<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to _______________
Commission File Number: 0-25612
STARBASE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 33-0567363
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Hutton Centre Drive, Suite 800
Santa Ana, California 92707
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip code)
(714) 445-4400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares outstanding as of January 31, 2000: Common Stock: 42,147,840
Preferred Stock: 0
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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<PAGE> 2
STARBASE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets at December 31, 1999 (Unaudited) and March 31, 1998 3
Statements of Operations (Unaudited) for the three and nine months
ended December 31, 1999 and 1998 4
Statements of Comprehensive Loss (Unaudited) for the three
and nine months ended December 31, 1999 5
Statements of Cash Flows (Unaudited) for the nine months
ended December 31, 1999 and 1998 6
Notes to Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II. OTHER INFORMATION
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 19
</TABLE>
2
<PAGE> 3
PART I
ITEM 1
FINANCIAL STATEMENTS
STARBASE CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,240 $ 1,363
Restricted cash 39 39
Marketable securities 22 121
Accounts receivable, net of allowances of $87 at
December 31, 1999 and $155 at March 31, 1999 4,273 2,528
Notes and other receivables, net of allowance of $702
at December 31, 1999 -- 9
Inventories 25 51
Prepaid expenses and other assets 320 214
-------- --------
Total current assets 13,919 4,325
Property and equipment, net 1,061 987
Developed technology, net 823 971
Note receivable from officer 98 94
Long-term restricted cash 39 79
Other non-current assets 368 149
-------- --------
Total assets $ 16,308 $ 6,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,653 $ 1,264
Deferred revenue 2,332 658
Current portion of capital lease obligation 132 95
-------- --------
Total current liabilities 4,117 2,017
Long-term liabilities:
Long-term debt, less current portion 73 116
Other long-term liabilities 638 10
-------- --------
Total long-term liabilities 711 126
-------- --------
Total liabilities 4,828 2,143
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized,
61,610 and 588,993 shares issued and outstanding at
December 31, 1999 and March 31, 1999; liquidation preference
of $87 (December 31, 1999) and $4,916 (March 31, 1999) 1 6
Common stock, $.01 par value; 80,000,000 shares authorized;
40,983,568 and 28,636,362 shares issued and outstanding at
December 31, 1999 and March 31, 1999 410 286
Additional paid-in capital 66,601 56,208
Accumulated deficit (55,433) (52,038)
Accumulated other comprehensive loss (99) -
-------- --------
Total stockholders' equity 11,480 4,462
-------- --------
Total liabilities and stockholders' equity $ 16,308 $ 6,605
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE> 4
STARBASE CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License $ 3,235 $ 1,477 $ 8,978 $ 3,740
Maintenance, training and consulting 754 214 1,848 553
Royalty 144 182 513 377
-------- -------- -------- --------
Total revenues 4,133 1,873 11,339 4,670
Cost of Revenues:
Products, licenses and other 610 112 1,845 448
-------- -------- -------- --------
Gross margin 3,523 1,761 9,494 4,222
Operating Expenses:
Research and development 1,132 1,023 3,075 3,161
Selling, general and administrative 3,418 2,729 9,102 8,007
-------- -------- -------- --------
Total operating expenses 4,550 3,752 12,177 11,168
-------- -------- -------- --------
Operating loss (1,027) (1,991) (2,683) (6,946)
Interest and other income/(loss) 53 (5) 88 41
Equity in loss of investee -- -- (250) -
-------- -------- -------- --------
Loss before income taxes (974) (1,996) (2,845) (6,905)
Provision for income taxes -- -- 1 2
-------- -------- -------- --------
Net loss (974) (1,996) (2,846) (6,907)
Non-cash dividend and accretion of beneficial
conversion feature -- 83 549 417
Net loss applicable to common stockholders $ (974) $ (2,079) $ (3,395) $ (7,324)
======== ======== ======== ========
Per share data:
Basic and diluted loss per common share $ (0.03) $ (0.10) $ (0.11) $ (0.39)
======== ======== ======== ========
Basic and diluted weighted average number of
common shares outstanding 34,268 20,555 30,859 18,810
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE> 5
STARBASE CORPORATION
STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss applicable to common stockholders $ (974) $(2,079) $(3,395) $(7,324)
Other comprehensive loss, net of tax:
Unrealized loss on available for sale securities (99) -- (99) --
------- ------- ------- -------
Total comprehensive loss $(1,073) $(2,079) $(3,494) $(7,324)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 6
STARBASE CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1999 1998
------- -------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(2,846) $(6,907)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 439 262
Provision for doubtful accounts and sales returns 634 218
Loss on disposal of property and equipment 41 3
Deferred revenue 2,312 277
Stock option compensation expense 415 140
Equity in loss of investee 250 --
Changes in operating assets and liabilities:
Accounts receivable (1,677) (1,685)
Notes and other receivables (693) 41
Inventories 26 34
Prepaid expenses (80) 152
Other non-current assets (223) (191)
Accounts payable and accrued liabilities 379 484
------- -------
Net cash used by operations (1,023) (7,172)
Cash Flows from Investing Activities:
Decrease (increase) in restricted cash 40 (118)
Investment in equity investee (250) --
Capital expenditures (342) (611)
------- -------
Net cash used by investing activities (552) (729)
Cash Flows from Financing Activities:
Proceeds from sale of preferred stock -- 3,850
Proceeds from issuance of common stock:
From private placements 4,225 152
Exercise of options 1,529 23
Exercise of warrants 4,363 --
Payment of financing related costs (569) (175)
Payments on capitalized lease obligations (96) (54)
------- -------
Net cash provided by financing activities 9,452 3,796
------- -------
Net increase (decrease) in cash 7,877 (4,105)
Cash and cash equivalents, beginning of period 1,363 4,167
------- -------
Cash and cash equivalents, end of period $ 9,240 $ 62
======= =======
Supplemental Cash Flow Information:
Interest paid in cash $ 25 $ 11
======= =======
Income taxes paid $ 1 $ 2
======= =======
Non-cash investing and financing transactions:
Non-cash preferred stock and common stock dividends $ 549 $ 417
======= =======
Conversion of preferred stock to common stock (Note 5) $ 47 $ 45
======= =======
Capitalized lease and insurance financing $ 90 $ 254
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements
6
<PAGE> 7
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
StarBase Corporation, a Delaware corporation (the "Company"), is a leading
provider of eBusiness digital asset management solutions for the enterprise. The
Company develops, markets, and supports a complete family of user-friendly
software products that enable teams of people to collaborate in the production
of Web sites, e-Commerce and business critical application while managing all
associated digital assets. The Company's products are designed to increase the
productivity of centralized and geographically remote teams of people that are
both internal and external to an enterprise. The Company's professional services
organization provides implementation, consulting and training expertise. The
Company's current product line consists of StarTeam(R) 4.2 and StarTeam(R)
Enterprise 4.2, StarDisk(R), StarGate(R), as well as StarSweeperTM,
RoundTable(R) and Versions(R).
2. BASIS OF PRESENTATION
The unaudited interim financial statements as of December 31, 1999 and for the
three and nine months ended December 31, 1999 and 1998, 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 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 nine months ended December 31, 1999 are not necessarily indicative of
the operating results for a full year. 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.
NET LOSS PER SHARE
Basic and diluted loss per share applicable to common stockholders is computed
using the weighted average number of common shares outstanding during the
periods presented. Common equivalent shares outstanding during the periods
presented assume 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. 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.
7
<PAGE> 8
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 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 $ (974)
Non-cash dividend 0
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE (974) 34,268 $ (0.03)
=======
Effect of Dilutive Securities -- --
------- ------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER SHARE $ (974) 34,268 $ (0.03)
======= ====== =======
</TABLE>
FOR THE THREE MONTHS ENDED DECEMBER 31, 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 $(1,996)
Non-cash dividend (83)
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE (2,079) 20,555 $(0.10)
======
Effect of Dilutive Securities -- --
------- ------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER SHARE $(2,079) 20,555 $(0.10)
======= ====== ======
</TABLE>
FOR THE NINE MONTHS ENDED DECEMBER 31, 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 $(2,846)
Non-cash dividend (549)
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE (3,395) 30,859 $(0.11)
======
Effect of Dilutive Securities -- --
------- ------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER SHARE $(3,395) 30,859 $(0.11)
======= ====== ======
</TABLE>
8
<PAGE> 9
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 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 $(6,907)
Non-cash dividend (417)
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE (7,324) 18,810 $(0.39)
======
Effect of Dilutive Securities -- --
------- -------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER SHARE $(7,324) 18,810 $(0.39)
======= ====== ======
</TABLE>
Common stock equivalents, which consist of options to purchase 2,296,234 shares
of common stock at prices ranging from $0.625 to $3.44 per share, warrants to
purchase 1,112,000 shares of common stock at prices ranging from $0.73 to $2.00
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 nine month periods ended December 31, 1999.
Common stock equivalents, which consist of options to purchase 1,633,881 shares
of common stock at prices ranging from $0.74 to $2.09 per share, warrants to
purchase 3,178,306 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 nine month period ended December 31, 1998.
9
<PAGE> 10
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
December 30, March 31,
(In thousands) 1999 1999
----------- ---------
Property and equipment:
Computer hardware $ 1,584 $ 1,337
Furniture and fixtures 355 315
Computer software 233 199
Leasehold improvements 233 198
------- -------
2,405 2,049
Less accumulated depreciation and amortization (1,344) (1,062)
------- -------
$ 1,061 $ 987
======= =======
Accounts payable and accrued liabilities:
Trade accounts payable $ 394 $ 640
Accrued professional fees 115 86
Accrued wages and bonuses 712 493
Other accrued expenses 432 45
------- -------
$ 1,653 $ 1,264
======= =======
4. RELATED PARTY TRANSACTIONS
During the quarter ended September 30, 1999, the Company invested $250,000 for
900,000 shares of common stock, or 47%, of OpenAvenue Inc ("OpenAvenue"), which
was subsequently reduced to 21% as of December 31, 1999 due to the issuance of
additional equity by OpenAvenue. OpenAvenue is an internet portal company for
open-source knowledge and effort sharing over the internet providing a meeting
and work place for virtual development teams acting in concert on distributed
projects. The Company accounts for this ownership under the equity method of
accounting for investments in common stock and through the nine months ended
December 31, 1999, the Company's equity in losses of OpenAvenue reduced the net
investment to zero. In addition, the Company agreed to loan OpenAvenue up to
$750,000 on a short-term basis until OpenAvenue's financing arrangements are
completed. As of December 31, 1999, the amount outstanding from the loan was
$702,247. The loan balance is fully reserved for as of December 31, 1999 because
of the uncertainty of repayment and such amount is included in selling, general
and administrative expense.
The Company also entered into a software license agreement with OpenAvenue,
where a one-time license fee of $1,000,000 will be paid in equal quarterly
installments over the next twelve months. The Company recognized revenue of
$500,000 during the three month period ended December 31, 1999 and deferred
recognition of the remaining $500,000 because the collectability of the second
$500,000 was not certain. Under the same agreement, the Company will also
provide maintenance and support services for the licensed software for an annual
fee of $180,000 which will also be paid in equal quarterly installments over the
next twelve months. The Company recorded the annual maintenance fee as deferred
revenue and will recognize it ratably over the applicable twelve month period.
As of December 31, 1999, the Company has $1,274,000 in accounts receivable from
OpenAvenue consisting of the $1,000,000 license fee, $180,000 annual maintenance
fee and $94,000 sales tax on the transaction and has $665,000 recorded in
deferred revenue.
10
<PAGE> 11
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. EQUITY TRANSACTIONS
During the quarter ending December 31, 1999, 359,608 shares of Series E
Preferred Stock were converted into 359,608 shares of common stock, 2,420 shares
of Series H Preferred Stock were converted into 2,923,772 shares of common stock
and 1,000 shares of Series I Preferred Stock were converted into 797,987 shares
of common stock.
As of December 31, 1999, 61,600 shares of Series E Preferred Stock, and 10
shares of Series H Preferred Stock were outstanding.
WARRANTS
Warrant activity for the nine month period ended December 31, 1999 is as
follows:
Warrant Price
Shares Per Share
---------- --------------
Outstanding at March 31, 1999 2,984,388 $0.59 - $3.25
Granted 2,148,011 $2.00 - $2.68
Exercised (4,020,399) $0.59 - $3.25
----------
Outstanding at December 31, 1999 1,112,000 $0.73 - $2.00
==========
11
<PAGE> 12
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. STOCK OPTION PLAN
The Company's stock option plan (the "1996 Plan") provides for the grant of
non-qualified and incentive stock options to directors, officers and employees
of the Company. Options are granted at exercise prices equal to the fair market
value of the common stock on the date of grant. Generally, twenty-five percent
of the options are available for exercise at the end of one year, while the
remainder of the grant is exercisable ratably over the next thirty-six month
period, provided the optionee remains in service to the Company. The
weighted-average remaining contractual life of options outstanding at December
31, 1999 was eight years. A total of 2,833,333 shares of common stock have been
authorized under the 1996 Plan, of which 1,707,216 were outstanding at December
31, 1999. In addition, the Company has granted non-qualified stock options, of
which 7,505,898 were outstanding at December 31, 1999.
Stock option activity for the nine month period ended December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Outstanding at March 31, 1999 6,547,411 $1.23
Granted 4,324,508 $1.93
Lapsed or canceled (562,666) $1.50
Exercised (1,096,139) $1.39
----------
Outstanding at December 31, 1999 9,213,114 $1.51
==========
Exercisable at December 31, 1999 2,296,234 $1.33
==========
</TABLE>
Stock option summary information at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Shares Contractual Life Price Shares Price
- -------- --------- ---------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
$0.50 - $1.00 2,207,431 8.8 years $0.68 581,661 $0.70
$1.01 - $1.50 3,878,639 8.7 years $1.30 844,105 $1.26
$1.51 - $2.00 1,798,961 8.4 years $1.66 623,634 $1.65
$2.01 - $2.50 430,146 9.5 years $2.11 183,822 $2.05
$2.51 - $3.00 250,603 5.4 years $2.68 58,638 $2.64
$3.01 - $3.50 283,334 2.3 years $3.46 4,374 $3.25
$3.51 - $4.00 35,000 9.9 years $3.57 0 $0.00
$4.01 - $4.50 250,000 8.3 years $4.05 0 $0.00
$4.51 - $10.00 79,000 7.5 years $8.56 0 $0.00
--------- ---------
9,213,114 2,296,234
========= =========
</TABLE>
12
<PAGE> 13
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. OPERATING SEGMENT INFORMATION
The Company's reportable operating segments include software licenses and
services. The software licenses operating segment develops and markets the
Company's eBusiness digital asset management products. The services segment
provides after-sale support for software products and fee-based training and
consulting services related to the Company products.
The Company does not allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information
reported includes only revenues, cost of revenues and gross margin.
Operating segment data for the three and nine month periods ended December 31,
1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Software
licenses Services Total
--------- -------- -------
<S> <C> <C> <C>
(In thousands)
Three months ended December 31, 1999:
Revenues $ 3,379 $ 754 $ 4,133
Cost of revenues 255 355 610
------- ------- -------
Gross margin $ 3,124 $ 399 $ 3,523
======= ======= =======
Three months ended December 31, 1998:
Revenues $ 1,659 $ 214 $ 1,873
Cost of revenues 112 0 112
------- ------- -------
Gross margin $ 1,547 $ 214 $ 1,761
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Software
licenses Services Total
--------- -------- -------
<S> <C> <C> <C>
(In thousands)
Nine months ended December 31, 1999:
Revenues $ 9,491 $ 1,848 $11,339
Cost of revenues 930 915 1,845
------- ------- -------
Gross margin $ 8,561 $ 933 $ 9,494
======= ======= =======
Nine months ended December 31, 1998:
Revenues $ 4,117 $ 553 $ 4,670
Cost of revenues 448 0 448
------- ------- -------
Gross margin $ 3,669 $ 553 $ 4,222
======= ======= =======
</TABLE>
13
<PAGE> 14
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. ACQUISITION OF OBJECTSHARE INC.
On November 4, 1999, the Company signed a definitive agreement to acquire
ObjectShare, Inc. ("ObjectShare"), a leading provider of object-oriented and
eBusiness professional services, in a merger transaction. The Company will issue
its stock in exchange for ObjectShare stock at an anticipated enterprise value
of $7.5 million, with a minimum of $6.15 million and a maximum of $8.85 million
based upon the average trading price of StarBase stock prior to the closing. The
transaction, which is subject to ObjectShare stockholders' approval and certain
other conditions, is expected to be completed in early 2000. In addition, the
Company has provided ObjectShare with a $500,000 line of credit under the terms
of a credit agreement. The line of credit is secured by all of the accounts
receivable and other assets of ObjectShare. The outstanding balance of the line
of credit as of December 31, 1999, was $0.
9. SUBSEQUENT EVENTS
None
14
<PAGE> 15
PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue increased in the three month period ended December 31, 1999 by
$2,260,000 or 121%, to $4,133,000, from $1,873,000 in the same three month
period of the previous year due to the increase in license revenue, $1,758,000,
and an increase in maintenance, training and consulting revenue, $540,000,
partially offset by a decrease in royalty revenue $38,000. Total revenue for the
nine month period ended December 31, 1999, increased to $11,339,000 from
$4,670,000 in the same period of the prior year. The increase in product revenue
was a result of the continued acceptance of the StarTeam 4.1 family of products.
Cost of revenues consists primarily of manufacturing and related costs such as
media, documentation, product assembly and costs related to the training and
consulting revenue. The Company out-sources manufacturing for all software
products. Cost of revenues increased to $610,000 from $112,000 in the three
month period ended December 31, 1999 over the same quarter of the previous year
due to the increase in training and consulting costs, $355,000, along with an
increase in license costs due to increased volume, $143,000. For the nine month
period ended December 31, 1999 cost of revenues increased to $1,845,000 from
$448,000 due to the increase in training and consulting costs, $915,000, along
with costs for an exchange of technology, $471,000.
Operating expenses in the three month period ended December 31, 1999 increased
to $4,550,000 from $3,752,000 in the same quarter of the previous year. The
increase was primarily due to increased headcount. At December 31, 1999, the
Company had 97 full-time employees, which consisted of 49 in sales and
marketing, 31 in research and development and 17 in general and administrative.
At December 31, 1998, the Company had 90 employees, which consisted of 35 in
sales and marketing, 40 in research and development and 15 in general and
administrative. For the nine month period ended December 31, 1999, operating
expenses increased to $12,177,000 from $11,168,000. The increase was primarily
due to the continued building of the sales and marketing infrastructure to
support the increased level of sales.
Research and development expenses. Research and development expenses include
personnel and other direct and overhead expenses incurred in the development of
the Company's products. The Company continues to make significant investments in
research and development intended to bring its products to market and to support
existing products. In the nine month period ended December 31, 1999 overall
research and development expenses increased slightly to $1,132,000 compared to
$1,023,000 for the same period in the prior year and for the nine month period
ended December 31, 1999 decreased to $3,075,000 from $3,161,000 for the same
period in the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended December 31, 1999 increased
approximately $689,000 over the same period in the prior year. For the nine
month period ended December 31, 1999 selling, general and administrative
expenses increased to $9,102,000 from $8,007,000 in the corresponding period of
the prior year. Both increases was mainly the result of additional sales and
marketing personnel coupled with the advertising and promotion programs to
support the StarTeam 4.1 family of products.
INTEREST INCOME/EXPENSE
Interest income for the three month period ended December 31, 1999 increased to
$60,000 compared to $4,000 for the same period in the prior year due to more
cash being available to invest. For the nine month period ended December 31,
1999, interest income was $114,000 compared to $57,000 for the same period in
the prior year.
Interest expense for the three month period ended December 31, 1999 was $7,000
unchanged from same period in the prior year. For the nine month period ended
December 31, 1999, interest expense increased to $25,000 from $11,000 for the
same period in the prior year.
15
<PAGE> 16
EQUITY IN LOSS OF INVESTEE
There was no equity in loss of investee for the three months ended December 31,
1999 and 1999. Equity in loss from investee for the nine month period ended
December 31, 1999 was $250,000. This amount is the Company's portion, 47%, of
the operating results of OpenAvenue Inc. limited to the total amount invested,
$250,000.
INCOME TAXES
The Company has not recorded a current or deferred provision for federal income
taxes for any period to date, as a result of losses incurred since its
inception. Any provision for income taxes represents the minimum required for
state taxes.
NON-CASH DIVIDEND AND ACCRETION OF BENEFICIAL CONVERSION FEATURE
Non-cash dividend and accretion of beneficial conversion feature for the three
month period ended December 31, 1999 was $0 compared to $83,000 for the three
month period ended December 31, 1998. For the nine month period ended December
31, 1999, non-cash dividend and accretion of beneficial conversion feature was
$549,000 compared to $417,000 for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of December 31, 1999 were $9,240,000 and $1,363,000
as of March 31, 1999. At December 31, 1999 the Company had working capital of
$9,802,000, compared to $2,308,000 at March 31, 1999.
Net cash used by operating activities was $1,023,000 and $7,172,000 for the nine
month periods ended December 31, 1999 and December 31, 1998, respectively. The
improvement was primarily due to the reduced net loss from operations and the
increase in deferred revenue.
Investing activities have consisted of purchases of property and equipment,
investment in equity affiliates, and restricted cash. Capital expenditures were
approximately $342,000 and $611,000 during the nine months ended December 31,
1999 and December 31, 1998, respectively. Investment in equity affiliates was
$250,000 for the nine month period ended December 31, 1999. Restricted cash
decreased $40,000 in the nine month period ended December 31, 1999 and increased
$118,000 for the nine month period ended December 31, 1998.
Financing activities provided $9,452,000 for the nine month period ended
December 31, 1999, compared to $3,796,000 in the same period of the prior year.
Exercise of options provided $1,529,000 and exercise of warrants provided
$4,363,000 for the nine month period ended December 31, 1999.
The Company believes that it's existing cash balances and cash equivalents and
cash from operations will be sufficient to finance it's operations through at
least the next 12 months. If additional financing is needed, there can be no
assurance that such financing will be available to the Company on commercially
reasonable terms or at all.
The Company warrants products against defects for 90 days and has a policy
permitting the return of products within 30 days. Warranty costs and returns,
which are not significant, have historically been within management's
expectations. The Company has reserved approximately $87,000 at December 31,
1999 for future returns and other collection issues, down from $155,000 at March
31, 1999.
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY EFFECT FUTURE RESULTS
The following discussion contains forward-looking statements within the meaning
of Sections 21E and 27A of the Securities Exchange Act of 1934. These forward
looking statements are subject to risks and uncertainties. There are several
important factors that could cause actual results to differ materially from
those anticipated by the forward-looking 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.
16
<PAGE> 17
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.
The Company has experienced no disruptions or problems regarding the year 2000
changeover. As part of the Company year 2000 plan, prior to January 1, 2000, the
Company tested and sampled internal systems consisting primarily of desktop and
network computers, and third-party software utilized in the day-to-day
operations of the Company. All sampling and tested completed by January 1, 2000,
indicated all systems were operating as normal. All of the date of the filing of
this document, all of the Company's internal hardware and software continue to
operate as normal and to-date, all vendors utilized by the Company in its daily
operations are operating normally and have not indicated any year 2000
anomalies.
The Company still continues to monitor and oversee all internal operations and
be in contact with its vendors regarding the upcoming dates (such as February
29, 2000) which are identified as presenting potential year 2000 issues. Based
upon the successful transition through the January 1, 2000 rollover period, the
Company does not anticipate any problems to materialize.
The Company's expenditures for the year 2000 effort were not material and the
Company does not expect to incur any material costs over the next few months in
regards to year 2000.
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 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 but will
continue to evaluate the effect of adopting SFAS No. 133. The Company will adopt
SFAS No. 133 in its fiscal year 2002.
17
<PAGE> 18
PART II
ITEM 5
OTHER INFORMATION
None.
18
<PAGE> 19
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Ref./
Number Description Of Document Page
------- ----------------------- -----
27 Financial data schedule
(b) Reports on Form 8-K
None.
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)
Date: February 14, 2000 /s/ Douglas S. Norman
--------------------------------
Douglas S. Norman
Chief Accounting Officer
19
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