, a Delaware corporation (the "Company"), is a leading
provider of advanced Internet and intranet based technical collaboration
products for web site application production and software configuration
management (SCM) tools. The Company develops, markets, and supports
team-oriented development software that targets the evolving needs of corporate
information technology (IT) structures that support projects requiring technical
collaboration on an enterprise level. The Company's current product line
consists of the recently launched products StarTeam(R) 4.1 and Enterprise Suite
as well as StarSweeperTM, RoundTable(R) and Versions(R).
2. BASIS OF PRESENTATION
The unaudited interim financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have not been presented. The accompanying unaudited financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the StarBase Corporation report to the Securities and Exchange
Commission on Form 10-KSB, for the year ended March 31, 1999.
The interim financial statements reflect all normal recurring adjustments that
are, in the opinion of management, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
period presented. The results of operations for the three months ended June 30,
1999 are not necessarily indicative of the operating results for a full year.
NET LOSS PER SHARE
Basic loss per share applicable to common stockholders is computed using the
weighted average number of common shares outstanding during the periods
presented. Diluted loss per share applicable to common stockholders is computed
using the weighted average number of common and common equivalent shares
outstanding during the periods presented assuming the exercise of the Company's
stock options, warrants, and potential shares (Escrow Shares). Common equivalent
shares have not been included where inclusion would be antidilutive. Escrow
Shares can be released to the founders upon attaining certain defined cash flow
requirements. The release of the Escrow Shares will be deemed compensatory and,
accordingly, will result in charges to earnings equal to the fair market value
of these shares recorded ratably over the period beginning on the date when
management determines that the cash flow requirements are probable of being met
and ending on the date when the goal is attained, causing the Escrow Shares to
be released. At the time a goal is attained, previously unrecognized
compensation expense will be adjusted by a one-time charge based on the then
fair market value of the shares released from escrow. Such charges could
substantially reduce the Company's net income or increase the Company's loss for
financial reporting purposes in the periods such charges are recorded. Based
upon historical results, the attainment of the goal is not probable at this
time. However, this does not preclude the attainment of the goal with future
results.
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STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(in thousands except per-share amounts)
<TABLE>
<CAPTION>
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC AND DILUTED LOSS PER SHARE
Net loss $ (705)
Non-cash dividend (596)
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE (1,301) 27,926 $(0.05)
======
Effect of Dilutive Securities -- --
------- ------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER SHARE $(1,301) 27,926 $(0.05)
======= ====== ======
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(in thousands except per-share amounts)
<TABLE>
<CAPTION>
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC AND DILUTED LOSS PER SHARE
Net loss $(2,281)
Non-cash dividend (156)
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE (2,437) 17,476 $(0.14)
======
Effect of Dilutive Securities -- --
------- ------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER SHARE $(2,437) 17,476 $(0.14)
======= ====== ======
</TABLE>
Common stock equivalents, which consist of options to purchase 2,095,476 shares
of common stock at prices ranging from $0.625 to $3.44 per share, warrants to
purchase 2,678,657 shares of common stock at prices ranging from $0.59 to $3.25
per share, and 1,418,638 common shares held in escrow were not included in the
computation of diluted loss per share because such inclusion would have been
antidilutive for the three month period ended June 30, 1999. Common stock
equivalents, which consist of options to purchase 1,214,473 shares of common
stock at prices ranging from $0.84 to $3.44 per share, warrants to purchase
2,177,722 shares of common stock at prices ranging from $1.25 to $1.80 per
share, and 1,418,638 common shares held in escrow were not included in the
computation of diluted loss per share because such inclusion would have been
antidilutive for the three month period ended June 30, 1998.
7
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STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
(In thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------- --------
(Unaudited)
<S> <C> <C>
Property and equipment:
Computer hardware $ 1,408 $ 1,337
Furniture and fixtures 315 315
Computer software 199 199
Leasehold improvements 233 198
------- -------
2,155 2,049
Less accumulated depreciation and amortization (1,151) (1,062)
------- -------
$ 1,004 $ 987
======= =======
Accounts payable and accrued liabilities:
Trade accounts payable $ 466 $ 640
Accrued professional fees 85 86
Accrued wages and bonuses 596 493
Other accrued expenses 278 45
------- -------
$ 1,425 $ 1,264
======= =======
</TABLE>
4. EQUITY TRANSACTIONS
During the quarter ending June 30, 1999, 143,600 shares of Series E Preferred
Stock and 600 shares of Series H Preferred Stock were converted into 143,600 and
522,109 shares of common stock. As of June 30, 1999, 441,208 shares of Series E
Preferred Stock, 2,585 shares of Series H Preferred Stock, and 1,000 shares of
Series I Preferred Stock were outstanding.
WARRANTS
Warrant activity for the three month period ended June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Warrant Price
Shares Per Share
--------- -------------
<S> <C> <C>
Outstanding at March 31, 1999 2,984,388 $0.59-$3.25
Exercised (305,731) $0.75-$1.80
---------
Outstanding at June 30, 1999 2,678,657 $0.59-$3.25
=========
</TABLE>
5. STOCK OPTION PLAN
The Company's stock option plan (the "1996 Plan") provides for the grant of
non-qualified and incentive stock options to directors, officers and employees
of the Company. Options are granted at exercise prices equal to the fair market
value of the common stock on the date of grant. Generally, twenty-five percent
of the options are available for exercise at the end of one year, while the
remainder of the grant is exercisable ratably over the next thirty-six month
period, provided the optionee remains in service to the Company. The
weighted-average remaining contractual life of options outstanding at June 30,
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 June 30,
1999. In addition, the Company has granted non-qualified stock options, of which
3,956,473 were outstanding at June 30, 1999.
8
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STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Stock option activity for the three month period ended June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding at March 31, 1999 6,547,411 $1.23
Granted 125,000 $2.32
Lapsed or canceled (129,900) $2.07
Exercised (268,478) $1.66
---------
Outstanding at June 30, 1999 6,274,033 $1.21
=========
Exercisable at June 30, 1999 2,095,476 $1.32
=========
</TABLE>
Stock option summary information at June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
- --------------- --------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.50-$1.00 2,572,702 9.3 years $0.68 405,723 $1.23
$1.01-$1.50 1,524,829 7.3 years $1.26 926,710 $2.32
$1.51-$2.00 1,781,002 8.6 years $1.65 684,468 $2.07
$2.01-$2.50 147,500 9.5 years $2.20 15,625 $1.66
$2.51-$3.00 228,000 7.1 years $2.64 56,910 $1.21
$3.01-$3.50 20,000 8.7 years $3.34 6,040 $1.32
--------- ---------
6,274,033 2,095,476
========= =========
</TABLE>
6. OPERATING SEGMENT INFORMATION
The Company's reportable operating segments include software licenses and
services. The software licenses operating segment develops and markets the
Company's web site application production and software configuration management
products. The services segment provides after-sale support for software products
and fee-based training and consulting services related to the Company products.
The Company does not allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of revenues and gross margin.
9
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STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Operating segment data for the three month ended June 30, 1999 and 1998 was as
follows:
<TABLE>
<CAPTION>
Software
licenses Services Total
-------- -------- --------
<S> <C> <C> <C>
(In thousands)
Three months ended June 30, 1999:
Revenues $2,794 $ 699 $3,493
Cost of revenues 164 282 446
------ ------ ------
Gross margin $2,630 $ 417 $3,047
====== ====== ======
Three months ended June 30, 1998:
Revenues $ 892 $ 261 $1,153
Cost of revenues 239 0 239
------ ------ ------
Gross margin $ 653 $ 261 $ 914
====== ====== ======
</TABLE>
7. SUBSEQUENT EVENTS
In July 1999, the Company entered into agreements to complete a private
placement of 2,349,437 shares of Common Stock for $4,000,031. In conjunction,
the Company issued 1,824,578 warrants to purchase 1,824,578 shares of common
stock. Each warrant is exercisable through January 26, 2000, after which the
warrants will expire. The fair value of these warrants using the Black-Scholes
pricing model at the date of grant was $2,749,637.
10
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PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of June 30, 1999 were $836,000 and $1,363,000 as of
March 31, 1999. At June 30, 1999 the Company had working capital of $2,998,000,
compared to $2,308,000 at March 31, 1999.
During the three months ended June 30, 1999, the Company used $1,177,000 in cash
for operations, a decrease of approximately $1,156,000 over the amount used for
operations in the same period of the prior year. The decrease was primarily due
to the reduced net loss from operations. Capital expenditures were approximately
$43,000 and $187,000 during the three months ended June 30, 1999 and June 30,
1998, respectively. During the three months ended June 30, 1999, financing
activities provided $693,00 compared to $18,000 in the same period of the prior
year. Exercise of options provided $447,000 and exercise of warrants provided
$294,000.
The Company warrants products against defects for 90 days and has a policy
permitting the return of products within 30 days. Warranty costs and returns,
which are not significant, have historically been within management's
expectations. The Company has reserved approximately $155,000 at June 30, 1999
for future returns and other collection issues, no change from March 31, 1999.
RESULTS OF OPERATIONS
Total revenue increased in the three month period ended June 30, 1999 by
$2,340,000 or 203%, to $3,493,000, from $1,153,000 in the same three month
period of the previous year due to the increase in license revenue, $1,902,000,
combined with the increase in maintenance, training and consulting revenue,
$368,000, and royalty revenue $70,000. The increase in product revenue was due
to the February 1999 release of the StarTeam 4.0 family of products.
Cost of revenues consists primarily of manufacturing and related costs such as
media, documentation, product assembly and costs related to the training and
consulting revenue. The Company out-sources manufacturing for all software
products, with the exception of the Company's Roundtable product. Cost of
Revenues increased to $446,000 from $239,000 in the three month period ended
June 30, 1999 over the same quarter of the previous year due to the increase in
product shipments and the increase in training and consulting costs.
Operating expenses in the three month period ended June 30, 1999 increased to
$3,755,000 from $3,235,000 in the same quarter of the previous year. The
increase was primarily due to the continued building of the sales and marketing
infrastructure to support the increased level of sales. At June 30, 1999, the
Company had 95 full-time employees, which consisted of 42 in sales and
marketing, 33 in research and development and 20 in general and administrative.
At June 30, 1998, the Company had 82 employees, which consisted of 28 in sales
and marketing, 41 in research and development and 13 in general and
administrative.
Research and development expenses. Research and development expenses include
personnel and other direct and overhead expenses incurred in the development of
the Company's products. StarBase continues to make significant investments in
research and development intended to bring its products to market and to support
existing products. In the three month period ended June 30, 1999 overall
research and development expenses decreased to $975,000 compared to $1,053,000
for the same period in the prior year as a result of the decrease in the
development staff.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 1999 increased
approximately $598,000 over the same period in the prior year. The increase was
mainly the result of additional sales and marketing personnel coupled with the
advertising and promotion programs to support the StarTeam 4.0 family of
products.
11
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INTEREST INCOME/EXPENSE
Interest income for the three month period ended June 30, 1999 decreased to
$10,000 compared to $42,000 for the same period in the prior year due to less
cash being available to invest.
Interest expense for the three month period ended June 30, 1999 increased to
$7,000 compared to $2,000 for the same period in the prior year.
INCOME TAXES
The Company has not recorded a current or deferred provision for federal income
taxes for any period to date, as a result of losses incurred since its
inception. Any provision for income taxes represents the minimum required for
state taxes.
NON-CASH DIVIDEND AND ACCRETION OF BENEFICIAL CONVERSION FEATURE
Non-cash dividend and accretion of beneficial conversion feature for the three
month period ended June 30, 1999 was $596,000 due to the beneficial conversion
feature of the Series H Preferred Stock, Series I Preferred Stock and the
warrants issued with each share of preferred stock. Non-cash dividend and
accretion of beneficial conversion feature for the three month period ended June
30, 1998 was $156,000.
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY EFFECT FUTURE RESULTS
The following discussion contains forward-looking statements within the meaning
of Sections 21E and 27A of the Securities Exchange Act of 1934. These forward
looking statements are subject to risks and uncertainties. There are several
important factors that could cause actual results to differ materially from
those anticipated by the forward-looking statements contained in the following
discussion. Such factors include, but are not limited to, the growth rates of
certain market segments, the timing of software product introductions, market
acceptance of product introductions, the positioning of the Company's products
in those segments, price pressures and the rapidly changing competitive
environment in the software industry, success in technological advances and
their implementation, business conditions and the general economy, the Company's
ability to manage its business in its evolution from a development stage
company, and the Company's ability to establish strategic alliances. Additional
information on these and other risk factors which could affect the Company's
financial results is included in the Company's Annual Report for the fiscal year
ended March 31, 1999 on Form 10-KSB on file with the Securities and Exchange
Commission.
THE YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the
calendar year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced to comply with
such "Year 2000" requirements.
State of Readiness
The Company is dependent on the operation of numerous systems that could
potentially be affected by Year 2000 related problems. Those systems include,
among others:
o The software products sold to customers;
o Hardware and software systems used for internal operations, including
proprietary software systems as well as software supplied by third parties;
o Communications networks such as the client/server Network, the Internet and
the internal intranet;
o The hardware and software systems of our customers and suppliers;
o Non-information technology systems and services, such as utilities,
telephone systems and building systems.
12
<PAGE> 13
The Company has completed a Year 2000 review program for the hardware, software
and systems the Company depends on to run its operation. The phases of the Year
2000 program consist of:
o Assignment of responsibility for issues, such as systems, facilities,
equipment, software and legal audit;
o Inventory of all aspects of the Company's operations and relationships
subject to the Year 2000 problem;
o Communication as necessary with significant supplier to determine the
readiness of their products and systems;
o Comprehensive analysis, including impact analysis and cost analysis of the
Company's Year 2000 readiness;
o Testing and remediation.
To date, the Company has not encountered any material Year 2000 problems with
the hardware and software systems in its operations. In the event that any such
third parties' products, services or systems do not meet the Year 2000
requirements on a timely basis, the Company could be materially adversely
affected.
Based on the Company's review of the use of dates within its products, each
version of its products was found to be Year 2000 compliant - that is, they are
capable of adequately distinguishing the 21st century dates from the 20th
century dates when used in accordance with the related documentation, and used
in conjunction with the Company's products.
Risks
Year 2000 related errors or defects that affect the operation of the Company's
software could result in:
o Delay or loss of revenue;
o Cancellation of customer contracts;
o Diversion of development resources;
o Damage to the Company's reputation;
o Increased customer support and warranty costs;
o Litigation costs.
Success of the Company's Year 2000 compliance efforts may also depend on the
success of its customers in dealing with their Year 2000 issues. The Company's
products are generally integrated into enterprise systems involving
sophisticated hardware and complex software products which may not be Year 2000
compliant. In addition, third party applications in which the Company's products
are embedded, or for which the Company's products are separately licensed, may
not comply with Year 2000 requirements, which may have an adverse impact on
software, while compatible with earlier, non Year 2000 compliant versions of
other software providers. While the Company does not believe they have any
obligation under these circumstances given that these customers are using older
versions of the Company's software products, there can be no assurance that the
Company will not be subject to claims or complaints by its customers.
In addition, the Company believes that purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or upgrade their current software systems for
Year 2000 compliance or defer additional software purchases until after 2000. As
a result, some customers and potential customers may have more limited budgets
available to purchase software products such as those offered by the Company,
and others may choose to refrain from changes in their information technology
environment until after 2000. Still other companies are accelerating purchases
of software products prior to 2000, causing an increase in short-term demand
which may, in turn, cause a corresponding decrease in long-term demand for
software products. To the extent Year 2000 issues cause significant change in,
delay in, or cancellation of, the decision to purchase the Company's products or
services, the Company's business could be materially adversely affected.
Contingency Plan
The Company could experience material adverse effects in its business if it
fails to identify all Year 2000 dependencies in its systems and the systems of
is suppliers, customers and financial institutions. Therefore, the Company is
currently in the process of developing plans for handling Year 2000 problems
that are not detected and corrected prior to their occurrence and should be
completed by October 31, 1999.
13
<PAGE> 14
Costs
To date, the Company has not incurred any material costs directly associated
with its Year 2000 compliance efforts, except for compensation expense
associated with its salaried employees who have devoted some time to its Year
2000 assessment and remediation efforts. The Company does not expect the total
cost of Year 2000 problems to be material to its business, financial condition
and operating results. The Company will continue to evaluate its products,
software provided by third parties and infrastructure systems that it relies on.
Despite its efforts, the Company may not identify and remediate all significant
Year 2000 problems on a timely basis, remediation efforts may involve
significant time and expense, and unremeditated problems may have a material
adverse effect on its business.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which the Company
is required to adopt effective in its fiscal year 2000. SFAS No. 133 will
require the Company to record all derivatives on the balance sheet at fair
value. The Company does not currently engage in hedging activities but will
continue to evaluate the effect of adopting SFAS No. 133. The Company will adopt
SFAS No. 133 in its fiscal year 2000.
14
<PAGE> 15
PART II
ITEM 5
OTHER INFORMATION
None.
15
<PAGE> 16
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Ref./
Number Description Of Document Page
- ------------ ------------------------------------------------ ----------
4.1 Form of Registration Rights Agreement
10.1 Form of Securities Purchase Agreement
10.2 Form of Warrant
27 Financial data schedule
(b) Reports on Form 8-K
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARBASE CORPORATION
(Registrant)
August 16, 1999 /s/ DOUGLAS S. NORMAN
- --------------- ----------------------------------
Date Douglas S. Norman
Director of Finance
Chief Accounting Officer
17
<PAGE> 18
EXHIBIT INDEX
Exhibit
Number Description Of Document
- ------------ ------------------------------------------------
4.1 Form of Registration Rights Agreement
10.1 Form of Securities Purchase Agreement
10.2 Form of Warrant
27 Financial data schedule
<PAGE> 1
EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of July
__, 1999, is entered into by and among Starbase Corporation., a Delaware
corporation, with headquarters located at 4 Hutton Centre, Ste. 800, Santa Ana,
CA 92707 (the "COMPANY"), and the undersigned buyers (each, a "BUYER" and
collectively, the "BUYERS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among
the parties dated as of July __, 1999 (the "SECURITIES PURCHASE AGREEMENT"), the
Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, (i) to issue and sell to the Buyers [_________]
shares of the Company's Common Stock, no par value per share (the "COMMON
SHARES") and (ii) to issue Warrants (the "WARRANTS") which will be exercisable
to purchase [__________] shares of Common Stock (the "WARRANT SHARES"); and
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Buyers hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings:
a. "INVESTOR" means a Buyer, any transferee or assignee thereof to
whom a Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9 and any
transferee or assignee thereof to whom a transferee or assignee assigns its
rights under this Agreement and who agrees to become bound by the provisions of
this Agreement in accordance with Section 9.
b. "PERSON" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the 1933 Act and pursuant to
Rule 415 under the 1933 Act or any successor rule providing for offering
securities on a continuous basis ("RULE 415"), and the declaration or ordering
of effectiveness of such Registration Statement(s) by the United States
Securities and Exchange Commission (the "SEC").
<PAGE> 2
d. "REGISTRABLE SECURITIES" means the Common Shares purchased
pursuant to the Securities Purchase Agreement and the Warrant Shares issued or
issuable upon exercise of the Warrants and any shares of capital stock issued or
issuable with respect to the Common Shares, Warrants or Warrant Shares as a
result of any stock split, stock dividend, recapitalization, exchange,
anti-dilution rights or similar event or otherwise, without regard to any
limitation on exercise of the Warrants.
e. "REGISTRATION STATEMENT" means a registration statement of the
Company filed under the 1933 Act and pursuant to Rule 415.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and, as soon
as practicable but in no event later than forty-five (45) calendar days after
the date of issuance of the relevant Common Shares, file with the SEC a
Registration Statement or Registration Statements (as is necessary) on Form S-3
(or if such form is unavailable, such other form as is available for
registration) covering the resale of all of the Registrable Securities. The
initial Registration Statement prepared pursuant hereto shall register for
resale at least that number of Company common stock shares equal to the number
of Registrable Securities as of the date immediately preceding the date the
Registration Statement is initially filed with the SEC. The Company shall use
its best efforts to have the Registration Statement declared effective by the
SEC as soon as practicable, but in no event later than ninety (90) calendar days
after the issuance of the relevant Common Shares.
b. Piggy-Back Registrations. Except in the event that the
Registration Statement has been declared effective and has not been suspended by
the SEC, if at any time prior to the expiration of the Registration Period (as
defined in Section 3(a)) the Company proposes to file with the SEC a
Registration Statement relating to an offering for its own account or the
account of others under the 1933 Act of any of its securities (other than on
Form S-4 or Form S-8 (or their equivalents at such time) relating to securities
to be issued solely in connection with any acquisition of any entity or business
or equity securities issuable in connection with stock option or other employee
benefit plans) the Company shall promptly send to each Investor written notice
of the Company's intention to file a Registration Statement and of such
Investor's rights under this Section 2(b) and, if within twenty (20) days after
receipt of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, subject to the priorities
set forth in Section 2(b) below. No right to registration of Registrable
Securities under this Section 2(b) shall be construed to limit any registration
required under Section 2(a). The obligations of the Company under this Section
2(b) may be waived by the Buyers. If an offering in connection with which an
Investor is entitled to registration under this Section 2(b) is an underwritten
offering, then each Investor whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten
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<PAGE> 3
offering using the same underwriter or underwriters and, subject to the
provisions of this Agreement, on the same terms and conditions as other shares
of Company common stock included in such underwritten offering. If a
registration pursuant to this Section 2(b) is to be an underwritten public
offering and the managing underwriter(s) advise the Company in writing, that in
their reasonable good faith opinion, marketing or other factors dictate that a
limitation on the number of shares of Company common stock which may be included
in the Registration Statement is necessary to facilitate and not adversely
affect the proposed offering, then the Company shall include in such
registration: (1) first, all securities the Company proposes to sell for its own
account, (2) second, up to the full number of securities proposed to be
registered for the account of the holders of securities entitled to inclusion of
their securities in the Registration Statement by reason of demand registration
rights, and (3) third, the securities requested to be registered by the
Investors and other holders of securities entitled to participate in the
registration, as of the date hereof, drawn from them pro rata based on the
number each has requested to be included in such registration.
c. Allocation of Registrable Securities. The initial number of
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held, or
which could be held, by each Investor at the time the Registration Statement
covering such initial number of Registrable Securities or increase thereof is
declared effective by the SEC. In the event that an Investor sells or otherwise
transfers any of such Person's Registrable Securities, each transferee shall be
allocated a pro rata portion of the then remaining number of Registrable
Securities included in such Registration Statement for such transferor. Any
shares of Common Stock included in a Registration Statement and which remain
allocated to any Person which ceases to hold any Registrable Securities shall be
allocated to the remaining Investors, pro rata based on the number of
Registrable Securities then held by such Investors.
d. Legal Counsel. Subject to Section 5 hereof, the Buyers shall have
the right to select one legal counsel to review and oversee any offering
pursuant to this Section 2 ("LEGAL COUNSEL"), which shall be Beckman, Millman &
Sanders or such other counsel as thereafter designated by the holders of a
majority of Registrable Securities. The Company shall reasonably cooperate with
Legal Counsel in performing the Company's obligations under this Agreement.
e. [Reserved.]
f. Rule 416. The Company and the Investors each acknowledge that
each Registration Statement prepared in accordance hereunder shall include an
indeterminate number of Registrable Securities pursuant to Rule 416 under the
1933 Act so as to cover any and all Registrable Securities which may become
issuable (i) to prevent dilution resulting from stock splits, stock dividends or
similar transactions and (ii) if permitted by law, by reason of the
anti-dilution provisions contained in the Warrants in accordance with the terms
thereof (collectively, the "RULE 416 SECURITIES"). In this regard, the Company
agrees to use all reasonable efforts to ensure that the maximum number of
Registrable Securities which may be registered pursuant to Rule 416 under the
1933 Act are covered by each Registration Statement and, absent guidance
-3-
<PAGE> 4
from the SEC or other definitive authority to the contrary, the Company shall
use all reasonable efforts to affirmatively support and to not take any position
adverse to the position that each Registration Statement filed hereunder covers
all of the Rule 416 Securities. If the Company determines that the Registration
Statement filed hereunder does not cover all of the Rule 416 Securities, the
Company shall immediately (i) provide to each Investor written evidence setting
forth the basis for the Company's position and the authority therefor and (ii)
prepare and file an amendment to such Registration Statement or a new
Registration Statement in accordance with Section 2(g).
g. Sufficient Number of Shares Registered. In the event the number
of shares available under a Registration Statement filed pursuant to Section
2(a) is insufficient to cover all of the Registrable Securities or an Investor's
allocated portion of the Registrable Securities pursuant to Section 2(c) (a
"DEFICIT FAILURE"), the Company shall amend the Registration Statement, or file
a new Registration Statement (on the short form available therefor, if
applicable), or both, so as to cover at least one hundred percent (100%) of such
Registrable Securities in each case, as soon as practicable, but in any event
not later than twenty (20) days after the necessity therefor arises. The Company
shall use it best efforts to cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof. For purposes of the foregoing provision, the number of shares available
under a Registration Statement shall be deemed "insufficient to cover all of the
Registrable Securities" if at any time the number of Registrable Securities is
greater than the number of shares of Company common stock available for resale
under such Registration Statement.
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(b) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a) or 2(g),
the Company will use its best efforts to effect the registration of the
Registrable Securities in accordance with the intended method of disposition
thereof and, pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or prior
to the forty-fifth (45th) calendar day after the date of issuance of any Common
Shares for the registration of Registrable Securities pursuant to Section 2(a))
and use its best efforts to cause such Registration Statement relating to the
Registrable Securities to become effective as soon as possible after such filing
(but in no event later than ninety (90) calendar days after the issuance of any
Common Shares for the registration of Registrable Securities pursuant to Section
2(a)), and keep such Registration Statement effective pursuant to Rule 415 at
all times until the earlier of (i) the date as of which the Investors may sell
all of the Registrable Securities without restriction pursuant to Rule 144(k)
promulgated under the 1933 Act (or successor thereto) or (ii) the date on which
the Investors shall have sold all the Registrable Securities (the "REGISTRATION
PERIOD"), which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
-4-
<PAGE> 5
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement.
c. The Company shall permit Legal Counsel to review and comment upon
a Registration Statement and all amendments and supplements thereto at least
seven (7) days prior to their filing with the SEC, and not file any document in
a form to which Legal Counsel reasonably objects. The Company shall furnish to
Legal Counsel, without charge, (i) any correspondence from the SEC or the staff
of the SEC to the Company or its representatives relating to any Registration
Statement, (ii) promptly after the same is prepared and filed with the SEC, one
copy of any Registration Statement and any amendment(s) thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits and (iii) upon the effectiveness of any Registration
Statement, one copy of the prospectus included in such Registration Statement
and all amendments and supplements thereto.
d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, at least one copy of
such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference and
all exhibits, (ii) upon the effectiveness of any Registration Statement, ten
(10) copies of the prospectus included in such Registration Statement and all
amendments and supplements thereto (or such other number of copies as such
Investor may reasonably request) and (iii) such other documents, including
copies of any preliminary or final prospectus, as such Investor may reasonably
request from time to time in order to facilitate the disposition of the
Registrable Securities owned by such Investor.
e. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as Legal Counsel or any Investor reasonably requests, (ii) prepare and
file in those jurisdictions, such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in
-5-
<PAGE> 6
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(e), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction. The Company shall promptly notify Legal Counsel and each Investor
who holds Registrable Securities of the receipt by the Company of any
notification with respect to the suspension of the registration or qualification
of any of the Registrable Securities for sale under the securities or "blue sky"
laws of any jurisdiction in the United States or its receipt of actual notice of
the initiation or threatening of any proceeding for such purpose.
f. [Reserved.]
g. As promptly as practicable after becoming aware of such event,
the Company shall notify Legal Counsel and each Investor in writing of the
happening of any event as a result of which the prospectus included in a
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and promptly prepare a supplement or
amendment to such Registration Statement to correct such untrue statement or
omission, and deliver ten (10) copies of such supplement or amendment to Legal
Counsel and each Investor (or such other number of copies as Legal Counsel or
such Investor may reasonably request). The Company shall also promptly notify
Legal Counsel and each Investor in writing (i) when a prospectus or any
prospectus supplement or post-effective amendment has been filed, and when a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to Legal Counsel and each
Investor by facsimile on the same day of such effectiveness and by overnight
mail), (ii) of any request by the SEC for amendments or supplements to a
Registration Statement or related prospectus or related information, and (iii)
of the Company's reasonable determination that a post-effective amendment to a
Registration Statement would be appropriate.
h. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify Legal Counsel and each Investor who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
i. [Reserved.]
j. [Reserved.]
k. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such
-6-
<PAGE> 7
information has been made generally available to the public other than by
disclosure in violation of this Agreement or any other agreement. The Company
agrees that it shall, upon learning that disclosure of such information
concerning an Investor is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt written notice to
such Investor and allow such Investor, at the Investor's expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
l. The Company shall use its best efforts either to (i) cause all
the Registrable Securities covered by a Registration Statement to be listed on
each securities exchange on which securities of the same class or series issued
by the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on the Nasdaq National Market. The Company shall pay all
fees and expenses in connection with satisfying its obligation under this
Section 3(l).
m. [Reserved].
n. The Company shall provide a transfer agent and registrar of all
such Registrable Securities not later than the effective date of such
Registration Statement.
o. If requested by an Investor, the Company shall (i) immediately
incorporate in a prospectus supplement or post-effective amendment such
information as the Investors agree should be included therein relating to the
sale and distribution of Registrable Securities; (ii) make all required filings
of such prospectus supplement or post-effective amendment as soon as notified of
the matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration Statement
if requested by a shareholder of such Registrable Securities.
p. [Reserved.]
q. [Reserved.]
r. The Company shall otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration hereunder and the Company shall use its best efforts to file with
the SEC in a timely manner all reports and documents required of the Company
under the 1933 Act and the 1934 Act (as defined in Section 6(a)).
s. Within two (2) business days after the Registration Statement
which includes the Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that the Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
-7-
<PAGE> 8
t. [Reserved.]
u. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
v. Notwithstanding anything to the contrary contained in this
Agreement, the Registration Statement shall register only the Registrable
Securities.
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) days prior to the first anticipated filing
date of the Registration Statement, the Company shall notify each Investor in
writing of the information the Company requires from each such Investor if such
Investor elects to have any of such Investor's Registrable Securities included
in such Registration Statement. It shall be a condition precedent to the
obligations of the Company to complete the registration pursuant to this
Agreement with respect to the Registrable Securities of a particular Investor
that such Investor shall furnish to the Company such information regarding
itself and the Registrable Securities held by it as shall be reasonably required
to effect the registration of such Registrable Securities and shall execute such
documents in connection with such registration as the Company may reasonably
request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company shall be paid by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the directors, officers, partners, employees, agents,
representatives of, and each Person, if any, who controls any Investor within
the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended
(the "1934 ACT"), (each, an "INDEMNIFIED PERSON"), against any losses, claims,
-8-
<PAGE> 9
damages, liabilities, judgments, fines, penalties, charges, costs, attorneys'
fees, amounts paid in settlement or expenses, joint or several, (collectively,
"CLAIMS") incurred in investigating, preparing or defending any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing by
or before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("BLUE SKY FILING"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading, or (iii) any violation or alleged violation by the Company
of the 1933 Act, the 1934 Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable Securities pursuant to a Registration Statement (the
matters in the foregoing clauses (i) through (iii) being, collectively,
"VIOLATIONS"). The Company shall reimburse the Investors promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim by an Indemnified Person arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by such Indemnified Person expressly for use
in connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, if such prospectus was timely made
available by the Company pursuant to Section 3(d); (ii) with respect to any
preliminary prospectus, shall not inure to the benefit of any such person from
whom the person asserting any such Claim purchased the Registrable Securities
that are the subject thereof (or to the benefit of any person controlling such
person) if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected in the prospectus, as then amended or
supplemented, if such prospectus was timely made available by the Company
pursuant to Section 3(d), and the Indemnified Person was promptly advised in
writing not to use the incorrect prospectus prior to the use giving rise to a
violation and such Indemnified Person, notwithstanding such advice, used it;
(iii) shall not be available to the extent such Claim is based on a failure of
the Investor to deliver or to cause to be delivered the prospectus made
available by the Company, if such prospectus was timely made available by the
Company pursuant to Section 3(d); and (iv) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.
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<PAGE> 10
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"),
against any Claim or Indemnified Damages to which any Indemnified Party may
become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such
Claim or Indemnified Damages arise out of or are based upon any Violation, in
each case to the extent, and only to the extent, that such Violation occurs in
reliance upon and in conformity with written information furnished to the
Company by such Investor expressly for use in connection with such Registration
Statement; and, subject to Section 6(d), such Investor will reimburse any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution
contained in Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Investor, which consent shall not be unreasonably withheld; provided, further,
however, that the Investor shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds to
such Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
-10-
<PAGE> 11
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay reasonable fees for only one separate legal counsel for the Investors, and
such legal counsel shall be selected by the Investors holding a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
fully apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for any
settlement of any action, claim or proceeding effected without its written
consent, provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the consent of the Indemnified Party or Indemnified Person, consent to entry of
any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party or Indemnified Person of a release from all liability
in respect to such claim or litigation. Following indemnification as provided
for hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
e. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Damages are incurred.
f. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
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<PAGE> 12
8. LIQUIDATED DAMAGES.
The Company agrees that the Buyers will suffer damages if the
Company violates any provision of or fails to fulfill its obligations pursuant
to Sections 2(a), 2(g), 3(a), 3(b), 3(e) or 3(h) of this Agreement (a
"REGISTRATION DEFAULT") and that it would not be possible to ascertain the
extent of such damages. Accordingly, in the event of such Registration Default,
the Company hereby agrees to pay liquidated damages ("LIQUIDATED DAMAGES") to
each Buyer following the occurrence of such Registration Default in an amount
determined by multiplying (i) $.037536 per Registrable Security then held by
and/or issuable to such Buyer by (ii) the percentage derived by dividing (A) the
actual number of days elapsed from the last day of the date of the Registration
Default or the prior 30-day period, as applicable, to the day such Registration
Default has been completely cured by (B) 30, in cash, or at the Buyer's option,
in the number of shares of Company common stock equal to the quotient of (v) the
dollar amount of the Liquidated Damages on the Payment Date (as defined below)
by (w) the closing bid price of the Company's common stock as of the date of the
Registration Default (as quoted in the Principal Market or the market or
exchange where the Company's common stock is then traded). The Liquidated
Damages payable pursuant hereto shall be payable within five (5) business days
from the end of the calendar month commencing on the first calendar month in
which the Registration Default occurs (each, a "PAYMENT DATE"). In the event the
Buyer elects to receive the Liquidated Damages amount in shares of Company
common stock, such shares shall have the piggy-back registration rights set
forth in Section 2(b) of this Agreement.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by
the Investors to any transferee (except those transferees which have purchased
Registrable Securities which have been registered under the Registration
Statement) of all or any portion of Registrable Securities if: (i) the Investor
agrees in writing with the transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company within a reasonable time
after such assignment; (ii) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (a) the name and
address of such transferee or assignee, and (b) the securities with respect to
which such registration rights are being transferred or assigned; (iii)
immediately following such transfer or assignment the further disposition of
such securities by the transferee or assignee is restricted under the 1933 Act
and applicable state securities laws; provided, however, that the transferee or
assignee may subsequently transfer or assign all or any portion of the
Registrable Securities if an exemption from registration under the 1933 Act is
applicable to such transfer or assignment; (iv) at or before the time the
Company receives the written notice contemplated by clause (ii) of this sentence
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions contained herein; and (v) such transfer shall have been made
in accordance with the applicable requirements of the Securities Purchase
Agreement.
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<PAGE> 13
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who then hold two-thirds (2/3) of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Registrable
Securities. No consideration shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of this Agreement
unless the same consideration also is offered to all of the parties to this
Agreement.
11. MISCELLANEOUS.
a. A Person is deemed to be a holder of Registrable Securities
whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more Persons with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions, notice or
election received from the registered owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications required
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile, if sent during normal
business hours, and if after such normal business hours, on the next business
day (provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one business day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If to the Company:
Starbase Corporation
4 Hutton Centre, Suite 800
Santa Ana, CA 92707
Telephone: (714)445-4400
Facsimile: (714)445-4482
Attention: Douglas Norman
With a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Telephone: (212)704-6000
Facsimile: (212) 704-6288
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<PAGE> 14
Attention: Christopher S. Auguste, Esq.
If to Legal Counsel:
Beckman, Millman & Sanders, LLP
116 John Street, Suite 1313
New York, New York 10038.
Telephone: (212) 406-4700
Facsimile: (212) 406-3750
Attention: Steven A. Sanders, Esq
If to a Buyer, to it at the address and facsimile number set forth on the
Schedule of Buyers attached hereto, with copies to such Buyer's representatives
as set forth on the Schedule of Buyers, or at such other address and/or
facsimile number and/or to the attention of such other person as the recipient
party has specified by written notice given to each other party five days prior
to the effectiveness of such change.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be governed by and construed in all respects
by the internal laws of the State of New York (except for the proper application
of the United States federal securities laws), without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New
York or any other jurisdictions) that would cause the application of the laws of
any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts sitting the City of New York, for the adjudication of any dispute
hereunder. If any provision of this Agreement shall be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. This Agreement, the Securities Purchase Agreement and the
Warrants constitute the entire agreement among the parties hereto with respect
to the subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement, the Securities Purchase Agreement and the Warrants
supersede all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
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<PAGE> 15
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
l. This Agreement is intended for the benefit of the parties hereto
and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.
[Signature Page Follows]
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<PAGE> 16
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
STARBASE CORPORATION
By: _________________________________ By: __________________________
Name: _______________________________ Name:_________________________
Title: ____________________________ Title: _______________________
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<PAGE> 17
SCHEDULE OF BUYERS
Investor's Address
Investor Name and Facsimile Number
- ------------- --------------------
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<PAGE> 18
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
ATTN:
RE: STARBASE CORPORATION
Ladies and Gentlemen:
We are counsel to StarBase Corporation, a Delaware corporation (the
"COMPANY"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "PURCHASE AGREEMENT") entered into by and
among the Company and the buyers named therein (collectively, the "HOLDERS")
pursuant to which the Company issued to the Holders shares of its Common Stock,
no par value per share, (the "COMMON SHARES") and Warrants exercisable into its
Common Stock (the "WARRANT SHARES"). Pursuant to the Purchase Agreement, the
Company also has entered into a Registration Rights Agreement with the Holders
(the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company agreed,
among other things, to register the Registrable Securities (as defined in the
Registration Rights Agreement), including the Common Shares and Warrant Shares,
under the Securities Act of 1933, as amended (the "1933 ACT"). In connection
with the Company's obligations under the Registration Rights Agreement, on
_________, 1999, the Company filed a Registration Statement on Form S-3 (File
No. _____________) (the "REGISTRATION STATEMENT") with the Securities and
Exchange Commission (the "SEC") relating to the Registrable Securities which
names each of the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[ISSUER'S COUNSEL]
By: _________________________________
_________________________________
cc: [LIST NAMES OF HOLDERS]
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<PAGE> 1
EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of July
__, 1999 (the "CLOSING DATE"), is entered into by and among Starbase
Corporation, a Delaware corporation, with headquarters located at 4 Hutton
Centre, Ste. 800, Santa Ana, CA 92707 (the "COMPANY"), and the investors listed
on Schedule 1 attached hereto (individually, a "BUYER" and collectively, the
"BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D ("REGULATION D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 ACT");
B. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, an aggregate of [________] shares of the Company's common stock,
par value $.01 per share (the "COMMON SHARES"), in the respective amounts set
forth opposite each Buyer's name on Schedule 1 and warrants, in substantially
the same form attached hereto as Exhibit D (the "WARRANTS") to acquire
[________] shares of Company Common Stock (as exercised, collectively, the
"WARRANT SHARES"); and
C. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit A (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
NOW, THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF COMMON SHARES.
a. Purchase of Common Shares and Warrants. In connection with
the offering (the "OFFERING") by the Company of its common stock to the Buyers,
and subject to the satisfaction (or waiver) of the conditions set forth in
Sections 6 and 7 below, the Company shall issue and sell to each Buyer and each
Buyer severally agrees to purchase from the Company the respective number of
shares of Common Shares set forth opposite such Buyer's name on Schedule 1,
along with Warrants to acquire the respective number of Warrant Shares set forth
opposite such Buyer's name on Schedule 1 (the "CLOSING"). The purchase price
(the "PURCHASE PRICE") of the Common Shares and the related Warrants at the
Closing shall be $_________.
<PAGE> 2
b. Closing Date. The date and time of the Closing (the
"CLOSING DATE") shall be 10:00 a.m. Central Time, within three (3) business days
following the date hereof, subject to notification of satisfaction (or waiver)
of the conditions to the Closing set forth in Sections 6 and 7 below (or such
later date as is mutually agreed to by the Company and the Buyers). The Closing
shall occur on the Closing Date at the offices of Beckman, Millman & Sanders,
LLP, 116 John Street, Suite 1313 New York, New York 10038.
c. Form of Payment. On the Closing Date, (i) subject to the
satisfaction (or waiver) of the conditions set forth in Section 7 below, each
Buyer shall pay its portion of the Purchase Price to the Escrow Agent (defined
below), for the Common Shares and Warrants to be issued and sold to such Buyer
at the Closing, by wire transfer of immediately available funds in accordance
with the Escrow Agent's written wire instructions, and (ii) subject to the
satisfaction (or waiver) of the conditions set forth in Section 6 below, the
Company shall deliver to Beckman, Millman & Sanders, 116 John Street, Suite
1313, New York, New York 10038, as the escrow agent (the "ESCROW AGENT"), on
behalf of each Buyer, stock certificates (in the denominations as such Buyer
shall request) (the "COMMON SHARE CERTIFICATES") representing such number of the
Common Shares which such Buyer is then purchasing (as indicated opposite such
Buyer's name on Schedule 1) along with the Warrants such Buyer is purchasing (as
indicated opposite such Buyer's name on Schedule 1) hereunder, duly executed on
behalf of the Company and registered in the name of such Buyer or its designee.
Upon the completion of the conditions contained in Sections 6 and 7 of this
Agreement, the Escrow Agent shall deliver the certificates representing the
Common Shares and the Warrants to the Buyers via overnight courier and the
Escrow Agent shall simultaneously wire the Purchase Price to the Company.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only itself
that:
a. Investment Purpose. Such Buyer is acquiring the Common
Shares and Warrants (the Common Shares and Warrants may also be referred to
herein as the "SECURITIES"), for its own account for investment only and not
with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act; provided, however, that by making the representations herein, such
Buyer does not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under
the 1933 Act.
b. Accredited Investor Status. Such Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
c. Reliance on Exemptions. Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
2
<PAGE> 3
determine the availability of such exemptions and the eligibility of such Buyer
to acquire such Securities.
d. Information. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Such Buyer
understands that its investment in the Securities involves a high degree of
risk. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its
acquisition of the Securities.
e. No Governmental Review. Such Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the Securities
or the fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. Transfer or Resale. Such Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned
or transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933
Act, as amended, (or a successor rule thereto) ("RULE 144"); and (ii) any sale
of the Securities made in reliance on Rule 144 may be made only in accordance
with the terms of Rule 144 and if Buyer intends to utilize Rule 144 but Rule 144
is not applicable to such resale, any resale of the Securities under
circumstances in which the Buyer (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder.
g. Legends. Such Buyer understands that the certificates or
other instruments representing the Warrants and, until such time as the sale of
the Common Shares and the Warrant Shares have been registered under the 1933 Act
as contemplated by the Registration Rights Agreement, except as set forth below,
the Common Shares and the Warrant Shares shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
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<PAGE> 4
ASSIGNED (1) IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE 1933 ACT, OR APPLICABLE STATE SECURITIES LAWS,
OR (2) IN THE ABSENCE OF AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER THE 1933 ACT
OR (3) UNLESS SOLD, TRANSFERRED OR ASSIGNED PURSUANT TO RULE 144 UNDER
SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) in
connection with a sale transaction, such holder provides the Company with an
opinion of counsel, in a generally acceptable form, to the effect that a public
sale, assignment or transfer of the Securities may be made without registration
under the 1933 Act, or (ii) such holder provides the Company with reasonable
assurances that the Securities can be sold pursuant to Rule 144 without any
restriction as to the number of securities acquired as of a particular date that
can then be immediately sold.
h. Validity; Enforcement. This Agreement has been duly and
validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement of such Buyer enforceable against such Buyer in
accordance with its terms, subject as to enforceability to general principles of
equity and to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors' rights and remedies.
i. Residency. Such Buyer is a resident of that country and
state (if applicable) specified in its address on Schedule 1.
j. No Broker-Dealer Affiliation. Such Buyer is neither a
broker-dealer registered with the SEC nor an affiliate (as that term is defined
in Rule 144(a) promulgated under the 1933 Act) of a broker-dealer registered
with the SEC.
k. Shorting. Such Buyer and any and all of its agents and
affiliates will comply with all SEC regulations regarding shorting. As of the
Closing Date, neither such Buyer, its agents nor any of its affiliates has a
short position in the Company's common stock.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers
that:
a. Organization and Qualification. The Company and its
"SUBSIDIARIES" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns a controlling position of capital
stock or holds a controlling position of an equity or similar interest) are
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power and authorization to own their properties and to carry on their
business as now being conducted.
4
<PAGE> 5
Except as set forth in Schedule 3(a) hereto, each of the Company and its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which its ownership of property or the
nature of the business conducted by it makes such qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not have a Material Adverse Effect. As used in this Agreement, "MATERIAL
ADVERSE EFFECT" means any material adverse effect on the business, properties,
assets, operations, results or operations or financial condition of the Company
and its Subsidiaries, if any, taken as a whole, or on the transactions
contemplated hereby or by the agreements and instruments to be entered into in
connection herewith, or on the authority or ability of the Company to perform
its obligations under the Transaction Documents (as defined below).
b. Authorization; Enforcement; Validity. (i) The Company has
the requisite corporate power and authority to enter into and perform this
Agreement, the Registration Rights Agreement, the Transfer Agent Instructions
(as defined in Section 5), the Warrants and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the "TRANSACTION DOCUMENTS"), and to issue the
Securities in accordance with the terms hereof and thereof, (ii) the execution
and delivery of the Transaction Documents by the Company and the consummation by
it of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Common Shares and the Warrants and the
reservation for issuance and the issuance of the Warrant Shares issuable upon
exercise thereof, have been duly authorized by the Company's Board of Directors
and no further consent or authorization is required by the Company, its Board of
Directors or its stockholders, (iii) the Transaction Documents have been duly
executed and delivered by the Company, and (iv) the Transaction Documents
constitute the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies.
c. Issuance of Securities. The Common Shares are duly
authorized and, upon issuance in accordance with the terms hereof, shall be (i)
validly issued, fully paid and non-assessable and (ii) free from all taxes,
liens and charges with respect to the issue thereof. _______ shares of Common
Stock (subject to adjustment pursuant to the Company's covenant set forth in
Section 4(g) below) have been duly authorized and reserved for issuance upon
exercise of the Warrants. Upon exercise in accordance with the Warrants, the
Warrant Shares will be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of common stock.
Assuming the Buyers' representations and warranties set forth in Section 2 are
true and correct, the issuance by the Company of the Securities is exempt from
registration under the 1933 Act.
d. No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby (including, without limitation,
the Company's issuance of the Common Shares and the reservation for issuance and
issuance of the Warrant Shares) will not (i) result in a violation of the
Company's Articles of Incorporation, as amended and as in effect on
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<PAGE> 6
the date hereof (the "ARTICLES OF INCORPORATION") or the Company's By-laws, as
amended and as in effect on the date hereof (the "BY-LAWS") or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations and the rules and
regulations of the Principal Market (as defined below)) applicable to the
Company or any of its Subsidiaries or by which any material property or asset of
the Company or any of its Subsidiaries is bound. Neither the Company nor its
Subsidiaries is in violation of any term of or in default under its Articles of
Incorporation, or By-laws or their organizational charter or by-laws,
respectively. Neither the Company or any of its Subsidiaries is in violation or
any term of or in default under any contract, agreement, mortgage, indebtedness,
indenture, instrument, judgment, decree or order or any statute, rule or
regulation applicable to the Company or its Subsidiaries, except for possible
conflicts, defaults, terminations, amendments which would not reasonably be
expected to have a Material Adverse Effect. The business of the Company and its
Subsidiaries is not being conducted, in violation of any law, ordinance,
regulation of any governmental entity, except for possible violations the
sanctions for which either individually or in the aggregate would not reasonably
be expected to have a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the 1933 Act, the Company
is not required to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency or any regulatory
or self-regulatory agency in order for it to execute, deliver or perform any of
its obligations under or contemplated by the Transaction Documents in accordance
with the terms hereof or thereof. All consents, authorizations, orders, filings
and registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the date
hereof. The Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing. To the Company's
knowledge, the Company is not in violation of the listing requirements of the
Principal Market (as defined below).
e. SEC Documents; Financial Statements. As of the Closing, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the "SEC DOCUMENTS"). As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be
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otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyers which is not included in the SEC Documents contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstance under
which they are or were made, not misleading. Neither the Company nor any of its
Subsidiaries or any of their officers, directors, employees or agents have
provided the Buyers with any material, nonpublic information.
f. Absence of Certain Changes. Since the most recent filing by
the Company with the SEC, there has been no material adverse change and no
material adverse development in the business, properties, operations, financial
condition or results of operations of the Company or its Subsidiaries. The
Company has not taken any steps, and does not currently expect to take any
steps, to seek protection pursuant to any bankruptcy law nor does the Company or
any of its Subsidiaries have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings.
g. Absence of Litigation. Except as set forth in the SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency, self-regulatory organization
or body pending or, to the knowledge of the Company or any of its Subsidiaries,
threatened against or affecting the Company, the Company's common stock, the
Common Shares or any of the Company's Subsidiaries or any of the Company's or
the Company's Subsidiaries' officers or directors in their capacities as such.
h. [Reserved].
i. No Undisclosed Events, Liabilities, Developments or
Circumstances. Except as limited by Section 3(e) above, no event, liability,
development or circumstance has occurred or exists, or is contemplated to occur,
with respect to the Company or its Subsidiaries or their respective business,
properties, operations or financial condition, that would be required to be
disclosed by the Company under applicable securities laws on a registration
statement filed with the SEC relating to an issuance and sale by the Company of
its common stock and which has not been publicly announced.
j. No General Solicitation. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
k. No Integrated Offering. To the best of the Company's
knowledge, neither the Company, nor any of its affiliates, nor any person acting
on its or their behalf has, directly or indirectly, made any offers or sales of
any security or solicited any offers to buy any security,
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<PAGE> 8
under circumstances that would require registration of any of the Securities
under the 1933 Act or cause this offering of the Securities to be integrated
with prior offerings by the Company for purposes of the 1933 Act or any
applicable stockholder approval provisions, including, without limitation, under
the rules and regulations of any exchange or automated quotation system on which
any of the Securities of the Company are listed or designated, nor will the
Company or any of its Subsidiaries take any action or steps that would require
registration of any of the Securities under the 1933 Act or cause the offering
of the Securities to be integrated with other offerings.
l. Employee Relations. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened.
m. Intellectual Property Rights. The Company and its
Subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. None of the Company's trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, government authorizations,
trade secrets or other intellectual property rights have expired or terminated,
or are expected to expire or terminate within two years from the date of this
Agreement. The Company and its Subsidiaries do not have any knowledge of any
infringement by the Company or its Subsidiaries of trademark, trade name rights,
patents, patent rights, copyrights, inventions, licenses, service names, service
marks, service mark registrations, trade secret or other similar rights of
others, or of any such development of similar or identical trade secrets or
technical information by others and the Company and its Subsidiaries are unaware
of any facts or circumstances which might give rise to any of the foregoing. The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties.
n. [Reserved.]
o. Title. The real property and facilities held under lease by
the Company and any of its Subsidiaries are held by them under valid, subsisting
and enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries.
p. Insurance. The Company and each of its Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged and the Company does not have any reason to believe it
will not be able to renew its existing insurance coverage under substantially
similar terms for the next two (2) years.
q. Regulatory Permits. The Company and its Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign
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<PAGE> 9
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit.
r. Tax Status. The Company and each of its Subsidiaries has
made or filed all federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provision reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
s. Transactions With Affiliates. Except as set forth in the
SEC Documents filed at least ten days prior to the date hereof, none of the
officers, control parties, control entities, directors, or employees of the
Company is presently a party to any transaction with the Company or any of its
Subsidiaries (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
t. Eligibility. The Company is currently eligible to register
the resale of the Common Shares on a registration statement on Form S-3 under
the 1933 Act.
4. COVENANTS.
a. Best Efforts. Each party shall use its best efforts timely
to satisfy each of the conditions to be satisfied by it as provided in Sections
6 and 7 of this Agreement.
b. Form D and Blue Sky. The Company agrees to file a Form D
with respect to the Securities as required under Regulation D and to provide a
copy thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Buyers at the Closing pursuant to this Agreement
under applicable securities or "Blue Sky" laws of the states of the United
States, and shall provide evidence of any such action so taken to the Buyers on
or prior to the Closing Date. The Company shall make all filings and reports
relating the offer and sale of the Securities required under applicable
securities or "Blue Sky" laws of the states of the United States following the
Closing Date.
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<PAGE> 10
c. Reporting Status. Until the earlier of (i) the date which
is one year after the date as of which the Buyers (as that term is defined in
the Registration Rights Agreement) may sell all of the Common Shares without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto), or (ii) the date on which the Buyers shall have sold all the Common
Shares and Warrant Shares (the "REGISTRATION PERIOD"), the Company shall file
all reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would otherwise permit such termination.
d. [Reserved].
e. [Reserved.]
f. Listing. The Company shall promptly secure the listing of
all of the Registrable Securities (as that term is defined in the Registration
Rights Agreement) upon each national securities exchange, automated quotation
system or bulletin board system, if any, upon which shares of the Company's
common stock are then listed (subject to official notice of issuance) and shall
maintain, so long as any other shares of common stock shall be so listed, such
listing of all Registrable Securities from time to time issuable under the terms
of the Transaction Documents. The Company shall maintain the Company's common
stock's authorization for quotation on the Nasdaq National Market, Nasdaq
Small-Cap Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc., as applicable (the "PRINCIPAL MARKET"). Neither the Company nor
any of its Subsidiaries shall take any action which would be reasonably expected
to result in the delisting or suspension of Company's common stock on the
Principal Market. The Company shall promptly, and in no event later than the
following business day, provide to each Buyer copies of any notices it receives
from the Principal Market regarding the continued eligibility of Company's
common stock for listing on such automated quotation system or securities
exchange. The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section 4(f).
g. Reservation of Shares. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 100% of the number of shares of common stock needed to
provide for the issuance of the shares of Common Stock upon exercise of all
outstanding Warrants.
h. [Reserved].
i. [Reserved.]
j. Independent Auditors. The Company shall, until at least
three (3) years after the Closing Date, maintain as its independent auditors an
accounting firm authorized to practice before the SEC.
k. Corporate Existence and Taxes. The Company shall, until at
least the date that is three (3) years after the Closing Date maintain its
corporate existence in good standing
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(provided, however, that the foregoing covenant shall not prevent the Company
from entering into any merger or corporate reorganization as long as the
surviving entity in such transaction, if not the Company, has common stock
listed for trading on the Principal Market and shall pay all its taxes when due
except for taxes which the Company disputes).
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to the
Transfer Agent, and any subsequent transfer agent, substantially in the form of
Exhibit B hereto (the "TRANSFER AGENT INSTRUCTIONS"). Prior to registration of
the Common Shares and Warrant Shares under the 1933 Act and the sale of the
Common Shares and Warrant Shares, all such certificates shall bear the
restrictive legend specified in Section 2(g) of this Agreement. The Company
warrants that no instruction other than the Transfer Agent Instructions referred
to in this Section 5, and stop transfer instructions to give effect to Section
2(f) hereof will be given by the Company to its Transfer Agent and that the
Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the Registration
Rights Agreement. Nothing in this Section 5 shall affect in any way each Buyer's
obligations to comply with all applicable prospectus delivery requirements, if
any, upon resale of the Securities. If a Buyer provides the Company with an
opinion of counsel in a generally acceptable form, to the effect that a public
sale, assignment or transfer of the Securities may be made without registration
under the 1933 Act or the Buyer provides the Company with reasonable assurances
that the Securities can be sold pursuant to Rule 144 without any restriction as
to the number of securities acquired as of a particular date that can then be
immediately sold, the Company shall permit the transfer, and, promptly instruct
its Transfer Agent to issue one or more certificates in such name and in such
denominations as specified by such Buyer and without any restrictive legend. The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyers shall be entitled,
in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the
Common Shares and Warrants to each Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion by providing
each Buyer with prior written notice thereof:
a. Such Buyer shall have executed each of the Transaction
Documents to which it is a party and delivered the same to the Escrow Agent for
the transactions contemplated by this Agreement;
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b. The representations and warranties of such Buyer shall be
true and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Buyer at or prior to the Closing Date;
c. The Escrow Agent and the Company shall have entered into an
escrow agreement; and
d. Such Buyer shall have delivered to the Escrow Agent such
other documents relating to the transactions contemplated by this Agreement as
the Escrow Agent may reasonable request.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the Common
Shares and Warrants at the Closing is subject to the satisfaction, at or before
the Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer's sole benefit and may be waived by such Buyer at
any time in its sole discretion by providing the Company with prior written
notice thereof:
a. The Company shall have executed each of the Transaction
Documents and delivered the same to the Escrow Agent;
b. Trading in Company common stock shall not have been
suspended by the SEC or the Principal Market;
c. The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Closing Date as though
made at that time (except for representations and warranties that speak as of a
specific date) and the Company shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Closing Date;
d. The Company shall have delivered to the Escrow Agent the
opinion of the Company's counsel dated as of the Closing Date, in form, scope
and substance reasonably satisfactory to such Buyer and in substantially the
form of Exhibit C attached hereto;
e. The Company shall have executed and delivered to the Escrow
Agent the Warrants and the Common Share Certificates (in such denominations as
such Buyer shall request) for the Common Shares being purchased by such Buyer at
the Closing;
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f. The Transfer Agent Instructions, in the form of Exhibit B
attached hereto, shall have been delivered to and acknowledged in writing by the
Company's transfer agent and a copy of the executed Transfer Agent Instructions
shall have been delivered to the Escrow Agent;
g. The Company shall have made all filings, other than those
contemplated by the Registration Rights Agreement, under all applicable federal
and state securities laws necessary to consummate the issuance of the Securities
pursuant to this Agreement in compliance with such laws;
h. The Company shall have delivered to the Escrow Agent such
other documents relating to the transactions contemplated by this Agreement as
the Escrow Agent may reasonably request;
i. At Closing, the Placement Agent (as defined in Section
11(m)) shall reimburse the Buyers for the Buyers' attorneys' fees and expenses
(in an amount not to exceed $20,000.00) incurred by the Buyers concerning the
negotiation and preparation of the Transaction Documents and the consummation of
the transactions contemplated thereby;
j. As of the Closing Date, the Company shall have reserved out
of its authorized and unissued Common Stock, solely for the purpose of effecting
the exercise of the Warrants, at least 999,041 shares of Common Stock; and
k. The Escrow Agent and the Company shall have entered into an
escrow agreement.
8. INDEMNIFICATION.
(a) Company Indemnification. In consideration of each Buyer's
execution and delivery of the Transaction Documents and acquiring the Securities
thereunder and in addition to all of the Company's other obligations under the
Transaction Documents, the Company shall defend, protect, indemnify and hold
harmless each Buyer and each other holder of the Securities and all of their
stockholders, officers, directors, employees and direct or indirect investors
and any of the foregoing person's agents or other representatives (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "BUYER INDEMNITEES") from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Buyer Indemnitee is a party to the action for
which indemnification hereunder is sought), and including reasonable attorneys'
fees and disbursements (the "BUYER INDEMNIFIED LIABILITIES"), incurred by any
Buyer Indemnitee as a result of, or arising out of, or relating to (a) any
material misrepresentation or breach of any representation or warranty made by
the Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby and delivered in connection with and
made a part of the Transaction Documents, or (b) any material breach of any
covenant, agreement or obligation of the Company contained in the Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby and delivered in connection with and made a part of the Transaction
Documents. To
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the extent that the foregoing undertaking by the Company may be unenforceable
for any reason, the Company shall make the maximum contribution to the payment
and satisfaction of each of the Buyer Indemnified Liabilities which is
permissible under applicable law.
b. Indemnification by Buyers. In consideration of the
Company's execution and delivery of the Transaction Documents and the Company's
performance of the transactions contemplated thereunder, each Buyer shall
severally and not jointly defend, protect, indemnify and hold harmless the
Company, its officers and directors (collectively, the "COMPANY INDEMNITEES")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith and including reasonable attorneys' fees and disbursements (the
"COMPANY INDEMNIFIED LIABILITIES"), incurred by any Company Indemnitee as a
result of, or arising out of, or relating to (a) any material misrepresentation
or breach of any representation or warranty made by such Buyer in the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby and delivered in connection with and made a part
of the Transaction Documents, or (b) any material breach of any covenant,
agreement or obligation of such Buyer contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby and
delivered in connection with and made a part of the Transaction Documents;
provided, however, that no Buyer shall be jointly liable for the indemnification
obligations of any other Buyer or investor and the Buyer subject to an
indemnification obligation shall be liable under this Section 8(b) for only that
amount of Company Indemnified Liabilities as does not exceed the net proceeds to
such Buyer as a result of the sale of Common Shares held by such Buyer. To the
extent that the foregoing undertaking by a Buyer may be unenforceable for any
reason, such Buyer shall make the maximum contribution to the payment and
satisfaction of each of the Company Indemnified Liabilities which is permissible
under applicable law; provided, however, that no Buyer shall be jointly liable
for the indemnification obligations of any other Buyer or investor and the Buyer
subject to an indemnification obligation shall be liable under this Section 8(b)
for only that amount of Company Indemnified Liabilities as does not exceed the
net proceeds to such Buyer as a result of the sale of Common Shares held by such
Buyer.
9. [Reserved.]
10. LIQUIDATED DAMAGES.
The Company agrees that Buyers will suffer damages if the
Company violates any provision of or fails to fulfill any of its obligations or
duties pursuant to Sections 4(c), 4(f), 4(g), 4(j) and 5 of this Agreement (a
"COMPANY VIOLATION"), and that it would not be possible to ascertain the extent
of such damages. Accordingly, in the event of such Company Violation, the
Company hereby agrees to pay liquidated damages ("LIQUIDATED DAMAGES") to each
Buyer following the occurrence of such Company Violation in an amount determined
by multiplying (i) $.037536 per Common Share then held by such Buyer by (ii) the
percentage derived by dividing (A) the actual number of days elapsed from the
last day of the date of the Company Violation or the prior 30-day period, as
applicable, to the day such Company Violation has been completely cured by (B)
30, in cash, or at the Buyer's option, in the number of shares of Company common
stock equal to the quotient of (v) the dollar amount of the Liquidated Damages
on the Payment
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<PAGE> 15
Date (as defined below) divided by (w) the closing bid price of the Company's
common stock as of the date of the Company Violation (as quoted in the Principal
Market or the market or exchange where the Company's common stock is then
traded). The Liquidated Damages payable pursuant hereto shall be payable within
five (5) business days from the end of the calendar month commencing on the
first calendar month in which the Company Violation occurs (each, a "PAYMENT
DATE"). In the event the Buyer elects to receive the Liquidated Damages amount
in shares of Company common stock, such shares shall also be considered Common
Shares and shall have the piggy-back registration rights set forth in Section
2(b) of the Registration Rights Agreement.
11. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction; Jury Trial. This Agreement
shall be governed by and construed in all respects by the internal laws of the
State of New York (except for the proper application of the United States
federal securities laws), without giving effect to any choice of law or conflict
of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York. Each party hereby irrevocably submits to the
non-exclusive jurisdiction of the state and federal courts sitting in the City
of New York. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.
b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
c. Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
d. Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all
other prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking
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with respect to such matters. No provision of this Agreement may be amended
other than by an instrument in writing signed by the Company and the Buyers, and
no provision hereof may be waived other than by an instrument in writing signed
by the party against whom enforcement is sought.
f. Notices. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered: (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile,
if sent during normal business hours, and if after such normal business hours,
on the next business day (provided confirmation of transmission is mechanically
or electronically generated and kept on file by the sending party); or (iii) one
business day after deposit with a nationally recognized overnight delivery
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:
If to the Company:
Starbase Corporation
4 Hutton Centre, Suite 800
Santa Ana, CA 92707
Telephone: 714-445-4400
Facsimile: 714-445-4482
Attention: Douglas Norman
With a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Telephone: 212-704-6000
Facsimile: 212-704-6288
Attention: Christopher S. Auguste, Esq.
If to the Transfer Agent:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Telephone: 718-921-8293
Facsimile: 718-921-8334
Attention: Isaac Kagen
If to a Buyer, to it at the address and facsimile number set forth on Schedule 1
with copies to such Buyer's representatives as set forth on Schedule 1, or at
such other address and/or facsimile number and/or to the attention of such other
person as the recipient party has specified by written notice given to each
other party five days prior to the effectiveness of such change.
16
<PAGE> 17
g. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Buyers. A Buyer
may assign some or all of its rights hereunder without the consent of the
Company, provided, however, that any such assignment shall not release such
Buyer from its obligations hereunder unless such obligations are assumed by such
assignee and the Company has consented to such assignment and assumption.
h. No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
i. Survival. Unless this Agreement is terminated under Section
11(l), the agreements and covenants set forth in Sections 4, 5 and 11, the
indemnification provisions set forth in Section 8, and the liquidated damage
provisions set forth in Section 10 shall survive the Closing. Each Buyer shall
be responsible only for its own representations, warranties, agreements and
covenants hereunder.
j. [Reserved].
k. Further Assurances. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing shall not have
occurred with respect to a Buyer on or before three (3) business days from the
date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated pursuant to
this Section 11(l), the Company shall remain obligated to reimburse the
nonbreaching Buyers for the expenses described in Section 7(i) above.
m. Placement Agent. The Company acknowledges that it has
engaged Wales Securities Limited as placement agent in connection with the sale
of the Common Shares and Warrants, which placement agent may have formally or
informally engaged other agents on its behalf. The Company shall be responsible
for the payment of any placement agent's fees or broker's commissions relating
to or arising out of the transactions contemplated hereby. The Company shall
pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, attorneys' fees and out of pocket expenses)
arising in connection with any such claim.
17
<PAGE> 18
n. No Strict Construction. The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
o. Remedies. Each Buyer and each holder of the Securities
shall have all rights and remedies set forth in the Transaction Documents and
all rights and remedies which such holders have been granted at any time under
any other agreement or contract and all of the rights which such holders have
under any law. Any Person having any rights under any provision of this
Agreement shall be entitled to enforce such rights specifically (without posting
a bond or other security), to recover damages by reason of any breach of any
provision of this Agreement and to exercise all other rights granted by law.
p. Payment Set Aside. To the extent that the Company makes a
payment or payments to the Buyers hereunder or pursuant to the Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
[Signature Page Follows]
18
<PAGE> 19
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
COMPANY: BUYERS:
STARBASE CORPORATION
By: By:
------------------------- -------------------------
Name: Name:
------------------------- -------------------------
Title: Title:
------------------------- -------------------------
<PAGE> 20
SCHEDULE 1: LIST OF INVESTORS
-----------------------------
<TABLE>
<CAPTION>
INVESTOR'S LEGAL
REPRESENTATIVES'
INVESTOR ADDRESS PURCHASE NUMBER OF NUMBER OF ADDRESS AND FACSIMILE
INVESTOR'S NAME AND FACSIMILE NUMBER PRICE COMMON SHARES WARRANT SHARES NUMBER
--------------- -------------------- ----- ------------- -------------- ------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 21
EXHIBITS
--------
Exhibit A Form of Registration Rights Agreement
Exhibit B Form of Transfer Agent Instructions
Exhibit C Form of Company Counsel Opinion
Exhibit D Form of Warrant
<PAGE> 22
SCHEDULE 3(a)
-------------
None.
<PAGE> 1
EXHIBIT 10.2
WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE 1933 ACT, OR APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, REASONABLY ACCEPTABLE
TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER THE 1933 ACT OR UNLESS
SOLD PURSUANT TO RULE 144 UNDER SAID ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR
TRANSFER MUST ALSO COMPLY WITH THE APPLICABLE STATE SECURITIES LAWS.
STARBASE CORPORATION
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: 1999-CMN-XXX Number of Shares: _________
Date of Issuance: ______, 1999
Starbase Corporation, a Delaware corporation (the "COMPANY"), hereby certifies
that, for Ten United States Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
________________, the registered holder hereof or its permitted assigns, is
entitled, subject to the terms set forth below, to purchase from the Company
upon surrender of this Warrant, at any time or times on or after the date
hereof, but not after 11:59 P.M. Central Time on the Expiration Date (as defined
herein) ________________ (_______) fully paid nonassessable shares of Common
Stock (as defined herein) of the Company (the "WARRANT SHARES") at the purchase
price per share provided in Section 1(b) below.
Section 1.
(a) Securities Purchase Agreement. This Warrant is one of the
Warrants (the "WARRANTS") issued pursuant to the terms of that certain
Securities Purchase Agreement dated as of _______, 1999, among the Company and
the Buyers referred to therein (the "SECURITIES PURCHASE AGREEMENT").
(b) Definitions. The following words and terms as used in this
Warrant shall have the following meanings:
<PAGE> 2
(i) "APPROVED STOCK PLAN" shall mean any employee
benefit plan which has been approved by the Board of Directors of the Company,
pursuant to which the Company's securities may be issued to any employee,
officer, director, consultant or other service provider for services provided to
the Company.
(ii) "COMMON STOCK" means (i) the Company's common
stock, $.01 par value per share, and (ii) any capital stock into which such
Common Stock shall have been changed or any capital stock resulting from a
reclassification of such Common Stock.
(iii) "COMMON STOCK DEEMED OUTSTANDING" means, at any
given time, the number of shares of Common Stock actually outstanding at such
time, plus the number of shares of Common Stock deemed to be outstanding
pursuant to Sections 8(b)(i) and 8(b)(ii) hereof regardless of whether the
Options (as defined below) or Convertible Securities (as defined below) are
actually exercisable or convertible at such time, but excluding any shares of
Common Stock owned or held by or for the account of the Company or issuable upon
exercise of the Warrants.
(iv) "CONVERTIBLE SECURITIES" means any stock or
securities (other than Options) directly or indirectly convertible into or
exchangeable for Common Stock.
(v) "EXPIRATION DATE" means the date three (3) years
from the date of this Warrant or, if such date falls on a Saturday, Sunday or
other day on which banks are required or authorized to be closed in the City of
Chicago or the State of Illinois or on which trading does not take place on the
principal exchange or automated quotation system on which the Common Stock is
traded (a "HOLIDAY"), the next date that is not a Holiday.
(vi) "OPTIONS" means any rights, warrants or options
to subscribe for or purchase Common Stock or Convertible Securities.
(vii) "OTHER SECURITIES" means (i) the other Warrants
and (ii) the shares of Common Stock issued pursuant to the Securities Purchase
Agreement.
(viii) "PERSON" means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
(ix) "PRINCIPAL MARKET" means the Nasdaq Small Cap
Market.
(x) "SECURITIES ACT" means the Securities Act of
1933, as amended.
(xi) "WARRANT" means this Warrant and all Warrants
issued in exchange, transfer or replacement of any thereof.
(xii) "WARRANT EXERCISE PRICE" shall be $_____ per
common share, subject to adjustment as hereinafter provided.
-2-
<PAGE> 3
Section 2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant
may be exercised by the holder hereof then registered on the books of the
Company, in whole or in part, at any time on any business day on or after the
opening of business on the date hereof and prior to 11:59 P.M. Central Time on
the Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as Exhibit A hereto (the "EXERCISE NOTICE"), of
such holder's election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased, (ii) payment to the Company of an
amount equal to the Warrant Exercise Price multiplied by the number of Warrant
Shares as to which this Warrant is being exercised (plus any applicable issue or
transfer taxes) (the "AGGREGATE EXERCISE PRICE") in cash or by check or wire
transfer, and (iii) the surrender to a common carrier for delivery to the
Company as soon as practicable following such date, this Warrant (or an
indemnification undertaking with respect to this Warrant in the case of its
loss, theft or destruction); provided, that if such Warrant Shares are to be
issued in any name other than that of the registered holder of this Warrant,
such issuance shall be deemed a transfer and the provisions of Section 7 shall
be applicable. In the event of any exercise of the rights represented by this
Warrant in compliance with this Section 2(a), a certificate or certificates for
the Warrant Shares so purchased, in such denominations as may be requested by
the holder hereof and registered in the name of, or as directed by, the holder,
shall be delivered at the Company's expense to, or as directed by, such holder
as soon as practicable, and in no event later than three business days, after
the Company's receipt of the Exercise Notice, the Aggregate Exercise Price and
this Warrant (or an indemnification undertaking with respect to this Warrant in
the case of its loss, theft or destruction). Upon delivery of the Exercise
Notice and Aggregate Exercise Price referred to in clause (ii) above, the holder
of this Warrant shall be deemed for all corporate purposes to have become the
holder of record of the Warrant Shares with respect to which this Warrant has
been exercised, irrespective of the date of delivery of this Warrant as required
by clause (iii) above or the certificates evidencing such Warrant Shares.
(b) Unless the rights represented by this Warrant shall have
expired or shall have been fully exercised, the Company shall, as soon as
practicable and in no event later than five (5) business days after any exercise
and at its own expense, issue a new Warrant identical in all respects to this
Warrant exercised except it shall represent rights to purchase the number of
Warrant Shares purchasable immediately prior to such exercise under this Warrant
exercised, less the number of Warrant Shares with respect to which such Warrant
is exercised.
(c) No fractional shares of Common Stock are to be issued upon
the exercise of this Warrant, but rather the number of shares of Common Stock
issued upon exercise of this Warrant shall be rounded up or down to the nearest
whole number.
(d) If the Company shall fail for any reason or for no reason
to issue to the holder on a timely basis as described in this Section 2, a
certificate for the number of shares of Common Stock to which the holder is
entitled upon the holder's exercise of this Warrant or a new Warrant for the
number of shares of Common Stock to which such holder is entitled pursuant to
Section 2(b) hereof, the Company shall, in addition to any other remedies under
this Warrant or the Securities Purchase Agreement or otherwise available to such
holder, including any
-3-
<PAGE> 4
indemnification under the Securities Purchase Agreement, pay as additional
damages in cash to such holder on each day the issuance of such Common Stock
certificate or new Warrant, as the case may be, is not timely effected an amount
equal to .25% of the product of (A) the sum of the number of shares of Common
Stock not issued to the holder on a timely basis and to which the holder is
entitled and/or, the number of shares represented by the portion of this Warrant
which is not being converted, as the case may be, and (B) the average of the
closing bid price of the Common Stock for the three consecutive trading days
immediately preceding the last possible date which the Company could have issued
such Common Stock or Warrant, as the case may be, to the holder without
violating this Section 2.
Section 3. Covenants as to Common Stock. The Company hereby covenants
and agrees as follows:
(a) This Warrant is, and any Warrant issued in substitution
for or replacement of this Warrant will upon issuance be, duly authorized and
validly issued.
(b) All Warrant Shares which may be issued upon the exercise
of the rights represented by this Warrant will, upon payment of the Aggregate
Exercise Price in full and issuance, be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof.
(c) During the period within which the rights represented by
this Warrant may be exercised, the Company will at all times have authorized and
reserved at least 100% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant and the par
value of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.
(d) The Company shall promptly secure the listing of the
shares of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance upon
exercise of this Warrant) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of all shares of Common Stock from
time to time issuable upon the exercise of this Warrant; and the Company shall
so list on each national securities exchange or automated quotation system, as
the case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so long
as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(e) The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the
-4-
<PAGE> 5
tenor and purpose of this Warrant will take all such actions as may be necessary
or appropriate in order that the Company may validly and legally issue fully
paid and nonassessable shares of Common Stock upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to
the Company by merger, consolidation or acquisition of all or substantially all
of the Company's assets.
Section 4. Taxes. The Company shall pay any and all taxes which may be
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.
Section 5. Warrant Holder Not Deemed a Stockholder. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
Section 5, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
Section 6. Representations of Holder. The holder of this Warrant, by
the acceptance hereof, represents that it is acquiring this Warrant and the
Warrant Shares for its own account for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution of
this Warrant or the Warrant Shares, except pursuant to sales registered or
exempted under the Securities Act; provided, however, that by making the
representations herein, the holder does not agree to hold this Warrant or any of
the Warrant Shares for any minimum or other specific term and reserves the right
to dispose of this Warrant and the Warrant Shares at any time in accordance with
or pursuant to a registration statement or an exemption under the Securities
Act. The holder of this Warrant further represents, by acceptance hereof, that,
as of this date, such holder is an "accredited investor" as such term is defined
in Rule 501(a)(1) of Regulation D promulgated by the Securities and Exchange
Commission under the Securities Act (an "ACCREDITED INVESTOR").
Section 7. Ownership and Transfer.
(a) The Company shall maintain at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee. The
-5-
<PAGE> 6
Company may treat the person in whose name any Warrant is registered on the
register as the owner and holder thereof for all purposes, notwithstanding any
notice to the contrary, but in all events recognizing any transfers made in
accordance with the terms of this Warrant.
(b) Commencing after the 90th calendar day following the date
of this Warrant, as specified in Section 13 below, this Warrant and the rights
granted to the holder hereof are transferable, in whole or in part, upon
surrender of this Warrant, together with a properly executed warrant power in
the form of Exhibit B attached hereto; provided, however, that any transfer or
assignment shall be subject to the conditions set forth in Section 7(c) below.
(c) The holder of this Warrant understands that this Warrant
has not been and is not expected to be, registered under the Securities Act or
any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (a) subsequently registered thereunder, or (b) such holder
shall have delivered to the Company an opinion of counsel, in generally
acceptable form, to the effect that the securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration; provided that (i) any sale of such securities made in
reliance on Rule 144 promulgated under the Securities Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and (ii)
neither the Company nor any other person is under any obligation to register the
Warrants under the Securities Act or any state securities laws or to comply with
the terms and conditions of any exemption thereunder.
(d) The Company is obligated to register the Warrant Shares
for resale under the Securities Act pursuant to the Registration Rights
Agreement dated _______, 1999 by and between the Company and the Buyers listed
on the signature page thereto (the "REGISTRATION RIGHTS AGREEMENT") and the
initial holder of this Warrant (and certain assignees thereof) is entitled to
the registration rights in respect of the Warrant Shares as set forth in the
Registration Rights Agreement.
Section 8. Adjustment of Warrant Exercise Price and Number of Shares.
The Warrant Exercise Price and the number of shares of Common Stock issuable
upon exercise of this Warrant shall be adjusted from time to time as follows:
(a) Adjustment of Warrant Exercise Price upon Subdivision or
Combination of Common Stock. If the Company at any time after the date of
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, the Warrant Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of shares of Common Stock obtainable upon exercise of this Warrant
will be proportionately increased. If the Company at any time after the date of
issuance of this Warrant combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Warrant Exercise Price in effect immediately
-6-
<PAGE> 7
prior to such combination will be proportionately increased and the number of
shares of Common Stock obtainable upon exercise of this Warrant will be
proportionately decreased.
(b) Adjustment of Warrant Exercise Price Due to Fluctuation in
Closing Bid Price. In the event of either (i) during the twenty (20) trading day
period ending on the trading day immediately preceding the effective date of the
Registration Statement (as that term is defined in the Registration Rights
Agreement) covering for resale the Warrant Shares, the average of the closing
bid prices of the Company's common stock for such period is less than $3.00
(Three Dollars) per common share or (ii) during any twenty (20) trading day
period ending on any January __ or July __ during the term of this Warrant or
the Expiration Date, the average of the closing bid prices of the Company's
common stock for such applicable period is less than $3.00 (Three Dollars) per
common share, then, in either case, the Warrant Exercise Price shall be
automatically reset to the lower of (x) $1.00 (One Dollar) per common share
(such amount to be adjusted in the same manner as any adjustment to the Warrant
Exercise Price effected since the date of this Warrant) or (y) the Warrant
Exercise Price then in effect.
(c) Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 8 but not expressly provided for
by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company's Board of Directors will make an appropriate adjustment in the
Warrant Exercise Price and the number of shares of Common Stock obtainable upon
exercise of this Warrant so as to protect the rights of the holders of the
Warrants; provided that no such adjustment will increase the Warrant Exercise
Price or decrease the number of shares of Common Stock obtainable as otherwise
determined pursuant to this Section 8.
(d) Notices.
(i) Immediately upon any adjustment of the Warrant
Exercise Price, the Company will give written notice thereof to the holder of
this Warrant, setting forth in reasonable detail, and certifying, the
calculation of such adjustment.
(ii) The Company will give written notice to the
holder of this Warrant at least twenty (20) days prior to the date on which the
Company closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Organic Change (as defined below), dissolution or
liquidation, provided that such information shall be made known to the public
prior to or in conjunction with such notice being provided to such holder.
(iii) The Company will also give written notice to
the holder of this Warrant at least twenty (20) days prior to the date on which
any Organic Change, dissolution or liquidation will take place, provided that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to such holder.
-7-
<PAGE> 8
Section 9. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Company's assets to another
Person or other transaction which is effected in such a way that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as "ORGANIC CHANGE." Prior to or after the
consummation of any (i) sale of all or substantially all of the Company's assets
to an acquiring Person or (ii) other Organic Change following which the Company
is not a surviving entity, the holder shall have the right to effect a Cashless
Exercise (as defined below), by presentation and surrender of this Warrant to
the Company at its principal executive offices with a written notice of the
holder's intention to effect a Cashless Exercise, including a calculation of the
number of shares of Common Stock to be issued upon such exercise in accordance
with the terms hereof. A "CASHLESS EXERCISE" shall mean that, in lieu of paying
the Warrant Exercise Price in cash, the holder shall surrender this Warrant for
that number of Warrant Shares determined by subtracting from the number of
Warrant Shares otherwise issuable to the holder upon such exercise, an amount of
Warrant Shares (the "SURRENDER SHARES") having a closing bid price (as reported
by Bloomberg) on the date immediately preceding the date of the exercise notice
equal to the Aggregate Exercise Price (as defined in Section 2) of the Warrant
Shares for which this Warrant is being exercised; and thereafter the Surrendered
Shares shall no longer be available for issuance hereunder.
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this
Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt
of an indemnification undertaking, issue a new Warrant of like denomination and
tenor as this Warrant so lost, stolen, mutilated or destroyed.
Section 11. Notice. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this Warrant
must be in writing and will be deemed to have been delivered: (i) upon receipt,
when delivered personally; (ii) upon receipt, when sent by facsimile if sent
during normal business hours, and if after such normal business hours, on the
next Business Day (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
business day after deposit with a nationally recognized overnight delivery
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:
If to the Company:
Starbase Corporation
4 Hutton Centre, Suite 800
Santa Ana, CA 92707
Telephone: 714-445-4400
Facsimile: 714-445-4482
Attention: Douglas Norman
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<PAGE> 9
With copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Telephone: 212-704-6000
Facsimile: 212-704-6288
Attention: Christopher S. Auguste, Esq.
If to a holder of this Warrant, to it at the address and facsimile number set
forth on the Schedule of Buyers to the Securities Purchase Agreement, with
copies to such holder's representatives as set forth on such Schedule of Buyers,
or at such other address and facsimile as shall be delivered to the Company upon
the issuance or transfer of this Warrant. Each party shall provide five days'
prior written notice to the other party of any change in address or facsimile
number. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
Section 12. Amendments. This Warrant and any term hereof may be
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or holder hereof against which enforcement of such change,
waiver, discharge or termination is sought.
Section 13. Date. The date of this Warrant is ______, 1999. This
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 7 shall continue in full force and
effect after such date as to any Warrant Shares or other securities issued upon
the exercise of this Warrant.
Section 14. Amendment and Waiver. Except as otherwise provided herein,
the provisions of the Warrants may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of Warrants representing a majority of the shares of Common Stock
obtainable upon exercise of the Warrants then outstanding; provided that no such
action may increase the Warrant Exercise Price of the Warrants or decrease the
number of shares or class of stock obtainable upon exercise of any Warrants
without the written consent of the holder of such Warrant.
Section 15. Descriptive Headings; Governing Law. The descriptive
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be governed by the internal laws of the State of Illinois, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Illinois or any other jurisdictions) that would cause the application
of the laws of any jurisdictions other than the State of Illinois.
[Signature Page Follows]
-9-
<PAGE> 10
This Warrant has been duly executed by the Company as of the date first
set forth above.
STARBASE CORPORATION
By:
------------------------------
Name: Douglas S. Norman
Title: Assistant Secretary
<PAGE> 11
EXHIBIT A TO WARRANT
--------------------
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
STARBASE CORPORATION
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("WARRANT SHARES") of Starbase
Corporation, a Delaware corporation (the "COMPANY"), evidenced by the attached
Warrant (the "WARRANT"). Capitalized terms used herein and not otherwise defined
shall have the respective meanings set forth in the Warrant.
1. Payment of Warrant Exercise Price. The holder shall pay the sum of
$___________________ to the Company in accordance with the terms of the Warrant.
2. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: ______________ ________, _____________
________________________________
Name of Registered Holder
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
<PAGE> 12
EXHIBIT B TO WARRANT
--------------------
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of Starbase Corporation, a Delaware
corporation, represented by warrant certificate no. _____, standing in the name
of the undersigned on the books of said corporation. The undersigned does hereby
irrevocably constitute and appoint ______________, attorney to transfer the
warrants of said corporation, with full power of substitution in the premises.
Dated: _________, 199_
------------------------------------
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 836
<SECURITIES> 121
<RECEIVABLES> 4,245
<ALLOWANCES> 155
<INVENTORY> 34
<CURRENT-ASSETS> 5,465
<PP&E> 2,155
<DEPRECIATION> 1,151
<TOTAL-ASSETS> 7,693
<CURRENT-LIABILITIES> 2,467
<BONDS> 0
0
4
<COMMON> 298
<OTHER-SE> 4,183
<TOTAL-LIABILITY-AND-EQUITY> 7,693
<SALES> 2,794
<TOTAL-REVENUES> 3,493
<CGS> 446
<TOTAL-COSTS> 3,755
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (705)
<INCOME-TAX> 0
<INCOME-CONTINUING> (705)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (705)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
