<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-25612
STARBASE CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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 September 30, 2000: Common Stock: 50,298,101
Preferred Stock: 0
<PAGE> 2
STARBASE CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<S> <C>
Consolidated Balance Sheets at September 30, 2000
(Unaudited) and March 31, 2000 3
Consolidated Statements of Operations (Unaudited) for the
three and six month periods ended September 30, 2000 and 1999 4
Consolidated Statements of Comprehensive Operations
(Unaudited) for the three and six month periods ended
September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows (Unaudited) for the
three and six month periods ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3. Qualitative and Quantitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
2
<PAGE> 3
PART I
ITEM 1
FINANCIAL STATEMENTS
STARBASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 26,336 $ 11,448
Restricted cash 39 39
Marketable securities 3 11
Accounts receivable, net of allowances of $403 at
Sept. 30, 2000 and $202 at March 31, 2000 6,818 6,696
Notes and other receivables, net of allowances of $735 at
Sept. 30, 2000 and $707 at March 31, 2000 106 26
Prepaid expenses and other assets 1,093 568
--------- --------
Total current assets 34,395 18,788
Property and equipment, net 1,933 1,526
Intangible assets, net 31,333 21,074
Note receivable from officer 101 99
Long-term restricted cash -- 39
Other non-current assets 295 687
--------- --------
Total assets $ 68,057 $ 42,213
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,859 $ 1,358
Accrued compensation 1,727 1,475
Other accrued liabilities 526 390
Deferred revenue 4,420 4,017
Current portion of long-term obligations 204 119
--------- --------
Total current liabilities 8,736 7,359
Long-term liabilities:
Long-term obligations, less current portion 75 49
Long-term deferred revenue 328 535
--------- --------
Total long-term liabilities 403 584
--------- --------
Total liabilities 9,139 7,943
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized, none issued and outstanding at September 30, 2000
and March 31, 2000 -- --
Common stock, $.01 par value; 100,000,000 authorized;
50,298,101 and 44,315,610 shares issued and outstanding at
September 30, 2000 and March 31, 2000 503 443
Additional paid-in capital 124,113 92,242
Accumulated deficit (65,579) (58,305)
Accumulated other comprehensive loss (119) (110)
--------- --------
Total stockholders' equity 58,918 34,270
--------- --------
Total liabilities and stockholders' equity $ 68,057 $ 42,213
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE> 4
STARBASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License $ 6,411 $ 3,119 $ 11,526 $ 6,093
Service 2,033 593 3,960 1,112
-------- -------- -------- --------
Total revenues 8,444 3,712 15,486 7,205
Cost of Revenues:
License 195 509 301 673
Service 1,046 279 1,970 561
Amortization of intangibles 503 -- 908 --
-------- -------- -------- --------
Total cost of revenues 1,744 788 3,179 1,234
-------- -------- -------- --------
Gross margin 6,700 2,924 12,307 5,971
Operating Expenses:
Research and development 2,192 963 4,019 1,936
Sales and marketing 4,621 1,749 8,543 3,676
General and administrative 1,981 1,128 3,522 1,927
Non-cash stock based compensation 162 (19) 1,284 (10)
Amortization of intangibles 1,316 49 2,556 98
-------- -------- -------- --------
Total operating expenses 10,272 3,870 19,924 7,627
-------- -------- -------- --------
Operating loss (3,572) (946) (7,617) (1,656)
Interest and other income (expense) 186 (218) 344 (215)
-------- -------- -------- --------
Loss before income taxes (3,386) (1,164) (7,273) (1,871)
Provision for income taxes -- 1 1 1
-------- -------- -------- --------
Net loss (3,386) (1,165) (7,274) (1,872)
Non-cash dividend and accretion of beneficial
conversion feature -- (47) -- 549
-------- -------- -------- --------
Net loss applicable to common stockholders $ (3,386) $ (1,118) $ (7,274) $ (2,421)
======== ======== ======== ========
Per share data:
Basic and diluted net loss per common share $ (0.07) $ (0.04) $ (0.16) $ (0.08)
======== ======== ======== ========
Basic and diluted weighted average common shares
outstanding 46,231 30,355 45,288 29,146
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 5
STARBASE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------- ------------------------
2000 1999 2000 1999
------- -------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $(3,386) $(1,165) $(7,274) $(1,872)
Other comprehensive loss:
Unrealized loss on available for sale
securities (6) -- (8) --
------- ------- ------- -------
Total comprehensive loss $(3,392) $(1,165) $(7,282) $(1,872)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 6
STARBASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
September 30,
-------------------------
2000 1999
-------- -------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (7,274) $(1,872)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,796 288
Provision for doubtful accounts and sales returns 49 576
Stock option compensation (recovery) expense 1,285 (10)
Loss on disposition of property and equipment -- 41
Equity in loss of investee -- 250
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable 1 362
Notes and other receivables (116) (638)
Prepaid expenses and other assets (355) (77)
Other non-current assets (107) (159)
Accounts payable and accrued liabilities 53 383
Deferred revenue 187 1,384
-------- -------
Net cash provided (used) by operations (2,481) 528
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired 30 --
Decrease in restricted cash 39 40
Investment in equity investee -- (250)
Capital expenditures (1,124) (155)
-------- -------
Net cash used in investing activities (1,055) (365)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock:
From private placements 17,500 4,225
Exercise of options 654 615
Exercise of warrants 1,961 394
Payment of financing related costs (1,526) (514)
Payments on capitalized lease obligations (165) (61)
-------- -------
Net cash provided by financing activities 18,424 4,659
-------- -------
Net increase in cash 14,888 4,822
Cash and cash equivalents, beginning of period 11,448 1,363
-------- -------
Cash and cash equivalents, end of period $ 26,336 $ 6,185
======== =======
Supplemental Cash Flow Information:
Interest paid $ 21 $ 18
======== =======
Income taxes paid $ 1 $ 1
======== =======
Non-cash investing and financing transactions:
Non-cash preferred stock and common stock dividends $ -- $ 549
======== =======
Conversion of preferred stock to common stock $ -- $ 6
======== =======
Capitalized lease and insurance financing $ 171 $ 90
======== =======
Change in unrealized loss on securities available for sale $ 8 $ --
======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements
6
<PAGE> 7
STARBASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
StarBase Corporation, a Delaware corporation (the Company), is a leading
provider of collaboration products for the creation and management of integrated
code and content eBusiness applications. Collaboration is the simultaneous
coordination, management and communication of geographically dispersed
contributors of both code and content for eBusiness applications. The Company
develops, markets, and supports a complete family of user-friendly software
products that support the continuous cycle of creating, linking and managing
digital assets, which comprise complex eBusiness applications. The Company's
products enable users with differing technical and functional backgrounds to
collaborate on the production of Web sites and eBusiness initiatives from
multiple locations. The Company's professional services organization provides
implementation, consulting and training expertise. The Company's current product
line consists of StarTeam(R) and StarTeam(R) Enterprise, StarDisk(R),
StarGate(R), StarSweeper(TM), StarTeam Web Edition(R), StarTeam Web Approval(R),
StarFlow(R), StarEstimator(R), StarSync(R), RoundTable(R), and Versions(R) as
well as the product lines acquired through acquisitions: CodeWright(R),
CostWright(R)/Surveyor(R) and SpyWright(R).
2. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements as of September 30, 2000
and for the three and six months ended September 30, 2000, and 1999, have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
not been presented. The interim consolidated 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 and six months ended September 30, 2000 are not necessarily
indicative of the operating results for the full year. The accompanying
unaudited consolidated 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-K, for
the year ended March 31, 2000.
NET LOSS PER SHARE
Basic and diluted net loss per share applicable to common stockholders is
computed using the weighted average number of common shares outstanding during
the periods presented. Potentially dilutive shares, stock options, warrants, and
Escrow Shares, have not been included where inclusion would be antidilutive.
Escrow Shares (1,418,638) will be released to the founders upon attaining
certain defined cash flow requirements. The release of the Escrow Shares will be
deemed compensatory and, accordingly, will result in charges to earnings equal
to the fair market value of these shares recorded ratably over the period
beginning on the date when management determines that the cash flow requirements
are probable of being met and ending on the date when the goal is attained,
causing the Escrow Shares to be released. At the time a goal is attained,
previously unrecognized compensation expense will be adjusted by a one-time
charge based on the then fair market value of the shares released from escrow.
Such charges could substantially reduce the Company's net income or increase the
Company's loss for financial reporting purposes in the periods such charges are
recorded. Based upon historical results, the attainment of the goal is not
probable at this time. However, this does not preclude the attainment of the
goal with future results.
For the three months ended September 30, 2000, net loss and net loss applicable
to common stockholders was $3,386,000. For the three months ended September 30,
1999, net loss applicable to common stockholders was $1,118,000 representing net
loss of $1,165,000 less non-cash dividend and accretion of beneficial conversion
feature of $47,000 associated with the Series H Preferred Stock.
For the six months ended September 30, 2000, net loss and net loss applicable to
common stockholders was $7,274,000. For the six months ended September 30, 1999,
net loss applicable to common stockholders was $2,421,000 representing net loss
of $1,872,000 plus non-cash dividend and accretion of beneficial conversion
feature of $549,000 consisting of $501,000 associated with the Series H
Preferred Stock and $48,000 associated with the Series I Preferred Stock.
7
<PAGE> 8
STARBASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Potentially dilutive securities, which consist of options to purchase 3,702,096
shares of common stock at prices ranging from $0.625 to $13.07 per share,
warrants to purchase 906,246 shares of common stock at prices ranging from $0.73
to $6.81 per share and 1,418,638 common shares held in escrow were not included
in the computation of diluted loss per share because such inclusion would have
been antidilutive for the three and six month periods ended September 30, 2000.
Common stock equivalents, which consist of options to purchase 2,460,750 shares
of common stock at prices ranging from $0.625 to $3.44 per share, warrants to
purchase 4,526,668 shares of common stock at prices raging from $0.59 to $3.25
per share, and 1,418,638 common shares held in escrow were not included in the
computation of diluted loss per share because such inclusion would have been
antidilutive for the three and six month periods ended September 30, 1999.
3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
(In thousands) September 30, March 31,
2000 2000
------------ ---------
(Unaudited)
<S> <C> <C>
Property and equipment:
Computer hardware $ 1,438 $ 1,836
Furniture and fixtures 615 628
Computer software 559 239
Motor vehicle 32 32
Leasehold improvements 269 251
-------- --------
2,913 2,986
Less accumulated depreciation and amortization (980) (1,460)
-------- --------
$ 1,933 $ 1,526
======== ========
Intangible assets:
Patents and trademarks $ 20 $ 20
Manufacturing/sales license 385 --
Developed technology 9,533 7,073
Customer lists 161 161
Assembled workforce 368 368
Goodwill 24,837 13,959
-------- --------
35,304 21,581
Less accumulated amortization (3,971) (507)
-------- --------
$ 31,333 $ 21,074
======== ========
</TABLE>
8
<PAGE> 9
STARBASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EQUITY TRANSACTIONS
During September 5, 2000, the Company completed a private placement consisting
of 3,211,009 shares of common stock for $17,500,000. In addition, the Company
issued warrants to purchase 738,531 shares of common stock exercisable at $6.81
per share that will expire on September 5, 2003. The fair value of these
warrants using the Black-Scholes model at the date of grant was $3,279,000.
WARRANTS
Warrant activity for the six month period ended September 30, 2000 is as
follows:
<TABLE>
<CAPTION>
Warrant Price
Shares Per Share
-------- ------------
<S> <C> <C>
Outstanding at March 31, 2000 239,669 $0.73-$2.00
Granted 884,910 $3.88-$6.81
Exercised (218,333) $1.25-$2.00
--------
Outstanding at September 30, 2000 906,246 $0.73-$6.81
========
</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 September
30, 2000 was 8.5 years. A total of 2,833,333 shares of common stock have been
authorized under the 1996 Plan, of which 1,442,536 were outstanding at September
30, 2000. In addition, the Company has granted non-qualified stock options, of
which 12,237,806 were outstanding at September 30, 2000. As a result of the
acquisition of Premia Corporation, the Company assumed all of the outstanding
options granted under the Premia ISO stock option plan, of which 208,699 were
outstanding at September 30, 2000.
Stock option activity for the six month period ended September 30, 2000 is as
follows:
<TABLE>
<CAPTION>
Weighted-Average
Exercise
Shares Price
---------- ----------------
<S> <C> <C>
Outstanding at March 31, 2000 11,836,123 $4.16
Granted 3,399,157 $5.12
Lapsed or canceled (573,817) $6.55
Exercised (772,422) $2.83
----------
Outstanding at September 30, 2000 13,889,041 $4.36
==========
Exercisable at September 30, 2000 3,702,096 $1.74
==========
</TABLE>
9
<PAGE> 10
STARBASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option summary information at September 30, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Weighted-Average
Remaining Weighted-Average Weighted-Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
--------------- ------ ----------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$0.50 - $1.00 1,829,697 8.1 years $0.67 941,492 $0.67
$1.01 - $1.50 3,883,445 8.0 years $1.31 1,157,697 $1.29
$1.51 - $2.00 1,603,185 7.7 years $1.66 851,654 $1.65
$2.01 - $2.50 418,054 8.8 years $2.12 292,007 $2.07
$2.51 - $3.00 218,751 4.8 years $2.68 139,014 $2.70
$3.01 - $3.50 176,252 7.4 years $3.46 32,292 $3.44
$3.51 - $4.00 1,112,695 9.1 years $3.88 47,500 $3.88
$4.01 - $4.50 235,000 7.5 years $4.05 0 $0.00
$4.51 - $10.00 1,758,800 9.5 years $6.03 175,945 $5.26
$10.01 - $20.00 2,653,162 9.4 years $12.68 64,495 $10.97
---------- -----------
13,889,041 3,702,096
=========== ===========
</TABLE>
10
<PAGE> 11
STARBASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OPERATING SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and in assessing performance. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
The Company's reportable operating segments include software licenses and
services. The software licenses operating segment develops and markets the
Company's eBusiness collaboration products. The services segment provides
after-sale support for software products and fee-based training and consulting
services related to the Company products.
The Company does not allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of revenues and gross margin.
Operating segment data for the three and six months ended September 30, 2000 and
1999 was as follows:
<TABLE>
<CAPTION>
Software
licenses Services Total
-------- --------- -------
(In thousands)
<S> <C> <C> <C>
Three months ended September 30, 2000:
Revenues $6,411 $2,033 $8,444
Cost of revenues 698 1,046 1,744
------ ------ ------
Gross margin $5,713 $ 987 $6,700
====== ====== ======
Three months ended September 30, 1999:
Revenues $3,119 $ 593 $3,712
Cost of revenues 509 279 788
------ ------ ------
Gross margin $2,610 $ 314 $2,924
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Software
licenses Services Total
---------- -------- --------
(In thousands)
<S> <C> <C> <C>
Six months ended September 30, 2000:
Revenues $11,526 $3,960 $15,486
Cost of revenues 1,209 1,970 3,179
------- ------ -------
Gross margin $10,317 $1,990 $12,307
======= ====== =======
Six months ended September 30, 1999:
Revenues $ 6,093 $1,112 $ 7,205
Cost of revenues 673 561 1,234
------- ------ -------
Gross margin $ 5,420 $ 551 $ 5,971
======= ====== =======
</TABLE>
11
<PAGE> 12
PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion in this Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The statements that are not purely historical
are forward-looking statement within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as
amended, and Sections 21E of the Securities Exchange Act of 1934, as amended. We
have based these forward-looking statements on currently available information
and our current beliefs, expectation and projections about future events,
including, among other things: successfully implementing our business strategy;
maintaining and expanding market acceptance of the products we offer; and our
ability to successfully compete in our marketplace. All forward-looking
statements included in this document are based on the information available to
the Company on the date hereof, and the Company assumes no obligation to update
any such forward-looking statements. Actual results could differ materially from
the results discussed herein. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed under the caption
"Risk Factors" of this document and in the Company's other filings with the
Securities and Exchange Commission, including the Company's Annual Report for
the year ended March 31, 2000 on Form 10-K.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
RESULTS OF OPERATIONS
The following table summarizes our results of operations as a percentage of
total revenue for the three and six months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
License 75.9% 84.0% 74.4% 84.6%
Service 24.1 16.0 25.6 15.4
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
License 2.3 13.7 1.9 9.3
Service 12.4 7.5 12.7 7.8
Amortization of intangibles 6.0 -- 5.9 --
------ ------ ------ ------
Total cost of revenues 20.7 21.2 20.5 17.1
------ ------ ------ ------
Gross profit 79.3 78.8 79.5 82.9
Operating expenses:
Research and development 26.0 26.0 26.0 26.9
Sales and marketing 54.7 47.1 55.2 51.0
General and administrative 23.4 30.4 22.7 26.7
Non-cash stock based compensation 1.9 (0.5) 8.3 (0.1)
Amortization of intangibles 15.6 1.3 16.5 1.4
------ ------ ------ ------
Total operating expenses 121.6 104.3 128.7 105.9
------ ------ ------ ------
Loss from operation (42.3) (25.5) (49.2) (23.0)
Other income (expense), net 2.2 (5.9) 2.2 (3.0)
------ ------ ------ ------
Loss before income taxes (40.1) (31.4) (47.0) (26.0)
Provision for income taxes 0.0 0.0 0.0 0.0
------ ------ ------ ------
Net loss (40.1) (31.4) (47.0) (26.0)
Non-cash dividend and accretion of
beneficial conversion feature -- (1.3) -- 7.6
------ ------ ------ ------
Net loss applicable to common stockholders (40.1)% (30.1)% (47.0)% (33.6)%
====== ====== ====== ======
</TABLE>
12
<PAGE> 13
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Revenues were $8.4 million and $3.7 million for the three month periods ended
September 30, 2000 and 1999, respectively, representing an increase of $4.7
million or 127%. International revenues accounted for less than 10% of total
revenue in the three months ended September 30, 2000 and 1999.
License - License revenues were $6.4 million and $3.1 million for the three
month periods ended September 30, 2000 and 1999, respectively, representing an
increase of $3.3 million or 106%. License revenues represented 75.9% and 84.0%
of total revenues for the three months ended September 30, 2000 and 1999,
respectively. The increase in license revenues was due to an increase in the
Company's sales force along with the new products available through the Premia
acquisition. The acquired products were CodeWright, Surveyor/CostWright, and
SpyWright.
Service - Service revenues were $2.0 million and $593,000 for the three month
periods ended September 30, 2000 and 1999, respectively, representing an
increase of $1.4 million or 243%. Service revenues represented 24.1% and 16.0%
of total revenues for the three months ended September 30, 2000 and 1999,
respectively. The increase in service revenues was due to an increase in the
Company's training and consulting organization along with an increase in the
number of software licenses sold with maintenance agreements.
COST OF REVENUES
License - License cost of revenues consists primarily of manufacturing and
related costs such as media, documentation, product assembly. The Company
out-sources manufacturing for all software products, with the exception of the
Company's Roundtable product. License cost of revenues was $195,000 and $509,000
for the three month periods ended September 30, 2000 and 1999, respectively,
representing a decrease of $314,000 or 62%. License cost of revenues as a
percentage of total revenue was 2.3% and 13.7% for the three months ended
September 30, 2000 and 1999, respectively. The decrease in cost of revenues was
a result of an increase in the average size of the Company's sales thus
requiring a fewer number of manuals and media to be shipped. Also, license cost
of revenues for the three months ended September 30, 1999 included costs for an
exchange of technology of $471,000.
Service - Service cost of revenues consists of the costs associated with
performing training and consulting services. Service cost of revenues were $1.0
million and $279,000 for the three month periods ended June 30, 2000 and 1999,
respectively, representing an increase of $767,000 or 275%. Service cost of
revenues as a percentage of total revenue was 12.4% and 7.5% for the three
months ended September 30, 2000 and 1999, respectively. The increases were due
to the increases in the training and consulting organization.
Amortization of intangibles - Amortization of intangibles consists of the
amortization of developed technology associated with the Premia and Genitor
acquisitions. Amortization of intangibles was $503,000 for the three months
ended September 30, 2000 and was 6.0% of total revenues. There was no
amortization of intangibles for the three months ended September 30, 1999.
OPERATING EXPENSES
Research and development expenses - Research and development expenses were $2.2
million and $1.0 million for the three months ended September 30, 2000 and 1999,
respectively, representing an increase of $1.2 million or 128%. The increase was
primarily related to an increase in salaries and related expenses associated
with an increase in software developers and quality assurance personnel compared
to the same period in the prior year.
Sales and marketing - Sales and marketing expenses were $4.6 million and $1.7
million for the three months ended September 30, 2000 and 1999, respectively,
representing an increase of $2.9 million or 164%. The increase was primarily
related to the increase in salaries and related expenses incurred in expanding
the sales and marketing staff.
General and administrative - General and administrative expenses were $2.0
million and $1.1 million for the three months ended September 30, 2000 and 1999,
respectively, representing an increase of $900,000 or 76%. The increase was
primarily due an increase in salaries and related expenses incurred in building
our infrastructure.
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Non-cash stock based compensation - Non-cash stock based compensation was
$162,000 and $(19,000) for the three months ended September 30, 2000 and 1999,
respectively, representing an increase of $181,000. Non-cash stock based
compensation expense represents the difference between the exercise price of
stock options and warrants granted to non-employees and the deemed fair market
value of the Company's common stock at the date of the grant amortized over the
vesting period. The credit for the three months ended September 30, 1999, was
due to the cancellation of options for which the Company had recorded a non-cash
stock base compensation expense.
Amortization of intangibles - Amortization of intangibles was $1.3 million and
$49,000 for the three months ended September 30, 2000 and 1999, respectively.
This includes amortization of goodwill, customer list and assembled workforce
associated with the SITE, Premia, and ObjectShare acquisitions.
Interest and other income (expense) - Interest and other income (expense) was
$186,000 and $(218,000) for the three months ended September 30, 2000 and 1999,
respectively, representing an increase of $404,000. The increase is due to
higher interest income resulting from more cash being available to invest.
Interest and other income (expense) for the three months ended September 30,
1999 included an expense of $250,000 as a result of equity loss from investee
(OpenAvenue).
Provision for income taxes - Provision for income taxes was $1,000 for the three
months ended September 30, 1999. This represents the minimum amount required for
state taxes. The Company has not recorded any deferred taxes because of the
losses incurred since its inception.
Net loss applicable to common stockholders - Net loss applicable to common
stockholders for the three months ended September 30, 2000 was $3.4 million
consisting of our net loss for the period. Net loss applicable to common
stockholders for the three months ended September 30, 1999 was $1.1 million
consisting of our net loss for the period of $1.2 million and $(47,000) of
non-cash dividend and accretion of beneficial conversion feature of preferred
stock.
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Revenues were $15.5 million and $7.2 million for the six month periods ended
September 30, 2000 and 1999, respectively, representing an increase of $8.3
million or 115%. International revenues accounted for less than 10% of total
revenue in the six months ended September 30, 2000 and 1999.
License - License revenues were $11.5 million and $6.1 million for the six month
periods ended September 30, 2000 and 1999, respectively, representing an
increase of $5.4 million or 89%. License revenues represented 74.4% and 84.6% of
total revenues for the six months ended September 30, 2000 and 1999,
respectively. The increase in license revenues was due to an increase in the
Company's sales force along with the new products available through the Premia
acquisition. The acquired products were CodeWright, Surveyor/CostWright, and
SpyWright.
Service - Service revenues were $4.0 million and $1.1 million for the six month
periods ended September 30, 2000 and 1999, respectively, representing an
increase of $2.9 million or 256%. Service revenues represented 25.6% and 15.4%
of total revenues for the six months ended September 30, 2000 and 1999,
respectively. The increase in service revenues was due to an increase in the
Company's training and consulting organization along with an increase in the
number of software licenses sold with maintenance agreements.
COST OF REVENUES
License - License cost of revenues consists primarily of manufacturing and
related costs such as media, documentation, product assembly. The Company
out-sources manufacturing for all software products, with the exception of the
Company's Roundtable product. License cost of revenues was $301,000 and $673,000
for the six month periods ended September 30, 2000 and 1999, respectively,
representing a decrease of $372,000 or 55%. License cost of revenues as a
percentage of total revenue was 1.9% and 9.3% for the six months ended September
30, 2000 and 1999, respectively. The decrease in cost of revenues was a result
of an increase in the average size of the Company's sales thus requiring a
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fewer number of manuals and media to be shipped. Also, license cost of revenues
for the six months ended September 30, 1999 included costs for an exchange of
technology of $471,000.
Service - Service cost of revenues consists of the costs associated with
performing training and consulting services. Service cost of revenues were $2.0
million and $561,000 for the six month periods ended September 30, 2000 and
1999, respectively, representing and increase of $1.4 million or 251%. Service
cost of revenues as a percentage of total revenue was 12.7% and 7.8% for the six
months ended September 30, 2000 and 1999, respectively. The increases were due
to the increases in the training and consulting organization.
Amortization of intangibles - Amortization of intangibles consists of the
amortization of developed technology associated with the Premia and Genitor
acquisitions. Amortization of intangibles was $908,000 for the six months ended
September 30, 2000 and was 5.9% of total revenues. There was no amortization of
intangibles for the six months ended September 30, 1999.
OPERATING EXPENSES
Research and development expenses - Research and development expenses were $4.0
million and $1.9 million for the six months ended September 30, 2000 and 1999,
respectively, representing an increase of $2.1 million or 108%. The increase was
primarily related to an increase in salaries and related expenses associated
with an increase in software developers and quality assurance personnel compared
to the same period in the prior year.
Sales and marketing - Sales and marketing expenses were $8.5 million and $3.7
million for the six months ended September 30, 2000 and 1999, respectively,
representing an increase of $4.8 million or 132%. The increase was primarily
related to the increase in salaries and related expenses incurred in expanding
the sales and marketing staff.
General and administrative - General and administrative expenses were $3.5
million and $1.9 million for the six months ended September 30, 2000 and 1999,
respectively, representing an increase of $1.6 million or 83%. The increase was
primarily due an increase in salaries and related expenses incurred in building
our infrastructure.
Non-cash stock based compensation - Non-cash stock based compensation was $1.3
million and $(10,000) for the six months ended September 30, 2000 and 1999,
respectively, representing an increase of $1.3 million. Non-cash stock based
compensation expense represents the difference between the exercise price of
stock options and warrants granted to non-employees and the deemed fair market
value of the Company's common stock at the date of the grant amortized over the
vesting period. The credit for the six months ended September 30, 1999, was due
to the cancellation of options for which the Company had recorded a non-cash
stock base compensation expense.
Amortization of intangibles - Amortization of intangibles was $2.6 million and
$98,000 for the six months ended September 30, 2000 and 1999, respectively. This
includes amortization of goodwill, customer list and assembled workforce
associated with the SITE, Premia, and ObjectShare acquisitions.
Interest and other income (expense) - Interest and other income (expense) was
$344,000 and $(215,000) for the six months ended September 30, 2000 and 1999,
respectively, representing an increase of $559,000. The increase is due to
higher interest income resulting from more cash being available to invest.
Interest and other income (expense) for the six months ended September 30, 1999
included an expense of $250,000 as a result of equity loss from investee
(OpenAvenue).
Provision for income taxes - Provision for income taxes was $1,000 for the six
months ended September 30, 2000 and 1999. This represents the minimum amount
required for state taxes. The Company has not recorded any deferred taxes
because of the losses incurred since its inception.
Net loss applicable to common stockholders - Net loss applicable to common
stockholders for the six months ended September 30, 2000 was $7.3 million
consisting of our net loss for the period. Net loss applicable to common
stockholders for the six months ended September 30, 1999 was $2.4 million
consisting of our net loss for the period of $1.9 million and $549,000 of
non-cash dividend and accretion of beneficial conversion feature of preferred
stock.
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INFLATION
Inflation has not had a significant effect on our results of operations of
financial position for the three and six month periods ended September 30, 2000
and 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our business, to date, primarily from the issuance of equity
securities. Cash and cash equivalents as of September 30, 2000 were $26.3
million and $11.4 million as of March 31, 2000. At September 30, 2000 the
Company had working capital of $25.7 million, compared to $11.4 million at March
31, 2000.
Net cash used in operating activities was $2.5 million for the six months ended
September 30, 2000 and net cash provided by operations was $528,000 for the six
months ended September 30, 1999. The increase in cash used in operating
activities was primarily due to an increase in net loss partially offset by an
increase in non-cash stock option compensation expense and depreciation and
amortization expense.
Net cash used in investing activities was $1.1 million and $365,000 for the six
months ended September 30, 2000 and 1999, respectively. The increase was
primarily due to an increase in capital expenditures.
Net cash provided from financing activities was $18.4 million and $4.7 million
for the six months ended September 30, 2000 and 1999, respectively. In September
2000, the Company raised $16.0 million, net, through a private placement of
common stock. See Note 4 of the notes to the consolidated financial statements.
For the six months ended September 30, 2000, exercise of options provided
$654,000 and exercise of warrants provided $2.0 million.
The Company believes that our existing cash balances and cash equivalents and
cash from operations will be sufficient to finance our operations through at
least the next twelve months. If additional financing is needed, there can be no
assurance that such financing will be available to us on commercially reasonable
terms or at all.
The Company warrants products against defects for 90 days and has a policy
permitting the return of products within 30 days. Warranty costs and returns,
which are not significant, have historically been within management's
expectations. The Company has reserved approximately $403,000 at September 30,
2000 for future returns and other collection issues, no change from March 31,
2000.
NEW ACCOUNTING STANDARDS
In December 1999, Staff Accounting Bulletin No. 101 was issued to provide to
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101, is effective no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company is currently evaluating the impact this bulletin may have on its
financial statements.
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 2002. 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 and the
effect of adopting SFAS No. 133 is not presently determinable.
RISK FACTORS
Our business is subject to a variety of risks and special considerations. As a
result, our prospective investors should carefully consider the risks described
below and the other information in this document before deciding to invest in
the shares.
Our business, financial condition and results of operations could be adversely
affected by any of the following risks. If we are adversely affected by such
risks, then the trading price of our common stock could decline, and you could
lose all or part of your investment.
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OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH
MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE
Our revenues and operating results for any quarter are not necessarily
indicative of results to be expected in future periods. We expect our common
stock price to vary with our operating results and, consequently, any adverse
fluctuations in our operating results could have an adverse effect on our stock
price. Our operating results have in the past been, and will continue to be,
subject to quarterly fluctuations as a result of a number of factors. These
factors include:
- the size and timing of customer orders and the recognition of
revenue from those orders;
- changes in budgets or purchasing patterns of our customers;
- increased pricing pressure from competitors in the software and
Internet industries;
- the introduction and market acceptance of new technologies and
standards;
- the integration of people, operations, and products from
acquired businesses and technologies;
- changes in operating expenses and personnel; and
- changes in general and specific economic conditions in the
software and Internet industries.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES
Since our inception, we have had a history of losses and as of September 30,
2000, we had an accumulated deficit of $65,579,000. Further, our cash
requirements to run our business have been and will continue to be significant.
In the past, we have had negative cash flow from operations. We anticipate
incurring additional losses until we can successfully develop, market and
distribute our products. Developing software products is difficult and time
consuming and requires the coordinated participation of various technical and
marketing personnel and, at times, independent third-party suppliers. This
development process often encounters unanticipated delays and expenses. The
likelihood of the success of our business must be considered in light of the
problems, expenses, difficulties, complications and unforeseen delays frequently
encountered in connection with the development of new software technologies.
Further, our ability to achieve or sustain our revenue or profit goals depends
on a number of factors outside of our control, including the extent to which:
- there is market acceptance of commercial services utilizing our
products;
- our competitors announce and develop competing products or
significantly lower their prices; and
- our customers promote our product.
We may not be able to achieve our goals and become profitable.
WE RELY HEAVILY ON SALES OF STARTEAM AND IF IT DOES NOT SUSTAIN OR INCREASE
MARKET ACCEPTANCE, WE ARE LIKELY TO EXPERIENCE LARGER LOSSES
We believe that revenues generated from StarTeam will continue to account for a
large percentage of our revenues for the foreseeable future. A decline in the
price of, or demand for, StarTeam would have a material adverse effect on our
business, operating results and financial condition. The following events may
reduce the demand for StarTeam:
- competition from other products;
- flaws in our software products or incompatibility with
third-party hardware or software products;
- negative publicity or evaluation of our company; or
- obsolescence of the hardware platforms or software environments
in which our systems run.
In addition, our future financial performance will depend upon successfully
developing and selling enhanced versions of StarTeam. If we fail to deliver
product enhancements or new products for our customers it will be difficult for
us to succeed.
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WE FACE INTENSE COMPETITION FOR EBUSINESS SOFTWARE, WHICH COULD MAKE IT
DIFFICULT TO ACQUIRE AND RETAIN CUSTOMERS
The eBusiness software market is intensely competitive and rapidly evolving. Our
customer's requirements and the technology available to satisfy those
requirements continually change. We expect competition to intensify in the
future. Our principal competitors include in-house development efforts by
potential customers or partners, vendors of code management software, and
vendors of content management software. Many of these companies have longer
operating histories and significantly greater financial, technical, marketing
and other resources than we do. Many of these companies can also leverage
extensive customer bases and adopt aggressive pricing policies to gain market
share. Potential competitors may bundle their products in a manner that may
discourage users from purchasing our products. In addition, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our software. If we fail to
compete successfully against current or future competitors, we could lose
customers and our business, operating results and financial condition would
suffer.
THE SALES CYCLE FOR OUR PRODUCTS CAN BE LONG AND MAY HARM OUR OPERATING RESULTS
The period of time between initial customer contact and an actual sales order
may span several months. This long sales cycle increases the risk that we will
not forecast our revenue accurately and adjust our expenditures accordingly. The
longer the sales cycle, the more likely a customer is to decide not to purchase
our products or to scale down its order of our products for various reasons,
including changes in our customers' budgets and purchasing priorities and
actions by competitors, including introduction of new products and price
reductions. In addition, we often must provide a significant level of education
to our prospective customers regarding the use and benefit of our products,
which may cause additional delays during the evaluation process.
WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL, WHICH IS PARTICULARLY DIFFICULT
FOR US BECAUSE WE COMPETE WITH OTHER SOFTWARE COMPANIES WHERE COMPETITION FOR
PERSONNEL IS EXTREMELY INTENSE
Our success depends on our ability to attract and retain qualified, experienced
employees. We compete in a relatively new market and there are a limited number
of people who have acquired the skills needed to provide the services that our
clients demand. We compete for experienced engineering, sales and consulting
personnel with Internet professional services firms, software vendors,
consulting firms and professional services companies. Since we may issue options
as compensation to recruit employees, the volatility of the market price of our
common stock may make it difficult for us to attract and retain highly qualified
employees.
In addition, our customers that license our software generally engage our
professional services organization to assist with support, training, consulting
and implementation of their Web solutions. While we have recently established
relationships with some third-party service providers, we continue to be the
primary provider of these services. Competition for qualified services personnel
with the appropriate Internet specific knowledge is intense. We could also
experience deterioration in service levels or decreased customer satisfaction.
Any of these events could disrupt our business and have a materially adverse
effect on our business, operating results and financial condition.
IF WE DO NOT DEVELOP OUR INDIRECT SALES CHANNEL, OUR REVENUES MAY DECLINE
Domestic and international resellers and original equipment manufacturers may be
able to reach new customers more quickly or more effectively than our direct
sales force. Although we are currently investing and plan to continue to invest
significant resources to develop these indirect sales channels, we may not
succeed in establishing a channel that can market our products effectively and
provide timely and cost-effective customer support and services. In addition, we
may not be able to manage conflicts across our various sales channels, and our
focus on increasing sales through our indirect channel may divert management
resources and attention from our direct sales efforts.
IF WE DO NOT CONTINUE TO RECEIVE REPEAT BUSINESS FROM EXISTING CUSTOMERS, OUR
REVENUE WILL SUFFER
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We generate a significant amount of our software license revenues from existing
customers. Most of our current customers initially purchase a limited number of
licenses as they implement and adopt our products. Even if the customer
successfully uses our products, customers may not purchase additional licenses
to expand the use of our products. Purchases of expanded licenses by these
customers will depend on their success in deploying our products, their
satisfaction with our products and support services and their use of competitive
alternatives. A customer's decision to widely deploy our products and purchase
additional licenses may also be affected by factors that are outside of our
control or which are not related to our products or services. In addition, as we
deploy new versions of our products or introduce new products, our current
customers may not require the functionality of our new products and may decide
not to license these products.
OUR PRODUCTS COULD BECOME OBSOLETE IF WE ARE UNABLE TO ADAPT TO THE RAPID
CHANGES IN THE EBUSINESS MARKET
Rapidly changing Internet technology and standards may impede market acceptance
of our products. The continued success of our products will require us to
develop and introduce new technologies and to offer functionality that we do not
currently provide. We may not be able to quickly adapt our products to new
Internet technology. If Internet technologies emerge that are incompatible with
StarTeam or other new Internet products that we develop, our products may become
obsolete and existing and potential new customers may seek alternatives. The
following factors characterize the markets for our products:
- rapid technological advances;
- evolving industry standards, including operating systems;
- changes in end-user requirements; and
- frequent new product introductions and enhancements.
To succeed, we will need to enhance our current products and develop new
products on a timely basis to stay current with developments related to Internet
technology and to satisfy the increasingly sophisticated requirements of our
customers. Internet commerce technology, particularly eBusiness software
technology, is complex and new products and product enhancements can require
long development and testing periods. Any delays in developing and releasing
enhanced or new products could cause us to lose market share and have a material
adverse effect on our business, operating results and financial condition.
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS, THE MARKET
ACCEPTANCE OF OUR PRODUCTS AND OUR FINANCIAL PERFORMANCE MAY SUFFER
To offer products and services to a larger customer base our direct sales force
depends on strategic partnerships and marketing alliances to obtain customer
leads, referrals and distribution. If we are unable to maintain our existing
strategic relationships or fail to enter into additional strategic
relationships, our ability to increase our sales will be harmed. We would also
lose anticipated customer introductions and co-marketing benefits. In addition,
our strategic partners may not regard us as significant for their own
businesses. Therefore, they could reduce their commitment to us or terminate
their relationships with us, pursue other partnerships or relationships, or
attempt to develop or acquire products or services that compete with our
products and services. Even if we succeed in establishing these relationships,
they may not result in additional customers or revenues.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITION OF PREMIA
CORPORATION
We acquired Premia Corporation on March 8, 2000. The success of this acquisition
will depend on our ability to:
- successfully integrate and manage Premia's technology and
operations;
- retain Premia's software developers;
- develop and market new products and enhance existing products
based on Premia's technology; and
- retain Premia's customer base.
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Our failure to successfully address the risks associated with our acquisition of
Premia could hurt our ability to develop and market products based on Premia's
technology.
WE MAY ACQUIRE ADDITIONAL TECHNOLOGIES OR COMPANIES IN THE FUTURE AND THESE
ACQUISITIONS COULD RESULT IN DILUTION TO OUR STOCKHOLDERS AND/OR DISRUPT OUR
BUSINESS
We may acquire additional technologies or companies in the future through a
merger, acquisition, joint venture or other structure. We may not be able to
identify, acquire, profitably manage or successfully integrate any acquired
business without substantial expense, delay or other operational or financial
problems. Entering into an acquisition entails many risks, including:
- diversion of management's attention from other business
concerns;
- failure to integrate and manage the combined company's business;
- potential loss of key employees, including software developers
and other information technology, or IT, professionals, from
either our business or an acquired business;
- dilution to our existing stockholders as a result of issuing
common stock or other securities; and
- assumption of liabilities of an acquired company.
Any of these risks could significantly harm our business, operating results or
financial condition or result in dilution to our stockholders.
WE HAVE LIMITED EXPERIENCE CONDUCTING OPERATIONS INTERNATIONALLY, WHICH MAY MAKE
OVERSEAS EXPANSION MORE DIFFICULT AND COSTLY
To date, we have derived most of our revenues from sales to North American
customers. We plan to expand our international operations in the future. There
are many barriers and risks to competing successfully in the international
marketplace, including:
- costs of customizing products for foreign countries;
- foreign currency risks;
- dependence on local vendors;
- compliance with multiple, conflicting and changing governmental
laws and regulations;
- longer sales cycles; and
- import and export restrictions and tariffs.
As a result of these competitive barriers to entry and risks, we cannot assure
you that we will be able to successfully market, sell and deliver our products
and services in international markets.
WE MAY FAIL TO EFFECTIVELY MANAGE AND SUPPORT OUR ANTICIPATED GROWTH IN
OPERATIONS
To succeed in the implementation of our business strategy, we must rapidly
execute our sales strategy, further develop and enhance products and expand our
service capabilities. To manage anticipated growth resulting from this strategy,
we must:
- continue to implement and improve our operational, financial and
management information systems;
- hire, train and retain qualified personnel;
- continue to expand and upgrade core technologies; and
- effectively manage multiple relationships with our customers,
applications developers and other third parties.
If we fail to manage and support our growth as planned, our business strategy
and the anticipated growth in revenues and our profitability may not be
achieved.
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WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
Our success depends significantly on our ability to protect our proprietary
technologies. If we are not adequately protected, our competitors could use the
intellectual property that we have developed to enhance their products and
services to our detriment. We rely on a combination of trade secrets,
confidentiality provisions and other contractual provisions to protect our
proprietary rights, but these legal means provide only limited protection.
OUR PRODUCTS USE TECHNOLOGY THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF THIRD
PARTIES, WHICH MAY EXPOSE US TO LITIGATION AND OTHER COSTS
As the number of entrants into our market increases, the possibility of a patent
infringement claim against us grows. For example, we inadvertently may be
infringing a patent of which we are unaware. In addition, because patent
applications can take many years to issue, there may be a patent application now
pending of which we are unaware, which will cause us to be infringing such
patent when it issues in the future. To address any patent infringement claims,
we may have to enter into royalty or licensing agreements on commercial terms
that are not favorable to us. A successful claim of product infringement against
us, or our failure to license the infringed or similar technology, may cause us
to delay or cancel shipment of our products or result in significant costs. This
could hurt our revenues and profitability and result in a material adverse
effect on our business, operating results and financial condition. In addition,
any infringement claims, with or without merit, would be time-consuming and
expensive to litigate or settle and could divert management attention from
administering our core business.
OUR FAILURE TO DELIVER DEFECT-FREE SOFTWARE COULD RESULT IN GREATER LOSSES AND
HARMFUL PUBLICITY
Our software products are complex and may contain defects or failures. Moreover,
third parties may develop and spread computer viruses that may damage the
functionality of our software products. Any of these events may result in
delayed or lost revenues, loss of market share, failure to achieve market
acceptance, reduced customer satisfaction, diversion of development resources,
product liability or warranty claims against us, and damage to our reputation.
Although we maintain liability insurance, this insurance coverage may not be
adequate to cover losses from claims against us. Further, defending a product
liability lawsuit, regardless of its merits, could harm our business because it
entails substantial expense and diverts the time and attention of key management
personnel.
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF THE INTERNET FOR EBUSINESS
Our future success depends heavily on the Internet being accepted and widely
used for commerce. If Internet commerce does not continue to grow or grows more
slowly than expected, our business, operating results and financial condition
would be materially adversely affected. Consumers and businesses may reject the
Internet as a viable commercial medium for a number of reasons, including
potentially inadequate network infrastructure, slow development of enabling
technologies or insufficient commercial support. The Internet infrastructure may
not be able to support the demands placed on it by increased Internet usage and
bandwidth requirements. Enterprises that have already invested substantial
resources in other methods of conducting eBusiness may be reluctant or slow to
adopt a new approach that may replace, limit or compete with their existing
systems. Any of these factors could inhibit the growth of eBusiness solutions
and in particular the market's acceptance of our products and services. In
addition, delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity, or increased
government regulation, could cause the Internet to lose its viability as a
commercial medium. Even if the required infrastructure, standards, protocols or
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our solutions to changing or emerging
technologies.
THERE IS SUBSTANTIAL RISK THAT FUTURE REGULATIONS COULD BE ENACTED THAT EITHER
DIRECTLY RESTRICT OUR BUSINESS OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE
GROWTH OF INTERNET COMMERCE
As Internet commerce evolves, we expect that federal, state or foreign agencies
will adopt new legislation or regulations covering issues such as user privacy,
pricing, content and quality of products and services. If enacted, these laws,
rules or regulations could directly or indirectly harm us to the extent that
they impact our business, customers and potential customers. We cannot predict
if or how any future legislation or regulations would impact our business.
Although
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many of these regulations may not apply to our business directly, we expect that
laws regulating or affecting commerce on the Internet could indirectly harm our
business.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
We expect cash on hand, cash equivalents, our line of credit and cash from
future operations to meet our current working capital and capital expenditure
needs. We may need to raise additional funds for other purposes and we cannot be
certain that we would be able to obtain additional financing on favorable terms,
if at all. If we cannot raise necessary funds on acceptable terms, we may not be
able to develop or enhance our products, take advantage of future opportunities
or respond to competitive pressures or unanticipated capital requirements, which
could have a material adverse effect on our business, operating results and
financial condition.
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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
It is our current policy to not enter into derivative financial instruments. We
do not currently have any significant foreign currency exposure since we do not
transact business in foreign currencies. Due to this, we do not have any
significant overall currency exposure at September 30, 2000.
We are exposed to a number of market risks in the ordinary course of business.
These risks, which include interest rate risk, foreign currency exchange risk
and commodity price risk, arise in the normal course of business rather than
from trading. We have examined our exposures to these risks and concluded that
none of our exposures in these areas is material to fair values, cash flows or
earnings. We regularly review these risks to determine if we should enter into
active strategies, such as hedging, to help manage the risks. At the present
time, we do not have any hedging programs in place and we are not trading in any
financial or derivative instruments.
We currently do not have any material debt, so we do not have interest rate risk
from a liability perspective. We do have a significant amount of cash and
short-term investments with maturities less than three months. This cash
portfolio exposes us to interest rate risk as short-term investment rates can be
volatile. Given the short-term maturity structure of our investment portfolio,
and the high-grade investment quality of our portfolio, we believe that we are
not subject to principal fluctuations and the effective interest rate of our
portfolio tracks closely to various short-term money market interest rate
benchmarks.
23
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PART II
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Ref./
Number Description Of Document Page
------- ----------------------- --------
<S> <C>
27 Financial data schedule
</TABLE>
(b) Reports on Form 8-K
None
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARBASE CORPORATION
(Registrant)
November 14, 2000 /s/ Douglas S. Norman
------------------ -----------------------------------------
Date Douglas S. Norman
Chief Financial Officer
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Ref./
Number Description Of Document Page
------- ----------------------- --------
<S> <C>
27 Financial data schedule
</TABLE>
