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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 2000
REGISTRATION NO. 333-30260
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO THE
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STARBASE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7372 33-0567363
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
4 HUTTON CENTRE DRIVE, SUITE 800
SANTA ANA, CA 92707-8713
(714) 445-4400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DOUGLAS S. NORMAN
4 HUTTON CENTRE DRIVE, SUITE 800
SANTA ANA, CA 92707-8713
(714) 445-4400
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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MARTIN ERIC WEISBERG, ESQ. WILLIAM J. SIMPSON, ESQ.
PARKER CHAPIN, LLP PAUL, HASTINGS, JANOFSKY & WALKER LLP
405 LEXINGTON AVENUE 695 TOWN CENTER DRIVE, 17TH FLOOR
NEW YORK, NY 10174 COSTA MESA, CA 92626
(212) 704-6000 (714) 668-6200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective and all
other conditions to the merger of ObjectShare, Inc. ("ObjectShare") with and
into OBJS Acquisition Corp. ("Subsidiary"), a wholly-owned subsidiary of
StarBase Corporation (the "Registrant" or "StarBase") pursuant to the Agreement
and Plan of Merger described in the enclosed proxy statement/prospectus have
been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
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Common Stock, $0.01 par value.... 651,535 $0.709654 $6,235,432 $1,646.15
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(1) This Registration Statement relates to the common stock, par value $0.01 per
share, of the Registrant (the "StarBase Common Stock") estimated to be
issuable to holders of common stock, par value $0.001 per share, of
ObjectShare Inc. (the "ObjectShare Common Stock") in connection with the
merger. The number of shares to be registered pursuant to this Registration
Statement is based on the maximum number of shares of StarBase Common Stock
estimated to be issuable to stockholders of ObjectShare upon the
consummation of the merger, determined as the product of (a) 0.0522, the
exchange ratio at which the Registrant would issue the maximum number of
shares of StarBase Common Stock to equal approximately $0.71 per share of
ObjectShare Common Stock (based upon an assumed minimum average per share
value of $13.5833 for StarBase Common Stock), and (b) 12,470,863, the number
of shares of ObjectShare Common Stock which were issued and outstanding as
of March 1, 2000.
(2) Estimated solely for the purpose of calculating the registration fee. The
proposed maximum aggregate offering price has been computed pursuant to Rule
457(c) and 457(f)(1) and (3) under the Securities Act based on the aggregate
market value of the outstanding ObjectShare Common Stock, based upon the
$0.50 per share average of the high and low prices of the ObjectShare Common
Stock reported on the OTC Bulletin Board on March 1, 2000.
(3) An amount of $1,547.38 was previously paid in connection with the original
filing of the Registration Statement on February 11, 2000.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), SHALL DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED MARCH 3, 2000
OBJECTSHARE
SPECIAL MEETING OF STOCKHOLDERS
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Board of Directors of ObjectShare, Inc. has unanimously approved a merger
between ObjectShare and a wholly-owned subsidiary of StarBase Corporation. The
merger will combine ObjectShare's leadership in object-oriented technologies in
training and consulting with StarBase's competencies in providing end-to-end
eBusiness lifecycle solutions. We believe the merger will create a company able
to offer a vast array of solutions and services to the Software Configuration
Market and Web content and portal infrastructure markets, thereby enabling these
businesses to take advantage of the cost and operational efficiencies offered by
the Internet.
Your Board of Directors has determined that the merger is fair to you and is in
your best interests. THE BOARD THEREFORE RECOMMENDS THAT YOU VOTE TO APPROVE THE
MERGER AND THE RELATED MERGER AGREEMENT.
If the merger is completed, and subject to certain limitations and adjustments
set forth in the related merger agreement, StarBase will issue shares of
StarBase common stock to ObjectShare stockholders with a minimum value of
$6,150,000 and a maximum value of $8,850,000. This equates to a per share
exchange value for each share of ObjectShare common stock of a range between
approximately $0.49 and $0.71.
Assuming the price per share of StarBase common stock remains at above $2.37, we
estimate that each share of ObjectShare common stock will effectively be valued
at approximately $0.71 and that ObjectShare stockholders will collectively hold
or have a right to acquire approximately 1.2% of the outstanding StarBase common
stock after the merger (assuming all StarBase stock options are exercised). The
per share price of StarBase common stock as of March 1, 2000, the last
practicable trading day for which information was available prior to the date of
this Proxy Statement/Prospectus was $13.58. StarBase stockholders will continue
to own their existing shares after the merger.
At the special meeting, you will be asked to approve the merger and the related
merger agreement. The affirmative vote of the holders of a majority of the
outstanding shares of ObjectShare common stock at March 6, 2000, the record date
for the vote, is required to approve the merger and related merger agreement.
THE MERGER CANNOT BE COMPLETED UNLESS A MAJORITY OF OBJECTSHARE STOCKHOLDERS
APPROVE IT. Stockholders of StarBase are not required to approve the merger.
The date, time and place of the special meeting:
April 12, 2000, 10:00 a.m., PST
16811 Hale Avenue, Suite A
Irvine, California 92614
This Proxy Statement/Prospectus provides you with detailed information about the
proposed merger. In addition, you may obtain information about ObjectShare and
StarBase from documents filed with the Securities and Exchange Commission. We
encourage you to read this entire document carefully.
Whether or not you plan to attend the special meeting, please take the time to
vote by completing and mailing the enclosed proxy card to us. If you sign, date
and mail your proxy card without indicating how you wish to vote, your proxy
will be counted as a vote in favor of the merger and the related merger
agreement. If you fail to return your card, the effect will be a vote against
the merger. YOUR VOTE IS VERY IMPORTANT.
On behalf of the Board of Directors of ObjectShare, we urge you to vote "FOR"
approval of the merger and the related merger agreement.
EUGENE L. GODA
Chairman of the Board,
Chief Executive Officer and President
ObjectShare, Inc.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DESCRIPTION OF RISK FACTORS
THAT SHOULD BE CONSIDERED BY STOCKHOLDERS WITH RESPECT TO THE MERGER.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the StarBase common stock to be issued in the merger or
determined if this Proxy Statement/Prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
THIS PROXY STATEMENT/PROSPECTUS IS DATED MARCH 6, 2000 AND IS FIRST MAILED
TO STOCKHOLDERS ON OR ABOUT MARCH 8, 2000.
<PAGE> 3
OBJECTSHARE, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 12, 2000
TO THE STOCKHOLDERS OF OBJECTSHARE, INC.
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
ObjectShare, Inc., a Delaware corporation, will be held on April 12, 2000, at
10:00 a.m. California time, at the Company's offices located at 16811 Hale
Avenue, Suite A, Irvine, CA 92614, for the following purposes:
1. To consider and vote upon the merger of ObjectShare with and into OBJS
Acquisition Corp., a Delaware corporation ("Subsidiary") and a wholly-owned
subsidiary of StarBase Corporation, a Delaware corporation ("StarBase"), as a
result of which ObjectShare will be merged with and into Subsidiary and each
share of ObjectShare common stock other than dissenting shares will be converted
into shares of StarBase common stock. The merger will occur as soon as possible
after ObjectShare and StarBase obtain all necessary regulatory and stockholder
approvals and satisfy certain other conditions set forth in the merger
agreement. Pursuant to a formula set forth in the merger agreement, each share
of ObjectShare common stock will be converted into the right to receive a
fraction of a share of StarBase common stock, and all options to acquire
ObjectShare common stock, excepting grants to specific executive officers and
employees which will be converted, will be canceled and extinguished without any
conversion. The aggregate number of shares of StarBase common stock that
StarBase will issue pursuant to the merger agreement depends on several factors
that cannot be determined definitively until the effective date of the merger,
including, but not limited to:
- the average of the closing price per share of StarBase common stock
as reported on the Nasdaq SmallCap Market for the three trading days
immediately preceding the day prior to the closing date of the merger
agreement; and
- the enterprise value of ObjectShare determined pursuant to the
formula contained in the merger agreement.
Depending on the average closing price per share of StarBase common stock
and the enterprise value of ObjectShare, StarBase will issue shares of StarBase
common stock with a minimum value of $6,150,000 and a maximum value of
$8,850,000. This equates to a per share exchange value for each share of
ObjectShare common stock of a range between approximately $0.49 and $0.71. If
the average closing price per share of StarBase common stock at the effective
date is above $2.37, then each share of ObjectShare common stock will
effectively be valued at approximately $0.71. Based on an average closing price
per share of StarBase common stock of $13.58 as of March 1, 2000, the last
practicable trading day for which information was available prior to the date of
this Proxy Statement/Prospectus, ObjectShare stockholders would acquire
approximately 651,535 shares of StarBase common stock, representing
approximately 1.2% of StarBase common stock on a fully-diluted basis. Each of
these aspects of the merger is more fully described in the enclosed Proxy
Statement/Prospectus.
2. To consider and vote upon any postponement or adjournment of the special
meeting in order to solicit additional votes to approve the merger if the
secretary of the special meeting determines that there are not enough votes to
approve the merger.
The close of business on March 6, 2000, has been fixed as the record date
for determining stockholders entitled to vote at the special meeting. Only
stockholders of record on that date are entitled to notices of, and to vote at,
the special meeting and any adjournments or postponements thereof.
Stockholders of ObjectShare who do not vote in favor of the merger and who
otherwise comply with the applicable statutory procedures set forth in Section
262 of the Delaware General Corporation Law (the "Delaware Law") may exercise
appraisal rights and receive cash for their shares of ObjectShare common stock
("Appraisal Rights"). A dissenting Stockholder of ObjectShare must follow the
appropriate procedures under Delaware Law or suffer the termination or waiver of
such rights. StarBase has no
<PAGE> 4
obligation to consummate the merger if demands for Appraisal Rights are made
with respect to five percent (5%) or more of the outstanding shares of
ObjectShare common stock. A description of the Appraisal Rights of the holders
of ObjectShare common stock is more fully described in the enclosed Proxy
Statement/Prospectus.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH
DOES NOT REQUIRE POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE
SPECIAL MEETING, YOU MAY VOTE IN PERSON, EVEN IF YOU HAVE PREVIOUSLY RETURNED
YOUR PROXY CARD.
PLEASE NOTE THAT THE MERGER MUST BE APPROVED BY THE HOLDERS OF A MAJORITY
OF OBJECTSHARE'S COMMON STOCK. ACCORDINGLY, YOUR VOTE IS EXTREMELY IMPORTANT. WE
URGE YOU TO REVIEW CAREFULLY THE ENCLOSED MATERIALS AND TO RETURN YOUR PROXY
CARD PROMPTLY.
By Order of the Board of Directors,
Eugene L. Goda
Chairman of the Board,
Chief Executive Officer and President
March 6, 2000
Irvine, California
<PAGE> 5
TABLE OF CONTENTS
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PROXY STATEMENT/PROSPECTUS SUMMARY.......................... 1
SELECTED HISTORICAL FINANCIAL DATA.......................... 6
StarBase Corporation...................................... 7
ObjectShare, Inc.......................................... 8
FORWARD-LOOKING STATEMENTS.................................. 9
RISK FACTORS................................................ 10
OBJECTSHARE SPECIAL MEETING................................. 16
Time and Place; Purpose................................... 16
Record Date; Voting Rights And Proxies.................... 16
Share Ownership Of Management And Certain Stockholders.... 16
Solicitation Of Proxies................................... 16
Quorum.................................................... 17
Required Vote............................................. 17
APPRAISAL RIGHTS OF OBJECTSHARE STOCKHOLDERS................ 17
THE MERGER TRANSACTION...................................... 20
General................................................... 20
Background Of The Merger.................................. 20
StarBase's Reasons For Merger............................. 21
ObjectShare's Reasons For Merger.......................... 22
Opinion Of Financial Advisor Of ObjectShare............... 24
Recommendation Of ObjectShare's Board Of Directors........ 27
Accounting Treatment...................................... 28
Certain Federal Income Tax Consequences Of The Merger..... 28
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA......... 30
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND
INFORMATION............................................... 31
Dividend Policies......................................... 31
SELECTED UNAUDITED PRO FORMA CONDENSED FINANCIAL
INFORMATION............................................... 32
STARBASE AND OBJECTSHARE UNAUDITED PRO FORMA COMBINED
CONDENSED BALANCE SHEET................................... 33
STARBASE AND OBJECTSHARE UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS......................... 34
THE MERGER AGREEMENT........................................ 37
Closing................................................... 37
Consideration To Be Received For ObjectShare Common Stock
In The Merger.......................................... 37
Procedures For Exchange Of ObjectShare Common Stock....... 39
Treatment Of Fractional Shares............................ 39
Treatment Of ObjectShare Employee And Director Stock
Options................................................ 39
Treatment Of Certain ObjectShare Employee Stock Options... 40
Treatment Of Executive Officers' Stock Options In
ObjectShare............................................ 40
ObjectShare's Employee Severance Payments................. 40
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ObjectShare's Directors' And Officers' Liability.......... 40
Registration Of StarBase Common Stock..................... 40
Representations And Warranties............................ 41
Covenants Regarding Conduct Of Business Before The
Merger................................................. 41
Conditions To The Completion Of The Merger................ 42
Termination Of The Merger Agreement....................... 42
Termination Fees And Expenses............................. 43
No Solicitation........................................... 43
Amendment Or Waiver Of The Merger Agreement............... 43
INTERESTS OF CERTAIN PERSONS IN THE MERGER.................. 44
Arrangements with ObjectShare Employees Regarding Stock
Options................................................ 44
Arrangements with Certain ObjectShare Executives Regarding
Stock Options.......................................... 44
Arrangements Regarding ObjectShare Employee Severance
Payments............................................... 45
Indemnification and Insurance............................. 46
Consultancy Arrangement................................... 47
RELATIONSHIP BETWEEN STARBASE AND OBJECTSHARE............... 48
Line of Credit............................................ 48
Employment of James H. Smith.............................. 48
MANAGEMENT OF SURVIVING CORPORATION......................... 49
DESCRIPTION OF STARBASE SECURITIES.......................... 52
Common Stock.............................................. 52
Preferred Stock........................................... 52
Warrants.................................................. 52
Options................................................... 52
COMPARISON OF RIGHTS OF HOLDERS OF STARBASE COMMON STOCK AND
HOLDERS OF OBJECTSHARE COMMON STOCK....................... 53
STARBASE CORPORATION........................................ 54
Description of StarBase's Business........................ 54
The Market Opportunity.................................... 54
The StarBase Solution..................................... 54
StarBase Strategy......................................... 55
Products.................................................. 56
Services.................................................. 57
Sales and Marketing....................................... 57
Competition............................................... 57
Proprietary Rights........................................ 58
Employees................................................. 58
Description of Property................................... 58
Legal Proceedings......................................... 58
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 59
Results of Operations..................................... 60
Liquidity and Capital Resources........................... 62
Executive Compensation.................................... 63
SUMMARY COMPENSATION TABLE.................................. 64
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND OPTION
VALUES AS OF MARCH 31, 1999............................... 65
BENEFICIAL STOCKHOLDERS OF STARBASE CORPORATION............. 66
OBJECTSHARE, INC. .......................................... 68
Description Of ObjectShare's Business..................... 68
General................................................... 68
Background................................................ 68
Professional Services..................................... 70
Strategic Relationships................................... 70
Employees................................................. 71
Description of Property................................... 71
Competition............................................... 71
Legal Proceedings......................................... 71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 72
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OBJECTSHARE,
INC. ..................................................... 72
Overview.................................................. 73
Recent Sale Transactions.................................. 73
Factors Which May Affect Future Results................... 74
Results Of Operations..................................... 77
Liquidity And Capital Resources........................... 84
BENEFICIAL STOCKHOLDERS OF OBJECTSHARE, INC. ............... 86
NAMED EXPERTS............................................... 86
Legal Matters............................................. 86
Experts................................................... 86
Financial Advisors........................................ 87
OTHER MATTERS............................................... 87
WHERE YOU CAN FIND MORE INFORMATION......................... 87
APPENDIX A -- Agreement and Plan of Merger.................. A-1
APPENDIX B -- Financial Statements of StarBase
Corporation............................................... B-1
APPENDIX C -- Consolidated Financial Statements of
ObjectShare, Inc. ........................................ C-1
APPENDIX D -- Delaware General Corporation Law, Section
262....................................................... D-1
APPENDIX E -- Fairness Opinion of Duff & Phelps, LLC........ E-1
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iii
<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHEN AND WHERE IS THE OBJECTSHARE STOCKHOLDER'S MEETING?
A: ObjectShare's meeting of its stockholders will be held at the offices of
ObjectShare located at 16811 Hale Avenue, Suite A, Irvine, California 92614 on
April 12, 2000 at 10:00 a.m., California time.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: ObjectShare stockholders are being asked to approve the merger agreement
and the merger of ObjectShare with and into a wholly-owned subsidiary of
StarBase.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: At the effective date of the merger, except for ObjectShare stockholders
dissenting to the merger, stockholders of ObjectShare will receive for their
shares of ObjectShare common stock that number of shares of StarBase common
stock having a minimum aggregate value of $6,150,000 and a maximum aggregate
value of $8,850,000. Accordingly, the exchange value per share of ObjectShare
common stock shall range from approximately $0.49 to $0.71, which per share
exchange value divided by the average closing price of StarBase's common stock
for the three trading day immediately preceding the day prior to the effective
date of the merger shall determine the actual fraction of a share of StarBase
common stock to be received in the merger.
Assuming the average closing price per share of StarBase common stock at
the effective date is greater than $2.37, then each share of ObjectShare common
stock will effectively be valued at approximately $0.71 and holders of
ObjectShare common stock will acquire $0.71 worth of StarBase common stock for
each one (1) share of ObjectShare common stock held. At March 1, 2000, the last
practicable trading day for which information was available prior to the date of
this Proxy Statement/Prospectus, the average closing price per share of StarBase
common stock was $13.58.
OTHER THAN THE MAXIMUM AND MINIMUM AGGREGATE VALUE, THE EXACT VALUE OF THE
SECURITIES YOU WILL RECEIVE IN THE MERGER AS AN OBJECTSHARE STOCKHOLDER WILL NOT
BE KNOWN AT THE TIME YOU VOTE ON THE MERGER AND MAY INCREASE OR DECREASE AS THE
MARKET PRICE OF STARBASE COMMON STOCK GOES UP OR DOWN AND BASED UPON
OBJECTSHARE'S ENTERPRISE VALUE.
ObjectShare stockholders dissenting to the merger will receive appraisal
rights, entitling them to receive cash for their shares of ObjectShare common
stock.
StarBase stockholders will continue to hold their respective shares of
StarBase common stock after the merger.
Q: HOW DOES MY BOARD OF DIRECTORS RECOMMEND THAT I VOTE ON THE PROPOSALS?
A: The board of directors for ObjectShare unanimously recommends that the
ObjectShare stockholders, vote FOR the merger agreement and the merger.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSALS?
A: The merger agreement and the merger must be approved by the holders of a
majority of the outstanding shares of ObjectShare common stock.
Q: HOW DO I CAST MY VOTE?
A: Each ObjectShare stockholder should indicate on their enclosed proxy
card how he, she or it wants to vote, sign it and mail it in the enclosed return
envelope, as soon as possible, so that his, her or its shares may be represented
at their stockholders' meeting. ObjectShare stockholders may also attend the
stockholders' meeting and vote their shares in person.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just send in a later-dated, signed proxy card to ObjectShare's President
as set forth above in the notice of special meeting. Any person holding common
stock in ObjectShare can also attend the stockholders' meeting in person and
vote. An ObjectShare stockholder may also revoke his, her or its proxy by
sending a notice of revocation to ObjectShare's President. Further details on
how to revoke a proxy may be found on page 16.
iv
<PAGE> 9
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: No, shares of ObjectShare held in street name will not be voted on any
matter if the beneficial owner of the shares does not provide his, her or its
broker with instructions on how to vote the "street name" shares. ObjectShare
stockholders should therefore instruct their brokers how to vote their
respective shares, following the directions provided by the broker.
IF YOU ARE AN OBJECTSHARE STOCKHOLDER AND DO NOT GIVE VOTING INSTRUCTIONS
TO YOUR BROKER, YOU WILL, IN EFFECT, BE VOTING AGAINST THE MERGER, UNLESS YOU
APPEAR IN PERSON AT THE STOCKHOLDERS' MEETING AND VOTE IN FAVOR OF THE MERGER.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, the transfer agent for StarBase will
send ObjectShare stockholders written instructions for exchanging their stock
certificates. StarBase stockholders will keep their existing certificates.
Q: WHEN IS THE MERGER GOING TO BE COMPLETED?
A: ObjectShare and StarBase hope to complete the merger as soon as possible
after the stockholders approve the transaction at the stockholders' meeting.
WHO CAN HELP ANSWER YOUR QUESTIONS?
FOR STARBASE INFORMATION:
StarBase Corporation
4 Hutton Centre Drive, Suite 800
Santa Ana, CA 92707
(714) 445-4400
Attn: Douglas S. Norman
FOR OBJECTSHARE INFORMATION:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York, 10010
(212) 929-5500 (Call Collect)
or
CALL TOLL-FREE (800) 322-2885
This document incorporates by reference important business and financial
information about StarBase and ObjectShare from other documents filed or as may
be filed in the future with the SEC. A listing of these documents can be found
under the heading "Where You Can Find More Information," but you can obtain any
of them from StarBase or ObjectShare's proxy solicitor, MacKenzie Partners,
Inc., as appropriate, or the SEC. The documents incorporated by reference are
available without charge upon written or oral request to the persons or entities
identified above. If you would like to request documents from either StarBase or
MacKenzie Partners, Inc., please do so by April 5, 2000 to receive them before
the ObjectShare special meeting.
v
<PAGE> 10
PROXY STATEMENT/PROSPECTUS SUMMARY
This brief summary highlights selected information from this Proxy
Statement/Prospectus. It does not contain all of the information that is
important to you. You should carefully read the entire Proxy
Statement/Prospectus and the other documents to which this Proxy
Statement/Prospectus refers for a complete understanding of the proposed merger.
See "Where You Can Find More Information" on page 87.
THE COMPANIES
STARBASE CORPORATION
StarBase Corporation, a Delaware corporation, headquartered in Santa Ana,
California, is a leading provider of eBusiness digital asset management
solutions for the enterprise. StarBase offers 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 applications while managing all
associated digital assets. StarBase'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. StarBase's current product line
consists of StarTeam(R) 4.2 and Enterprise Suite as well as StarSweeperTM,
RoundTable(R) and Versions(R).
StarBase's principal executive offices are located at 4 Hutton Centre
Drive, Suite 800, Santa Ana, California 92707 and its telephone number is (714)
445-4400.
OBJS ACQUISITION CORP.
OBJS Acquisition Corp., a Delaware corporation, is a wholly-owned
subsidiary of StarBase formed solely in connection with the proposed merger.
Upon successful completion of the merger, ObjectShare shall be merged into this
subsidiary and carry on its business as a subsidiary of StarBase.
OBJS Acquisition Corp.'s principal executive offices are located c/o
StarBase Corporation, 4 Hutton Centre Drive, Suite 800, Santa Ana, California
92707 and its telephone number is (714) 445-4400.
OBJECTSHARE, INC.
ObjectShare, Inc., a Delaware corporation, headquartered in Irvine,
California, provides a comprehensive range of training and consulting services
supporting object-oriented application developments for use in distributed
client/server/web applications.
ObjectShare's principal executive offices are located at 16811 Hale Avenue,
Suite A, Irvine, CA 92606 and its telephone number is (949) 833-1122.
THE SPECIAL MEETING
TIME, DATE AND PLACE OF THE SPECIAL MEETING (SEE PAGE 16).
10:00 a.m. P.S.T. or California time on April 12, 2000, at 16811 Hale
Avenue, Suite A, Irvine, CA 92606.
RECORD DATE AND THE VOTES REQUIRED
You can vote at the special meeting if you owned ObjectShare common stock
at the close of business on March 6, 2000, the record date for the meeting. You
can cast one vote for each share of ObjectShare common stock you owned at that
time.
To adopt the merger agreement, the holders of a majority of shares of
ObjectShare common stock allowed to vote at the special meeting must vote in
favor of the agreement. On March 6, 2000, 12,470,863 shares of ObjectShare
common stock were outstanding and entitled to vote.
AFFILIATED VOTING (SEE PAGE 16).
As of March 6, 2000, directors, executive officers and affiliates of
ObjectShare did not beneficially own any shares of ObjectShare common stock
(excluding options).
StarBase's directors, executive officers and affiliates owned no shares of
ObjectShare common stock as of March 6, 2000.
VOTING PROCEDURE (SEE PAGE 16-17).
As a holder of shares of ObjectShare common stock on March 6, 2000, you may
vote your
1
<PAGE> 11
shares in person by attending the meeting or by
mailing to ObjectShare a proxy if you are unable to or do not wish to attend.
You may revoke your proxy at any time before a vote is taken at the meeting by
sending a written notice revoking the proxy or a later-dated proxy to the
President of ObjectShare, or by attending the meeting and voting in person.
APPRAISAL RIGHTS (SEE PAGE 17-19).
If the merger is completed, stockholders of ObjectShare who do not vote for
the merger may, under certain circumstances, be entitled to appraisal rights
under Delaware Law.
THE MERGER
We have attached the merger agreement to this document as Appendix A.
Please read the merger agreement. It is the legal document that governs the
transaction.
GENERAL (SEE PAGE 20).
We propose a merger in which ObjectShare will merge with and into a
wholly-owned subsidiary of StarBase
WHAT YOU WILL RECEIVE (SEE PAGE 37).
If you are an ObjectShare stockholder, your ObjectShare shares will be
converted into the right to receive merger consideration consisting of shares of
StarBase common stock. The number of shares of StarBase common stock deliverable
for each share of ObjectShare common stock will depend on an exchange ratio
determined by the average closing price per share of StarBase common stock on
the Nasdaq SmallCap Market for the three trading days ending on the trading day
prior to the effective date of the merger. Accordingly, it will not be known at
the time of the ObjectShare stockholder meeting what the exchange ratio will be.
However, assuming the price per share of StarBase common stock remains greater
than or equal to $2.37, we estimate that each share of ObjectShare common stock
will effectively receive approximately $0.71 of StarBase common stock. At the
minimum, each share of ObjectShare common stock will convert into approximately
$0.49 of StarBase common stock. On March 1, 2000, the last practicable trading
day for which information was available prior to this Proxy
Statement/Prospectus, the average closing price per share of StarBase common
stock was $13.58.
REASONS FOR THE MERGER (SEE PAGE 21-24).
Management of ObjectShare and StarBase believe that the merger will enable
the companies to enhance the potential value of their combined assets and
businesses and to more effectively compete in the eBusiness industry as a result
of the synergies of an integrated management team, operations and strengthened
product and service offering.
OPINIONS OF FINANCIAL ADVISOR (SEE PAGE 24).
ObjectShare's financial advisor, Duff & Phelps, gave a written opinion to
the ObjectShare board of directors that, as of the date of the opinion, the
merger consideration for the ObjectShare common stock, was fair to ObjectShare
stockholders from a financial point of view.
We have attached a copy of the opinion of the financial advisor as Appendix
E and encourage you to read the same. The fairness opinion is subject to the
qualifications and limitations referred to in the opinion.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (SEE PAGE 27).
On November 3, 1999 and November 2, 1999, respectively, the boards of
directors for each of StarBase and ObjectShare approved the merger agreement,
authorized its execution and delivery, and determined that the merger is fair to
and in the best interests of their respective companies. Each board of
directors, in reaching its decision, considered a number of factors. The
ObjectShare board of directors recommends that you vote "FOR" the proposal to
approve and adopt the merger agreement.
NO FRACTIONAL SHARES (SEE PAGE 39).
No fractional shares of StarBase common stock will be issued at the closing
of the merger and, as a holder of ObjectShare common stock, you will be paid an
amount of cash equal to such fraction of a share multiplied by the average of
the closing price per share of StarBase common stock for the three trading days
immediately preceding the day prior to the closing date of the merger agreement.
2
<PAGE> 12
EMPLOYEE STOCK OPTIONS (SEE PAGE 39-40).
With the exception of certain director/officer options and certain employee
options, each outstanding stock option of ObjectShare will be canceled in the
merger. Each employee who is employed by StarBase after the merger, will, on a
case by case basis, receive options to purchase shares of StarBase common stock
upon substantially the same terms and conditions as the outstanding options
currently held with ObjectShare.
DIRECTORS' AND EXECUTIVE OFFICERS' OPTIONS/SEVERANCE PAY (SEE PAGE 44-45)
Eugene L. Goda, the President of ObjectShare, pursuant to his employment
agreement dated June 10, 1997 (the "Goda Agreement"), currently holds options to
purchase 650,000 shares of ObjectShare common stock. By the terms of the Goda
Agreement, in the event Mr. Goda's employment terminated, his options were to
continue to be in existence for an additional three years. In consideration
thereof, StarBase shall grant to the President of ObjectShare stock options to
purchase shares of the common stock of StarBase, upon substantially the same
terms and conditions as the outstanding stock options currently held by such
officer with ObjectShare.
StarBase has granted options to a certain former vice president of
ObjectShare, who is currently in the employ of StarBase.
Four officers and directors of ObjectShare are entitled to severance, in
the aggregate sum of $415,000, upon the closing of the merger. Payment shall be
in the form of shares of ObjectShare common stock issued to such officers
immediately prior to the closing of the merger, at which time such shares shall
be converted into the right to receive merger consideration, as provided above.
The shares of ObjectShare common stock issued as severance will not affect the
calculation of your exchange ratio or the maximum and minimum aggregate value to
be paid to ObjectShare stockholders.
CONDITIONS TO COMPLETING THE MERGER
(SEE PAGE 42).
The respective obligations of StarBase and ObjectShare to complete the
merger are subject to the satisfaction or waiver of certain conditions. These
conditions include:
- approval of the merger by ObjectShare stockholders;
- that there is no law or court order prohibiting the merger;
- that the representations and warranties of the respective parties made in
the merger agreement remain accurate in all material respects, with
permitted exceptions; and
- that each of StarBase and ObjectShare has performed in all material
respects all of its respective obligations under the merger agreement.
GOVERNMENTAL APPROVALS.
Neither ObjectShare nor StarBase is aware of any governmental approvals
required to complete the merger other than compliance with applicable securities
laws of the various states.
However, either of StarBase or ObjectShare can choose to complete the
merger even though one or more of these conditions has not been satisfied, as
long as the law allows the companies to do so. There can be no certainty, when,
or if, the conditions to the merger will be satisfied or waived, or that the
merger will be completed.
TERMINATION OF THE MERGER AGREEMENT
(SEE PAGE 42).
Both ObjectShare and StarBase can mutually agree at any time prior to
completing the merger to terminate the merger agreement. Also, either company
can decide, without the other's consent, to terminate the merger agreement if
the merger has not been completed by April 17, 2000 or if the other company has
breached the merger agreement.
In addition, ObjectShare may terminate the merger agreement if, after
ObjectShare's board of directors has received an unsolicited proposal from a
potential acquirer, its board decides in good faith, after consultation with
legal counsel, that it must withdraw its recommendation of the merger in order
to comply with its fiduciary duties under Delaware Law.
3
<PAGE> 13
Moreover, StarBase may terminate the merger agreement if:
- ObjectShare's accounts receivable (net), plus cash and cash equivalents
less indebtedness for borrowed money less accounts payable less accrued
liabilities less net proceeds realized from any sale of the European
operation exceed a negative balance of $2,500,000 in the aggregate;
- StarBase is required to issue more than 4,750,000 shares of StarBase
common stock in the merger (exclusive of options to purchase shares of
StarBase common stock granted to certain officers and directors and
employees of ObjectShare); or
- ObjectShare stockholders holding more than 5% of the outstanding shares
of ObjectShare common stock exercise their appraisal rights.
TERMINATION FEES AND EXPENSES (SEE PAGE 43).
In the event that ObjectShare terminates the merger agreement because of a
third party transaction, ObjectShare has agreed to pay StarBase a termination
fee equal to $500,000 plus reasonable legal, accounting and investment banking
fees incurred by StarBase in connection with the merger, not to exceed $200,000.
NO SOLICITATION (SEE PAGE 43).
From November 3, 1999 until the merger is completed, each of StarBase and
ObjectShare has agreed not to initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer with respect to a merger, transaction, consolidation or similar
transaction involving, or any purchase of all or substantially all of the assets
or equity securities resulting in, a change of control of either of the two
companies, except under certain circumstances.
ObjectShare may, however, engage in negotiations regarding an unsolicited
proposal from a potential acquirer other than StarBase if the ObjectShare's
board decides, in good faith and with the assistance of its financial advisor,
that the potential acquirer is presenting a proposal that is superior to the
merger.
ACCOUNTING TREATMENT (SEE PAGE 28).
The merger will be treated as a purchase for accounting and financial
reporting purposes.
CERTAIN TAX CONSEQUENCES (SEE PAGE 28).
It is expected that, for United States federal income tax purposes, the
conversion of shares of ObjectShare common stock for shares of StarBase common
stock generally will not cause ObjectShare stockholders to recognize any gain or
loss. ObjectShare stockholders may, however, recognize gain or loss in
connection with any cash they receive in lieu of fractional shares as provided
in the merger agreement.
THE ACTUAL TAX CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND ON YOUR
SPECIFIC SITUATION AND YOU SHOULD CONSULT YOUR OWN TAX ADVISOR FOR A FULL
UNDERSTANDING OF THE MERGER'S TAX CONSEQUENCES ON YOU.
MARKET VALUE OF SECURITIES (SEE PAGE 31).
StarBase common stock is traded on the Nasdaq SmallCap Market and
ObjectShare common stock is traded on the OTC Bulletin Board. On November 3,
1999, the last full trading day prior to the public announcement of the merger,
StarBase common stock closed at $1.3125 and ObjectShare common stock closed at
$0.359375. On March 1, 2000, StarBase common stock closed at $14.63 and
ObjectShare common stock closed at $0.49. March 1, 2000 was the last practicable
trading day for which information was available prior to the date of this Proxy
Statement/Prospectus.
LISTING OF STARBASE COMMON STOCK.
StarBase will list the shares of its common stock issued in the merger on
the Nasdaq SmallCap Market.
OTHER MATTERS
RISK FACTORS (SEE PAGE 10).
The decision to vote to adopt the merger agreement and to authorize the
merger of ObjectShare into a wholly-owned subsidiary of StarBase involves a
number of risks to the stockholder and
4
<PAGE> 14
should not be made without reference to the risk factors incorporated into this
Proxy Statement/ Prospectus.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (SEE PAGE 9).
Each of StarBase and ObjectShare has made forward-looking statements in
this Proxy Statement/Prospectus that are subject to risks and uncertainties.
Forward-looking statements include expectations concerning matters that are not
historical facts. Words such as "believes," "expects," "anticipates" or similar
expressions indicate forward-looking statements. For more information regarding
factors that could cause actual results to differ from these expectations, you
should refer to "Risk Factors" on page 10.
WHO CAN HELP ANSWER YOUR QUESTIONS.
If you have questions about the merger, you should contact:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York, 10010
(212) 929-5500 (Call Collect)
or
CALL TOLL-FREE (800) 322-2885
5
<PAGE> 15
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data for StarBase and
ObjectShare is provided to help you in your analysis of the financial aspects of
the merger. This financial data for the five years ended March 31, 1999 is
derived from the audited financial statements of StarBase and ObjectShare. For
the four years ended March 31, 1998, the financial statements of StarBase were
audited by independent accountants PricewaterhouseCoopers LLP, and for the year
ended March 31, 1999, the financial statements of StarBase were audited by
independent auditors Deloitte & Touche LLP. Deloitte & Touche LLP's report on
the financial statements of StarBase for the year ended March 31, 1999, which is
included in Appendix B, includes an explanatory paragraph which describes an
uncertainty about StarBase's ability to continue as a going concern. For the
five years ended March 31, 1999, the financial statements of ObjectShare were
audited by independent auditors Ernst & Young LLP. Ernst & Young LLP's report on
the consolidated financial statements of ObjectShare for the year ended March
31, 1999, which is included in Appendix C, includes an explanatory paragraph
which describes an uncertainty about ObjectShare's ability to continue as a
going concern. The financial data for the nine month periods ended December 31,
1999 and 1998 are derived from unaudited financial statements. The management of
StarBase and the management of ObjectShare believe that the unaudited financial
statements include all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the financial position and the
results of operations for these periods. The results for the interim periods
presented are not necessarily indicative of the results that may be expected for
any future period.
The data is only a summary and you should read it together with the
consolidated financial statements, related notes, and other financial
information included elsewhere in this Proxy Statement/ Prospectus. See "Where
You Can Find More Information" on page 87.
6
<PAGE> 16
STARBASE CORPORATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED MARCH 31,
----------------- -----------------------------------------------
1999 1998 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
License fees........................... $ 9,491 $ 4,117 $ 5,964 $ 1,863 $ 968 $ 491 $ 959
Services............................... 1,848 553 868 276 71 500 2,576
------- ------- ------- ------- ------- ------- -------
Total revenues....................... 11,339 4,670 6,832 2,139 1,039 991 3,535
Costs and expenses:
Cost of license fees................... 930 448 508 162 96 82 182
Cost of services....................... 915 -- -- -- -- 624 2,666
Research and development............... 3,075 3,161 4,437 2,762 1,791 2,466 3,145
Selling, general and administrative.... 9,102 8,007 10,601 5,370 5,050 3,759 5,312
------- ------- ------- ------- ------- ------- -------
Total costs and expenses............. 14,022 11,616 15,546 8,294 6,937 6,931 11,305
------- ------- ------- ------- ------- ------- -------
Operating loss........................... (2,683) (6,946) (8,714) (6,155) (5,898) (5,940) (7,770)
Other income (expense), net.............. (162) 41 32 (877) 198 48 52
------- ------- ------- ------- ------- ------- -------
Loss before income taxes................. (2,845) (6,905) (8,682) (7,032) (5,700) (5,892) (7,718)
Provision for income taxes............... 1 2 1 1 3 1 2
------- ------- ------- ------- ------- ------- -------
Net loss................................. (2,846) (6,907) (8,683) (7,033) (5,703) (5,893) (7,720)
Non-cash dividend and accretion of
beneficial conversion feature.......... 549 417 1,277 2,832 1,096 3,635 1,878
------- ------- ------- ------- ------- ------- -------
Net loss applicable to common
stockholders........................... $(3,395) $(7,324) $(9,960) $(9,865) $(6,799) $(9,528) $(9,598)
======= ======= ======= ======= ======= ======= =======
Per Share Data:
Basic and diluted net loss per share..... $ (0.11) $ (0.39) $ (0.49) $ (0.70) $ (0.62) $ (1.64) $ (2.65)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------- ------------------------------------------
1999 1998 1999 1998 1997 1996 1995
-------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents..................... $ 9,240 $ 62 $1,363 $4,167 $2,722 $1,252 $1,972
Working capital............................... $ 9,802 $ 274 $2,308 $3,632 $2,384 $ (536) $ 191
Total assets.................................. $16,308 $3,735 $6,605 $5,682 $3,876 $2,173 $4,147
Long term debt................................ $ 73 $ 147 $ 116 $ 38 $ -- $ 153 $ 45
Stockholders' equity.......................... $11,480 $1,511 $4,462 $4,430 $2,991 $ 68 $1,357
</TABLE>
7
<PAGE> 17
OBJECTSHARE, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED MARCH 31,
----------------- -------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
------- ------- ------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Licenses............................. $ 1,464 $ 3,630 $ 5,380 $ 8,172 $ 20,148 $ 31,667 $32,521
Services............................. 4,897 7,958 10,426 12,068 17,138 17,943 23,147
------- ------- ------- ------- -------- -------- -------
Total revenues..................... 6,361 11,588 15,806 20,240 37,286 49,610 55,668
Costs and expenses:
Cost of licenses..................... 543 762 1,737 1,626 5,537 5,814 5,286
Cost of services..................... 3,040 4,180 5,705 7,569 10,379 11,111 12,548
Research and development............. 824 2,881 3,542 4,648 8,904 10,335 8,306
Selling, general and administrative
(including restructuring and
acquired R&D)...................... 5,428 6,424 9,834 14,261 35,576 33,947 25,271
------- ------- ------- ------- -------- -------- -------
Total costs and expenses........... 9,835 14,247 20,818 28,104 60,396 61,207 51,411
------- ------- ------- ------- -------- -------- -------
Operating income (loss)................ (3,474) (2,659) (5,012) (7,864) (23,110) (11,597) 4,257
Other income (expense), net............ 3,229 256 160 313 725 1,303 1,385
------- ------- ------- ------- -------- -------- -------
Income (loss) before income taxes...... (245) (2,403) (4,852) (7,551) (22,385) (10,294) 5,642
Provision (benefit) for income taxes... -- (29) (13) 31 95 102 1,078
------- ------- ------- ------- -------- -------- -------
Net income (loss)...................... $ (245) $(2,374) $(4,839) $(7,582) $(22,480) $(10,396) $ 4,564
======= ======= ======= ======= ======== ======== =======
Per Share Data:
Basic net income (loss) per share...... $ (0.02) $ (0.19) $ (0.39) $ (0.63) $ (1.91) $ (0.98) $ 0.47
Diluted net income (loss) per share.... $ (0.02) $ (0.19) $ (0.39) $ (0.63) $ (1.91) $ (0.98) $ 0.38
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH, 31
------------------- -----------------------------------------------
1999 1998 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................. $ 780 $1,638 $ 1,675 $ 5,134 $ 7,418 $14,367 $25,059
Working capital........................... $ (30) $ 842 $(1,366) $ 3,420 $ 8,108 $27,701 $35,368
Total assets.............................. $1,642 $6,980 $ 7,712 $13,255 $23,872 $47,302 $54,119
Long term debt............................ $ 74 $ -- $ 103 $ -- $ -- $ -- $ --
Stockholders' equity...................... $ 234 $2,603 $ 124 $ 4,792 $12,272 $33,504 $37,463
</TABLE>
8
<PAGE> 18
FORWARD-LOOKING STATEMENTS
StarBase and ObjectShare have made forward-looking statements in this Proxy
Statement/Prospectus and in other documents to which you are referred that are
subject to risks and uncertainties. These forward-looking statements include
information about possible or assumed future results of operations or the
performance of the companies after the merger is completed. When any of the
words "believes," "expects," "anticipates," "intends," "estimates" or similar
expressions are used, forward-looking statements are being made. Many possible
events or factors could affect the actual financial results and performance of
each of the companies before the merger and of the combined company after the
merger, and these factors or events could cause those results or performance to
differ significantly from those expressed in these forward-looking statements.
Many of these risks and uncertainties are not within either company's control
and are set forth under "Risk Factors" at page 10. Possible events or factors
include the following:
- revenues after the merger may be lower than currently expected for a
variety of reasons including loss of personnel, loss of consulting
projects, changes in market conditions and responses by competitors;
- integrating the businesses and products or any businesses acquired in the
future may be more time consuming, costly and difficult than anticipated;
- competition in StarBase's and ObjectShare's industries is extremely
intense and may increase;
- third parties may infringe StarBase's proprietary intellectual property
rights;
- issues and difficulties that are faced in connection with rapid growth;
- litigation involving matters such as intellectual property, securities,
antitrust, employees and customer issues may adversely affect the
business;
- general economic conditions in the U.S. or abroad may change or be worse
than currently expected; and
- changes may occur with respect to StarBase's stock price or in the
securities markets in general.
Neither StarBase nor ObjectShare is undertaking any responsibility to
release publicly any revisions to these forward-looking statements to take into
account events or circumstances that occur after the date of this Proxy
Statement/Prospectus. Additionally, neither StarBase nor ObjectShare is
undertaking any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this Proxy
Statement/Prospectus. You are cautioned not to place undue reliance on these
statements, which speak only as of the date of this Proxy Statement/Prospectus.
9
<PAGE> 19
RISK FACTORS
This offering involves a high degree of risk, including those risks
described below. You should carefully consider these risk factors, together with
all of the other information in this Proxy Statement/ Prospectus, before
deciding to invest in shares of StarBase common stock.
RISKS ASSOCIATED WITH THE MERGER
UNCERTAINTIES EXIST REGARDING INTEGRATION OF THE COMBINED COMPANIES.
Although ObjectShare and StarBase entered into the merger agreement with
the expectation that the merger will result in beneficial synergistic effects
for the combined companies, there are significant uncertainties and risks
relating to the integration of the two companies' operations. Whether the
anticipated benefits of the merger are ultimately achieved will depend on a
number of factors, including the ability of the combined companies to achieve
administrative cost savings, general economies of scale and, generally, to
capitalize on the combined asset base and strategic position of the combined
entity. The timing and manner of the implementation of decisions made with
respect to the ongoing business of the combined companies following the merger
will materially affect the operations of the combined companies. There can be no
assurance that any expected synergies will be realized, that decisions affecting
the business of the combined companies will be made on a timely or effective
basis or that the results of the combined operations of ObjectShare and StarBase
will prove to be favorable.
OBJECTSHARE'S STOCKHOLDERS WILL HAVE A REDUCED OWNERSHIP AND VOTING INTEREST
AFTER THE MERGER.
After the merger's completion, ObjectShare stockholders will own a
significantly smaller percentage of StarBase than they currently own of
ObjectShare. Consequently, ObjectShare stockholders will be able to exercise
less influence over the management and policies of StarBase than they currently
exercise over the management and policies of ObjectShare.
OBJECTSHARE'S DIRECTORS AND OFFICERS HAVE INTERESTS THAT DIFFER IN SOME RESPECTS
FROM OBJECTSHARE STOCKHOLDERS.
In considering the recommendation of the ObjectShare's board of directors
to approve the merger, ObjectShare's stockholders should consider that some of
ObjectShare's directors and officers have interests in the merger that differ
from, or are in addition to, their interests as ObjectShare stockholders.
ObjectShare's directors and officers may receive benefits from the merger not
available to ObjectShare stockholders generally. These benefits include the
receipt of StarBase stock options for persons who will provide services to
StarBase, payments under ObjectShare's severance agreements and the continuation
of existing indemnification policies and agreements.
OBJECTSHARE STOCKHOLDERS MAY BE ENTITLED TO APPRAISAL RIGHTS.
Stockholders of ObjectShare who do not vote in favor of the merger may,
under certain circumstances and by following procedures prescribed by the
Delaware General Corporation Law (the "Delaware Law"), exercise appraisal rights
and receive cash for their shares of ObjectShare common stock ("Appraisal
Rights"). A dissenting stockholder of ObjectShare must follow the appropriate
procedures under Delaware Law or suffer the termination or waiver of such
rights. In the event an ObjectShare stockholder relinquishes or loses his, her
or its Appraisal Rights, the stockholder will receive from StarBase the same
number of shares of StarBase common stock that the stockholder would have
received in the merger had such stockholder not attempted to exercise his, her
or its Appraisal Rights. StarBase has no obligation to consummate the merger if
more than five percent (5%) of the outstanding shares of ObjectShare common
stock request or continue to have the right to exercise Appraisal Rights. See
"The Merger -- Appraisal Rights."
10
<PAGE> 20
RISKS ASSOCIATED WITH STARBASE
When referenced in the remainder of this "Risk Factors" section, references
to "us," "our Company" and "we" shall mean StarBase.
WE HAVE A HISTORY OF LOSSES.
There can be no assurance that our Company's product development efforts
will result in a commercially viable business or that our Company will be able
to generate significant revenues or operate profitably. Since our inception, we
have had a history of losses and as of December 31, 1999, we had an accumulated
deficit of $55,433,000. We anticipate incurring additional losses until our
Company can successfully market and distribute its existing products, as well as
successfully develop, market and distribute its planned future products. The
development of software products is difficult and time consuming, requiring the
coordinated participation of various technical and marketing personnel and, at
times, independent third-party suppliers. This development process often
encounters unanticipated delays and expenses. The likelihood of the success of
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 technologies.
WE COULD BE REQUIRED TO CUT BACK OR STOP OPERATIONS IF WE ARE UNABLE TO RAISE OR
OBTAIN NEEDED FUNDING.
Our ability to continue operations will depend on our generating positive
cash flow, if any, from future operations or our ability to raise additional
funds through equity or debt financing. We do not know if we can raise
additional funding or that such funding will be available on favorable terms. We
could be required to cut back or stop operations if we are unable to raise or
obtain needed funding.
Our cash requirements to run our business have been and will continue to be
significant. Since 1995, our cash flow from operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED: NEGATIVE CASH FLOW
- ------------------ ------------------
<S> <C>
March 31, 1995.............................................. $6,179,000
March 31, 1996.............................................. $4,949,000
March 31, 1997.............................................. $6,506,000
March 31, 1998.............................................. $5,662,000
March 31, 1999.............................................. $9,430,000
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED: NEGATIVE CASH FLOW
- ------------------ ------------------
<S> <C>
December 31, 1999........................................... $1,023,000
</TABLE>
OUR SUCCESS IS DEPENDENT ON PRODUCT LINES UNDER DEVELOPMENT AND/OR DEVELOPING
CERTAIN MARKETS.
Our success will be dependent in large part upon our ability to market our
StarTeam 4.2 and Enterprise product lines and to quickly introduce and market
additional products. While we are in various stages of developing additional
products, there can be no assurance that such additional products will be
completed or successfully marketed. User preferences for software products are
difficult to predict and, historically, only a limited number of software
products have achieved sustained market acceptance. Demand for software products
is subject to a number of variables, including user preferences and the size of
the installed base of personal computers capable of running the products.
Further, the market for our software products is evolving. There can be no
assurance that the products introduced by us will achieve acceptance, or that
other software vendors will not develop and market products which render our
products obsolete or less competitive. Failure to obtain significant customer
satisfaction or market share for our products would have a material adverse
effect on our Company.
11
<PAGE> 21
WE MAY HAVE TO LOWER PRICES OR SPEND MORE MONEY TO EFFECTIVELY COMPETE AGAINST
COMPANIES WITH GREATER RESOURCES THAN US WHICH COULD RESULT IN LOWER REVENUES
AND/OR PROFITS.
The success of our products in the marketplace depends on many factors,
including product performance, price, ease of use, support of industry
standards, and customer support and service. Given these factors we cannot
assure you that we will be able to compete successfully. For example, if our
competitors offer lower prices, we could be forced to lower prices which would
result in reduced margins and a decrease in revenues. If we do not lower prices
we could lose sales and market share. In either case, if we are unable to
compete against companies which can afford to cut prices, we would not be able
to generate sufficient revenues to grow the company or reverse our history of
losses.
In addition, we may have to spend more money to effectively compete for
market share, including funds to expand our infrastructure, which is a capital
and time intensive process. Further, if other companies want to aggressively
compete against us, we may have to spend more money on advertising, promotion,
trade shows, product development, marketing and overhead expenses, hiring and
retaining personnel, and developing new technologies. These higher expenses
would hurt our net income and profits.
WE MAY NOT ACHIEVE OR SUSTAIN OUR REVENUE OR PROFIT GOALS.
Because we expect to continue to incur significant product development,
sales and marketing, and administrative expenses, we will need to generate
significant revenue to achieve and sustain profitability on a quarterly or
annual basis. We may not achieve or sustain our revenue or profit goals and our
ability to do so 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 products to their subscribers and customers.
WE MAY FAIL TO SUPPORT OUR ANTICIPATED GROWTH IN OPERATIONS.
To succeed in the implementation of our business strategy, we must rapidly
execute our sales strategy and further develop products and expand service
capabilities, while managing anticipated growth by implementing effective
planning and operating processes. To manage anticipated growth, we must:
- continue to implement and improve our operational, financial and
management information systems;
- hire, train and retain additional qualified personnel;
- continue to expand and upgrade core technologies; and
- effectively manage multiple relationships with various e-commerce website
operators, applications developers and other third parties.
If we fail to manage our growth effectively, our business could suffer
materially.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our business. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which could harm our business.
We rely on a combination of copyright and trademark laws, trade secrets,
confidentiality provisions and other contractual provisions to protect our
proprietary rights, but these legal means provide only limited protection. 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
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<PAGE> 22
licensing agreements on disadvantageous commercial terms. A successful claim of
product infringement against us, and our failure to license the infringed or
similar technology, would harm our business. 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.
WE MAY ACQUIRE TECHNOLOGIES OR COMPANIES IN THE FUTURE AND THESE ACQUISITIONS
COULD RESULT IN THE DILUTION OF OUR SHAREHOLDERS AND DISRUPTION OF OUR BUSINESS.
We may acquire 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, any of which could materially
harm our business, including:
- diversion of management's attention from other business concerns;
- failure to assimilate the acquired company with our pre-existing
business;
- potential loss of key employees from either our pre-existing business or
the acquired business;
- dilution of our existing shareholders as a result of issuing common stock
or other securities; and
- assumption of liabilities of the acquired company.
RISKS ASSOCIATED WITH HOLDING OUR SECURITIES
YOUR PERCENTAGE OF OWNERSHIP, VOTING POWER AND PRICE OF STARBASE COMMON STOCK
MAY DECREASE BECAUSE WE HAVE ISSUED, AND MAY CONTINUE TO ISSUE, A SUBSTANTIAL
NUMBER OF SECURITIES CONVERTIBLE OR EXERCISABLE INTO OUR COMMON STOCK.
We have the authority to issue up to 80,000,000 shares of our common stock
and to issue preferred stock as well as options and warrants to purchase shares
of our common stock without shareholder approval. These future issuances could
be at values substantially below the price paid for our common stock by current
stockholders.
As of December 31, 1999, we had the following capital structure:
<TABLE>
<S> <C>
Shares of common stock outstanding:......................... 40,983,568
----------
Shares of common stock issuable upon:
Conversion of warrants:................................... 1,112,000
Conversion of options:.................................... 9,213,114
----------
Total:............................................ 51,308,682
==========
</TABLE>
The number of shares of common stock outstanding includes 1,418,638 shares
held in escrow under a performance escrow agreement. The common stock issuable
upon exercise of options must vest and is generally issuable over a four year
period. As of December 31, 1999, only 2,296,234 shares could be issued upon the
exercise of options. We may conduct additional future offerings of our common
stock or other securities with rights to convert the securities into shares of
our common stock.
YOUR INTEREST IN STARBASE MAY BE DILUTED BY THE ISSUANCE OF PREFERRED STOCK WITH
GREATER RIGHTS THAN THE COMMON STOCK WHICH WE CAN SELL OR ISSUE AT ANY TIME.
The sale or issuance of any shares of preferred stock having rights
superior to those of StarBase common stock may result in a decrease in the value
or market price of StarBase common stock. The issuance of preferred stock could
have the effect of delaying, deferring or preventing a change of ownership
without further vote or action by the stockholders and may adversely affect the
voting and other rights of the holders of StarBase common stock.
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<PAGE> 23
Our board of directors is authorized to issue up to 10,000,000 shares of
preferred stock. The board has the power to establish the dividend rates,
preferential payments on our liquidation, voting rights, redemption and
conversion terms and privileges for any series of preferred stock.
OUR STOCK PRICE FLUCTUATIONS MAY AFFECT THE NUMBER OF SHARES OF OUR COMMON STOCK
YOU WILL RECEIVE IN THE MERGER.
In the merger, you will receive shares of our common stock for the
respective shares of ObjectShare common stock that you currently hold. The
market price of our common stock will fluctuate as a result of changes in our
business, operations, prospects or the market assessment of the impact of the
merger. Because the market price of our common stock fluctuates, the value of
our common stock that you will receive for your ObjectShare common stock will
depend upon the market price of our stock at the time of the merger. There can
be no assurance as to this value. For historical and current market prices of
our common stock, see "Comparative Per Share Market Price and Dividend
Information" on page 35.
IF WE CANNOT MEET THE NASDAQ SMALLCAP MARKET MAINTENANCE REQUIREMENTS AND NASDAQ
RULES, NASDAQ MAY DELIST OUR COMMON STOCK WHICH COULD NEGATIVELY AFFECT THE
PRICE OF STARBASE COMMON STOCK AND YOUR ABILITY TO SELL STARBASE COMMON STOCK.
In the future, we may not be able to meet the listing maintenance
requirements of the Nasdaq SmallCap Market and Nasdaq rules, which require,
among other things, minimum net tangible assets of $2 million, a minimum bid
price for our common stock of $1.00. Although we currently comply with Nasdaq's
listing maintenance requirements, in the past there were times when we have not
been in compliance and it is possible we may not meet the requirements in the
future. If we were no longer in compliance with Nasdaq rules and were unable to
receive a waiver of the rules or achieve compliance, and if our common stock
were to be delisted from the Nasdaq SmallCap Market, an investor in our company
may find it more difficult to sell our common stock. This lack of liquidity also
may make it more difficult for us to raise capital in the future.
RISKS RELATED TO EBUSINESS AND THE INTERNET
OUR EXISTING PRODUCTS COULD BECOME OBSOLETE, IF WE ARE UNABLE TO MEET THE RAPID
CHANGES IN EBUSINESS TECHNOLOGY.
The market for our products is marked by rapid technological change,
frequent new product introductions and Internet-related technology evolving
industry standards. We cannot be certain that we will successfully develop and
market new products, new product enhancements or new products compliant with
present or emerging Internet technology standards. New products based on new
technologies or new industry standards can render existing products obsolete and
unmarketable. To succeed, we will need to enhance our current products and
develop new products on a timely basis to keep pace with developments related to
Internet technology and to satisfy the increasingly sophisticated requirements
of our clients. 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 have a material adverse effect on our business,
operating results and financial condition.
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF THE INTERNET FOR COMMERCE.
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
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<PAGE> 24
Internet usage and bandwidth requirements. 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.
OUR PERFORMANCE WILL DEPEND ON THE NEW MARKET FOR EBUSINESS SOLUTIONS.
The market for eBusiness solutions is new and rapidly evolving. We expect
that we will continue to need intensive marketing and sales efforts to educate
prospective clients about the uses and benefits of our products and services.
Accordingly, we cannot be certain that a viable market for our products will
emerge or be sustainable. 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. Similarly, individuals have established patterns of purchasing goods
and services. They may be reluctant to alter those patterns. They may also
resist providing the personal data necessary to support our existing and
potential product uses. Any of these factors could inhibit the growth of on-line
business generally and the market's acceptance of our products and services in
particular.
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, federal, state or foreign agencies may 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 indirectly harm us to the extent that they impact our
customers and potential customers. We cannot predict if or how any future
legislation or regulations would impact our business. Although many of these
regulations may not apply to our business directly, these laws regulating or
affecting commerce on the Internet could indirectly harm our business.
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<PAGE> 25
OBJECTSHARE SPECIAL MEETING
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies from the holders of ObjectShare common stock by
ObjectShare's board of directors for use at the special meeting. This Proxy
Statement/Prospectus and accompanying form of proxy are first being mailed to
the stockholders of ObjectShare on or about March 8, 2000.
TIME AND PLACE; PURPOSE
The special meeting will be held at 10:00 a.m., California or Pacific
Standard Time, on April 12, 2000 at the headquarters of ObjectShare Inc., 16811
Hale Avenue, Suite A, Irvine, California 92614. At the special meeting (and any
adjournment or postponement thereof), the stockholders of ObjectShare will be
asked to consider and vote upon the approval and adoption of the merger
agreement and the merger and such other matters as may properly come before the
special meeting.
ObjectShare stockholder approval of the merger agreement and the merger is
required by Delaware Law.
The ObjectShare Board has unanimously approved the terms of the merger
agreement and the consummation of the merger contemplated thereby, unanimously
believes that the terms of the merger agreement and the merger are fair to, and
in the best interests of, ObjectShare and its stockholders, and unanimously
recommends that holders of ObjectShare common stock vote "FOR" approval of the
merger and the merger agreement.
RECORD DATE; VOTING RIGHTS AND PROXIES
Only holders of record of ObjectShare common stock at the close of business
on March 6, 2000 (the "Record Date") are entitled to notice of and to vote at
the special meeting. As of the Record Date, there were 12,470,863 shares of
ObjectShare common stock outstanding, each of which entitled the holder thereof
to one vote.
All shares of ObjectShare common stock represented by properly executed
proxies will, unless such proxies have been previously revoked, be voted in
accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS
ARE INDICATED, SUCH SHARES OF OBJECTSHARE COMMON STOCK WILL BE VOTED "FOR"
APPROVAL OF THE MERGER AND THE MERGER AGREEMENT. ObjectShare does not know of
any matters other than the approval of the merger and the related merger
agreement that are to come before the special meeting. If any other matter or
matters are properly presented for action at the special meeting, the persons
named in the enclosed form of proxy and acting thereunder will have the
discretion to vote on such matters in accordance with their best judgment. A
stockholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice of revocation to ObjectShare by signing and
returning a later dated proxy, or by voting in person at the special meeting.
Votes cast by proxy or in person at the special meeting will be tabulated by the
inspector of election appointed for the meeting.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS
On the Record Date, ObjectShare directors, executive officers, and their
affiliates did not beneficially own any shares of ObjectShare common stock
(excluding options).
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the ObjectShare Board. In
addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of ObjectShare in person or by telephone,
telegram or other means of communication. Such directors, officers and employees
will not be additionally compensated, but may be reimbursed for out-of-pocket
expenses incurred in connection with such solicitation. Arrangements have also
been made with brokerage firms, banks, custodians, nominees and fiduciaries for
the forwarding of proxy solicitation materials to owners of ObjectShare common
stock held of record by such persons and in connection therewith such firms will
be reimbursed
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<PAGE> 26
for reasonable expenses incurred in forwarding such materials. ObjectShare has
retained MacKenzie Partners to assist in the solicitation of proxies from its
stockholders. The fees of MacKenzie Partners are estimated to be $7,500 plus out
of pocket expenses. StarBase will reimburse ObjectShare for the payment of such
fees and expenses.
ObjectShare stockholders should not send any certificates representing
ObjectShare common stock with their proxy cards. Following the effective date of
the merger, ObjectShare stockholders will receive instructions for the
surrender, and exchange of such stock certificates.
QUORUM
The presence in person or by properly executed proxy of a majority of the
issued and outstanding shares of ObjectShare stock entitled to vote is necessary
to constitute a quorum at the special meeting.
REQUIRED VOTE
Approval of the merger and the merger agreement requires the affirmative
vote of a majority of the outstanding shares of ObjectShare common stock.
Accordingly, any failure to vote will have the effect of a vote against the
merger and the merger agreement.
APPRAISAL RIGHTS OF OBJECTSHARE STOCKHOLDERS
Holders of shares of StarBase common stock are not entitled to Appraisal
Rights.
Holders of ObjectShare common stock who do not vote in favor of the merger
may, under certain circumstances and by following the procedure prescribed by
Section 262 of the Delaware Law, exercise Appraisal Rights and receive cash for
their shares of ObjectShare common stock. A dissenting stockholder must follow
the appropriate procedures under the Delaware Law or suffer the termination or
waiver of such rights.
Holders of record of ObjectShare common stock who do not vote in favor of
the merger and who otherwise comply with the procedures set forth in Section 262
of the Delaware Law, and summarized herein, will be entitled to have their
shares of ObjectShare common stock appraised (the "Appraisal Shares") and will
receive a payment in cash for such shares. The failure of an ObjectShare
stockholder to follow the appropriate procedures set forth in Section 262 will
result in the termination or waiver of the stockholder's Appraisal Rights. A
person having a beneficial interest in shares of ObjectShare common stock held
of record in the name of another person, such as a broker or nominee, must act
promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect Appraisal Rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER THE DELAWARE LAW AND IS QUALIFIED IN ITS ENTIRETY BY
THE FULL TEXT OF SECTION 262 WHICH IS REPRINTED IN ITS ENTIRETY AS APPENDIX D.
ALL REFERENCES IN SECTION 262 AND THIS SUMMARY TO A "STOCKHOLDER" OR "HOLDER'
ARE TO THE RECORD HOLDER OF THE SHARES OF OBJECTSHARE COMMON STOCK AS TO WHICH
APPRAISAL RIGHTS ARE ASSERTED.
Under the Delaware Law, holders of shares of ObjectShare common stock who
follow the procedures set forth in Section 262 will be entitled to have their
Appraisal Shares appraised by the Delaware Chancery Court and to receive payment
in cash of the "fair value" of such Appraisal Shares, exclusive of any element
of value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, if any, as determined by such court. Pursuant to
the terms of the merger agreement, StarBase has no obligation to consummate the
merger if demands for Appraisal Rights are made or continue to exist with
respect to more than five percent (5%) of the outstanding shares of ObjectShare
common stock. If the merger is not consummated, no ObjectShare stockholder will
be entitled to Appraisal Rights.
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<PAGE> 27
Under Section 262, where a proposed merger is to be submitted for approval
at a meeting of stockholders, the corporation, must notify each of its
stockholders, as determined on the record date for such meeting, not less than
twenty (20) days prior to the meeting that Appraisal Rights are available. The
corporation must also include a copy of Section 262 in such notice.
This Proxy Statement/Prospectus constitutes notice to the holders of
ObjectShare common stock of their Appraisal Rights as required by Section 262.
Section 262 is attached to this Proxy Statement/ Prospectus as Appendix D. Any
ObjectShare's stockholder who wishes to exercise his, her or its Appraisal
Rights, or who wishes to preserve his, her or its right to do so, should review
the following discussion and Appendix D carefully. Failure to comply timely and
properly with the procedures specified in Section 262 will result in the loss of
Appraisal Rights.
A HOLDER OF APPRAISAL SHARES WISHING TO EXERCISE SUCH HOLDER'S APPRAISAL
RIGHTS MUST (1) NOT VOTE IN FAVOR OF THE MERGER AND (2) DELIVER TO OBJECTSHARE
PRIOR TO THE VOTE ON THE MERGER AGREEMENT AT THE OBJECTSHARE MEETING TO BE HELD
ON APRIL 12, 2000, A WRITTEN DEMAND FOR APPRAISAL. A HOLDER OF APPRAISAL SHARES
WISHING TO EXERCISE SUCH HOLDER'S APPRAISAL RIGHTS MUST BE THE RECORD HOLDER OF
SUCH APPRAISAL SHARES ON THE DATE THE WRITTEN DEMAND FOR APPRAISAL IS MADE AND
MUST CONTINUE TO HOLD SUCH APPRAISAL SHARES OF RECORD UNTIL THE CONSUMMATION OF
THE MERGER. ACCORDINGLY, A HOLDER OF APPRAISAL SHARES WHO IS THE RECORD HOLDER
OF APPRAISAL SHARES ON THE DATE THE WRITTEN DEMAND FOR APPRAISAL IS MADE, BUT
WHO THEREAFTER TRANSFERS SUCH APPRAISAL SHARES PRIOR TO THE CONSUMMATION OF THE
MERGER, WILL LOSE ANY RIGHT TO APPRAISAL IN RESPECT OF SUCH APPRAISAL SHARES. A
PROXY OR VOTE AGAINST THE APPROVAL OF THE MERGER DOES NOT IN ITSELF CONSTITUTE A
DEMAND FOR APPRAISAL.
Only a holder of record of Appraisal Shares is entitled to assert Appraisal
Rights for the Appraisal Shares registered in that holder's name. A demand for
appraisal should be executed by or on behalf of the holder of record, fully and
correctly, as such holder's name appears on such holder's stock certificate. If
the Appraisal Shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of the demand should be made in that
capacity, and if the Appraisal Shares are owned of record by more than one
person as in a joint tenancy or tenancy in common, the demand should be executed
by or on behalf of all joint owners. An authorized agent, including one or more
joint owners, may execute a demand for appraisal on behalf of a holder of
record; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, the agent is agent
for such owner or owners. A record holder such as a broker who holds Appraisal
Shares as a nominee for several beneficial owners may exercise appraisal rights
with respect to the Appraisal Shares held for one or more beneficial owners
while not exercising such rights with respect to the Appraisal Shares held for
other beneficial owners; in such case, the written demand should set forth the
number of Appraisal Shares as to which appraisal is sought. When no number of
Appraisal Shares is expressly mentioned, the demand will be presumed to cover
all Appraisal Shares held in the name of the record owner. Stockholders who hold
their Appraisal Shares in brokerage accounts or other nominee forms and who wish
to exercise Appraisal Rights are urged to consult with their brokers to
determine the appropriate procedures for the making of a demand for appraisal by
such a nominee.
ALL WRITTEN DEMANDS FOR APPRAISAL SHOULD BE SENT OR DELIVERED TO
OBJECTSHARE, INC., 16811 HALE AVENUE, SUITE A, IRVINE, CALIFORNIA 92614,
ATTENTION: EUGENE L. GODA.
Within ten (10) days after the consummation of the merger, the combined
company will provide notice of the date on which the merger was consummated to
each stockholder who has properly asserted Appraisal Rights under Section 262
and has not voted in favor of the merger.
Within 120 days after the consummation of the merger but not thereafter,
the combined company or any stockholder who has complied with the statutory
requirements summarized above may file a petition in the Delaware Chancery Court
demanding a determination of the fair value of the Appraisal Shares.
Accordingly, it is the obligation of the stockholders to initiate all necessary
action to perfect their Appraisal Rights within the time prescribed in Section
262. At any time within sixty (60) days from the consummation of the merger, a
stockholder may withdraw his, her or its demand for appraisal, and accept the
terms offered under the merger agreement.
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<PAGE> 28
Within 120 days after the consummation of the merger, any stockholder who
has complied with the requirements for exercise of Appraisal Rights will be
entitled, upon written request, to receive from the combined company a statement
setting forth the aggregate number of Appraisal Shares and the aggregate number
of holders of such Appraisal Shares not voted in favor of the merger and with
respect to which demands for appraisal have been received. The combined company
must mail the statement within ten (10) days after it has received a written
request.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Chancery Court will determine the stockholders entitled
to Appraisal Rights and will appraise the fair value of their Appraisal Shares,
exclusive of any element of value arising from the accomplishment or expectation
of the merger, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. Stockholders considering whether to
seek appraisal should be aware that the fair value of their Appraisal Shares as
determined under Section 262 could be more than, the same as or less than the
value of the consideration they would receive pursuant to the merger agreement
if they did not seek appraisal of their Appraisal Shares. Investment banking
opinions as to fairness from a financial point of view are not necessarily
opinions as to fair value under Section 262. The Delaware Supreme Court has
stated that proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court should be considered in the appraisal proceedings.
The Delaware Chancery Court will determine the amount of interest, if any,
to be paid upon the amounts to be received by persons whose Appraisal Shares
have been appraised. The costs of the action may be determined by the Delaware
Chancery Court and taxed upon the parties as the Delaware Chancery Court deems
equitable. The Delaware Chancery Court may also order that all or a portion of
the expenses incurred by any stockholder in connection with an appraisal,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all the Appraisal Shares entitled to appraisal.
Any holder of Appraisal Shares who had duly demanded an appraisal in
compliance with Section 262 will not, after the consummation of the merger, be
entitled to vote the Appraisal Shares subject to such demand for any purpose or
be entitled to the payment of dividends or other distributions on those
Appraisal Shares (except dividends or other distributions payable to holders of
record of Appraisal Shares as of a record date prior to the consummation of the
merger).
If any stockholder who properly demands appraisal of his, her or its
Appraisal Shares under Section 262 fails to perfect, or effectively withdraws or
loses, his, her or its Appraisal Rights, the Appraisal Shares of such
stockholder will be converted into the right to receive the consideration
receivable with respect to such Appraisal Shares in accordance with the merger
agreement. A stockholder will fail to perfect, or effectively lose or withdraw
his, her or its right to appraisal if, among other things, no petition for
appraisal is filed within 120 days after the consummation of the merger, or if
the stockholder delivers to StarBase a written withdrawal of his, her or its
demand for appraisal. Any such attempt to withdraw an appraisal demand more than
sixty (60) days after the consummation of the merger will require the written
approval of StarBase.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 FOR PERFECTING
APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS (IN WHICH EVENT A
STOCKHOLDER WILL BE ENTITLED TO RECEIVE THE CONSIDERATION RECEIVABLE WITH
RESPECT TO SUCH APPRAISAL SHARES IN ACCORDANCE WITH THE MERGER AGREEMENT). IN
VIEW OF THE COMPLEXITY OF THE PROVISIONS OF SECTION 262, OBJECTSHARE
STOCKHOLDERS WHO ARE CONSIDERING OBJECTING TO THE MERGER SHOULD CONSULT THEIR
OWN LEGAL ADVISORS.
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THE MERGER TRANSACTION
GENERAL
Each of StarBase's and ObjectShare's board of directors has approved the
merger agreement, which provides for acquisition, by merger, of ObjectShare, as
a result of which ObjectShare shall become a wholly-owned subsidiary of
StarBase. Under the merger, ObjectShare stockholders will receive in the
aggregate for their shares of ObjectShare common stock shares of StarBase common
stock having a minimum value of $6,150,000 and a maximum value of $8,850,000.
The exact aggregate number of shares of StarBase common stock that will be
issued by StarBase pursuant to the merger agreement depends on several factors
that cannot be determined definitively until the effective date of the merger.
These factors include:
- the average of the closing price per share of StarBase common stock as
reported on the Nasdaq SmallCap Market for the three trading days
immediately preceding the day prior to the closing date of the merger
agreement; and
- the enterprise value of ObjectShare determined pursuant to the formula
contained in the merger agreement.
Based on an average closing price per share of StarBase common stock of
$13.58 as of March 1, 2000, the last practicable trading day for which
information was available prior to the date of this Proxy Statement/Prospectus,
ObjectShare stockholders would acquire approximately 651,535 shares of StarBase
common stock, representing approximately 1.2% of StarBase common stock on a
fully-diluted basis.
BACKGROUND OF THE MERGER
On April 25,1999, James H. Smith, the then Chief Operating Officer/Vice
President of Sales and Marketing of ObjectShare, contacted William McManes, Vice
President of Sales at StarBase, to discuss opportunities for the two companies
to work together or form a strategic alliance. Mr. Smith had spent the past
several months talking to various companies about partnering or acquiring all or
pieces of ObjectShare's tools business in connection with both the Java and
Smalltalk product lines. Mr. Smith had earlier been successful in facilitating
the sale of ObjectShare's Java product line to SeaGull Software Systems, Inc.
and was exploring at such time opportunities for the remaining Smalltalk and
consulting/ training business of ObjectShare.
ObjectShare had been looking to expand its presence in the eBusiness
marketplace and started searching the web for potential partners. Because
StarBase had repositioned the company from a traditional SCM vendor into
providing solutions for the web and the Internet, Mr. Smith believed that the
training and consulting business at ObjectShare could be very complimentary to
StarBase and that the object-oriented application development experience,
training and customer base were extremely complimentary as well.
On May 7, 1999, Messrs. Smith and McManes and Carlos Caballero, Vice
President of Marketing at StarBase, met to discuss some general thoughts about
partnering. This meeting led to additional meetings with Mr. Stow and Douglas
Norman, Chief Accounting Officer of StarBase, with respect to the possibility of
the two companies working together.
On three separate occasions during May 1999, representatives of ObjectShare
and StarBase met to explore the strategy and possible synergies of merging the
two companies.
On June 9, 1999, Messrs. Farrow, Norman and Smith and Eugene Goda,
Chairman, Chief Executive Officer and President of ObjectShare and Winston
Hickman (interim Chief Financial Officer of ObjectShare) met to explore possible
deal structures.
On June 10, 1999, Messrs. Smith and Stow met to discuss valuation issues,
the involvement of investment bankers and more particularly, the engagement of
First Security Van Kasper ("FSVK") and Duff & Phelps, LLC ("Duff & Phelps").
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<PAGE> 30
On June 23, 1999, ObjectShare's board of directors met to decide whether to
pursue the opportunity presented by StarBase.
On June 25, 1999, Messrs. Goda and Smith met with Duff & Phelps to begin
financial analysis.
From June 25, 1999 through August of 1999, discussions of a possible merger
with StarBase were put on hold while ObjectShare engaged in discussions with a
number of potential buyers for ObjectShare's VisualWorks product line based on
the SmallTalk programming language. On August 30, 1999, ObjectShare sold its
VisualWorks product line to Cincom Systems, Inc.
On September 10, 1999, discussions again took place between Messrs. Goda
and Stow, together with the two companies' investment bankers, FSVK and Duff &
Phelps, concerning the proposed valuation of ObjectShare for establishing a
purchase price.
On September 23 and 24, 1999, Messrs. Smith and Stow met to discuss
employee issues and the drafting of the definitive merger agreement.
On October 5, 1999, ObjectShare's board of directors met to discuss the
definitive merger agreement and the proposed valuation.
On October 21, 1999, ObjectShare presented to StarBase's board of directors
the strategy of the merged companies and the synergies on the combined entity in
order for the StarBase Board to make an informed decision concerning a decision
to approve the proposed merger. Attendees included Messrs. Goda, Smith, Farrow,
Stow and each of Phillip Pierce and Daniel Ginns, directors of StarBase.
On October 25, 1999, representatives of ObjectShare met with
representatives of Duff & Phelps to go over the financial projections of both
ObjectShare and StarBase.
During October 1999, StarBase's attorneys and accountants performed
additional due diligence concerning ObjectShare and its business.
The form of merger agreement and the proposed merger were approved by the
boards of directors of ObjectShare and StarBase on each of November 2, 1999 and
November 3, 1999, respectively.
On November 3, 1999, representatives of ObjectShare and StarBase signed a
definitive merger agreement.
STARBASE'S REASONS FOR MERGER
The StarBase Board's decision to approve the merger agreement was based
primarily on factors resulting from the rapid expansion of the eBusiness
industry in recent months and StarBase's business prospects within that
industry. StarBase's strategy going forward is to provide eBusiness life cycle
management solutions for enterprise level applications. The ability to provide
professional services is a major component of this strategy due to the
increasing complexity of eBusiness applications and the need for custom
solutions. StarBase currently has a small professional services group that has
been focused primarily on training and consulting in the software configuration
management (SCM) space. The eBusiness sector of the economy is much broader,
covering web, portal and software application development and entailing
management of diverse components such as graphics, HTML pages, Active Server
Pages (ASP) as well as software components such as Java, C++, COBOL. The
StarBase Board determined that a strong professional services organization, with
expertise in web, portal and software application development, was needed to
support the eBusiness life cycle management strategy. ObjectShare can help to
provide this expertise.
The following sets forth the StarBase need for professional services, and
the specific synergies achieved by merging ObjectShare with StarBase:
21
<PAGE> 31
The Need for Professional Services:
- StarBase needs to provide a 'whole product' solution to compete
effectively in the eBusiness sector.
- Many of the major web software framework companies competitive with, or
perceived as so by, StarBase have invested heavily in services (e.g.
Interwoven, Vignette, Rational, BroadVision, etc.).
- According to Industry analysts, "Labor represents 79% of the cost to
build an e-commerce web site; software and hardware represent 21%."
- eBusiness applications, in particular those which need to integrate
legacy software components with web-specific components, are
significantly more complex as compared to software specific or web
specific applications. The synergies realized by the merger can enable
StarBase to manage such applications.
- The new complexity consists primarily of implementing backend connections
to existing software-based applications such as billing, sales tax,
inventory and warehouse, as well as help desk -- no two websites are
alike. Absent the synergies to be realized by the merger, StarBase
currently lacks the breadth of in-house expertise needed to deal with
these implementations.
- To attempt to position StarBase as the 'premier' enterprise solution for
eBusiness life cycle management.
- To create a predictable backlog of service revenue for earnings
projections.
ObjectShare Provides StarBase:
- Established training and consulting infrastructure;
- Object-oriented language expertise in Java, HTML, XML and Smalltalk;
- Distributed architecture expertise with back-end connection and
integration experience (CORBA, COM/DCOM, DLL/C, MQ/CICS);
- e-commerce, portal, web development expertise;
- SCM/Version Control expertise (e.g. Envy, TEAM V, and STORE);
- Senior sales and marketing personnel;
- Worldwide commercial customer base (60% of Fortune 100), the majority of
which is transitioning to eBusiness; and
- Revenue stream
Synergies with StarBase:
- eBusiness focus -- managing all life cycle components;
- Portal infrastructure focus;
- Complementary and synergistic technology that requires professional
services to implement; and
- Organizational synergies.
The merger of ObjectShare with StarBase provides an opportunity for added
value over and above each company's individual value.
OBJECTSHARE'S REASONS FOR MERGER
The ObjectShare Board has unanimously approved the merger agreement and
recommends that the holders of shares of ObjectShare common stock vote FOR the
approval of the merger and the merger agreement.
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<PAGE> 32
The ObjectShare Board's decision to approve the merger agreement was based
on a number of factors including: the rapid expansion of the eBusiness industry
in recent months and ObjectShare's business prospects within that industry,
increased competition and the need for working capital.
In particular, ObjectShare's Board noted the potential for training and
consulting opportunities created by the rapid proliferation of eBusiness
solutions as well as the need for StarBase to increase its training and
consulting capabilities with its proprietary software solutions. ObjectShare's
Board concluded that the best means for ObjectShare to capitalize on these
opportunities was to enter into a strategic combination with StarBase whose
software product is well positioned to provide solutions for eBusiness
applications.
The ObjectShare Board also believed that increasing competition in the
expanding eBusiness market would make it more difficult for ObjectShare to
succeed as a relatively small independent training and consulting company. The
ObjectShare Board believed that it would be increasingly important for
ObjectShare to grow and gain critical mass in order to compete against larger
companies with substantially greater resources and broader, more integrated
product offerings. In order to enhance its competitive position, the ObjectShare
Board has considered a number of alternatives, including growth through the
acquisition of smaller companies that could extend ObjectShare's training and
consulting capabilities or a merger with a larger company.
The ObjectShare Board identified a number of benefits for ObjectShare
stockholders, employees and customers that could result from the merger. These
potential benefits include:
- synergies and compatibility of ObjectShare and StarBase, based on their
complementary skill sets, which could lead to the creation of a
comprehensive eBusiness life cycle products and services;
- opportunities for ObjectShare, as part of the combined company, to
compete more effectively in the increasingly competitive and rapidly
changing eBusiness industry;
- the access to working capital resulting in the ability to dedicate
greater resources to fund the future growth of ObjectShare's business;
and
- the merger consideration to be received by ObjectShare stockholders which
represented a premium of approximately 36% over the market price as of
the date of the merger agreement;
- the opportunity for ObjectShare stockholders to participate in the growth
potential of the combined company after the merger;
- the greater liquidity to ObjectShare stockholders offered by StarBase
common stock relative to ObjectShare common stock;
- the presentation by Duff & Phelps and its opinion dated as of November 3,
1999, that based upon the facts and circumstances as they existed at that
time, and subject to certain assumptions and factors set forth in the
opinion, the consideration to be received by ObjectShare stockholders
under the terms of the merger agreement is fair to ObjectShare
stockholders from a financial point of view. In particular, the
ObjectShare Board focused on the portions of the Duff & Phelps
presentation regarding the implied valuation of the ObjectShare common
stock in the proposed transaction, including the comparison of the
implied valuation to historic and recent market valuations of shares of
ObjectShare common stock as well as the premium cited by Duff & Phelps
for the ObjectShare common stock to be acquired by StarBase. See "Opinion
of ObjectShare's Financial Advisor" for a discussion of the factors
considered by Duff & Phelps in rendering its opinion;
- the tax-free aspects of the merger to ObjectShare stockholders;
- the compatibility of the business philosophies and strategies of
ObjectShare and StarBase, which the ObjectShare Board believes is
important for the successful integration of the companies;
- historical information concerning ObjectShare's and StarBase's respective
businesses, prospects, financial performance and condition, operations,
technology, management and competitive position,
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<PAGE> 33
including public reports concerning results of operations during the most recent
fiscal year and fiscal quarter for each company; and
- current financial market conditions and historical market prices,
volatility and trading information with respect to ObjectShare and
StarBase common stock.
The ObjectShare Board also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including, but not limited to:
- the risk that, despite the efforts of ObjectShare and StarBase, key
technical marketing and management personnel might choose not to remain
employed by StarBase after the merger;
- the risk that the potential benefits sought in the merger might not be
realized fully, or within the time frame contemplated, if at all;
- the possibility that the merger would not be consummated and the effect
of the public announcement of the merger on (a) ObjectShare's sales and
operating results and (b) ObjectShare's ability to attract and retain key
management, sales, marketing and technical personnel;
- the substantial charges to be incurred, primarily in the quarter in which
the merger is consummated, including costs of integrating the business
and transaction expenses arising from the merger; and
- the other risks associated with StarBase's business and the merger
described under "Risk Factors" herein.
The ObjectShare Board believes that the potential benefits of the merger
outweigh these risks.
The foregoing discussion of the information and factors considered by the
ObjectShare Board is not intended to be exhaustive but is believed to include
all material factors considered by the ObjectShare Board. In view of the variety
of factors considered in connection with its evaluation of the merger, the
ObjectShare Board did not find it practicable to and did not quantify or
otherwise assign relative weight to the specific factors considered in reaching
its determination. In addition, individual members of the ObjectShare Board may
have given different weight to different factors.
In light of the size and diversity of the marketplace and the competitive
positions of both StarBase and ObjectShare, the ObjectShare Board has concluded
that the merger represents the best current and long-term strategy for
ObjectShare.
OPINION OF FINANCIAL ADVISOR OF OBJECTSHARE
On November 3, 1999, in connection with the evaluation of the merger
agreement by the ObjectShare Board, Duff & Phelps, LLC ("Duff & Phelps")
rendered a written opinion to the ObjectShare Board that, as of November 3,
1999, the merger transaction was fair to the stockholders of ObjectShare from a
financial point of view. Duff & Phelps' opinion is attached as Appendix E and is
incorporated herein by reference. OBJECTSHARE STOCKHOLDERS ARE ENCOURAGED TO
READ THE ATTACHED OPINION IN ITS ENTIRETY.
Pursuant to an agreement dated June 22, 1999, (the "Agreement"), Duff &
Phelps was engaged by the ObjectShare Board to render an opinion to the
ObjectShare Board as to whether the merger transaction is fair to ObjectShare
and its stockholders from a financial point of view.
Duff & Phelps is a nationally recognized investment banking firm that is
regularly engaged in rendering financial opinions in connection with mergers and
acquisitions, private placements, tax matters, corporate planning, and other
purposes. Duff & Phelps has previously provided fairness opinions to ObjectShare
in connection with transactions involving the sale of ObjectShare's SmallTalk
operations to Cincom Systems, Inc., and the sale of ObjectShare's two
wholly-owned European subsidiaries, ObjectShare GmbH and ObjectShare Limited, to
Valtech S.A. and Valtech Limited, respectively.
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<PAGE> 34
Duff & Phelps' opinion is directed to the ObjectShare Board only and is
directed only as to the fairness of the merger transaction to ObjectShare and
its stockholders from a financial point of view and does not constitute a
recommendation to any of ObjectShare stockholders as to how such stockholders
should vote on any matter.
For purposes of its opinion and in connection with its review of the merger
transaction, among other things, Duff & Phelps:
- met with certain members of senior management of ObjectShare and StarBase
to discuss the history, financial condition, future prospects and
projected performance of both ObjectShare and StarBase;
- reviewed the merger agreement;
- reviewed the Asset Purchase Agreement by and between Cincom Systems and
ObjectShare dated August 27, 1999;
- reviewed ObjectShare's and StarBase's annual reports and forms 10-K and
10-KSB, respectively, for the year ended March 31, 1999;
- reviewed ObjectShare's and StarBase's forms 10-Q and 10-QSB,
respectively, for the quarter ended June 30, 1999, including the
financial statements contained therein;
- reviewed projections prepared by ObjectShare and StarBase management and
their representatives;
- reviewed historical trading price and volume of ObjectShare and StarBase
common stock;
- reviewed certain articles and press releases regarding ObjectShare and
StarBase and miscellaneous SEC filings for ObjectShare and StarBase;
- reviewed the ObjectShare Board minutes from February 1, 1996, through
August 26, 1999;
- reviewed other operating and financial information provided by management
of ObjectShare and StarBase; and
- reviewed economic and industry information and conducted such studies,
analyses and investigations that it deemed appropriate.
In connection with its opinion, with ObjectShare's permission and without
any independent verification, Duff & Phelps relied on the accuracy and
completeness of all the financial and other information reviewed by Duff &
Phelps, furnished, or otherwise communicated to Duff & Phelps by ObjectShare and
StarBase or obtained by Duff & Phelps from publicly available sources. Duff &
Phelps did not make an independent valuation or appraisal of the assets or
liabilities of ObjectShare or StarBase and was not furnished with such valuation
or appraisal. Any inaccuracies in the information on which Duff & Phelps relied
could materially affect its opinion.
Set forth below is a brief summary of the analyses performed by Duff &
Phelps in reaching its opinion as of November 3, 1999.
Premium to Market Value. Duff & Phelps compared the value of the merger
transaction to the market valuation of ObjectShare. Based on the market price of
ObjectShare common stock as of November 3, 1999 of $0.36, and balance sheet data
as of September 30, 1999, ObjectShare's enterprise value was approximately $4.3
million, or $0.35 per share. The merger transaction value of $7.5 million, or
$0.60 per share, indicated a premium of approximately 73% over the market value
of ObjectShare.
Current Status of Business. Duff & Phelps considered ObjectShare's
projected cash flows, historical stock price performance and employee turnover
ratio among other factors used in determining the fairness of the merger
transaction.
ObjectShare's revenues have been trending downward since 1995. In 1995,
total net revenues for the fiscal year ended March 31 were $55.7 million and
decreased to $15.8 million by fiscal year 1999.
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<PAGE> 35
ObjectShare has been unprofitable every year since 1996, with losses ranging
from $22.5 million in fiscal 1997 to $4.8 million in fiscal 1999. As of June 30,
1999, ObjectShare had a very weakened financial position, with only $1.4 million
in cash and equivalents, $2.0 million in receivables and $6.0 million in current
liabilities. ObjectShare's working capital was a deficit of $2.2 million with a
quick ratio of 0.2 and current ratio of 0.6. Furthermore, ObjectShare's
accumulated deficit was $51.0 million.
ObjectShare (including its predecessor companies) went public in 1994 at
$15.50 per share. Since then, ObjectShare's stock price has declined
significantly, with the stock price dropping to $1 per share in May 1997.
ObjectShare was delisted from NASDAQ on June 24, 1999, due to the continued
failure to meet listing requirements. The market reacted to the delisting with a
40% decline in the stock price, to approximately $0.63 per share on the day of
the delisting announcement. ObjectShare common stock is currently trading on the
OTC Bulletin Board. On November 3, 1999, the closing price for ObjectShare
common stock was $0.36 per share, implying a value of ObjectShare's equity of
approximately $4.5 million.
Without a capital infusion in the near-term future, ObjectShare would most
likely be unable to meet its financial requirements and would be unlikely to
continue to operate as a going concern, posing a very serious risk to
ObjectShare's ability to retain its clients and employees.
In rendering its opinion, Duff & Phelps considered potential benefits of
the merger transaction to ObjectShare such as cost reductions, increased
financial stability and growth prospects, and increased liquidity for
ObjectShare's stockholders.
Comparable Companies Analysis. Duff & Phelps compared selected financial
and other operating ratios for ObjectShare to the corresponding ratios of
certain publicly traded software training and consulting companies. These
comparable public companies were as follows: A Consulting Team, Inc., Canterbury
Information Technology, Inc., Learning Tree International, Inc., National
TechTeam, Inc., New Horizons Worldwide, Inc., ProsoftTraining.com and Wave
Technologies International, Inc. Such ratios included enterprise value-to-sales
and equity value-to-book value. Other commonly used valuation multiples, such as
enterprise value-to-cash flow and equity value-to-net income, were not
applicable since ObjectShare had negative cash flow and negative earnings. The
statistics were generally based on financial and operating data up to, at or for
the twelve months ended September 30, 1999, and market prices as of November 3,
1999.
Duff & Phelps compared the typical range of valuation multiples for the
comparable public companies with the valuation multiples for ObjectShare that
were implied by the merger transaction. Enterprise value as a multiple of latest
twelve months' revenues for the comparable companies ranged from 0.3x to 5.4x
with a median of 1.3x. The merger transaction values ObjectShare at $7.5
million, or 0.6x the latest twelve months' revenues, which falls near the middle
of the range observed for the comparable public companies. Equity value as a
multiple of book value ranged from 0.7x to 8.9x, with a median of 1.3x, for the
comparable companies. The merger transaction values ObjectShare's equity at
approximately 10.5x book value, above the range formed by the comparable
companies.
Duff & Phelps also performed a comparable control merger transaction
analysis by identifying selected mergers and acquisitions in the software
training and consulting industry. Merger transaction value as a multiple of
latest twelve months revenues ranged from 0.1x to 15.4x, with a median of 1.5x,
for the identified control transactions. The implied merger transaction
value-to-sales multiple of 0.6x for ObjectShare falls within this range.
Discounted Cash Flow Analysis. Duff & Phelps performed a discounted cash
flow analysis of ObjectShare based on the forecasted information provided by
ObjectShare's management. The terminal value of ObjectShare was estimated by
capitalizing projected year 2004 debt-free net cash flows. The projected cash
flows and terminal value were discounted to present value using discount rates
ranging from 20% to 35%, which reflect different assumptions regarding the
required rates of return of holders and prospective buyers of ObjectShare common
stock. The range of equity value of ObjectShare common stock resulting from this
analysis was $0.06 to $0.31 per share, or $0.8 million to $3.8 million for the
total
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<PAGE> 36
equity. This compares to an equity value of approximately $0.61 per share, or
$7.7 million, implied in the merger transaction.
Liquidation Analysis. Duff & Phelps considered the value of ObjectShare's
equity under an orderly liquidation scenario. This analysis supported only
speculative value for ObjectShare's equity.
No company or transaction used in the above analyses is identical to
ObjectShare, StarBase or the merger transaction. Accordingly, an analysis of the
foregoing results is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other facts that could affect the public
trading value of the companies to which they are being compared.
The material analyses performed by Duff & Phelps have been summarized
above. Nonetheless, the summary set forth above does not purport to be a
complete description of the analyses performed by Duff & Phelps. The preparation
of a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances. Therefore, such an opinion is not readily
susceptible to a summary description. Duff & Phelps did not form a conclusion as
to whether any individual analysis, considered in isolation, supported or failed
to support an opinion as to fairness. Rather, in reaching its conclusion, Duff &
Phelps considered the results of the analyses in light of each other and
ultimately reached its opinion based on the results of all analyses taken as a
whole. Duff & Phelps did not place a particular reliance or weight on any
particular analysis, but instead concluded that its analyses, taken as whole,
supported its determination.
In performing its analyses, Duff & Phelps made numerous assumptions with
respect to ObjectShare's performance, general business and economic conditions
and other matters. The analyses performed by Duff & Phelps are not necessarily
indicative of future actual values or future results, which may be significantly
more or less favorable than suggested by such analyses. The analyses do not
purport to be appraisals or to reflect prices at which a company might actually
be sold or the prices at which any securities may trade at the present time or
at any time in the future. Duff & Phelps used in its analyses various
projections of future performance prepared by the management of ObjectShare. The
projections were based on numerous variables and assumptions which are
inherently unpredictable and must be considered not certain of occurrence as
projected. Accordingly, actual results could vary significantly from those
assumed in the projections and any related analyses. Duff & Phelps' opinion does
not address the relative merits of the merger transaction as compared to any
alternative business strategies that might exist for ObjectShare or the effect
of any other business combination in which ObjectShare might engage.
Pursuant to the terms of its agreement with Duff & Phelps, ObjectShare has
agreed to pay Duff & Phelps a fee of $125,000 for financial advisory services in
connection with the merger transaction, including the rendering of its opinion.
ObjectShare has also agreed to reimburse Duff & Phelps for reasonable
out-of-pocket expenses and to indemnify Duff & Phelps against certain expenses
and liabilities, including liabilities under federal securities law, incurred in
connection with the performance of its duties under the Agreement.
Duff & Phelps' opinion to the ObjectShare board of directors was one of
many factors taken into consideration by the ObjectShare Board in making its
determination to approve the merger transaction.
RECOMMENDATION OF OBJECTSHARE'S BOARD OF DIRECTORS
FOR THE REASONS DISCUSSED ABOVE, THE OBJECTSHARE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT OBJECTSHARE
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
In considering the recommendation of ObjectShare's board of directors with
respect to the merger agreement, you should be aware that certain directors and
officers of ObjectShare have certain interests in the merger that are different
from, or are in addition to, the interests of ObjectShare stockholders
generally. Please see the section entitled "Interests of Certain Persons in the
Merger" on page 51 of this Proxy Statement/Prospectus.
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<PAGE> 37
ACCOUNTING TREATMENT
The merger will be accounted for as a purchase as such term is used under
generally accepted accounting principles, for accounting and financial reporting
purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary of the material federal income tax
consequences of the merger to ObjectShare stockholders who hold their shares of
ObjectShare common stock as capital assets. This summary is based upon
provisions of the Code, applicable Treasury regulations promulgated under the
Code, and judicial and administrative decisions currently in effect. All of
these authorities are subject to retroactive or prospective change and to
possibly differing interpretations. This discussion does not address the federal
income tax consequences applicable to holders of ObjectShare common stock who
are subject to special treatment under the Code, such as foreign holders,
holders who acquired their stock pursuant to the exercise of employee stock
options or otherwise as compensation, holders who are dealers in securities,
banks, insurance companies or tax exempt organizations, and holders who hold
their shares of ObjectShare common stock as part of a hedge, straddle, or other
risk reduction transaction. In addition, this discussion does not address the
tax consequences of the merger under applicable state or local tax laws.
STOCKHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE EFFECTS OF STATE, LOCAL AND FOREIGN
TAX LAWS.
It is expected that the merger will constitute a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). It is anticipated that the merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Code, and, accordingly, the merger will result in the following U.S. federal
income tax consequences:
An ObjectShare stockholder exchanging shares of ObjectShare common stock
for shares of StarBase common stock will not recognize any gain or loss upon the
exchange, except for any gain or loss attributable to any cash received in lieu
of a fractional share of StarBase common stock. The aggregate tax basis of the
shares of StarBase common stock received by the stockholder in the exchange will
be the aggregate tax basis of the shares of ObjectShare common stock surrendered
in the exchange. Also, the stockholder's holding period for the StarBase common
stock received in exchange for shares of ObjectShare common stock will include
the period during which the stockholder held shares of ObjectShare common stock
that were surrendered in the exchange.
Any cash received by ObjectShare stockholders in lieu of fractional shares
of StarBase common stock will result in the recognition of gain or loss equal to
the difference between the amount of cash received and the portion of the
adjusted tax basis of each stockholder's shares of ObjectShare common stock that
are allocable to the fractional interest. Such gain or loss will constitute
capital gain or loss, and will generally be long-term capital gain or loss if
the holding period for the shares was greater than one year as of the date of
the exchange. Capital gains of individuals, estates and trusts generally are
subject to a maximum federal income tax rate of (a) 39.6% if, at the effective
date of the merger, the ObjectShare common stock has been held by the
stockholder for not more than one year, and (b) 20% if the common stock had been
held for more than one year. Capital gains of corporations generally are taxed
at the federal income tax rates applicable to corporate ordinary income.
Each ObjectShare stockholder's aggregate tax basis in the StarBase common
stock received in the merger will equal his or her aggregate tax basis in the
ObjectShare common stock exchanged therefor, decreased by the amount of any tax
basis allocable to any fractional share interest for which cash is received.
In the event of a successful Internal Revenue Service challenge to the
"reorganization" status of the merger, ObjectShare stockholders would recognize
gain or loss with respect to each share of their common stock surrendered equal
to the difference between the their basis in such share and the sum of the fair
market value, as of the effective date of the merger, of the StarBase common
stock received in exchange therefore plus the amount of any cash received in
lieu of a fractional share. In such event, ObjectShare
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<PAGE> 38
stockholder's aggregate basis in StarBase common stock so received would equal
its fair market value, and his or her holding period for such stock would begin
the day after the effective date of the merger.
THE ABOVE DISCUSSION MAY NOT APPLY TO CERTAIN CATEGORIES OF STOCKHOLDERS SUBJECT
TO SPECIAL TREATMENT UNDER THE CODE. OBJECTSHARE STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER, INCLUDING ANY FEDERAL, STATE, LOCAL OR OTHER TAX CONSEQUENCES OF THE
MERGER.
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<PAGE> 39
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following table shows StarBase's, ObjectShare's and the pro forma
combined historical book value per share data at December 31, 1999 and March 31,
1999 along with the basic and diluted net income/(loss) per share data for the
nine month period ended December 31, 1999 and for the year ended March 31, 1999.
The historical information for the nine month period ended December 31, 1999 was
derived from unaudited financial statements. The historical information for the
year ended March 31, 1999 was derived from the audited consolidated financial
statements of StarBase and ObjectShare, which have been audited by the
independent auditors Deloitte & Touche LLP and Ernst & Young LLP, respectively.
Deloitte & Touche LLP's report on the financial statements of StarBase for the
year ended March 31, 1999, which is included in Appendix B, includes an
explanatory paragraph which describes an uncertainty about StarBase's ability to
continue as a going concern. Ernst & Young LLP's report on the consolidated
financial statements of ObjectShare for the year ended March 31, 1999, which is
included in Appendix C, includes an explanatory paragraph which describes an
uncertainty about ObjectShare's ability to continue as a going concern. The pro
forma data is prepared assuming the merger is to be accounted for under the
purchase method of accounting.
The pro forma combined financial information does not purport to represent
what the combined financial position or results of operations actually would
have been if the merger had been consummated as of or at the beginning of the
periods presented. The data below should be read in conjunction with the
historical consolidated financial statements, related notes, and other financial
information and the unaudited pro forma combined condensed financial statements
included elsewhere in this Proxy Statement/Prospectus. See "Selected Unaudited
Pro Forma Condensed Financial Information."
<TABLE>
<CAPTION>
HISTORICAL EQUIVALENT PRO
----------------------- FORMA PER
STARBASE OBJECTSHARE PRO FORMA SHARE DATA(3)
-------- ----------- --------- --------------
<S> <C> <C> <C> <C>
BOOK VALUE PER SHARE(1):
At December 31, 1999......................... $ 0.28 $ 0.02 $ 0.68 $ 0.05
At March 31, 1999............................ $ 0.16 $ 0.01 $ 0.48 $ 0.04
NET INCOME/(LOSS) PER SHARE -- BASIC AND
DILUTED(2):
For the nine months ended December 31,
1999....................................... $(0.11) $(0.02) $(0.16) $(0.01)
For the year ended March 31, 1999............ $(0.49) $(0.39) $(0.78) $(0.06)
</TABLE>
- ---------------
(1) Pro forma book value per share data assumes the merger occurred on December
31, 1999 and March 31, 1999, respectively.
(2) Pro forma net income/(loss) per share assumes the merger occurred on April
1, 1999 for the nine month period ended December 31, 1999 and on April 1,
1998 for the year ended March 31, 1999.
(3) Determined by multiplying Pro Forma data by Exchange Ratio (0.076373) as of
December 31, 1999.
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<PAGE> 40
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The following table sets out the high and low sales prices of StarBase
(symbol: "SBAS") and ObjectShare (symbol: "OBJS") common stock for each quarter
within the last two fiscal years, as reported on the NASDAQ SmallCap Market and,
with respect to ObjectShare after June 23, 1999, the OTC Bulletin Board where
its stock is currently traded.
<TABLE>
<CAPTION>
STARBASE OBJECTSHARE
--------------- --------------
DATE HIGH LOW HIGH LOW
- ---- ------ ----- ----- -----
<S> <C> <C> <C> <C>
FISCAL YEAR 2000
Quarter Ended December 31, 1999.......................... $15.13 $1.19 $0.58 $0.19
Period Ended November 3, 1999............................ 2.03 1.19 0.58 0.19
Quarter Ended September 30, 1999......................... 2.97 1.78 0.94 0.31
Quarter Ended June 30, 1999.............................. 3.38 1.50 2.75 0.19
FISCAL YEAR 1999
Quarter Ended March 31, 1999............................. $ 2.50 $0.62 $4.88 $1.88
Quarter Ended December 31, 1998.......................... 1.25 0.59 2.75 1.06
Quarter Ended September 30, 1998......................... 2.13 0.66 1.50 1.06
Quarter Ended June 30, 1998.............................. 3.41 1.47 1.34 0.25
FISCAL YEAR 1998
Quarter Ended March 31, 1998............................. $ 3.75 $1.13 $1.56 $1.00
Quarter Ended December 31, 1997.......................... 2.00 1.00 1.38 0.97
Quarter Ended September 30, 1997......................... 2.06 0.88 1.31 0.50
Quarter Ended June 30, 1997.............................. 1.75 0.53 2.94 0.63
</TABLE>
As of December 31, 1999, based on information received from the transfer
agent for each of StarBase and ObjectShare, the number of stockholders of record
for StarBase and ObjectShare was 634, and 232, respectively.
DIVIDEND POLICIES
StarBase has never declared a cash dividend on its common stock or
preferred stock. The StarBase Board of Directors presently intends to retain all
earnings for use in StarBase's business and therefore does not anticipate paying
any cash dividends on its common stock in the foreseeable future. Payment of
dividends on common stock, if any, would be subject to the discretion of the
Board of Directors, which may consider factors such as StarBase's results of
operations, financial condition, capital needs and merger strategy, among
others. In addition, under the Delaware Law StarBase is prohibited from paying
dividends except out of StarBase's surplus (retained earnings) or, if there is
no surplus, out of StarBase's net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. At December 31, 1999,
StarBase's balance sheet reflected an accumulated deficit of $55,433,000.
ObjectShare has not paid any dividends since its inception and does not
intend to pay any dividends in the foreseeable future.
31
<PAGE> 41
SELECTED UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma financial information is provided in this
Proxy Statement/ Prospectus to show you how StarBase might have looked if the
merger had been completed on December 31, 1999 for the unaudited pro forma
combined condensed balance sheet as of December 31, 1999 and on April 1, 1998
for the unaudited pro forma combined condensed statements of operations for the
year ended March 31, 1999 and on April 1, 1999 for the interim nine month period
ended December 31, 1999. The pro forma financial information for the nine month
period ended December 31, 1999 is derived from the unaudited financial
statements of StarBase and ObjectShare, combined and adjusted to give effect to
the merger. The pro forma financial information for the year ended March 31,
1999 is derived from the audited financial statements of StarBase and
ObjectShare, combined and adjusted to give effect to the merger.
The financial statements of StarBase and ObjectShare for the year ended
March 31, 1999 have been audited by the independent auditors Deloitte & Touche
LLP and Ernst & Young LLP, respectively. Deloitte & Touche LLP's report on the
financial statements of StarBase for the year ended March 31, 1999, which is
included in Appendix B, includes an explanatory paragraph which describes an
uncertainty about StarBase's ability to continue as a going concern. Ernst &
Young LLP's report on the consolidated financial statements of ObjectShare for
the year ended March 31, 1999, which is included in Appendix C, includes an
explanatory paragraph which describes an uncertainty about ObjectShare's ability
to continue as a going concern. The information should be read in conjunction
with the consolidated financial statements, related notes, and other financial
information included elsewhere in this Proxy Statement/ Prospectus.
The pro forma financial information was prepared using the purchase method
of accounting.
If the merger had actually been completed on those dates, the acquired
company might have performed differently. You should not rely on the pro forma
financial information as an indication of the results that would have been
achieved if the merger had taken place earlier or the future results that will
be experienced after completion of the merger.
32
<PAGE> 42
STARBASE AND OBJECTSHARE
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------
PRO FORMA PRO FORMA
STARBASE OBJECTSHARE ADJUSTMENTS COMBINED
-------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEETS
Assets
Current Assets:
Cash and cash equivalents................... $ 9,240 $ 780 $ -- $ 10,020
Restricted cash............................. 39 -- -- 39
Marketable securities....................... 22 -- -- 22
Accounts receivable......................... 4,273 500 -- 4,773
Inventories................................. 25 -- -- 25
Prepaid expenses and other current assets... 320 24 -- 344
-------- -------- -------- --------
Total current assets..................... 13,919 1,304 -- 15,223
Property and equipment, net................... 1,061 279(1) (279) 1,061
Developed technology, net..................... 823 -- -- 823
Note receivable from officer.................. 98 -- -- 98
Long-term restricted cash..................... 39 -- -- 39
Other non-current assets...................... 368 59 -- 427
Goodwill...................................... -- --(2) 10,799 10,799
-------- -------- -------- --------
Total assets.................................. $ 16,308 $ 1,642 $ 10,520 $ 28,470
======== ======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities.... $ 1,653 $ 1,285(3) $ 560 $ 3,498
Deferred revenue............................ 2,332 -- -- 2,332
Current portion of long-term debt........... 132 49 -- 181
-------- -------- -------- --------
Total current liabilities................ 4,117 1,334 560 6,011
Long-term liabilities:
Long-term debt, less current portion........ 73 74 -- 147
Other long-term liabilities................. 638 -- -- 638
-------- -------- -------- --------
Total long-term liabilities.............. 711 74 -- 785
-------- -------- -------- --------
Total liabilities........................ 4,828 1,408 560 6,796
Commitments and contingencies
Stockholders' equity:
Preferred stock............................. 1 -- -- 1
Common stock................................ 410 12(4) (1) 421
Additional paid-in capital.................. 66,601 50,239(5) (40,056) 76,784
Accumulated deficit......................... (55,433) (50,017)(6) 50,017 (55,433)
Accumulated other comprehensive loss........ (99) -- -- (99)
-------- -------- -------- --------
Total stockholders' equity............... 11,480 234 9,960 21,674
-------- -------- -------- --------
Total liabilities and stockholders' equity.... $ 16,308 $ 1,642 $ 10,520 $ 28,470
======== ======== ======== ========
</TABLE>
33
<PAGE> 43
STARBASE AND OBJECTSHARE
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1999
---------------------------------------------------
PRO FORMA PRO FORMA
STARBASE OBJECTSHARE ADJUSTMENTS COMBINED
-------- ----------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
License...................................... $ 9,491 $ 1,464 $ -- $10,955
Services..................................... 1,848 4,897 -- 6,745
------- ------- ------- -------
Total revenues............................ 11,339 6,361 -- 17,700
Costs and expenses:
Cost of license.............................. 930 543 -- 1,473
Cost of services............................. 915 3,040 -- 3,955
Research and development..................... 3,075 824 -- 3,899
Selling, general and administrative.......... 9,102 5,428 -- 14,530
Amortization of goodwill..................... -- --(7) 1,620 1,620
------- ------- ------- -------
Total costs and expenses.................. 14,022 9,835 1,620 25,477
------- ------- ------- -------
Operating loss................................. (2,683) (3,474) (1,620) (7,777)
Other income, interest expense and other....... (162) 3,229 -- 3,067
------- ------- ------- -------
Loss before income taxes....................... (2,845) (245) (1,620) (4,710)
Provision for income taxes..................... 1 -- -- 1
------- ------- ------- -------
Net loss....................................... (2,846) (245) (1,620) (4,711)
Non-cash dividend and accretion of beneficial
conversion feature........................... 549 -- -- 549
------- ------- ------- -------
Net loss applicable to common stockholders..... $(3,395) $ (245) $(1,620) $(5,260)
======= ======= ======= =======
Per common share data
Basic and diluted net loss per share......... $ (0.11) $ (0.02) $ (0.16)
Basic and diluted weighted average number of
common shares outstanding.................... 30,859 12,451 31,956
</TABLE>
34
<PAGE> 44
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1999
---------------------------------------------------
PRO FORMA PRO FORMA
STARBASE OBJECTSHARE ADJUSTMENTS COMBINED
-------- ----------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
License...................................... $ 5,964 $ 5,380 $ -- $ 11,344
Services..................................... 868 10,426 -- 11,294
------- ------- ------- --------
Total revenues............................ 6,832 15,806 -- 22,638
Costs and expenses:
Cost of license.............................. 508 1,737 -- 2,245
Cost of services............................. 0 5,705 -- 5,705
Research and development..................... 4,437 3,542 -- 7,979
Selling, general and administrative.......... 10,601 9,834 -- 20,435
Amortization of goodwill..................... -- --(8) 2,160 2,160
------- ------- ------- --------
Total costs and expenses.................. 15,546 20,818 2,160 38,524
------- ------- ------- --------
Operating loss................................. (8,714) (5,012) (2,160) (15,886)
Other income, interest expense and other....... 32 160 -- 192
------- ------- ------- --------
Loss before income taxes....................... (8,682) (4,852) (2,160) (15,694)
Provision for income taxes..................... 1 (13) -- (12)
------- ------- ------- --------
Net loss....................................... (8,683) (4,839) (2,160) (15,682)
Non-cash dividend and accretion of beneficial
conversion feature........................... 1,277 -- -- 1,277
------- ------- ------- --------
Net loss applicable to common stockholders..... $(9,960) $(4,839) $(2,160) $(16,959)
======= ======= ======= ========
Per common share data Basic and diluted net
loss per share............................... $ (0.49) $ (0.39) $ $ (0.78)
Basic and diluted weighted average number of
common shares outstanding.................... 20,526 12,308 21,623
</TABLE>
ADJUSTMENTS:
(1) Property and equipment, net
Write-down of ObjectShare's property and equipment, net, to fair market
value.
(2) Goodwill
Goodwill is calculated as follows assuming acquisition is completed on
December 31, 1999.
<TABLE>
<S> <C>
Value of StarBase common stock issued (enterprise value).... $ 8,850
Less: ObjectShare's total stockholders' equity.............. (234)
Plus: Write-down of ObjectShare's property and equipment,
net(1).................................................... 279
Plus: Acquisition transaction expenses(3)................... 560
Plus: Market value of StarBase common stock issued to First
Security Van Kasper(4,5).................................. 929
Plus: Severance (issued as StarBase common stock)........... 415
-------
Total goodwill.............................................. $10,799
=======
</TABLE>
35
<PAGE> 45
(3) Accounts payable and accrued liabilities
Transaction expenses estimated as follows:
<TABLE>
<S> <C>
Accounting fees............................................. $ 80
Legal fees.................................................. 155
Investment banking fees..................................... 170
Proxy statement costs....................................... 25
Registration statement fees................................. 75
Miscellaneous............................................... 55
----
Total transaction expense................................... $560
====
</TABLE>
(4) Common stock
<TABLE>
<S> <C>
100,000 shares of StarBase common stock issued to First
Security Van Kasper(a).................................... $ 1
Value of 12,470,863 shares of ObjectShare common stock
redeemed for StarBase common stock........................ (12)
952,432 shares of StarBase stock issued to ObjectShare
stockholders(a)(b)........................................ 10
44,662 shares of StarBase common stock issued for
severance(a).............................................. 0
----
Total common stock.......................................... $ (1)
====
</TABLE>
(5) Additional paid-in capital
<TABLE>
<S> <C>
100,000 shares of StarBase common stock issued to First
Security Van Kasper (a)................................... $ 928
Value of 12,470,863 shares of ObjectShare common stock
redeemed for StarBase common stock........................ (50,239)
952,432 shares of StarBase common stock issued to
ObjectShare stockholders (a)(b)........................... 8,840
44,662 shares of StarBase common stock issued for severance
(a)....................................................... 415
--------
Total common stock.......................................... $(40,056)
========
</TABLE>
(a) Average closing price of StarBase common stock for the last three
trading days as of December 31, 1999 is $9.292, which is above the
price required for the maximum aggregate value.
(b) Number of StarBase common stock shares issued is determined by
dividing value to be paid ($8,850,000) by the average closing price
($9.292) determine in (a) above.
(6) Accumulated deficit
To eliminate ObjectShare's balance.
(7) Amortization of goodwill
Goodwill is calculated as if the acquisition is completed on December 31,
1999, and amortized assuming the acquisition is completed on April 1, 1999,
using the straight line method over a five year period.
(8) Amortization of goodwill
Goodwill is calculated as if the acquisition is completed on December 31,
1999, and amortized assuming the acquisition is completed on April 1, 1998,
using the straight line method over a five year period.
36
<PAGE> 46
THE MERGER AGREEMENT
This is a description of the terms of the material terms and conditions of
the merger agreement. However, the description does not contain all the terms of
the merger agreement. A copy of the merger agreement, as amended, is attached as
Appendix A to this Proxy Statement/Prospectus and is incorporated herein by
reference. ObjectShare stockholders are encouraged you to read the entire merger
agreement.
CLOSING
The merger will become effective at the closing, which will take place on
the date on which all closing conditions under the merger agreement are
satisfied and/or waived and the certificate of merger is filed with the Delaware
Secretary of State, or at such later time as the certificate of merger
specifies. It is anticipated that the filing of the certificate of merger with
the State of Delaware will occur as soon as practicable after ObjectShare
stockholders approve and adopt the merger at the special meeting.
CONSIDERATION TO BE RECEIVED FOR OBJECTSHARE COMMON STOCK IN THE MERGER
At the effective date of the merger, each share of ObjectShare common
stock, other than shares held by dissenting stockholders of ObjectShare, shall
be converted into the right to receive that fraction of a share of StarBase
common stock equal to the merger exchange ratio (the "Merger Exchange Ratio").
Except as discussed under "Maximum and Minimum Aggregate Value To Be Paid," the
Merger Exchange Ratio shall be equal to:
(enterprise value of ObjectShare) / (outstanding number of shares of ObjectShare
common stock)
- --------------------------------------------------------------------------------
$2.00
For example, if the enterprise value were $7.5 million and ObjectShare had
12,470,863 shares outstanding, then the Merger Exchange Ratio would be:
($7,500,000 / 12,470,863*) = .30
-----------------------------
$2.00
- ---------------
* The number of outstanding shares of ObjectShare common stock will not include
any shares issued as severance to ObjectShare officers and directors.
Thus, one share of ObjectShare common stock would be eligible to receive
.30 shares of StarBase common stock. The ultimate value to the ObjectShare
stockholder will be determined, in part, by the average closing price per share
of the StarBase common stock. If the closing price of StarBase common stock were
$2.00, then each share of ObjectShare common stock would be valued at
$2.00 X Merger Exchange Ratio (or .30) = $0.60.
It is important to note that the enterprise value of ObjectShare is a value
which, as a base amount, has been set at $7.5 million. This $7.5 million figure
is subject to reduction as set forth in the merger agreement. In general, the
$7.5 million base amount will be reduced to the extent that the result of the
following formula (the "Enterprise Adjustment Amount") is less than a negative
balance of $1.6 million:
Enterprise
Amount Adjustment = (A/R* + cash + cash
equivalents) - (debt** + A/P*** + accrued liabilities)
- ---------------
* ObjectShare's accounts receivable.
** ObjectShare's indebtedness for borrowed money.
*** ObjectShare's accounts payable.
Accordingly, if the Enterprise Adjustment Amount is determined to
negatively exceed a negative balance of $1.6 million, then and to the extent of
such excess, the $7.5 million enterprise value shall be
37
<PAGE> 47
reduced. It is important to note that StarBase has the right to terminate the
merger transaction if this negative balance exceeds $2.5 million. See
"-- Termination of the Merger Agreement."
Given that the numerator of the formula used to derive the Merger Exchange
Ratio would be reduced by any reduction in the enterprise value, so too would
the Merger Exchange Ratio. This, of course, would result in fewer shares of
StarBase common stock being exchanged for shares of ObjectShare common stock.
For example, if the enterprise value were adjusted downward by $500,000, then we
would have the following:
<TABLE>
<S> <C> <C>
Merger Exchange Ratio: [($7,500,000 -- $500,000) / 12,470,863] = .28
-------------------------------------------
$2.00
</TABLE>
Thus, assuming the average closing price of StarBase common stock were at
$2.00, then each share of ObjectShare common stock would be valued at
$2.00 X Merger Exchange Ratio (or .28) = $0.56.
Maximum and Minimum Aggregate Value To Be Paid
The above analysis holds true unless the price of the StarBase common stock
declines or raises substantially below or above the $2.00 price. The merger
agreement allows for an upper and lower end collar which provides that no matter
how large or small of a number results from use of the Merger Exchange Ratio
formula, the actual total value paid by StarBase for all of the shares of common
stock of ObjectShare will never be less than $6,150,000 or greater than
$8,850,000. To accomplish this result, the merger agreement provides for a lower
end collar formula and an upper end collar formula.
The lower end collar formula is as follows:
<TABLE>
<S> <C>
Merger Exchange Ratio: ($6,150,000 / 12,470,863*)
------------------------------------------------
(average closing price of StarBase common stock)
</TABLE>
The upper end collar formula is as follows:
<TABLE>
<S> <C>
Merger Exchange Ratio: ($8,850,000 / 12,470,863*)
------------------------------------------------
(average closing price of StarBase common stock)
</TABLE>
- ---------------
* The number of outstanding shares of ObjectShare common stock will not include
any shares issued as severance to ObjectShare officers and directors.
The two collar formulae are dependent upon the average of the closing price
per share of StarBase common stock as reported on the Nasdaq SmallCap Market for
the three trading days immediately preceding the day prior to the closing date
of the merger agreement. The two collar formulae adjust the Merger Exchange
Ratio so that no matter how high or how low the price per share of StarBase
common stock moves, the overall value paid for all the shares of ObjectShare
common stock will be no less $6,150,000 and no more than $8,850,000. Put another
way, the result of collar formulae is to require that each share of ObjectShare
common stock be valued at least approximately $0.49 and no more than
approximately $0.71.
The other practical result of the two-collar formulae, is that enterprise
value, or any adjustment thereto, is not utilized to determine the Merger
Exchange Ratio unless the average closing price of StarBase common stock is
between the approximate value range of $1.64 to $2.37 per share. Accordingly, if
the average closing price per share of StarBase common stock falls outside of
that range, then the collar formulae apply and ObjectShare stockholders will
receive either approximately $0.49 or $0.71 per share, as applicable.
38
<PAGE> 48
For purposes of illustration only, let us assume that the average closing
price per share of StarBase common stock on the closing date was $1.50. Because
the average closing price per share of StarBase common stock is below $1.64 the
lower collar formula applies as follows:
<TABLE>
<S> <C> <C>
Merger Exchange Ratio: ($6,150,000 / 12,470,863) = .3288
-------------------------
$1.50
</TABLE>
The value of the exchange to a holder of 100 shares would be calculated as
follows: [(100 shares X .3288 X $1.50)] = $49.31. Thus each share of ObjectShare
common stock would receive approximately $0.49 in value per share exchanged.
For purposes of illustration only, let us assume that the average closing
price per share of StarBase common stock on the closing date will be the same as
of December 31, 1999 or $9.292. Because the average closing price per share of
StarBase common stock is above $2.37 the upper collar formula applies as
follows:
<TABLE>
<S> <C> <C>
Merger Exchange Ratio: ($8,850,000 / 12,470,863) = .0764
-------------------------
$9.292
</TABLE>
The value of the exchange to a holder of 100 shares would be calculated as
follows: [(100 shares X .0764) X $9.292)] = $70.99. Thus each share of
ObjectShare common stock would receive approximately $0.71 in value per share
exchanged.
After the effective date of the merger, all shares of ObjectShare common
stock will cease to be outstanding and will automatically be canceled.
Each share of ObjectShare common stock held by ObjectShare as treasury
stock or owned by StarBase or any wholly-owned subsidiary of either company
immediately before the effective date of the merger will be canceled without any
conversion or payment.
PROCEDURES FOR EXCHANGE OF OBJECTSHARE COMMON STOCK
Soon after the merger is completed, StarBase's transfer agent, American
Stock Transfer & Trust Co., shall send to ObjectShare stockholders of record
immediately before the closing, other than dissenting stockholders, a notice and
letter of transmittal instructing the stockholders on how to exchange their
shares of ObjectShare common stock for shares of StarBase common stock. Promptly
after surrender to American Stock Transfer & Trust Co. of the completed
instruction letter and stock certificate(s) representing ObjectShare common
stock held by the stockholder, American Stock Transfer & Trust Co. shall issue
to the stockholder a new stock certificate for shares StarBase common stock
(based on the exchange ratio) and a check with respect to any fractional share
interests the stockholder is entitled to receive under the merger.
TREATMENT OF FRACTIONAL SHARES
Holders of ObjectShare common stock will be paid cash instead of any
fractional shares of StarBase common stock they would otherwise receive. The
amount of cash (rounded to the nearest whole U.S. $0.01) to be received instead
of the fractional share (after aggregating all fractional shares of StarBase
common stock to be received by such holder) shall be equal to such fraction of a
share multiplied by the average of the closing price per share of StarBase
common stock as reported on the Nasdaq SmallCap Market for the three trading
days immediately preceding the day prior to the closing date of the merger
agreement.
TREATMENT OF OBJECTSHARE EMPLOYEE AND DIRECTOR STOCK OPTIONS
At the effective date of the merger, all outstanding stock options to
purchase ObjectShare common stock, (with the exception of specific grants to
officers and certain employees) shall be canceled and
39
<PAGE> 49
extinguished in accordance with the terms of the plans under which the options
were issued. Following the merger, if StarBase chooses to employ any former
employees of ObjectShare, StarBase shall reserve sufficient shares of its common
stock to grant options to purchase StarBase common stock, upon substantially
similar terms and conditions as the outstanding options currently held by such
employees and directors who held options to purchase ObjectShare common stock.
TREATMENT OF CERTAIN OBJECTSHARE EMPLOYEE STOCK OPTIONS
Subsequent to the signing of the merger agreement, the StarBase Board of
Directors has, in light of ObjectShare employees current ObjectShare options
terminating as a result of merger and in the interest of retaining/acquiring
certain of the employees of ObjectShare, approved, subject to the closing of the
merger agreement, the issuance of options to purchase shares of StarBase common
stock to certain ObjectShare employees. See "Interests of Certain Persons in the
Merger" at page 44.
TREATMENT OF EXECUTIVE OFFICERS' STOCK OPTIONS IN OBJECTSHARE
Under the terms of the merger agreement the 650,000 and 550,000 options to
purchase shares of ObjectShare held by Mr. Goda and Mr. Smith, respectively,
will be (in the case of Mr. Goda) and have been (in the case of Mr. Smith)
converted into options to purchase shares of StarBase common stock. See
"Interests of Certain Persons in the Merger" at page 44.
OBJECTSHARE'S EMPLOYEE SEVERANCE PAYMENTS
Pursuant to an ObjectShare Board resolution, each of Eugene L. Goda, James
H. Smith, Samuel Inman and Edward B. Merino, as officers and directors of
ObjectShare, are entitled to receive severance payments, in the amounts of
$240,000, $100,000, $50,000 and $25,000, respectively, in the event of a merger
or other fundamental corporate change.
Under the merger agreement, ObjectShare shall immediately prior to the
merger closing issue shares of the common stock of ObjectShare (which shares
shall be converted into the right to receive shares of StarBase common stock at
the effective date, as provided above) which shall equate to a value which
corresponds to the applicable severance amounts. See "Interests of Certain
Persons in the Merger" at page 44.
OBJECTSHARE'S DIRECTORS' AND OFFICERS' LIABILITY
At the effective date of the merger and for two years thereafter, StarBase
shall procure and maintain for Mr. Goda, Mr. Smith, Mr. Inman, Mr. Merino
insurance against liability by ObjectShare as of November 3, 1999 when the
merger agreement was executed an insurance policy with respect to any liability
to ObjectShare existing at the closing by reason of the fact that such named
individual holds or held a position with ObjectShare. The cost to procure and
maintain each insurance policy shall be shared equally by StarBase and
ObjectShare.
StarBase further agrees that all provisions with respect to indemnification
by ObjectShare or with respect to liability to ObjectShare existing at the
closing in favor of any named individual, as set forth in ObjectShare's
Certificate of Incorporation, as amended, or By-laws or the agreements in effect
on the date hereof with respect to each of Messrs. Goda, Smith, Inman and Merino
as well as Jos Henkens, James F. Sutter and Lester "Buck" Hill shall survive the
merger and shall continue in full force and effect for a period of two years.
REGISTRATION OF STARBASE COMMON STOCK
This Proxy Statement/Prospectus, when declared effective by the SEC, shall
register the shares of StarBase common stock to be issued as consideration in
the merger under the Securities Act of 1933, as amended. StarBase shall also
file with the Nasdaq Stock Market a supplemental listing application to list
40
<PAGE> 50
the shares of StarBase common stock to be issued pursuant to the transactions
called for under the merger agreement on the Nasdaq SmallCap Market.
However, Mr. Smith has agreed, for a period of six (6) months after the
merger closing, not to sell or transfer any StarBase common stock issued to Mr.
Smith pursuant to the merger or upon the exercise of any of the options (as well
as the StarBase common stock underlying any such options) granted to Smith by
StarBase in connection with the merger. Stock certificates with respect to the
StarBase common stock issued to Mr. Smith, either in connection with the merger
or upon Smith's exercise of options, shall bear a restrictive legend to such
effect.
REPRESENTATIONS AND WARRANTIES
Each of ObjectShare and StarBase has made certain customary representations
and warranties to each other in the merger agreement, including as to:
- corporate existence;
- corporate authorization;
- disclosure documents;
- absence of certain changes;
- government authorization;
- compliance with laws;
- litigation;
- SEC filings;
- financial statements;
- environmental matters;
- insurance;
- real property
- no undisclosed material liabilities;
- capitalization;
- subsidiaries;
- taxes;
- employee benefit plans;
- opinion of financial advisors;
- intellectual property; and
- customers and suppliers.
None of the representations and warranties contained in the merger
agreement survive beyond the effective date of the merger.
COVENANTS REGARDING CONDUCT OF BUSINESS BEFORE THE MERGER
ObjectShare and StarBase have agreed to conduct their businesses from
November 3, 1999 to the effective date of the merger in the ordinary course,
consistent with past practice, and each has further agreed to use its reasonable
best efforts to preserve intact its current business organizations and
relationships with third parties.
ObjectShare has also agreed with certain exceptions not to take any of the
following actions outside the ordinary course as specified in the merger
agreement:
- declaring or paying dividends or recapitalizing or redeeming its capital
stock;
- issuing, selling or encumbering any shares of its capital stock or
options (except as otherwise provided in the merger agreement) to acquire
shares of its capital stock;
- amending its organization documents;
- making loans, advances or capital contributions, except in the ordinary
course or under its business plan;
- selling, leasing or otherwise encumbering its property or assets, except
in the ordinary course or pursuant to existing commitments;
41
<PAGE> 51
- incurring indebtedness, except in the ordinary course or under its
business plan or pursuant to that loan agreement dated November 3, 1999
between ObjectShare and StarBase (see "Relationship between StarBase and
ObjectShare");
- entering into or adopting a new, or amending an existing severance
arrangement, employee plan or employment or consulting agreement;
- increasing the compensation of its officers and employees;
- granting or awarding equity-based incentive awards;
- changing its accounting practices or its fiscal year;
- settling a federal, state, local or foreign tax liability; and
- preparing or filing a tax return inconsistent with past practice.
An exception to the foregoing prohibitions was made for the November 24,
1999 sale of all of the stock of the two European subsidiaries of ObjectShare,
ObjectShare, GmbH in Germany and ObjectShare (U.K.) Limited in England to
Valtech S.A., a French societe anonyme and its wholly-owned subsidiary Valtech
Limited. Total consideration paid for these two subsidiaries was (i)
approximately $1,600,000, in cash, and (ii) the cancellation of certain
intercompany indebtedness owed by the subsidiaries to ObjectShare.
CONDITIONS TO THE COMPLETION OF THE MERGER
Neither StarBase nor ObjectShare is obligated to complete the merger unless
the conditions specified in the merger agreement are either satisfied or waived.
The conditions include:
- ObjectShare stockholders have approved and adopted the merger;
- there is no law or court order prohibiting the merger;
- ObjectShare, on the one hand, and StarBase, on the other hand, have
performed in all material respects all of their respective obligations
under the merger agreement; and
- the representations and warranties made by the other party in the merger
agreement remain accurate in all material respects, with such exceptions
as would not reasonably be expected to have a material adverse effect.
TERMINATION OF THE MERGER AGREEMENT
Both companies may mutually agree to terminate the merger agreement at any
time without completing the merger.
Either company may terminate the merger agreement if :
(1) the merger is not completed by April 17, 2000. Neither company may
terminate the merger agreement on this basis, however, if that company's
breach of the merger agreement results in the merger not being completed by
the applicable deadline;
(2) a court or other governmental authority issues a final,
non-appealable order prohibiting the merger, or any law makes the merger
illegal. Neither company may terminate the merger agreement on this basis,
however, if its breach of the merger agreement results in the imposition of
the order or the application of the law or regulation to the merger; or
(3) ObjectShare stockholders do not approve the merger.
In addition, StarBase may terminate the merger agreement if :
(1) certain elements constituting ObjectShare's enterprise value
exceed a negative balance of $2,500,000 in the aggregate;
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<PAGE> 52
(2) based upon the exchange ratio as of the closing date of the
merger, StarBase is required to issue, in the aggregate, more than
4,750,000 shares of its common stock in the merger (exclusive of options to
purchase shares of StarBase common stock granted to certain officers and
directors and employees of ObjectShare). However, ObjectShare, at its
option, could elect to complete the transaction for an aggregate of the
4,750,000 shares of StarBase common stock; or
(3) ObjectShare's stockholders holding more than 5% of the outstanding
shares of ObjectShare common stock exercise their Appraisal Rights.
Furthermore, ObjectShare may terminate the merger agreement if
ObjectShare's board of directors approves a superior, unsolicited proposal or
withdraws or amends, in a manner adverse to StarBase, its recommendation of the
merger, so long as ObjectShare's board of directors also determines in good
faith, after consultation with outside legal counsel, that failure to take such
action would be consistent with its fiduciary duties and ObjectShare
concurrently pays to StarBase the termination fee.
TERMINATION FEES AND EXPENSES
ObjectShare has agreed to pay StarBase a termination fee of $500,000 plus
reasonable legal, accounting and investment banking fees incurred by StarBase in
connection with the merger, not to exceed $200,000, if ObjectShare terminates
the merger agreement because of a third party solicitation.
NO SOLICITATION
The merger agreement prevents ObjectShare from negotiating or otherwise
engaging in discussions with, or furnishing information to, a third party
regarding an acquisition transaction with ObjectShare unless:
- ObjectShare has received an unsolicited proposal for the transaction
from that third party;
- ObjectShare has notified StarBase about the proposal;
- ObjectShare's board of directors determines in good faith with the
assistance of its financial advisor that, based on the terms and
conditions contained in the third-party proposal, the proposal
represents a transaction more favorable to ObjectShare and, after
consulting with its legal counsel, that failure to enter into
discussions and/or negotiations with the third party would be
inconsistent with the board's fiduciary duties under applicable law;
and
- the third party executes a confidentiality agreement.
AMENDMENT OR WAIVER OF THE MERGER AGREEMENT
The parties may amend the merger agreement or waive its terms and
conditions before the effective date; but, after ObjectShare stockholders have
approved the merger agreement, the parties may not amend the merger agreement in
a manner that would reduce or change the kind of consideration ObjectShare
stockholders will receive in the merger.
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<PAGE> 53
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of ObjectShare's management and employees have interests in
the merger that are different from and in addition to the interests of
ObjectShare stockholders generally. ObjectShare's board of directors was aware
of these interests, to the extent they existed prior to the signing of the
merger agreement, and considered them in approving the merger agreement.
ARRANGEMENTS WITH OBJECTSHARE EMPLOYEES REGARDING STOCK OPTIONS.
Subsequent to the signing of the merger agreement, the StarBase Board of
Directors has, in light of ObjectShare employees current ObjectShare options
terminating as a result of merger and in the interest of retaining/acquiring
certain of the employees of ObjectShare, approved, the issuance of options to
purchase shares of StarBase common stock to the following employees:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF STARBASE COMMON
NAME STOCK SUBJECT TO OPTION
- ---- -----------------------------------
<S> <C>
Anderson, David....................................... 15,455
Brown, Christopher.................................... 16,183
Calbert, Barbara...................................... 30,167
Dand, Dilip........................................... 70,841
Lambert, Brian........................................ 8,455
Larson, Jamie......................................... 8,804
Sherman, Daniel....................................... 4,082
Suydam, William....................................... 26,820
Thompson, Georgia..................................... 7,437
Viswanathan, K. ...................................... 49,550
White, Jerry.......................................... 11,455
</TABLE>
The foregoing option grants will consist of options subject to full four
year vesting. All options grants shall be at an exercise price ($1.32) equal to
the average of the high ($1.38) and low ($1.25) price per share of StarBase
common stock as of the date prior to the signing of the merger agreement
(November 3, 1999).
Within sixty (60) days of the merger closing, StarBase shall register the
shares of common stock underlying the options granted to above employees at the
closing by filing a registration statement on Form S-8 with the Securities and
Exchange Commission as well as filing with the Nasdaq Stock Market a
supplemental listing application for such shares.
ARRANGEMENTS WITH CERTAIN OBJECTSHARE EXECUTIVES REGARDING STOCK OPTIONS.
By stock option agreements dated June 10, 1997 with Object Share, each of
Eugene Goda, President of ObjectShare, and James H. Smith, a former officer of
ObjectShare, were granted stock options to purchase up to 650,000 and 455,000
shares, respectively, of the common stock of ObjectShare. James H. Smith was
granted stock options to purchase an additional 100,000 on February 3, 1998, for
a total number of options at 555,000. At the time of the merger negotiations,
these stock options were fully vested and exercisable.
The merger agreement requires StarBase to assume the outstanding stock
options held by Mr. Goda at the effective date of the merger, in the following
manner:
At the merger closing, StarBase shall grant to Mr. Goda options to purchase
shares of StarBase common stock on the same terms and conditions as contained in
Mr. Goda's prior stock option agreement with ObjectShare, except that: (i) such
options will be exercisable to purchase up to that number of shares of StarBase
common stock equal to 650,000 (that number of shares of ObjectShare common stock
for which Mr. Goda previously held options) multiplied by the Merger Exchange
Ratio and (ii) the per share exercise price for each share of StarBase common
stock issuable to Mr. Goda upon exercise of his
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<PAGE> 54
options will be equal to the quotient determined by dividing $1.0625 (that
exercise price per share of ObjectShare common stock at which Mr. Goda's prior
options were exercisable) by the Merger Exchange Ratio, rounded to the nearest
whole cent.
For example, assuming that the average closing price per share of StarBase
common stock on the closing date will be the same as of December 31, 1999 or
$9.292, then, in accordance with the following calculation, Goda would receive
49,642 fully-vested options to purchase shares of StarBase common stock at an
exercise price of $13.91 per share.
650,000 X (8,850,000 / 12,470,863) = 49,642 options
-----------------------
$9.292
$1.0625 / ($8,850,000 / 12,470,863) = $13.91
-------------------------
$9.292
The merger agreement requires StarBase to assume the outstanding stock
options held by Mr. Smith in the following manner:
At the merger closing, StarBase shall grant to Mr. Smith options to
purchase shares of StarBase common stock on the same terms and conditions
as contained in Mr. Smith's prior stock option agreement with ObjectShare,
except that: (i) such options will be exercisable to purchase up to that
number of shares of StarBase common stock equal to 555,000 (that number of
shares of ObjectShare for which Mr. Smith previously held options)
multiplied by the Merger Exchange Ratio and (ii) the per share exercise
price for each share of StarBase common stock issuable to Mr. Smith upon
exercise of his options will be equal to the fair market value of the
StarBase common stock on the date of the merger closing (the grant date).
For example, assuming that the average closing price per share of
StarBase common stock on the closing date will be the same as of December
31, 1999 or $9.292, then, in accordance with the following calculation,
Smith would receive 42,004 fully-vested options to purchase shares of
StarBase common stock at an exercise price of $9.292 per share.
550,000 X (8,850,000 / 12,470,863) = 42,004 options
------------------------
$9.292
Mr. Smith was also issued, on November 3, 1999, an additional 437,000
options to purchase shares of StarBase common stock with an exercise price of
$1.32 and vesting ratably over four years. See "Relationship between StarBase
and ObjectShare -- Employment of James H. Smith"
If the above calculations result in fractional shares being authorized in
the foregoing options, such fractional number of shares shall be rounded up or
down to the nearest whole share of StarBase common stock.
StarBase shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued common stock, the full
number of shares of common stock issuable upon the exercise of any of the
foregoing options.
Within sixty (60) days of the merger closing, StarBase shall register the
shares of common stock underlying the options granted to Messrs. Goda and Smith
at the closing by filing a registration statement on Form S-8 with the
Securities and Exchange Commission as well as filing with the Nasdaq Stock
Market a supplemental listing application for such shares.
ARRANGEMENTS REGARDING OBJECTSHARE EMPLOYEE SEVERANCE PAYMENTS.
Pursuant to an ObjectShare board resolution, each of Eugene L. Goda, James
H. Smith, Samuel Inman and Edward B. Merino, as officers and directors of
ObjectShare, is entitled to receive severance payments, in the amounts of
$240,000, $100,000, $50,000 and $25,000, respectively, in the event of a merger
or other fundamental corporate change.
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<PAGE> 55
Under the merger agreement, ObjectShare shall immediately prior to the
merger closing issue shares of the common stock of ObjectShare (which shares
shall be converted into the right to receive shares of StarBase common stock at
the effective date, as provided above) in the following manner:
(1) to Mr. Goda, that number of shares of ObjectShare common stock
determined by dividing $240,000 (the severance amount to which he is
entitled if the merger closes) by the average closing market price of
StarBase common stock for the 3 trading days preceding the day prior to the
merger closing and then, by dividing the result obtained by the Merger
Exchange Ratio;
(2) to Mr. Smith, (i) that number of shares of ObjectShare common
stock determined by dividing $50,000 (constituting 50% of the severance
amount to which he is entitled if the merger closes) by the average closing
market price of StarBase common stock for the 3 trading days preceding the
day prior to the merger closing and then, by dividing the result obtained
by the Merger Exchange Ratio. In addition, ObjectShare shall pay to Mr.
Smith the aggregate sum of $50,000 (constituting the other 50% of Mr.
Smith's severance package) at the merger closing;
(3) to Mr. Inman, that number of shares of ObjectShare common stock
determined by dividing $50,000 (the severance amount to which he is
entitled if the merger closes) by the average closing market price of
StarBase common stock for the 3 trading days preceding the day prior to the
merger closing and then, by dividing the result obtained by the Merger
Exchange Ratio; and
(4) to Mr. Merino, that number of shares of ObjectShare common stock
determined by dividing $25,000 (the severance amount to which he is
entitled if the merger closes) by the average closing market price of
StarBase common stock for the 3 trading days preceding the day prior to the
merger closing and then, by dividing the result obtained by the Merger
Exchange Ratio.
If the above calculations result in fractional shares being authorized by
the foregoing, such fractional number of shares shall be rounded up or down to
the nearest whole share of ObjectShare common stock.
By way of illustration, assuming that the average closing price per share
of StarBase common stock on the closing date will be the same as of December 31,
1999 or $9.292, then, in accordance with the following calculation, Mr. Goda,
Mr. Smith, Mr. Inman and Mr. Merino would receive 338,193, 70,457, 70,457 and
35,228 shares of ObjectShare common stock, respectively:
<TABLE>
<S> <C> <C> <C>
Goda: (240,000 / $9.292 = 338,193 shares
------------------------
(8,850,000 / 12,470,863)
------------------------
$9.292
Inman/Smith: (50,000 / $9.292 = 70,457 shares
------------------------
(8,850,000 / 12,470,863)
------------------------
$9.292
Merino: (25,000 / $9.292 = 35,228 shares
------------------------
(8,850,000 / 12,470,863)
------------------------
$9.292
</TABLE>
INDEMNIFICATION AND INSURANCE
At the effective date of the merger and for two years thereafter, StarBase
shall procure and maintain for any present or former director, officer, employee
or agent of ObjectShare (each, an "Indemnitee") insured against liability by
ObjectShare as of November 3, 1999 when the merger agreement was executed an
insurance policy with respect to any liability to ObjectShare existing at the
closing by reason of the fact
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<PAGE> 56
that such named individual holds or held a position with ObjectShare. The cost
to procure and maintain each insurance policy shall be shared equally by
StarBase and ObjectShare.
StarBase further agrees that all provisions with respect to indemnification
by ObjectShare or with respect to liability to ObjectShare existing at the
closing in favor of any named individual, as set forth in ObjectShare's
Certificate of Incorporation, as amended, or By-laws or the agreements in effect
on the date hereof with respect to each of Messrs. Goda, Smith, Inman and Marino
as well as Jos Henkens, James F. Sutter and Lester "Buck" Hill shall survive the
merger and shall continue in full force and effect for a period of two years.
CONSULTANCY ARRANGEMENT
Edward Merino serves as a member of ObjectShare's Board of Directors. Mr.
Merino is also the Chief Executive Officer of Office of the Chairman, Inc.
("Office"). ObjectShare has retained the consultancy services of Office related
to certain corporate governance issues. ObjectShare has paid a total of
approximately $25,000 in consulting fees to Office under this arrangement.
ObjectShare's management believes that the terms of the consultancy arrangement
are at least as favorable to ObjectShare as would be available from a company
other than Office in an arm's length transaction.
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<PAGE> 57
RELATIONSHIP BETWEEN STARBASE AND OBJECTSHARE
LINE OF CREDIT
On November 3, 1999, StarBase extended to ObjectShare a line of credit up
to $500,000, subject to limitations on the aggregate amount of funds advanced or
outstanding during any given month. The line of credit is evidenced by a Secured
Promissory Note, bears interest at prime plus 0.75%, and matures on October 31,
2000 unless earlier becoming repayable in full upon the occurrence of specified
events. Such events include the termination of the merger agreement and the sale
by ObjectShare of its foreign subsidiaries. A sale of the foreign subsidiaries
took place in late November 1999, at which time the $200,000 initially advanced
by StarBase under the note was repaid in full.
Under the terms of the note, ObjectShare made standard representations and
warranties to StarBase with respect to its authority to execute the note and its
ownership of collateral being pledged as security for the line of credit. In
addition, ObjectShare agreed to furnish to StarBase during the term of the note
its financial statements and a current list of its accounts receivable, together
with aging schedule, as updated on a biweekly basis. Until payment in full of
any outstanding balance under the note, ObjectShare also agreed:
- not to permit the ratio of its "quick" assets to its current liabilities
fall below 0.48;
- to keep its cash flow within an acceptable range of its projected ending
cash balance for each week; and
- not to incur additional indebtedness other than an existing facility not
to exceed a prescribed amount.
Other than the initial advance in November 1999 of $200,000, which amount
was repaid in full at the time of the sale of the foreign subsidiaries by
ObjectShare, no additional funds have been advanced. At the date of this Proxy
Statement/Prospectus, there was no outstanding balance under the note and
StarBase is under no obligation to make further advances.
EMPLOYMENT OF JAMES H. SMITH
By an employment agreement dated November 3, 1999, StarBase employed James
H. Smith for an initial one-year term as its Executive Vice President of Sales
and Marketing. The agreement contains the standard confidentiality and "work for
hire" provisions and provides for a salary to Mr. Smith of $200,000 per annum.
Under the terms of the agreement, Mr. Smith agreed not to compete with StarBase
for a period of a year after termination of his employment.
The agreement contains a "change of control" provision, entitling Mr. Smith
to receive his salary at the annual rate in effect at the time of a change in
control for a twelve month period from the date of his termination. A "change of
control" includes the sale, directly and indirectly, of more than fifty percent
(50%) of StarBase's voting stock as well as a merger or consolidation in which
StarBase is not the surviving entity.
As part of Mr. Smith's compensation, StarBase also granted him ten (10)
year options to purchase up to 437,000 shares of the company's common stock, at
an exercise price of $1.32 per share (the then fair market value of StarBase
common stock). Such options vest in equal installments (109,250) over a four
year period, commencing on November 3, 2000.
Mr. Smith previously served as Chief Operating Officer/Executive Vice
President of Sales and Marketing for ObjectShare, from which position he
resigned as of November 3, 1999.
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<PAGE> 58
MANAGEMENT OF SURVIVING CORPORATION
At the effective date of the merger, the directors and the executive
officers of the surviving corporation, appointed to serve until their removal or
resignation, shall be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William R. Stow III.................. 55 Chief Executive Officer and Chairman of the Board
Donald R. Farrow..................... 54 Vice Chairman and Director
Alan D. Kucheck...................... 48 Vice President, Engineering
Douglas S. Norman.................... 36 Chief Accounting Officer and Assistant Secretary
James H. Smith....................... 44 Vice President, Marketing and Sales
Lydia J. Patterson................... 49 Vice President, Products Group
Thomas M. Brattvet................... 43 Vice President, Sales
Frank R. Caccamo..................... 60 Director
Daniel P. Ginns...................... 49 Director
Phillip E. Pearce.................... 70 Director
John R. Snedegar..................... 50 Director
Barry W. Sullivan.................... 58 Director
</TABLE>
William R. Stow III -- founded the company in September 1991. Mr. Stow has
served as Chief Executive Officer of the Company since September 1991 (exclusive
of the period from August 1996 to January 1997) and has served as President of
the Company since July 1998. This is a position he also held from September 1991
to August 1996, exclusive of the period from April 1994 through July 1995. Mr.
Stow has served as a Director of the Company since September 1991, Co-Chairman
of the Board from October 1994 to August 1996 and Chairman of the Board since
August 1996.
Frank R. Caccamo -- has served as a Director of the Company since November
1998. Mr. Caccamo is the Vice President and Chief Information Officer of The
Reynolds and Reynolds Company, a position he has held since January 1997. Prior
to joining Reynolds and Reynolds, Mr. Caccamo was Vice President of Information
Systems at Procter & Gamble from 1990 to January 1997. Mr. Caccamo is a director
of the Agency Services Division of the Cincinnati Community Chest, the
Cincinnati Community Chest, the Cincinnati Eye Bank for Sight Restoration, and
the Health Alliance Information Systems and Technology Governance Board.
Donald R. Farrow -- has served as the Vice Chairman of the Company since
July 1998. Mr. Farrow has been with the Company since March 1996. His various
positions within the company include: (1) President (January 1997 to July 1998);
(2) Chief Operating Officer and Director (February 1997 to July 1998); (3) Vice
President, Sales and Marketing (August 1996 to January 1997); Vice President,
Sales (May 1996 to August 1996); and (4) consultant (March 1996 to May 1996).
From January 1995 to May 1996, Mr. Farrow was an independent consultant in the
area of sales and marketing of software technology. Prior to January 1995, Mr.
Farrow served as Vice President, Sales and Marketing for Comm Vision, a leading
provider of server solutions, from December 1993 through December 1994; Vice-
President of Sales of Image Online from February 1993 through November 1993; and
Director -- Western Area of Novell, a provider of network software, from 1987 to
February, 1993.
Daniel P. Ginns -- has served as a Director of the Company since January
1997. Since October 1996, Mr. Ginns has been Chairman of the Board and Chief
Executive Officer of Datametrics Corporation, a reporting company which designs,
develops and manufactures printers and computers. From 1989 to 1996, Mr. Ginns
was President of Belmont Capital, Inc., a management and financial advisory
firm.
Phillip E. Pearce -- has served as a Director of the Company since January
1996. Mr. Pearce is the owner of Phil Pearce & Associates since 1986. Prior to
that, he was Senior Vice President and a member of the Board of Directors of
E.F. Hutton & Co., from 1971 through 1983, a member of the Board of Governors of
the New York Stock Exchange, and Chairman of the Board of governors of the NASD.
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<PAGE> 59
Mr. Pearce is a member of the Board of three other reporting companies, China
Peregrine, Mustang Software and Xybernaut Corporation.
John R. Snedegar -- has served as a Director of the Company since December
1991. Mr. Snedegar is President/CEO and a director of Micro General Corporation,
a full service telecommunications and electronic commerce company. From May 1990
through April 1999, Mr. Snedegar served as President, Director and Chief
Executive Officer of United Digital Network Inc., a diversified
telecommunications provider based in Irving, Texas. From March 1981 to May 1992,
Mr. Snedegar served as President and Chief Executive Officer of AmeriTel
Management, Inc., currently known as WCT Communications, Inc. Mr. Snedegar is
also a member of the Board of Star Communications, Inc., an international long
distance wholesale provider, ShopNow.com, an electronic commerce shopping portal
and TeleHub Communications Corporation, a long distance technology company.
Barry W. Sullivan -- has served as a Director of the Company since
September 1998. Mr. Sullivan has served the Electronic Data Systems (EDS) from
1971 through 1998, most recently as Corporate Vice President in charge of
managing their Internet, New Media and Electronic Business. Mr. Sullivan was a
member of (1) the Stanford University Computer Industry Project form 1992 to
1997 and (2) the New Marketing Imperatives Roundtable. He has served on the
Board and as Chairman of the Information Technology Association of America
(ITAA) from 1993 through 1998, and on the Board of CommerceNet, a not-for-profit
market and business development organization from 1996 to 1998.
The following biographical information has been submitted by the
non-Director Executive Officers.
Alan D. Kucheck -- has served the Company as the Vice President of
Engineering since January 1995. From July 1993 to January 1995, Mr. Kucheck
served as a Project Director for the Company.
James H. Smith -- has served the Company as Executive Vice President,
Customer Group in November 1999. He has over 18 years experience in the software
industry with specific expertise in marketing and selling application
development products and services. Prior to StarBase, from June 1997 until
November 1999, Mr. Smith was Chief Operating Officer/Executive Vice President of
Sales and Marketing at ObjectShare Inc., a developer of objected-oriented tools
and services. From October 1995 to June 1997, Mr. Smith served as COO for Select
Software Tools, a provider of object-oriented application development tools and
services. From 1994 to October 1995, Mr. Smith was VP of Sales at SoftLab. From
1993 to 1994, Mr. Smith served as VP Sales at Knowledgeware. From 1988 until
1993 Mr. Smith functioned as EVP Sales and Marketing at Meridian Software, which
was acquired by what is now Rational Software. Smith received a BS in
Business/Marketing from the University of Rhode Island in 1977.
Douglas S. Norman -- founded the Company in September 1991. He has served
as Chief Accounting Officer since September 1997, Assistant Secretary of the
Company since February 1997, Director of Finance since June 1996, and as
Financial Manager from 1991 to 1996. Douglas S. Norman is the son-in-law of
William R. Stow III.
Lydia J. Patterson -- has served the Company as Vice President, Products
Group since November 1999. From March 1999 to November 1999, Ms. Patterson
served as Director of Marketing at Rational Software. From 1993 to 1999, Ms.
Patterson held several positions at SELECT Software including: Senior Vice
President, Technology (1997-1999); Vice President, Product Marketing (1997);
Vice President, Technical Services (1995-1997); Vice President, Technical
Marketing (1994); and Product Manager (1993). She has over 18 years experience
in the software industry, in both vendor and end-user organizations. Ms.
Patterson received a BSc in Computer Science from the University of Cheltenham &
Gloucester (U.K.) and a Bachelor of Education from the University of Liverpool
(U.K.).
Thomas M. Brattvet -- has served the Company as Vice President, Sales since
October 1998. Mr. Brattvet history in software sales, began in the late 70's
with the payroll and human resource systems industry selling for ADP. In the
mid-80's Brattvet moved into mainframe based database management systems, 4GL,
and network Management software sales with Cincom Systems. In 1988, he was
recruited
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<PAGE> 60
to California by application development software provider Intersolv, now Merant
(Nasdaq: MRNT), to overhaul their sales efforts on the West Coast. As a top
producing salesperson there, Mr. Brattvet moved into sales management in 1991,
resulting in the western region being their top-producing region in the U.S for
Intersolv. He next took a position as western regional sales manager at start-up
Template Software in 1992, closing large opportunities at PacBell, BCBS, EPRI,
MCI and Jet Propulsion Lab. He then became GUPTA (now Centura Software) western
region director, where Mr. Brattvet helped develop the region by opening new
offices in Dallas and Los Angeles thereby increasing revenue from $400K to over
$4 million. Prior to joining StarBase Mr. Brattvet was Regional Vice President
at Novadigm for 3 years, where he set up the western U.S. sales division making
it the top-producing region in the world with revenues in excess of $6 million.
Mr Brattvet holds a B.S. in Business Administration from Ramapo College of New
Jersey.
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<PAGE> 61
DESCRIPTION OF STARBASE SECURITIES
StarBase is authorized to issue up to 80,000,000 shares of common stock,
$.01 par value, and up to 10,000,000 shares of preferred stock, $.01 par value.
As of December 31, 1999, 40,983,568 shares of StarBase common stock and no
shares of StarBase preferred stock were issued and outstanding.
COMMON STOCK
Each holder of StarBase common stock is entitled to one vote for each share
held of record. There is no right to cumulative votes for the election of
directors. The shares of common stock are neither entitled to pre-emptive rights
nor subject to redemption or assessment. Each share of common stock is entitled
to share ratably in distributions to stockholders and to receive ratably such
dividends as may be declared by StarBase's board of directors out of funds
legally available therefore. Upon liquidation, dissolution or winding up of
StarBase, the holders of StarBase common stock are entitled to receive, pro
rata, the assets which are legally available for distribution to shareholders.
The issued and outstanding shares of common stock are validly issued, fully paid
and non-assessable.
PREFERRED STOCK
The preferred stock of StarBase can be issued in one or more series as may
be determined from time to time by the board of directors without further
stockholder approval. In establishing a series, StarBase's board of directors
shall give to it a distinctive designation so as to distinguish it from the
shares of all other series and classes, shall fix the number of shares in such
series, and the preferences, rights and restrictions thereof. All shares of any
one series shall be alike in every particular. All series shall be alike except
that there may be variation as to the following: (1) the rate of distribution,
(2) the price at and the terms and conditions on which shares shall be redeemed,
(3) the amount payable upon shares for distributions of any kind, (4) sinking
fund provisions for the redemption of shares, and (5) the terms and conditions
on which shares may be converted if the shares of any series are issued with the
privilege of conversion, and (6) voting rights except as limited by law.
There are currently no series of preferred stock outstanding; all series
previously designated having been converted by the preferred stockholders and/or
redeemed by StarBase as of the date of this Proxy Statement/Prospectus.
WARRANTS
StarBase has issued from time to time in connection with raising private
capital two, three, four and five year warrants to purchase common stock. As of
December 31, 1999, 1,112,000 warrants were outstanding.
OPTIONS
As of December 31, 1999, StarBase had granted to its employees, directors
and officers options to purchase up to an aggregate of 9,051,114 shares of its
common stock, of which options to purchase 2,296,234 shares of StarBase common
stock are exercisable.
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COMPARISON OF RIGHTS OF HOLDERS OF STARBASE COMMON STOCK
AND HOLDERS OF OBJECTSHARE COMMON STOCK
Both StarBase and ObjectShare are corporations organized under the laws of
the State of Delaware and the rights of their respective stockholders are
governed by the Delaware General Corporation Law. Accordingly, if the merger
agreement is approved and the merger becomes effective, the ObjectShare
stockholders will become stockholders of StarBase whereby their rights will
continue to be governed by the Delaware General Corporation Law.
There are no significant differences between the provisions contained in
the Certificates of Incorporation and Bylaws of StarBase and ObjectShare.
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STARBASE CORPORATION
DESCRIPTION OF STARBASE'S BUSINESS
StarBase Corporation, a Delaware corporation ("StarBase"), is a leading
provider of eBusiness digital asset management solutions for the enterprise.
StarBase offers 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 applications while managing all associated digital assets.
StarBase'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. StarBase's professional services organization provides
implementation, consulting and training expertise.
StarBase's software has been licensed directly to over 1,000 corporations,
government agencies, software developers and eBusiness vendors. StarBase focuses
on three core markets, the corporation developing eBusiness solutions,
corporations updating their traditional software applications to work over the
Internet or just developing traditional software applications and embedded
solutions for OEMs. StarBase pursues sales opportunities through the efforts of
a direct sales force and its products are also sold indirectly through a network
of OEMs, distributors, value added resellers and system integrators.
THE MARKET OPPORTUNITY
The Internet has rapidly emerged as an important vehicle for software
application development, team collaboration and electronic commerce, known as
e-commerce or e-business. International Data Corporation has described the
market for e-business solutions as the Web Development Life-Cycle Management
(WDLM) market. This market is estimated to be $300 million for 2000 and is
expected to grow to $1.6 billion by 2003. International Data Corporation also
estimates that e-commerce software applications licensing revenue will grow to
$13.2 billion in 2003, up from $444 million in 1998. In addition, the
traditional software change management market was estimated to be $640 million
for 1999, growing to $1.2 billion by 2003.
The increased use of the Internet by businesses has been driven by the
rapid acceptance of e-business and the development of e-business applications.
This broad acceptance of the Internet led initially to the emergence of
corporate intranets as a platform for internal corporate development and team
collaboration. Corporations have further leveraged the Web to work with business
partners, suppliers and customers via Web-based applications on corporate
extranets. Intranets and extranets represent a significant opportunity for
enterprises to conduct business, improve collaboration for geographically
dispersed teams and improve overall operating efficiencies.
Organizations must rapidly develop increasingly complex software solutions
to address e-business market. In addition, outdated traditional software
applications (usually custom developed) must be updated to operate over the
Internet. Both of these markets require contributions from a wide range of
geographically distributed people with various technical skill levels. Team
members today might include marketing executives, IT managers, graphic
designers, advertising agents, Webmasters, and programmers.
StarBase is positioned to address the convergence of these two markets
through the combination of its e-business application development technology and
its traditional software application development technology.
THE STARBASE SOLUTION
StarBase is a leading provider e-business digital asset management
solutions for the enterprise. StarBase offers a complete family of user-friendly
software products that enable teams of people to collaborate in the production
of Web sites, e-business and business critical applications while managing all
associated digital assets. These teams can include both technical and
non-technical contributors that are either centralized or geographically
dispersed and are either internal or external to an enterprise. StarBase's
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products enable organizations to manage software development projects through
their life cycle by increasing project predictability, control, visibility and
productivity
StarBase's core technology was created from the ground up by StarBase,
beginning in 1996, to serve the needs of the Microsoft Windows development
environment. StarBase's products are scalable and now operate in multiple
development environments. StarBase's product's architecture encompasses new
emerging technologies such as Microsoft COM and Java. This architecture also
enables seamless integration with a variety of proprietary source code control
software programs, which allow users to easily export their data to our more
comprehensive solution. The architecture also allows interfaces to many other
software products and devices.
StarBase originally developed its e-business lifecycle management
technology for use in the traditional software application market. StarBase had
anticipated the wide usage of the Internet as a vehicle for conducting business,
and therefore built its products to work over the Internet. Over the past
several years, StarBase has enhanced and expanded our family of products and
markets. Today, StarBase offers a robust solution for organizations developing
e-business solutions, traditional software applications as well as OEM's and
embedded solutions.
E-business solutions. Organizations must rapidly develop increasingly
complex software solutions to address e-business market. The rapid growth in the
e-business market has resulted in an increase in the number of web sites, the
complexity of web sites and the cost of web projects. StarBase's products help
these organizations to manage the development of these complex software
applications by reducing project delays, failures and cost overruns.
Traditional software applications. Many of StarBase's existing customers
are currently using its products to perform basic change management functions
associated with traditional business software applications. The products provide
them with a secure, controlled repository for software code. It also enables
version control, defect tracking, change management and other software
development functions. In addition, organizations must update their traditional
software applications to e-business applications that operate on the Internet.
StarBase's products are uniquely positioned to help these organizations "webify"
their existing applications.
OEM's and Embedded Solutions. StarBase sells its products and/or
technology to other software companies that embed it into their product
offerings. Currently, StarBase has OEM relationships with content provider
Macromedia, test tool company Cyrano and database provider Progress. In each of
these relationships, StarBase's products have helped these companies provide
life cycle management solutions to their customers.
STARBASE STRATEGY
StarBase's objective is to maintain and expand its position as a leading
provider e-business digital asset management solutions for the enterprise. Key
elements of StarBase's strategy to achieve this objective are as follows:
Grow revenues through new and existing customers. With over 1,000 existing
customers, StarBase is positioned to generate additional revenue from these
customers by upgrading and expanding their use of our products. Many of
StarBase's customers use its software for traditional business software
applications. These customers are prime targets to expand their use of StarTeam
for Web site and e-business software development.
Increase penetration of the e-business market. StarBase believes our
technology, product offerings, large installed customer base and partnering
relationships position us well for deeper market penetration in e-business.
StarBase intends to leverage our market leadership to capitalize on the rapid
expansion of e-business. As StarBase's current installed customer base adopts
e-business strategies, StarBase intends to provide them with e-business
solutions that complement their existing traditional software development
application solutions.
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Enhance sales and marketing capabilities. StarBase intends to enhance our
sales and marketing organization in order to benefit from the growth of
e-business and Internet usage. StarBase seeks to continue to increase the size
and effectiveness of their direct sales organization to capitalize on the key
growth segments of our business. In addition, StarBase intends to leverage its
relationships with strategic partners such as original equipment manufacturers
(OEMs), value-added resellers (VARS), distributors, application service
providers (ASPs), and implementation partners. StarBase intends to increase its
brand awareness through a combination of advertising, direct marketing, public
relations and other marketing programs. StarBase also intends to develop
promotional and media campaigns with key customers and partners to increase its
visibility and improve its competitive position in the marketplace.
Expand product and service offerings. StarBase believes that its products
provide a strong foundation to provide e-business Life Cycle Management
Solutions. To strengthen this foundation, StarBase intends to expand its
products, technologies and services to meet its customer's strategic e-business
needs. To accomplish this goal, StarBase intends to continue to develop new
products and technologies through internal research and development, through
partnerships and the acquisition of complementary technologies and businesses.
StarBase also intends to expand the breadth of its professional services to
provide its business partners and customers with additional expertise in the
implementation of its products.
PRODUCTS
StarTeam and StarTeam Enterprise. StarBase's flagship product is called
StarTeam and it currently consists of StarTeam 4.2 and an enhanced version
called StarTeam Enterprise 4.2. StarTeam resides on a client system and runs in
a variety of development environments including Microsoft Windows NT, UNIX, and
Java Virtual Machine (JVM). StarBase is currently developing a Solaris and Linux
version. StarTeam's architecture also allows seamless integration with a variety
of source code control products, which allow users to easily export their data
to the more comprehensive StarTeam solution. The architecture also allows
interfaces to many other software products developed by other companies, such as
Microsoft Project (a Microsoft desktop project management software application).
StarTeam provides functions designed to improve productivity by increasing
team collaboration. StarTeam Enterprise adds enhanced task management and
customization capabilities. Both of these products include the StarTeam Task
Component, which is software that enables the flow of information between the
members of a project. StarTeam's Repository Customization component provides the
capability to track the unique information that a development team might need.
StarDisk. Disk, included with StarTeam Enterprise, provides an easy-to-use
software version control capability. It integrates with Microsoft Windows
Explorer, which allows both technical and non-technical team members to easily
access, revise, and store files that contain programming code, letters,
graphics, data, or other information. Team members can easily perform these
functions locally or remotely over intranets, extranets or the Internet.
StarTeam VirtualTeam Server and StarBase Server. StarTeam VirtualTeam
Server (VTS) provides team members with access to centralized project
information. The StarBase Server will add platform independence and other new
functional capabilities and includes project administration such as security,
user and group management, as well as license management. The centralized server
software is linked to the client system through a network connection (Local area
network, wide area network, or the Internet). Users on the client system have
the full functionality of the StarTeam products through the combination of the
StarTeam Client software (on the desktop) and the StarTeam VTS/Server software
(on the server).
The StarBase Server is designed to support complex eBusiness environments
including best-of-breed application development software products and Web
content-oriented portals. It will be platform independent, supporting Solaris
(Sun Microsystems) and Linux, in addition to Windows platforms.
StarGate. StarGate is a software development kit (SDK) providing access to
StarTeam's comprehensive application programming interfaces. StarGate enables
remote access to the StarBase Server through COM and JAVA interfaces. which
enables remote access to the StarBase Server. StarGate
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provides the necessary foundation for the rapid creation of e-business software
applications and Web browser interfaces.
SERVICES
StarBase provides extensive technical support and training services to its
customers, and provides consulting services designed to assist its customers in
using StarBase software to develop e-business solutions.
Technical Support and Maintenance. StarBase provides post-sale customer
support directly through its own technical support engineers, who handle most
support calls by telephone and electronic mail. StarBase offers annual
maintenance contracts, which entitle its customers to full telephone support
service and software maintenance releases. StarBase also provides its customers
access to technical support services by electronic mail and over the Internet.
Consulting. StarBase offers consulting services to its customers, OEMs,
value added resellers and system integrators to assist them in designing and
deploying StarBase applications tailored to meet their particular e-business
application needs. Consulting services have typically been offered on a time and
materials basis.
Training. StarBase provides training services at its own location as well
as at the facilities of its customers, value added resellers and system
integrators worldwide. StarBase believes its training helps to increase customer
satisfaction while enhancing its ability to make additional sales to its
existing customer base. Customers typically pay for training services on a set
fee basis.
SALES AND MARKETING
StarBase has established a centralized direct corporate sales organization
that is predominately telephone based. This centralized group is complemented by
regional sales managers, who are in the field, and sales engineers, who provide
pre-sales technical support. Sales leads are generated through a number of
marketing programs, including focused advertisements, direct mail campaigns,
trade show participation, seminars and press relations.
StarBase's domestic direct sales force produces the majority of its sales.
At December 31, 1999, StarBase 31 employees in our sales force. StarBase intends
to increase our sales force to include more field sales and strategic
partnership sales personnel. Additionally, the marketing department has sought
to further increase industry and potential customer recognition though various
marketing programs.
StarBase has also developed indirect sales channels through value-added
resellers, system integrators, resellers, consultants as well as international
distributors and resellers. In addition, StarBase has established OEM
relationships with software vendors that include our technology in their private
label products.
COMPETITION
Competition for StarBase's products and services come from companies that
address either of two major markets:
1. Team collaboration market for building and managing e-business and Web
based applications
2. Traditional software change management providers
Team collaboration market for building and managing e-business and Web based
applications
Every organization with a presence on the Internet has the requirement to
manage the process of developing, deploying, and maintaining its web sites and
intranets. The development and maintenance of web applications involve not only
the management of source code but also content. IDC refers to this particular
market as Web Development Life-Cycle Management (WDLM). As an emerging market,
WDLM includes new startup vendors and well known software developers including
Future Tense, Interwoven, Inso, IBM,
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NetObjects, Computer Associates and Vignette. StarBase is positioned in this
market to provide a unique solution that addresses the needs for management of
software releases together with web applications and web objects such as text
pages, graphics, applets, templates, style sheets and streaming media.
Traditional software change management
The market for traditional software change management solutions for
application development, like StarTeam, is intensely competitive. The major
developers and competitors in the lower-end SCM marketplace include Merant
(PVCS), Microsoft (Visual SourceSafe) and Mortice Kern Systems, Inc., "MKS",
(Source Integrity), with Continuus (Continuus/CM), Rational (ClearCase) and
Computer Associates (CCC/Harvest) products competing at the high-end of the
software configuration management market. At this time, StarBase is unaware of
any company that offers the comprehensive set of integrated tools found in
StarTeam, nor the Internet management capabilities that are present in StarTeam
VirtualTeam Server. Merant, MKS, Microsoft, Rational and others offer SCM
capabilities that are similar to those offered by StarTeam. MKS and others have
introduced configuration management products for the Web that offer some
features that are included in StarTeam VirtualTeam Server.
Many of StarBase's existing competitors have significantly greater
financial, technical and marketing resources than we do. Although StarBase
believes that its products and technologies compete favorably, StarBase cannot
assure you that it will be able to compete successfully against its current or
future competitors or that competition will not seriously harm its business.
PROPRIETARY RIGHTS
StarBase's success is heavily dependent upon its proprietary software
technology. StarBase does not currently have any patents and relies upon a
combination of copyright, trademark and trade secret laws, as well as license,
proprietary rights, non-disclosure and other contractual agreements to protect
the proprietary rights to its technology. StarBase generally enters into
proprietary information and inventions agreements with its employees. StarBase
also routinely limits access to its software, documentation and other
proprietary information. There can be no assurance that the steps taken by
StarBase will prevent misappropriation of its technology. In addition, such
protections may not preclude competitors from developing products with features
similar to StarBase's products. Although StarBase believes its products will not
infringe upon the proprietary rights of third parties, there can be no assurance
that infringement claims will not be brought against StarBase in the future. Any
such claims could result in costly litigation or have a material adverse effect
on StarBase's business, operating results and financial condition.
EMPLOYEES
As of December 31, 1999 StarBase had 97 full-time and 6 part-time
employees. Of these employees, 31 full-time and 3 part-time were in Research and
Development, 17 full-time and 2 part-time were in Administration and 49
full-time and 1 part-time were in Sales and Marketing. StarBase's workforce is
not unionized and management believes that StarBase's relations with its
employees are good.
DESCRIPTION OF PROPERTY
In July 1998, StarBase entered into a sub-lease for new office space
located at 4 Hutton Centre Drive, Santa Ana, CA 92707. The offices consist of
17,000 square feet costing approximately $27,000 per month through February 22,
2000. Simultaneously, StarBase also entered into a lease agreement for 4,100
contiguous square feet beginning January 1999 through September 2003 at a rate
of approximately $8,000 per month. In addition, StarBase entered into a lease
agreement for the 17,000 square feet beginning February 23, 2000 through
September 2003 at a rate of approximately $41,000 per month.
LEGAL PROCEEDINGS
None.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following selected financial data should be read in conjunction with
StarBase's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
included elsewhere herein. The selected financial data presented below under the
captions "Statement of Operations Data" for the years ended March 31, 1999,
1998, 1997, 1996, 1995 and "Balance Sheet Data" as of March 31, 1999, 1998,
1997, 1996 and 1995 are derived from the audited financial statements of
StarBase. The selected financial data presented below for the nine months ended
December 31, 1999 and 1998 are derived from the unaudited financial statements
on a basis consistent with StarBase's operating results and financial position
results are not necessarily indicative of future results of operations.
SELECTED HISTORICAL FINANCIAL DATA
STARBASE CORPORATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED MARCH 31,
----------------- -----------------------------------------------
1999 1998 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
License fees.................. $ 9,491 $ 4,117 $ 5,964 $ 1,863 $ 968 $ 491 $ 959
Services...................... 1,848 553 868 276 71 500 2,576
------- ------- ------- ------- ------- ------- -------
Total revenues............. 11,339 4,670 6,832 2,139 1,039 991 3,535
Costs and expenses:
Cost of license fees.......... 930 448 508 162 96 82 182
Cost of services.............. 915 -- -- -- -- 624 2,666
Research and development...... 3,075 3,161 4,437 2,762 1,791 2,466 3,145
Selling, general and
administrative............. 9,102 8,007 10,601 5,370 5,050 3,759 5,312
------- ------- ------- ------- ------- ------- -------
Total costs and expenses... 14,022 11,616 15,546 8,294 6,937 6,931 11,305
------- ------- ------- ------- ------- ------- -------
Operating loss.................. (2,683 (6,946) (8,714) (6,155) (5,898) (5,940) (7,770)
Other income (expense), net..... (162) 41 32 (877) 198 48 52
------- ------- ------- ------- ------- ------- -------
Loss before income taxes........ (2,845) (6,905) (8,682) (7,032) (5,700) (5,892) (7,718)
Provision for income taxes...... 1 2 1 1 3 1 2
------- ------- ------- ------- ------- ------- -------
Net loss........................ (2,846) (6,907) (8,683) (7,033) (5,703) (5,893) (7,720)
Non-cash dividend and accretion
of beneficial conversion
feature....................... 549 417 1,277 2,832 1,096 3,635 1,878
------- ------- ------- ------- ------- ------- -------
Net loss applicable to common
stockholders.................. $(3,395) $(7,324) $(9,960) $(9,865) $(6,799) $(9,528) $(9,598)
======= ======= ======= ======= ======= ======= =======
Per Share Data:
Basic and diluted net loss per
share......................... $ (0.11) $ (0.39) $ (0.49) $ (0.70) $ (0.62) $ (1.64) $ (2.65)
</TABLE>
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------- -----------------------------------------------
1999 1998 1999 1998 1997 1996 1995
-------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents....... $ 9,240 $ 62 $ 1,363 $ 4,167 $ 2,722 $ 1,252 $ 1,972
Working capital................. $ 9,802 $ 274 $ 2,308 $ 3,632 $ 2,384 $ (536) $ 191
Total assets.................... $16,308 $ 3,735 $ 6,605 $ 5,682 $ 3,876 $ 2,173 $ 4,147
Long term debt.................. $ 73 $ 147 $ 116 $ 38 $ -- $ 153 $ 45
Stockholders' equity............ $11,480 $ 1,511 $ 4,462 $ 4,430 $ 2,991 $ 68 $ 1,357
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998
Revenue
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. StarBase out-sources manufacturing for all software
products. 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 of $915,000, along with costs of $471,000 for an exchange of
technology.
Operating Expenses
Operating expenses for the nine month period ended December 31, 1999
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.
The number of persons employed by StarBase at December 31, 1999 compared
with December 31, 1998:
<TABLE>
<CAPTION>
DEPARTMENT: 1999 1998
- ----------- ----- ----
<S> <C> <C>
Research & Development...................................... 32.0 40.0
Sales & Marketing........................................... 49.5 36.0
Administration.............................................. 18.5 16.5
----- ----
Total............................................. 100.0 92.5
===== ====
</TABLE>
Part time employees are included in the count as one-half.
Research and development expenses.
Research and development expenses include personnel and other direct and
overhead expenses incurred in the development of StarBase's products. StarBase
continues to make significant investments in research and development intended
to bring its products to market and to support existing products. In the nine
month period ended December 31, 1999 overall research and development expenses
decreased to $3,075,000 from $3,161,000 for the same period in the prior year.
The decreases are a result of the decrease in the development staff, partially
offset by outsourced development costs.
Selling, general and administrative expenses.
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.
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The increase was mainly the result of additional sales and marketing
personnel coupled with the advertising and promotion programs to support the
StarTeam 4.1 family of products.
Interest Income/Expense
Interest income for the nine month period ended December 31, 1999, was
$114,000 compared to $57,000 for the same period in the prior year. Interest
expense for the nine month period ended December 31, 1999, increased to $25,000
from $11,000 for the same period in the prior year.
Equity in loss of investee
Equity in loss of investee for the nine month period ended December 31,
1999 was $250,000. This amount is StarBase's portion, 47%, of the operating
results of OpenAvenue Inc. limited to the total amount invested of $250,000.
Income Taxes
StarBase 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
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.
YEAR ENDED MARCH 31, 1999 COMPARED TO 1998
Revenue
Total revenue increased $4,693,000 or 219%, to $6,832,000, from $2,139,000
in fiscal 1998. This increase was substantially due to increased license and
maintenance revenue from the StarTeam product line. StarTeam 3.0 was released in
February 1998 and StarTeam 4.0 was released in February 1999.
Cost of revenues consists primarily of manufacturing and related costs such
as media, documentation, product assembly and third party royalties. StarBase
outsources manufacturing for all software products, except Roundtable. For the
year ended March 31, 1999 cost of revenues increased $346,000, to $508,000, from
$162,000 in fiscal 1998.
Operating expenses increased by approximately $6,906,000 or 85% from fiscal
1998. This increase was substantially all due to increased labor costs necessary
to develop and market the new products.
The number of persons employed by StarBase at March 31, 1999 compared with
March 31, 1998:
<TABLE>
<CAPTION>
DEPARTMENT: 1999 1998
- ----------- ---- ----
<S> <C> <C>
Research & Development...................................... 40 31
Sales & Marketing........................................... 36.5 26
Administration.............................................. 16.5 9
---- --
Total..................................................... 93 66
==== ==
</TABLE>
Part time employees are included in the count as one-half.
Research and development expenses
StarBase continues to make significant investments in research and
development intended to bring its products to market and to support existing
products. Research and development expenses increased $1,675,000 from the prior
year. The majority of the increase was due to increased compensation-related
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expenses due to a higher average number of employees during fiscal 1999 as
compared to fiscal 1998. In addition, costs increased for outside contractors
engaged for special programming and testing.
Selling, general and administrative expenses
For the year ended March 31, 1999, selling, general & administrative
expenses increased approximately $5,231,000 over the prior year. This was
substantially all due to increased compensation related expenses due to a higher
average number of employees during fiscal 1999 as compared to fiscal 1998.
Income Taxes
StarBase incurred minimal income taxes in the last two fiscal years due to
its cumulative losses. As of March 31, 1999, StarBase has net operating loss
("NOL") carryforwards of approximately $36.8 million and $17.6 million for
federal and state income tax purposes. The NOL are available to offset future
taxable income at varying amounts through the year 2019. At March 31, 1999, a
100% valuation allowance has been provided on the net deferred tax assets since
StarBase can not determine that such are "more likely than not" to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 2002, StarBase intends to adopt SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This pronouncement is not
expected to have a significant impact on StarBase's reported financial position
or results of operations.
THE YEAR 2000
As of January 31, 2000, the StarBase has experienced no disruptions or
problems regarding the year 2000 changeover. As part of StarBase's Y2K plan,
prior to January 1, 2000, StarBase tested and sampled internal systems
consisting primarily of desktop and network computers, and third-party software
utilized in the day-to-day operations of StarBase. All sampling and testing
completed by January 1, 2000 indicated all systems were operating as normal.
Through January 31, 2000, all of StarBase's internal hardware and software
continue to operate as normal and to-date, all vendors utilized by StarBase in
its daily operations are operating normally and have not indicated any Y2K
anomalies.
StarBase will continue 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 Y2K issues. Based upon
the successful transition through the January 1, 2000 rollover period, StarBase
does not anticipate any problems to materialize.
StarBase's expenditures for the Y2K effort were not material and StarBase
does not expect to incur any material costs over the next few months in regards
to Y2K.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED DECEMBER 31, 1999
Cash and cash equivalents as of December 31, 1999 were $9,240,000. At
December 31, 1999 StarBase had working capital of $9,802,000.
Net cash used by operating activities was $1,023,000 for the nine month
period ended December 31, 1999.
Investing activities have consisted of purchases of property and equipment,
investment in equity affiliates, and restricted cash. Capital expenditures were
$342,000 for the nine month period ended December 31, 1999. 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.
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Financing activities provided $9,452,000 for the nine month period ended
December 31, 1999. In July 1999, StarBase raised $4,225,000 through a private
placement of common stock. Exercise of options provided $1,529,000 and exercise
of warrants provided $4,363,000 for the nine month period ended December 31,
1999.
StarBase management projects that it will use approximately $27 million for
operating activities during the next twelve months. Based upon these
projections, StarBase believes that its 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. Should additional financing be
needed, there can be no assurance that such financing will be available to
StarBase on commercially reasonable terms or at all.
StarBase 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. StarBase has reserved approximately $87,000 at December 31, 1999
for future returns and other collection issues.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
Cash and cash equivalents as of year-end were $1.4 million in fiscal 1999
and $4.2 million in fiscal 1998. At March 31, 1999 StarBase had working capital
of $2.3 million, compared to $3.6 million at March 31, 1998.
Proceeds from the issuance of equity securities represent the primary
source of funds for meeting StarBase's requirements for operations. During
fiscal 1999, StarBase generated $7.1 million in cash from the sale of new
Preferred Stock. In addition, $0.6 million of capital was raised from the
exercise of warrants and $0.1 million was raised from the exercise of employee
stock options.
During fiscal 1999, StarBase used $9.4 million for operations, an increase
of approximately $3.8 million from the amount used for operations in the prior
year. The increase was primarily due to an increased loss from operations due to
investments in research and development and in sales and marketing
infrastructure and an increase of $2.2 million in accounts receivable. Capital
expenditures totaled $0.6 million, representing purchases primarily of computer
equipment and furniture. Capital expenditures in fiscal 1998 totaled $0.4
million.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid or accrued by StarBase to, or on behalf of, StarBase's Chief
Executive Officer and the other most highly compensated executive officers of
StarBase (the "Named StarBase Executive Officers"), for services rendered in all
capacities to StarBase during the fiscal years ended March 31, 1998 and 1999.
Except as otherwise noted, no Named StarBase Executive Officer received any
restricted stock award, stock appreciation right or payment under any long-term
incentive plan. No other officer of StarBase received annual salary and bonus
exceeding $100,000 during the relevant periods.
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<PAGE> 73
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
--------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(1)(SHARES) COMPENSATION
--------------------------- ---- --------- -------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
William R. Stow III(2)......... 1999 $150,000 $ -0- 152,000 $-0-
Chief Executive Officer, 1998 $150,000 $ -0- 249,790 $-0-
Chairman of the Board and
Director
Donald R. Farrow(3)............ 1999 $141,538 $ -0- 60,000 $-0-
President and Director 1998 $150,000 $ -0- 297,447 $-0-
Alan D. Kucheck(4)............. 1999 $130,000 $37,824 25,000 $-0-
Vice President, Engineering 1998 $120,833 $ -0- 245,075 $-0-
Douglas S. Norman(5)........... 1999 $ 92,850 $28,587 30,000 $-0-
Director of Finance, 1998 $ 72,100 $ -0- 91,700 $-0-
Chief Accounting Officer and
Assistant Secretary
</TABLE>
- ---------------
(1) Amounts represent stock options granted and/or repriced for the period
shown.
(2) Options granted during fiscal year 1998 include options to purchase 156,666
shares of the StarBase common stock, originally granted in prior years, that
were repriced.
(3) Options granted during fiscal year 1998 include options to purchase 206,250
shares of the StarBase common stock, originally granted in prior years, that
were repriced.
(4) Options granted during fiscal year 1998 include options to purchase 175,667
shares of the StarBase common stock, originally granted in prior years, that
were repriced.
(5) Option granted during fiscal year 1998 include options to purchase 54,590
shares of the StarBase common stock originally granted in prior years, that
were repriced.
(6) Amounts listed as All Other Compensation represent commissions earned or
consulting fees.
STOCK OPTIONS
The following table sets forth information concerning stock option grants
made during the fiscal year ended March 31, 1999 under StarBase's Stock Option
Plan (the "Plan") to Named Executive Officers. No stock appreciation rights were
granted to such individuals during the fiscal year.
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<PAGE> 74
OPTION/SAR GRANTS IN THE FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING OPTIONS/ PERCENT OF TOTAL OPTIONS/
SARS GRANTED SARS GRANTED TO EMPLOYEES EXERCISE OF BASE
NAME (# OF SHARES)(1) IN FISCAL YEAR(2) PRICE($/SH)(3) EXPIRATION DATE
- ---- -------------------- ------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
William R. Stow III..... 60,000 1.6% $.0625 1/04/2009
92,000 2.4% $.0625 1/04/2009
Donald R. Farrow........ 35,000 * $.0625 1/04/2009
25,000 * $.0625 1/04/2009
Alan D. Kucheck......... 25,000 * $.0625 1/04/2009
Douglas S. Norman....... 30,000 * $.0625 1/04/2009
</TABLE>
- ---------------
* Less than 1%
(1) Options granted to purchase common stock. Generally, twenty-five percent of
the options granted vest one year from the date of grant with the remaining
options vesting in equal monthly increments over the following thirty-six
months. Fifty percent of both the 60,000 options granted to Mr. Stow and the
35,000 options granted to Mr. Farrow vest immediately upon grant with the
remaining shares vesting in equal monthly increments over the following
twelve months. All of the options shown have a maximum term of ten years,
subject to earlier termination following the optionee's cessation of service
with StarBase.
(2) StarBase granted options to purchase a total of 3,873,160 shares of Common
Stock to employees, consultants and Board members during the year ended
March 31, 1999.
(3) The exercise price may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date.
OPTION EXERCISES, HOLDINGS AND FISCAL YEAR-END VALUES
The following table sets forth information concerning the number of shares
covered by both exercisable and unexercisable options held by each of the Named
Executive Officers as of March 31, 1999. No options were exercised during the
fiscal year ended March 31, 1999 by any of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND OPTION VALUES
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT MARCH 31, 1999 IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE (# OF SHARES) MARCH 31, 1999(1)
ON REALIZED --------------------------- ---------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William R. Stow III.............. 210,907 215,883 $90,473 $156,607
Donald R. Farrow................. 241,595 140,852 $99,595 $ 78,676
Alan D. Kucheck.................. 162,413 107,662 $65,310 $ 48,773
Douglas S. Norman................ 55,880 65,820 $26,446 $ 47,608
</TABLE>
- ---------------
(1) Calculated based on the closing price of the StarBase common Stock as
reported on the NASDAQ SmallCap Market on March 31, 1999 of $1.6875 per
share, less the applicable exercise price.
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<PAGE> 75
BENEFICIAL STOCKHOLDERS OF STARBASE CORPORATION
The following table sets forth as of December 31, 1999 certain information
regarding the ownership of voting securities of StarBase by each stockholder
known to the management of StarBase to be (i) the beneficial owner of more than
5% of StarBase's outstanding Common Stock, (ii) each of the directors and
nominees for director of StarBase, (iii) the executive officers named in the
Summary Compensation Table herein under "Executive Compensation" and (iv) all
named executive officers and directors as a group. Except as otherwise noted,
StarBase believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF
NAME(1) COMMON STOCK COMMON STOCK
- ------- ------------------- -------------
<S> <C> <C>
William R. Stow III......................................... 971,164(2) 2.3%
Frank R. Caccamo............................................ 84,791(3) *
Donald R. Farrow............................................ 257,364(4) *
Daniel P. Ginns............................................. 278,491(5) *
Alan D. Kucheck............................................. 210,521(6) *
Douglas S. Norman........................................... 102,884(7) *
Phillip E. Pearce........................................... 134,791(3) *
John R. Snedegar............................................ 248,235(8) *
Barry W. Sullivan........................................... 77,791(3) *
Thomas M Brattvet........................................... 46,405(3) *
Total: All Directors and Named Executive Officers (12
Persons).................................................. 3,361,959(9) 5.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise noted, the persons named in the above table have sole
voting and investment power with respect to all shares shown as beneficially
owned by them, subject to community property laws where applicable. The
address of each person named in the above table is in care of StarBase
Corporation, 4 Hutton Centre Drive, Suite 800 Santa Ana, CA 92707-8713.
(2) Includes 33,882 shares of StarBase common stock held by Mr. Stow. Also
includes 573,119 shares of StarBase common stock held by Mr. Stow as trustee
of the Stow Family Trust, of which 568,124 shares are subject to a
Performance Escrow Agreement. Also includes an aggregate of 1,749 shares of
StarBase common stock held by Mr. Stow in trust for his daughter and son.
Also includes 335,601 shares of StarBase common stock and 26,813 shares of
StarBase common stock issuable upon the exercise of currently exercisable
stock options by Mr. Stow and Mrs. Stow, respectively. Mr. Stow disclaims
beneficial ownership of the shares exercisable by Mrs. Stow.
(3) Represents shares of StarBase common stock issuable upon the exercise of
currently exercisable stock options.
(4) Includes 15,000 shares of StarBase common stock held by Mr. Farrow. Also
includes 242,364 shares of StarBase common stock issuable upon the exercise
of currently exercisable stock options.
(5) Includes 163,200 shares of StarBase common stock held by Mr. Ginns and 5,500
shares of StarBase common stock held by Mrs. Ginns. Also includes 109,791
shares of StarBase common stock issuable upon the exercise of currently
exercisable stock options. Mr. Ginns disclaims beneficial ownership of the
shares held by Mrs. Ginns.
(6) Includes 9,434 shares of StarBase common stock held by Mr. Kucheck. Also
includes 199,200 shares of StarBase common stock issuable upon the exercise
of currently exercisable stock options and 1,887 shares of StarBase common
stock issuable upon the exercise of warrants.
(7) Includes 24,220 shares of StarBase common stock held by Mr. Norman of which
13,786 shares are subject to a Performance Escrow Agreement. Also includes
76,777 shares of StarBase common stock
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<PAGE> 76
issuable upon the exercise of currently exercisable stock options and 1,887
shares of StarBase common stock issuable upon the exercise of warrants.
(8) Includes 13,753 shares of StarBase common stock held by Mr. Snedegar; 1,191
shares of StarBase common stock held by Mr. Snedegar as trustee for the
Snedegar Revocable Living Trust; 1,667 shares held by Norexco Petroleum of
which Mr. Snedegar is President; and 83,501 shares held by Access Financial
Limited of which Mr. Snedegar is the general partner. Also includes 148,123
shares of StarBase common stock issuable upon the exercise of currently
exercisable stock options.
(9) Includes a total of 926,216 shares of StarBase common stock, 3,774 shares of
StarBase common stock issuable upon the exercise of warrants and 1,482,447
shares of StarBase common stock issuable upon exercise of stock options held
by all directors and named executive officers of StarBase as a group that
are currently exercisable.
67
<PAGE> 77
OBJECTSHARE, INC.
DESCRIPTION OF OBJECTSHARE'S BUSINESS
General
ObjectShare provides a broad range of training and consulting services
supporting object-oriented software application development tools for use in the
development of distributed client/server/web applications. The three application
environments through which ObjectShare provides its services are Visual Works,
Visual Wave and Distributed SmallTalk. The first application, VisualWorks, is
the primary application development environment ("ADE") concerning which
ObjectShare provides its services. Visual Works provides a powerful visual
programming environment that enables programmers to develop, deploy, and
maintain applications ranging from workgroup and departmental applications to
complex enterprise-wide mission-critical client/server applications. VisualWorks
applications are portable across multiple platforms. The second application,
VisualWave, is an extension of the VisualWorks environment that allows a
VisualWorks application to be enhanced for deployment on the Internet. The third
application, Distributed Smalltalk ("DST"), is a tool set, used in conjunction
with VisualWorks or VisualWave, which provides a proven architecture for
developing mission-critical, enterprise-wide distributed applications.
Background
Object Oriented Application Development
Object-oriented application development represents a widely accepted
approach to develop software applications. The basic concept of object-oriented
technology is to construct software in terms of objects, which are independent
modules that can be modified independently from each other, reused in new
applications, and reused and extended to create new objects. Thus,
object-oriented technology can offer substantial productivity gains by enabling
programmers to reuse more of their application code in developing new
applications or adding new functionality to existing applications. Because new
functions can be added incrementally without changing existing objects,
applications developed using object-oriented programming are also more easily
maintained without risking the integrity of the entire system. The reusability
of tried-and-tested objects results in higher-quality code and reduced
maintenance requirements. Since independent objects can be combined to form new
objects, a complex system can be created from simpler sub-structures. These
characteristics of object-oriented systems make them well suited for the
complexity of larger-scale systems, such as those needed to support
enterprise-wide mission-critical business applications.
Smalltalk is a pure object-oriented programming language. As a pure
object-oriented language, Smalltalk provides the intended benefits of object
programming: direct business modeling, an easy-to-learn syntax, rapid
development of new objects, incremental changes to existing objects, and easy
and safe reuse of objects. Such benefits make Smalltalk generally more suitable
to corporate application development than object-based extensions of other
programming languages, such as C++, which is an object-oriented extension of C.
Both C and C++ are too complex and low level to provide a pragmatic solution for
the vast majority of corporate applications. In addition, although the C++
language provides for object orientation, it allows programmers to revert to
procedural programming techniques, thereby potentially limiting the benefits of
object-oriented programming.
Java is also an object-oriented programming language, and is being used
primarily for development of Web-based applications. Java has become the
perceived market leader for object-oriented programming language.
Client/Server/Web Computing
In recent years, many organizations have moved their information systems
from mainframe and mini-computer based architectures to distributed
client/server computing environments. Client/server systems
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<PAGE> 78
typically consist of multiple desktop PC and workstation clients linked in a
network to one or more high-performance servers. This computing architecture has
several benefits:
- client/server computing enables end-users to access and share
enterprise-wide data and applications;
- additional clients, servers and other computing resources can easily be
added to the network in cost-effective increments; and
- because of the distributed nature of client/server systems, organizations
can improve the overall effectiveness of their computing resources by
appropriately distributing application logic, processing and data among
clients and servers.
The distribution of functionality among objects and the ability of objects
to communicate with each other makes object-oriented technology ideally suited
for the client/server environment. Client/server architectures are based upon
the distribution of functionality among different computers on a network and the
ability of clients and servers to communicate via message-passing.
Object-oriented technology is based on a similar message-passing architecture in
which objects on clients and servers throughout a network can easily communicate
to comprise an enterprise-wide client/server application. Distributed computing
standards like the Common Object Request Broker Architecture ("CORBA") enhance
communication among objects.
The Internet is a global web of computer networks. This "network of
networks" allows any computer attached to the Internet to talk to any other,
using the Internet Protocol. Much of the recent growth in Internet use by
businesses and individuals has been driven by the emergence of the World Wide
Web (the "Web"), a format for delivering graphical information over the
Internet. The Web, based on a client/server model and a set of standards for
information access and navigation, can be accessed using client "browser"
software that allows non-technical users to exploit the capabilities of the
Internet. As an increasing number of organizations provide their employees with
Web access from their desktops, an opportunity is emerging for internal
information systems and enterprise applications hosted on internal Web servers.
These systems are referred to as the "intranet." An intranet enables
organizations to extend their internal information systems and enterprise
applications to geographically dispersed facilities, remote offices, and mobile
employees using Web browsers and server software.
Client/server/web computing refers to application development and delivery
systems for business software that will operate in both a client/server
environment and on the Internet and/or Intranet without modification or
recompilation.
Distributed Computing
Distributed computing is based on the ability to distribute applications
across a network. Early application networks provided simple data or procedural
interfaces among software programs that needed to interact. The complexity of
such a system expands geometrically as the number of discrete application
components in such a system increases. Managing application networks larger than
a single enterprise can be an impossible task unless distributed components can
communicate with each other without the need to understand each interface in the
distributed network of components.
Distributed objects resolve this crucial problem by using standards that
support sending messages to and receiving messages from other objects regardless
of location. Distributed objects can reside on different machines and on an
intranet or the Internet, and they can migrate from one host to the other,
surviving beyond the life of a current host. A majority of distributed objects
adhere to CORBA, a standard for object messaging maintained by the Object
Management Group ("OMG"). The main advantage of CORBA is the ability to
transparently interoperate with other languages that support CORBA. Messages
between objects are converted into language-neutral forms that are processed by
an object request broker ("ORB"), which carries the translated message from one
object to another.
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<PAGE> 79
Integrated Application Development Environment
ObjectShare believes that customers developing client/server/web or
distributed computing applications require a service provider who is complete,
powerful, robust and has an extensible development environment as a foundation
for their development efforts. VisualWorks, one of the application environments
within which ObjectShare delivers its services, provides a fully integrated
graphical user interface ("GUI") builder, access to multiple databases,
cross-platform portability, true object-oriented visual programming in the
Smalltalk language, and an extensive library of pre-developed classes and
methods that support its environment. VisualWave, a second application
environment within which ObjectShare delivers its services and as an extension
of VisualWorks, provides the capabilities to develop applications that are ready
to be deployed on the Internet in the familiar VisualWorks development
environment.
Professional Services
To help ensure successful development, deployment and maintenance of
mission-critical business applications, ObjectShare provides a full range of
professional services and support. ObjectShare's training programs and
consulting services allow ObjectShare to provide a complete service solution for
corporate application developers seeking the benefits of object-oriented
technology. As of December 31, 1999, ObjectShare had 13 full-time employees
consisting of three (3) in sales and marketing, four (4) in finance and
administration and six (6) employees providing training and consulting services.
In addition, ObjectShare maintains a network of contractor/consultants to
augment its permanent staff.
ObjectShare offers extensive training. ObjectShare offers courses focusing
on the concepts of object-oriented programming, as well as courses in the use of
ObjectShare's preferred application development environments, add-on tools, and
developer productivity tools.
For customers requiring experienced object-oriented developers, ObjectShare
offers consulting services. ObjectShare provides both short-term and long-term
project assistance at customer sites to help ensure a project's success and an
accelerated transfer of skills.
Strategic Relationships
Overview
ObjectShare has established a number of strategic relationships with
management consultants, system integrators, and computer system and software
providers. ObjectShare believes that its relationships with product and service
providers for client/server computing will encourage and reinforce the decision
by corporations to entrust their strategic mission-critical applications to
ObjectShare's training and support services. ObjectShare has strived to
establish strategic alliances to make object-oriented technology a clear choice
for large organizations.
Management Consultants and System Integrators
ObjectShare has marketing, training and development relationships with
leading management consultants and system integrators that help corporations
reengineer their business models and implement client/server computing
solutions. As facilitators for many customers migrating to client/server
architectures and object-oriented technology, management consultants and system
integrators help to encourage use of ObjectShare's services. ObjectShare has had
strategic relationships with organizations such as: American Management Systems,
Andersen Consulting, Arbor Intelligence, Cambridge Technology, Computer Sciences
Corporation, Gemini Consulting, Intelligent Environments, MCI Systemhouse,
Morgan, Parker, Johnson, Object Wave, and SPL Worldgroup. It has also
established technology partnerships with organizations such as Rational, Arbor
Intelligence, Intersolv, Oracle, Applied Reasoning, IC&K, and Unisys.
ObjectShare collaborates on projects and in the cross selling of services, etc.
These relationships are non-exclusive, are not all subject to written agreements
and may be discontinued at any time.
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EMPLOYEES
As of December 31, 1999, ObjectShare had thirteen (13) full-time employees,
consisting of three (3) in sales and marketing, four (4) in finance and
administration and six (6) in training and professional services. No employees
are covered by any collective bargaining agreements. ObjectShare believes that
its relationships with its employees are generally good. The future success of
ObjectShare depends in a large part on its ability to attract and retain
qualified personnel. The loss of the services of one or more of ObjectShare's
key employees could have a material adverse effect on ObjectShare's ability to
deliver its training and consulting services, thereby affecting ObjectShare's
operating results and financial condition. Competition for qualified personnel
is intense, and there can be no assurance that ObjectShare will be able to
retain or attract qualified personnel.
DESCRIPTION OF PROPERTY
ObjectShare's corporate headquarters are located in Irvine, California in
an 11,600 square foot facility occupied under a lease expiring in December,
2000. Also, ObjectShare leases offices in Illinois, Oregon and Virginia, which
are no longer utilized by ObjectShare and have been subleased or are being
offered for sublease. ObjectShare believes that its existing facilities will be
adequate to meet its needs through at least fiscal 2000.
COMPETITION
The market for providing training and consulting services related to
large-scale client/server/web computing environments is intensely competitive
and ObjectShare expects competition to continue to increase. ObjectShare's
competitors include a broad range of companies that also develop and market
tools and languages for software application development, including Borland,
Forte, Informix, Microsoft, Oracle, Sun Microsystems, and Sybase. Many of
ObjectShare's current and prospective competitors have significantly greater
financial, technical, and marketing resources than ObjectShare
The principal competitive factors affecting the market for ObjectShare's
services include the skillsets of the consultants ObjectShare is able to bring
to a project and the timeliness and content of the training courseware. There
can be no assurance that ObjectShare will be successful in the face of
increasing competition from new products and enhancements introduced by existing
competitors and by new companies entering the market.
LEGAL PROCEEDINGS
ObjectShare does not know of any current pending legal proceedings but may
in the future be subject to legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, ObjectShare's management does
not believe that the outcome of any of these legal matters will have a material
adverse affect on ObjectShare's consolidated financial position, results of
operations, or cash flows.
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<PAGE> 81
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following selected consolidated historical financial data should be
read in conjunction with ObjectShare's financial statements and related notes
thereto included elsewhere herein. The selected financial data presented below
under the captions "Statement of Operations Data" for the years ended March 31,
1999, 1998 and 1997 and "Balance Sheet Data" as of March 31, 1999, 1998 and 1997
are derived from the financial statements of ObjectShare, which have been
audited by Ernst & Young LLP, independent auditors. Ernst & Young LLP's report
on the consolidated financial statements for the year ended March 31, 1999,
which is included in Appendix C, includes an explanatory paragraph which
describes an uncertainty about ObjectShare's ability to continue as a going
concern. The selected financial data presented below for the nine months ended
December 31, 1999 and 1998, are derived from the unaudited financial statements
of ObjectShare. The unaudited financial statements have been prepared by
ObjectShare on a basis consistent with ObjectShare's audited financial
statements and in the opinion of management include all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of ObjectShare's
operating results and financial position for the periods and dates to which such
statements are related. Historical results are not necessarily indicative of
future results of operations.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
OBJECTSHARE, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, FOR THE YEAR ENDED MARCH 31,
------------------ ------------------------------
1999 1998 1999 1998 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenues:
Service............................... $ 4,897 $ 7,958 $10,426 $12,068 $ 17,138
License............................... 1,464 3,630 5,380 8,172 20,148
------- ------- ------- ------- --------
Total net revenues................. 6,361 11,588 15,806 20,240 37,286
Cost of net revenues:
Cost of service....................... 3,040 4,180 5,705 7,569 10,379
Cost of license....................... 543 762 1,737 1,626 5,537
------- ------- ------- ------- --------
Total cost of net revenues......... 3,583 4,942 7,442 9,195 15,916
------- ------- ------- ------- --------
Gross profit............................ 2,778 6,646 8,364 11,045 21,370
Operating expenses:
Sales and marketing................... 2,794 4,592 6,719 7,684 19,465
Research and development.............. 824 2,881 3,542 4,648 8,904
General and administrative............ 2,634 1,998 3,281 3,956 7,436
Acquired research and development..... -- -- -- -- 3,513
Restructuring and merger-related
costs.............................. -- (166) (166) 2,621 5,162
------- ------- ------- ------- --------
Total operating expenses........... 6,252 9,305 13,376 18,909 44,480
------- ------- ------- ------- --------
Loss from operations.................... (3,474) (2,659) (5,012) (7,864) (23,110)
Interest and other income, net.......... 3,229 256 160 313 725
------- ------- ------- ------- --------
Loss before provision for income
taxes................................. (245) (2,403) (4,852) (7,551) (22,385)
Provision (benefit) for income taxes.... -- (29) (13) 31 95
------- ------- ------- ------- --------
Net loss................................ $ (245) $(2,374) $(4,839) $(7,582) $(22,480)
======= ======= ======= ======= ========
Basic and diluted net loss per share.... $ (0.02) $ (0.19) $ (0.39) $ (0.63) $ (1.91)
Shares used in computing basic and
diluted
</TABLE>
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<PAGE> 82
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------ -------------------------------
1999 1998 1999 1998 1997
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents.................. $ 780 $1,638 $ 1,675 $ 5,134 $ 7,418
Working capital............................ $ (30) $ 842 $(1,366) $ 3,420 $ 8,108
Total assets............................... $1,642 $4,377 $ 7,712 $13,255 $23,872
Long term debt............................. $ 74 $ -- $ 103 $ -- $ --
Stockholders' equity....................... $ 234 $2,603 $ 124 $ 4,792 $12,272
</TABLE>
The following should be read in conjunction with ObjectShare's condensed
consolidated financial statements and notes thereto for the nine months ended
December 31, 1999 and the consolidated financial statements for the three years
ended March 31, 1999, included elsewhere herein.
OVERVIEW
ObjectShare provides a comprehensive range of training and consulting
services supporting object-oriented application developments for use in
distributed client/server/web applications.
Prior to December 1999, ObjectShare also sold software and related support.
ObjectShare's primary products were VisualWorks, VisualWave and Distributed
Smalltalk, which are application development environments ("ADEs") based on the
Smalltalk programming language. ObjectShare has over the last fiscal year, sold
off certain of its rights and assets related to its former products sales. See
"-- Recent Sale Transactions." ObjectShare is now focusing exclusively on its
training and consulting business.
RECENT SALE TRANSACTIONS
Java/Seagull Transaction
On April 8, 1999, ObjectShare completed the sale of certain rights and
assets to Seagull Software Systems, Inc. ("Seagull") in exchange for
approximately $725,000 in cash and the assumption of liabilities in the
approximate amount of $96,000. These rights and assets consisted of, among other
things: ObjectShare's proprietary computer software application development
environments, including VisualSmalltalk and PARTS for Java, a visual programming
environment based on Java programming language; products currently in
development to support Enterprise JavaBeans and legacy software system
integration; all technology, warranties, documentation and other intellectual
property rights of ObjectShare related to such software; as well as certain
personal property. Pursuant to a software license agreement between ObjectShare
and Seagull, Seagull licensed back to ObjectShare: the rights to continue to
provide support and maintenance and to sell the VisualSmalltalk product line;
and the rights to (a) sell, for a period of one year, and (b) provide support
and maintenance, perpetually, the PARTS for Java product line. The sale of these
assets resulted in a gain of $483,000 for ObjectShare which is included in Other
Income for the nine months ended December 31, 1999.
SmallTalk/Cincom Transaction
On August 30, 1999, ObjectShare completed the sale of certain rights and
assets to Cincom Systems, Inc. ("Cincom"), in exchange for approximately
$425,000 in cash, the assumption of certain liabilities, and guaranteed
royalties of approximately $500,000. These rights and assets consisted of, among
other things, ObjectShare's proprietary computer software known generally as
Smalltalk, and other intellectual property rights of ObjectShare related to such
software and certain personal property. Pursuant to this transaction, Cincom
agreed to allow ObjectShare the rights to continue to use the software for
training and consulting purposes and to sell the Smalltalk product line. In
addition, Cincom assumed the future obligations under certain other agreements.
The liabilities assumed by Cincom included ongoing maintenance and support,
certain capital leases, and accrued vacation and others, which were recorded on
the books of ObjectShare at approximately $2,100,000. The actual cost to perform
these obligations may
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be less than the amounts recorded. The sale of these assets resulted in a gain
of $2,486,000 for ObjectShare which is included in Other Income for the nine
months ended December 31, 1999.
European Transaction
On November 24, 1999, ObjectShare completed the sale of all of the stock of
ObjectShare, Gmbh, a German corporation, and ObjectShare (U.K.) Limited, an
English corporation (collectively, the "Subsidiaries"), to Valtech S.A. a French
societe anonyme and its wholly-owned subsidiary Valtech Limited, respectively,
in exchange for total consideration of (a) approximately $1,600,000 in cash and
(b) the cancellation of certain intercompany indebtedness owed by the
Subsidiaries to ObjectShare. As a result of this transaction, ObjectShare has no
operations in Europe, with its remaining operations consisting primarily of
providing training and consulting services in the United States. The sale of
these subsidiaries resulted in a gain of $254,000 for ObjectShare which is
included in Other Income for the nine months ended December 31, 1999.
As a result of these transactions, ObjectShare's remaining operations
consist primarily of providing training and consulting services in the United
States.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
In addition to the other information set forth in this report, the
following are certain risks that should be considered with regard to ObjectShare
and its common stock.
Decreased Acceptance Of Smalltalk
ObjectShare's training and consulting services are largely based on object
oriented analysis, design and development programming languages, which includes
both Java and Smalltalk. Previously, these services were based primarily on
Smalltalk which was a major factor in ObjectShare's sales decline in recent
years due in large part to corporate users' reluctance to make new and/or
additional investments in Smalltalk-based applications. This reluctance
correlates to the perception that Java has emerged as the leading programming
language for future object-oriented application development. Corporate users'
reluctance to invest in Smalltalk was further compounded by ObjectShare's
declining sales and recurring operating losses from fiscal 1996 through fiscal
1999.
Loss Of And Dependence On Key Personnel
ObjectShare has in the last nine months lost a total of 97 personnel,
primarily due to the sale transactions mentioned above. ObjectShare's future
success depends upon its ability to attract and retain highly qualified
personnel. Loss of key personnel or inability to hire and retain qualified
personnel could have a material adverse effect on ObjectShare's business and
results of operations. Competition for qualified personnel is intense and has
recently intensified in ObjectShare's geographic and industry segments. The loss
of key personnel or an inability to hire qualified personnel will adversely
affect ObjectShare's business and results of operations.
Need For Continued Acceptance Of Object-Oriented Technology
ObjectShare currently derives substantially all of its revenue from
consulting and training services focused on object-oriented application
development environments and expects this concentration to continue for the
foreseeable future. As a result, any factor adversely affecting the demand for,
or pricing of, object-oriented application development environments and related
services, would have a material adverse effect on ObjectShare's business and
results of operations. In addition, the future success of ObjectShare's current
product family depends upon continued market acceptance of object-oriented
technology, particularly continued investment by corporate users in developing
mission-critical applications. Because object-oriented technology represents a
fundamental shift in programming methodology, it requires a substantial
investment in the retraining of programmers, which can discourage organizations
from choosing object-oriented tools. Even if organizations choose to make the
investment required to use
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object-oriented technology, there can be no assurance that they will choose
products based on the Smalltalk language, such as ObjectShare's services, or
that ObjectShare will be successful in the market for object-oriented
application development environments, which is already crowded with larger and
better-funded competitors such as Oracle, IBM, Sun Microsystems and Symantec.
There are a number of potential approaches to implementing object technology,
including the use of languages other than Smalltalk, such as C++, object
extensions of COBOL, Java, object-based third-generation programming languages
("3GLs"), and other new languages and software tools that may currently be under
development or that may be developed in the future.
Need For Continued Acceptance Of ObjectShare's Legacy
ObjectShare has built its training and consulting practice based in part on
its expertise as a developer of Smalltalk and related tools. There can be no
assurance that, now that ObjectShare is no longer a developer, the marketplace
will not choose a competitor who is also a developer to provide training and
consulting services.
Fluctuations In Quarterly Results
ObjectShare has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. Service revenues tend
to fluctuate as consulting projects, which may continue over several quarters,
are undertaken or completed. Training revenues may fluctuate, as there are
normally periods of time between classes for preparation and development of new
courseware. Because ObjectShare's staffing and other operating expenses are
based on anticipated revenues, operating results will be adversely affected if
the anticipated level of revenues is not realized in the expected quarter or
over the course of the year. ObjectShare's results in recent quarters are not
necessarily indicative of future results and ObjectShare believes that
period-to-period comparisons of its financial results should not be relied upon
as the sole indicator of future performance, although such comparisons may be
useful in establishing an overall trend in financial results. For reasons
discussed above, ObjectShare will no longer generate license related revenue.
Volatility Of Stock Price
The market for ObjectShare common stock is highly volatile. The trading
price of ObjectShare common stock has been and will likely continue to be
subject to wide fluctuations in response to quarterly variations in
ObjectShare's operating results, announcements of new services provided by
ObjectShare or its competitors, general market fluctuations, and other events
and factors. Changes in earnings estimates made by brokerage firms and industry
analysts relating to the market in which ObjectShare does business, or relating
to ObjectShare specifically, have in the past resulted and could in the future
result in an immediate and adverse effect on the market price of ObjectShare
common stock.
On June 23, 1999, ObjectShare common stock was de-listed from the Nasdaq
Stock Market. Currently ObjectShare common stock is traded on the OTC Bulletin
Board under the symbol "OBJS".
Technological Change And New Products
The market for software related training and consulting for
client/server/web computing environments is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
ObjectShare must continually update its existing services to keep them current
with changing customer needs, technology, and competitive products. New
technologies could render existing products obsolete. If ObjectShare is unable
to enhance its existing consulting and training skillsets and develop new
skillsets in response to changing customer requirements, ObjectShare's business
and results of operations will be materially and adversely affected.
In particular, the market for ObjectShare's services has been adversely
affected by the emergence of Java as the dominant language for developing
web-based client applications. Also, the growth of the Internet as a means of
communicating information about competitive products has shortened the average
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development cycle for software. This has caused an increase in competition in
the market for ObjectShare's services. The failure of others to develop or
enhance technologies that are critical to broad public acceptance and use of the
Internet may also affect ObjectShare's ability to market its services for
Internet application development.
Intellectual Property And Other Proprietary Rights
ObjectShare disposed of all significant intellectual property during the
quarter ended September 30, 1999 in connection with several recent sale
transactions. See "-- Recent Sale Transactions."
Dependence On Third-Party Relationships
In its service offerings, ObjectShare uses certain products and
technologies of various third-party software developers. Such products and
technologies are obtained from the third-party providers under contractual
license agreements, which in some cases are for limited time periods and in some
cases provide that such licenses may be terminated under certain circumstances.
There can be no assurances that ObjectShare will be able to maintain adequate
relations with these third-party providers, that these third-party providers
will commit adequate development resources to maintain these products and
technologies, or that the license agreements that are for limited time periods
will be renewed upon termination. ObjectShare has established a number of
strategic relationships with management consultants, system integrators, and
computer system and software providers. These companies provide software
development, marketing, reselling, and training services that ObjectShare
believes are important to its existing and future business. These relationships
are non-exclusive and may be discontinued at any time.
Managing A Changing Business
Since its inception, ObjectShare has experienced changes in its operations
which have placed significant demands on ObjectShare's administrative,
operational, and financial resources. ObjectShare has experienced both rapid
growth and substantial downturns, which have caused extreme stresses on the
organization, both in the immediate term and in the longer term. In recent
years, ObjectShare has implemented a number of restructurings and reductions in
its workforce. As a result, ObjectShare has incurred a number of risks
associated with its reduced operating size and capabilities. These risks include
an increased sensitivity to employee turnover, with a greater likelihood that
turnover would have a significant negative effect on ObjectShare's operations,
potentially causing delays in generating consulting and training billings and
the need for ObjectShare to effectively manage dramatically changing operations.
Loss of Revenues from International Operations
Approximately 31%, 31%, and 32% of ObjectShare's net revenues for the years
ended March 31, 1999, 1998, and 1997, respectively, were attributable to
international sales. Approximately half of these international revenues were
derived from service revenues. As mentioned above, ObjectShare no longer has
operations outside the United States. See "Recent Sale Transactions -- European
Transaction."
Future Capital Requirements
It is anticipated that ObjectShare will need additional funds to support
its operations during fiscal year 2000. The terms of any equity financing may be
dilutive to ObjectShare's stockholders, and the terms of any debt financing are
likely to contain restrictive covenants which limit ObjectShare's ability to
pursue certain courses of action. There can be no assurance that additional
funding will be available on acceptable terms, if at all. If adequate funds are
not available, ObjectShare will experience severe liquidity problems. This
matter raises substantial doubt as to ObjectShare's ability to continue as a
going concern.
In connection with the signing of the merger agreement, StarBase has,
pursuant to a Secured Promissory Note, dated November 3, 1999 (the "Note"),
provided ObjectShare a line of credit of up to $500,000. This credit line bears
interest at a prime plus 0.75%, is secured by all assets of ObjectShare, and
matures on October 31, 2000 subject to earlier maturity based upon specified
events. Under the terms of
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the Note, StarBase may advance, but is not obligated to advance, loans to
ObjectShare following ObjectShare's sale of its previously held foreign
subsidiaries. These subsidiaries were sold on November 29, 1999. See "Recent
Sale Transactions -- European Transactions."
As of October 6, 1999, ObjectShare entered into an Accounts Receivable
Purchase Agreement with a bank. This agreement provides ObjectShare with the
ability to sell up to $1,000,000 of eligible receivables to the bank. The bank
will pay ObjectShare 80% of the face value upon the sale and the balance after
subsequent collection by the bank. ObjectShare remains contingently liable for
the collection of these receivables. ObjectShare's obligations are secured by
all of ObjectShare's assets. Fees include an administrative fee of 0.5% of the
amount sold and 1.5% per month on the uncollected balance of the receivables
sold. This replaced the prior credit agreement with the same bank.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items in ObjectShare's Statements of
Operations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
------------------ --------------------
1999 1998 1999 1998 1997
----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Net Revenues:........................... 100% 100% 100% 100% 100%
Service..................................... 77 69 66 60 46
License..................................... 23 31 34 40 54
Total Cost of Net Revenues:................... 57 43 47 45 43
Cost of Service............................. 48 36 36 37 28
Cost of License............................. 9 7 11 8 15
Gross Profit.................................. 43 57 53 55 57
Total Operating Expenses:..................... 98 80 85 93 119
Sales and marketing......................... 44 39 43 38 52
Research and development.................... 13 25 22 23 24
General and administrative.................. 41 17 21 20 20
Acquired research and development........... -- -- -- -- 9
Restructuring and merger related costs...... -- (1) (1) 13 14
Net loss from operations...................... (55) (23) (32) (39) (62)
Interest and other income (expense), net...... 51 2 1 2 2
Income/(loss) before income taxes............. (3) (21) (31) (37) (60)
Provision for income taxes.................... -- * * * *
Net income/(loss)............................. (3) (21) (31) (37) (60)
</TABLE>
- ---------------
* Less than one percent.
Nine Months Ended December 31, 1998 and 1999
Net Revenues. Total net revenues for the nine months ended December 31,
1999 were $6.4 million, compared with $11.6 million for the comparable 1998
period. This equates to a decrease of 45%. The decrease is due primarily to a
declining demand for SmallTalk products and related services resulting in
corresponding decreased in license and service revenues. Net revenues are
comprised of service revenues and license revenues.
Service Revenues. Service revenues for the nine months ended December 31,
1999 were $4.9 million, or 77% of net revenues, compared with $8.0 million, or
69% of net revenues, for the comparable 1998 period. This increase in service
revenues as a percentage of total net revenue was driven by the fact that
ObjectShare sold all aspects of its business which produced license revenues in
August 1999. See "-- Recent Sale Transactions."
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License Revenues. License revenues for the nine months ended December 31,
1999 were $1.5 million, or 23% of net revenues, compared with $3.6 million, or
31% of net revenues, for the comparable 1998 period. This $2.1 million decrease
relates to the fact that in August 1999, ObjectShare sold the portion of its
business which produced significant license revenues. See "-- Recent Sale
Transactions." Also the release of the new 5i version of Visual Works in March
1999, resulted in many customers making or accelerating Smalltalk related
license purchases into March 1999. Smalltalk license sales decreased $2.0
million. The balance of the decrease related to reduced Java license sales.
Cost of Net Revenues. Cost of Net Revenues for the nine months ended
December 31, 1999 were $3.6 million, or 57% of net revenues, compared with $4.9
million, or 43% of net revenues, for the comparable 1998 period.
Cost of Service Revenues. Cost of service revenues consists primarily of
salaries, commissions, facility expenses and travel-related expenses. Cost of
service revenues for the nine months ended December 31, 1999 were $3.0 million,
or 62% of related net service revenues, compared with $4.2 million, or 53% of
net service revenues, for the comparable 1998 period. Cost of service revenues
decreased for the first nine months of fiscal 2000, from the comparable periods
of fiscal 1999, because of a decrease in total headcount in the training,
consulting and technical support departments in anticipation of increased
service contracts which did not come to fruition by the first quarter of fiscal
2000. During the second and third quarters, headcount and related expenses
decreased to more closely match anticipated revenue levels. Expenses related to
support activities also decreased during the first nine months of fiscal 2000 as
a result of the Cincom transaction. See "-- Recent Sale Transactions."
Cost of License Revenues. Cost of license revenues is primarily comprised
of the cost of production of ObjectShare's products, related royalties and the
amortization of capitalized software costs. Cost of license revenues for the
nine months ended December 31, 1999 were $543,000, or 37% of related net license
revenues, compared with $762,000, or 21% of net license revenues, for the
comparable 1998 period. Costs associated with license revenues increased for the
first nine months of fiscal 2000, from the comparable period of fiscal 1999 due
primarily to ObjectShare's effecting definitive calculations of future royalty
payments owed by ObjectShare, primarily minimum royalties, now due as a result
of the Cincom transaction. See "-- Recent Sale Transactions."
Operating Expenses. Total operating expenses for the nine months ended
December 31, 1999 were $6.3 million, or 98% of net revenues, compared with $9.3
million, or 80% of net revenues, for the comparable 1998 period.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, travel-related expenses and advertising. Sales and
marketing expenses for the nine months ended December 31, 1999 were $2.8
million, or 44% of net revenues, compared with $4.6 million, or 40% of net
revenues, for the comparable 1998 period. The total amount spent decreased as
the Company scaled back its efforts in this area in anticipation of lower sales
levels. Total expense as a percentage of net revenues increased due to the fixed
nature of certain of the costs.
Research and Development. Research and development expenses for the nine
months ended December 31, 1999 were $824,000, or 13% of net revenues, compared
with $2.9 million, or 25% of net revenues, for the comparable 1998 period. This
decrease in research and development expense was due to a planned reduction in
research and related headcount. In August 1999, ObjectShare discontinued this
operation as part of the Cincom transaction. See "-- Recent Sale Transactions."
General and Administrative. General and administrative expenses for the
nine months ended December 31, 1999 were $2.6 million, or 41% of net revenues,
compared with $2.0 million, or 17% of net revenues, for the comparable 1998
period. This increase was largely due to increased reliance on outside services
for the divestitures effected during fiscal year 2000, for required increased
disclosure in the Annual Report on Form 10-K, and the hiring of certain
investment bankers and other professionals to assist in identifying strategic
options and downsizing opportunities.
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Restructuring and Merger Related Costs. ObjectShare recorded restructuring
costs in the second quarter of fiscal 1998 and the third and fourth quarters of
fiscal 1997. During the nine months ended December 31, 1998, ObjectShare made
payments of $347,000 and recorded a return to operations of reserves of $166,000
provided in prior years for events that were completed in the current period.
ObjectShare utilized the remaining reserves in fiscal 1999.
Interest And Other Income (Expense), Net. Interest and other income
(expense) for the nine months ended December 31, 1999 were $3.2 million, or 51%
of net revenues, compared with $256,000, or 2% of net revenues, for the
comparable 1998 period. This substantial increase was due primarily to the $2.5
million gain on the sale related to the Smalltalk/Cincom transaction, the
$483,000 gain related to the Java/Seagull transaction and the $254,000 gain
related to the European/Valtech transaction. See "-- Recent Sale Transactions."
Provision For Income Taxes. No provision for income taxes has been
recorded for fiscal 2000, as ObjectShare does not anticipate taxable income for
the year and has operating loss carryforwards in excess of the income reported
for the first nine months of fiscal 2000. ObjectShare reported losses for the
first six months of fiscal 1999. It recorded a foreign tax benefit of $49,000 in
fiscal 1999.
Years Ended March 31, 1999, 1998 and 1997
Net revenues
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------------------------------
1999 CHANGE 1998 CHANGE 1997 CHANGE
------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
License............................ $ 5,380 (34)% $ 8,172 (59)% $20,148 (36)%
Service............................ 10,426 (14)% 12,068 (30)% 17,138 (4)%
------- ------- -------
Net Revenues....................... $15,806 (22)% $20,240 (46)% $37,286 (25)%
======= ======= =======
</TABLE>
Net revenues for fiscal 1999, 1998 and 1997 were $15.8 million, 20.2
million and $37.3 million, respectively, which reflect decreases of 22%, 46% and
25% from each of the previous years, respectively. The decrease in revenues from
fiscal 1998 to fiscal 1999 is believed by ObjectShare to be due to the following
factors:
- Weakness in the marketplace for Smalltalk products resulting from the
perceived strength of Java;
- Customer concern regarding the viability of ObjectShare in light of four
years of declining sales and recurring operating losses; and
- A shift of focus to Y2K compliance by potential customers with a
resulting delay in development projects.
ObjectShare believes that the decrease in sales from fiscal 1997 to fiscal
1998 was due largely to events occurring in fiscal 1997 that affected results
for fiscal 1998, including:
- Termination of the VisualSmalltalk Enterprise (VSE) product line in
fiscal 1997;
- Elimination of runtime license fees in fiscal 1997;
- Lack of new releases in the core VisualWorks product line;
- Customer concern over the viability of ObjectShare in light of three
years of declining sales and recurring operating losses, led to
significant gains from competitors entering the Smalltalk market,
including IBM; and
- Growing customer perception of the Smalltalk programming language as an
academic/specialty niche tool, correlated to the emergence and popularity
of Java.
License Revenues. License revenues for fiscal 1999, 1998 and 1997 were
$5.4 million, $8.2 million and $20.1 million, respectively, which reflect
decreases of 34%, 59% and 36% from each of the previous
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years, respectively. License revenues for fiscal 1999, 1998 and 1997 represented
34%, 40% and 54%, respectively, of net revenues. These declines are the result
of Smalltalk's weakness in the marketplace and the customer concerns regarding
the financial viability of ObjectShare.
Service Revenues. Service revenues for fiscal 1999, 1998 and 1997 were
$10.4 million, $12.1 million and $17.1 million, respectively, which reflect
decreases 14%, 30% and 4% from each of the previous years, respectively. Service
revenues for fiscal 1999, 1998 and 1997 represented 66%, 60% and 46%,
respectively, of net revenues. The overall downward trend of service revenues is
due to both reduced demand for training and consulting, which is largely driven
by sales of development environments and the emergence of Smalltalk-oriented
consultancies that specialize in custom application/solution development, in
particular industries.
International Revenues. International revenues for fiscal 1999, 1998, and
1997 were $4.9 million, $6.2 million, and $11.9 million, respectively, which
reflect decreases 21%, 48% and 23% from each of the previous years,
respectively. International revenues for fiscal 1999, 1998 and 1997 represented
31%, 31%, and 32%, respectively, of net revenues. International revenues consist
primarily of U.S. export sales and European training and consulting. The
decrease in international revenue in fiscal 1999 was due to the same factors
discussed above for worldwide revenues. The 48% decrease in international
revenue in fiscal 1998 was also the result, in part, of the sale of the French
subsidiary in mid year. ObjectShare no longer has any international operations.
See "-- Recent Sales Transactions."
Cost Of Net Revenues.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------
1999 CHANGE 1998 CHANGE 1997 CHANGE
------ ------ ------ ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cost of license revenues............. $1,737 7% $1,626 (71)% $ 5,537 (5)%
Percentage of license revenues....... 32.3% 19.9% 27.5%
Cost of service revenues............. $5,705 (25)% $7,569 (27)% $10,379 (7)%
Percentage of service revenues....... 54.7% 62.7% 60.6%
Total cost of revenues............... $7,442 (19)% $9,195 (42)% $15,916 (6)%
Percentage of net revenues........... 47.1% 45.4% 42.7%
</TABLE>
Cost of net revenues is charged to either license revenues or service
revenues. Cost of license revenues, which is primarily comprised of the
production of ObjectShare's products and related royalties, is substantially
lower than cost of service revenues, which consists primarily of personnel
costs. Cost of net revenues for fiscal 1999, 1998, and 1997 were $7.4 million,
$9.2 million, and $15.9 million, respectively, representing 47%, 45%, and 43%,
respectively, of net revenues.
Cost Of License Revenues. Cost of license revenues consists principally of
royalties, materials, packaging and freight, and amortization of capitalized
software costs. Cost of license revenues for fiscal 1999, 1998, and 1997 were
$1.7 million, $1.6 million, and $5.5 million, respectively. Cost of license
revenues increased by 7% in fiscal 1999 compared to the prior year and decreased
by 71% and 5% in fiscal 1998 and fiscal 1997 compared to the prior years,
respectively, due to lower sales of development environments. License gross
profit as a percentage of license revenues in fiscal 1999 decreased to 68%. This
was primarily the result of the write-off of $372,000 of capitalized software
related to VEOS, ObjectShare's middleware product, at the end of fiscal 1999.
License gross profit improved as a percentage of license revenues in fiscal 1998
to 80%, as fiscal 1997 cost of sales were high due to write-offs of purchased
capitalized software, increased royalty accruals, write-offs of obsolete
inventory, and the higher launch cost of sales on Parts for Java.
Cost Of Service Revenues. Cost of service revenues consists principally of
personnel, and related costs for training, consulting and customer support. Cost
of service revenues for fiscal 1999, 1998, and 1997 were $5.7 million, $7.6
million, and $10.4 million, respectively. Overall services headcount and
contract personnel were reduced in fiscal 1998 and in fiscal 1997, although
international services headcount
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increased in fiscal 1997. In fiscal 1999, service gross profit increased as a
percentage of service revenues to 45%, due to the full year benefit of the cost
reduction actions taken in fiscal 1998.
Operating expenses.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------
1999 CHANGE 1998 CHANGE 1997 CHANGE
------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing.................. $ 6,719 (13)% $ 7,684 (61)% $19,465 (12)%
Percentage of net revenues........... 42.5% 38.0% 52.2%
Research and development............. $ 3,542 (24)% $ 4,648 (48)% $ 8,904 (14)%
Percentage of net revenues........... 22.4% 23.0% 23.9%
General and administrative........... $ 3,281 (17)% $ 3,956 (47)% $ 7,436 8%
Percentage of net revenues........... 20.8% 19.5% 19.9%
Acquired research and development.... -- -- $ 3,513 (N/A)
Percentage of net revenues........... 9.4%
Restructuring and merger related
costs.............................. (166) (106)% $ 2,621 (49)% $ 5,162 1%
Percentage of net revenues........... (1.1)% 12.9% 13.8%
Total operating expenses............. $13,376 (29)% $18,909 (58)% $44,480 0%
Percentage of net revenues........... 84.6% 93.4% 119.3%
</TABLE>
Operating expenses for fiscal 1999, 1998, and 1997 were $13.4 million,
$18.9 million, and $44.5 million, respectively, which reflect decreases of 29%,
58% and 0% from each of the previous years, respectively. Operating expenses for
fiscal 1999, 1998 and 1997 represented 85%, 93%, and 119%, respectively, of net
revenues. The fiscal 1999 declines reflect the full year impact of the prior
year's reduction of its workforce. In response to declining revenues,
ObjectShare implemented two reductions in the workforce in fiscal 1997, and one
in fiscal 1998. The year-to-year decline in operating expenses reflect these
workforce reductions and lower volume driven expenses such as commissions on
sales.
Sales And Marketing Expenses. Sales and marketing expenses consist
principally of salaries, commissions, travel, facility costs, marketing programs
and advertising. Sales and marketing expenses for fiscal 1999, 1998 and 1997
were $6.7 million, $7.7 million, and $19.5 million, respectively, which reflect
decreases of 13%, 61% and 12% from each of the previous years, respectively.
Sales and marketing expenses for fiscal 1999, 1998 and 1997 represented 43%,
38%, and 52%, respectively, of net revenues. During fiscal 1999, sales and
marketing expenses continued to decrease as a result of reducing the
international sales force, the effect of the spin-off of the sales subsidiary in
France effected in fiscal 1998, and a reduction in marketing personnel. As a
percentage of net revenues, however, these expenses increased to 42.5%. Sales
and marketing expense declines in fiscal year 1998 were also a result of the
1997 and 1998 de-layering and workforce reduction actions.
Research And Development Expenditures. Research and development
expenditures are mostly personnel related. Research and development expenditures
for fiscal 1999, 1998 and 1997 were $3.5 million, $4.7 million, and $8.9
million, respectively, which represents 22%, 23%, and 24%, respectively, of net
revenues. The decrease in fiscal 1999 was due to manpower reductions and the
capitalization of projects, which reached technological feasibility. During the
year, ObjectShare capitalized $495,000 of software development costs related to
its middleware product, VEOS, and $522,000 of costs associated with development
of the internet capable version of ObjectShare's VisualWorks Smalltalk product,
VW5i, as the development of these products reached technological feasibility.
Subsequently, in the fourth quarter of fiscal 1999, the unamortized development
costs related to VEOS were written off and charged to license cost of sales, as
the recoverability of such costs through future revenue did not materialize as
expected. ObjectShare did not capitalize software development costs in fiscal
1998 and fiscal 1997.
General And Administrative Expenses. General and administrative expenses
consist of personnel costs for administration, finance, information systems,
human resources, and general management, as well
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as professional service expenses. General and administrative expenses were $3.3
million, $4.0 million, and $7.4 million, respectively, which represents 21%,
20%, and 20%, respectively, of net revenues. General and administrative expenses
decreased in fiscal 1999 and 1998 primarily due to manpower reductions. The
fiscal 1998 decrease was also impacted by a decrease in bad debt allowance.
Fiscal 1997 expenses were up 8% from the prior year.
Acquired Research And Development. Acquired research and development
represents charges for software that had not yet reached technological
feasibility under SFAS 86. In fiscal 1997, a charge of $646,000 was taken in
connection with the October 1996 acquisition of privately held Polymorphic
Software, Inc. and a charge of $2.9 million was taken in connection with the
July 1996 acquisition of privately held ObjectShare Systems, Inc.
Restructuring And Merger Related Costs. Restructuring and merger related
costs for fiscal 1999, 1998 and 1997 were ($166,000), $2.6 million, and $5.2
million, respectively, which represents (1)%, 13% and 14%, respectively, of net
revenues. The following business combinations and restructurings are reflected
in these figures:
- In February 1996, ObjectShare acquired all the assets of AMiGO S.A, a
French-based distributor of ObjectShare's VisualWorks product. In
September 1997, ObjectShare decided to spin-off the entity to its
management. At the time of the acquisition, which was accounted for as a
purchase, ObjectShare made an initial payment of $688,000. In the second
quarter of fiscal 1998, ObjectShare paid an additional $150,000 in
satisfaction of its "earnout" obligation under the acquisition agreement,
in connection with revenues in France in accordance with the agreement
for the specified period. ObjectShare also provided an additional
$100,000 to the spin-off entity as working capital. Most of the initial
purchase price, which included transaction costs, was allocated to
intangible assets (included in other assets), a portion of which was
amortized in fiscal 1997 and the balance of which was written off in
connection with the spin-off. The results of operations of AMiGO, which
have not been material in relation to those of ObjectShare, are included
in the consolidated results of operations for the period of ownership by
ObjectShare.
- On July 31, 1996, ObjectShare acquired ObjectShare Systems, Inc. ("OSI"),
a privately held corporation which developed and marketed add-on products
for Smalltalk tools. The acquisition was accounted for as a purchase in
which ObjectShare paid $3.0 million in cash and assumed options for the
purchase of 104,086 shares of ObjectShare common stock. In connection
with the acquisition, ObjectShare recorded intangible assets of $363,000
and charged to operations $2.9 million for acquired research and
development. In connection with a restructuring of operations later in
fiscal 1997, ObjectShare charged to operations the unamortized portion of
the intangible assets. The operating results of OSI have been included in
ObjectShare's consolidated results of operations from the date of
acquisition.
- On October 1, 1996, ObjectShare acquired Polymorphic Software, Inc.
("PSI"), a privately held corporation which developed and marketed
Smalltalk tools and provided related consulting services. This
acquisition was accounted for as a purchase in which ObjectShare agreed
to pay approximately $1.0 million in cash, of which $700,000 was paid
during the third quarter of fiscal 1997, in exchange for all outstanding
shares of PSI common stock. The operating results of PSI are included in
ObjectShare's consolidated results of operations from the date of
acquisition. In connection with the acquisition, ObjectShare recorded
intangible assets of $403,000 and charged to operations $646,000 for
acquired research and development. In connection with the restructuring
of operations later in fiscal 1997, ObjectShare charged to operations the
unamortized portion of the intangible assets.
- During fiscal 2000, several transactions occurred which are described
under "Recent Sale Transactions."
Restructuring and merger related costs reflect charges recorded in
connection with the restructuring of operations in the second quarter of fiscal
1998, and the third and fourth quarters of fiscal 1997. In the
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restructurings, ObjectShare reduced its total headcount by an aggregate of
approximately 160 people, including employees and contractors, down to 110 at
March 31, 1998. These actions were taken in an effort to reduce ObjectShare's
ongoing operating expenses. ObjectShare recorded restructuring charges in the
second quarter of fiscal 1998 of $2.6 million and in the third and fourth
quarters of fiscal 1997 of approximately $2.2 million and $3.0 million,
respectively, to cover severance benefits, the closing of excess facilities,
write-down of acquired intangible assets related to discontinued products, and
the write-down of excess computer equipment and office furniture.
The fiscal 1998 restructuring costs and 1999 utilization and related
liabilities are summarized below:
<TABLE>
<CAPTION>
WRITE-DOWNS, WRITE-DOWNS,
PAYMENTS, AND ACCRUED PAYMENTS, AND ACCRUED
1998 RECLASSIFICATIONS RESTRUCTURING RECLASSIFICATIONS RESTRUCTURING
RESTRUCTURING THROUGH COSTS AT THROUGH COSTS AT
COSTS MARCH 31, MARCH 31, MARCH 31, MARCH 31,
PROVISION 1998 1998 1999 1999
------------- ----------------- ------------- ----------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Severance benefits......... $ 550 $ 550 $ -- $ -- $--
Closing of excess
facilities............... 1,395 881 514 514 --
Intangible assets
write-down............... 584 564 20 20 --
Equipment and furniture
write-down............... 68 68 -- -- --
Other...................... 24 24 -- -- --
------ ------ ---- ---- --
$2,621 $2,087 $534 $534 $--
====== ====== ==== ==== ==
</TABLE>
In fiscal 1999, ObjectShare completed these restructuring activities and
reversed to operations $166,000 of excess accruals related to the closing of
excess facilities.
Interest and other income, net.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1999 CHANGE 1998 CHANGE 1997 CHANGE
---- ------ ---- ------ ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and other income, net............... $160 (49)% $313 (57)% $725 (44)%
Percentage of net revenues................... 1.0% 1.5% 1.9%
</TABLE>
Interest and other income, net consists primarily of interest earned on
ObjectShare's cash and cash equivalent balances and marketable securities,
offset by interest paid and other expenses. The decrease in fiscal 1999 and 1998
reflects lower interest income from reduced cash, cash equivalent and marketable
securities balances.
THE YEAR 2000
As of the date of this filing, ObjectShare has experienced no disruptions
or problems regarding the year 2000 changeover. As part of ObjectShare's Y2K
plan, prior to January 1, 2000, ObjectShare tested and sampled internal systems
consisting primarily of desktop and network computers, and third-party software
utilized in the day-to-day operations of ObjectShare. All sampling and testing
completed by January 1, 2000 indicated all systems were operating as normal,
Through January 31, 2000, all of ObjectShare's internal hardware and software
continue to operate as normal and to-date, all vendors utilized by ObjectShare
in its daily operations are operating normally and have not indicated any Y2K
anomalies.
ObjectShare will continue 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 Y2K issues.
Based upon the successful transition through the January 1, 2000 rollover
period, ObjectShare does not anticipate any problems to materialize.
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<PAGE> 93
ObjectShare's expenditures for the Y2K effort were not material and
ObjectShare does not expect to incur any material costs over the next few months
in regards to Y2K.
LIQUIDITY AND CAPITAL RESOURCES
ObjectShare's operations have resulted in net losses of $4.8 million, $7.6
million and $22.5 million during each of the three years ended March 31, 1999,
1998 and 1997, respectively. As of March 31, 1999, ObjectShare has an
accumulated deficit of $49.8 million and ObjectShare's current liabilities
exceeded its current assets by $1.4 million. During fiscal 1999 and 1998,
management implemented certain cost reduction and product development actions to
improve ObjectShare's revenues and profitability. These actions included
leveraging and redirecting ObjectShare's technology and consulting resources and
revising the marketing strategy to implement more of a solutions and
services-oriented business model. However, ObjectShare continues to experience
operating losses which have seriously eroded cash reserves.
Although management's goal is to reduce losses and, ultimately, return
ObjectShare to profitability, there can be no assurance that these actions will
allow ObjectShare to achieve profitability. After giving effect to the planned
cost cutting measures, management believes that ObjectShare will still need to
obtain additional sources of financing to satisfy ObjectShare's near-term
operating requirements.
As of December 31, 1999, ObjectShare had cash and cash equivalents of
$780,000 and negative working capital of $30,000 compared to $1.7 million of
cash and cash equivalents and $1.4 million of negative working capital as of
March 31, 1999.
ObjectShare used cash in operations of $2.8 million in the nine months
ended December 31, 1999 down from the $3.4 million used in the nine months ended
December 31, 1998. This reflects the reduced sales level of operations and
related reduced payable and royalty levels. Due to its net losses in fiscal
1999, 1998 and 1997, ObjectShare used $4.1 million, $9.2 million and $9.4
million, respectively, of cash to fund its operating activities. The net cash
used in operating activities in fiscal 1998 was greater than the net loss,
primarily due to the net effect of decreases in accounts payable, accrued
liabilities, accrued restructuring costs, and deferred revenue. Accounts
receivable decreased as a result of reduced revenues.
ObjectShare has no significant capital commitments for fiscal 2000.
Financing activities provided cash of $1.2 million, $.1 million and $1.3
million for fiscal 1999, 1998 and 1997, respectively. Cash from financing
activities in 1999 was derived primarily from borrowings from ObjectShare's line
of credit with a bank and interest earned on cash equivalents.
Cash from financing activities in fiscal 1998 and 1997 was derived
primarily from the issuance of common stock under ObjectShare's employee stock
plans.
Cash from investing activities in 1998 and 1997 was derived primarily from
the maturing of marketable securities.
During December 1998, ObjectShare entered into a $5 million line of credit
with a commercial bank that expired in December 1999. On October 28, 1999
ObjectShare paid off substantially all of the indebtedness under the above
credit agreement using the proceeds from the sale of certain receivables to the
bank under an Accounts Receivable Purchase Agreement. There will be no more
advances under the above credit agreement. The Receivable Purchase Agreement
provides the facility to sell up to $1,000,000 of eligible receivables to the
bank. The bank will pay 80% of the face value upon the sale and the balance
after subsequent collection by the bank. ObjectShare remains contingently liable
for the collection of these receivables. ObjectShare's obligations are secured
by all of ObjectShare's assets. Fees include an administrative fee of 0.5% of
the amount sold and 1.5% per month on the uncollected balance of the receivables
sold. At December 31, 1999, ObjectShare was contingently liable for $25,000
related to receivables sold to the bank. This amount was received by the bank
during January 2000. In connection with this contingent liability, $7,000 of
cash was held in a restricted account at the bank at December 31, 1999.
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<PAGE> 94
It is anticipated that cash on hand and cash flow from operations will not
be sufficient to support ObjectShare's operations beyond the anticipated
timeframe for the completion of the merger. In the event the merger with
StarBase is not completed, ObjectShare will need additional capital. There is no
assurance ObjectShare will be able to obtain additional capital on terms
acceptable to ObjectShare or at all. Failure to obtain sufficient levels of
additional capital will result in material liquidity problems for ObjectShare.
These matters raise substantial doubt about ObjectShare's ability to continue as
a going concern.
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<PAGE> 95
BENEFICIAL STOCKHOLDERS OF OBJECTSHARE, INC.
The following table sets forth certain information regarding the beneficial
ownership of ObjectShare common stock of ObjectShare as of December 31, 1999 by:
(i) each person known by ObjectShare to be the beneficial owner of more than 5%
of the outstanding ObjectShare common stock; (ii) each director and executive
officer of ObjectShare; and (iii) all directors and executive officers of
ObjectShare as a group. Unless otherwise indicated, the persons named in this
table have sole voting and sole investment power with respect to all shares
shown as beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER(1) PERCENT(2)
- --------------------------------------- ---------- -----------
<S> <C> <C>
Eugene L. Goda(3)........................................... 650,000 5.2%
Sam Inman III(4)............................................ 7,916 *
Edward B. Merino(5)......................................... 4,166 *
James H. Smith(6)........................................... 555,000 4.5%
All directors and executive officers as a group (4
persons)(7)............................................... 1,217,082 9.8%
</TABLE>
- ---------------
(1) Except as otherwise indicated, (i) the persons named in the table have sole
voting and investment power with respect to all shares of ObjectShare common
stock shown as beneficially owned by them, subject to community property
laws, where applicable and (ii) the address for persons named in the table
is: 16811 Hale Avenue, Suite A, Irvine, California 92614.
(2) Percentage of ownership is based on 12,470,863 shares of ObjectShare common
stock outstanding on December 31, 1999, and is calculated pursuant to Rule
13d-3(d)(1) under the Securities Exchange Act of 1934, as amended.
(3) Includes 650,000 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1999.
(4) Includes 7,916 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1999.
(5) Includes 4,166 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1999.
(6) Includes 555,000 shares issuable to Mr. Smith upon the exercise of options
exercisable within 60 days of December 31, 1999. Mr. Smith's address is: c/o
4 Hutton Centre Drive, Suite 800, Santa Ana, CA 92707.
(7) Includes 1,217,082 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1999.
NAMED EXPERTS
LEGAL MATTERS
Parker Chapin, LLP, New York, New York will pass upon the validity of the
securities offered hereby.
EXPERTS
The financial statements as of March 31, 1998 and for the year then ended
included in this Proxy Statement/Prospectus have been so included in reliance on
the report (which contains an explanatory paragraph relating to the ability of
StarBase to continue as a going concern as described in Note 2 to the financial
statements) of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
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<PAGE> 96
The financial statements of StarBase Corporation for the year ended March
31, 1999, included in this Proxy Statement/Prospectus, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to substantial doubt about the ability of
StarBase Corporation to continue as a going concern, as described in Note 2 to
the financial statements), and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of ObjectShare, Inc. at March 31,
1999 and 1998, and for each of the three years in the period ended March 31,
1999, included in this Proxy Statement/Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon (which contains an explanatory paragraph describing
conditions that raise substantial doubt about ObjectShare's ability to continue
as a going concern as described in Note 2 to the consolidated financial
statements) appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
FINANCIAL ADVISORS
Duff & Phelps acted as financial advisor to ObjectShare in connection with
the merger. Pursuant to the terms of its engagement, ObjectShare has agreed to
pay Duff & Phelps $125,000 certain fees for its financial advisory services
provided in connection with the merger. In addition, ObjectShare has agreed to
indemnify Duff & Phelps and certain related persons against certain liabilities,
including certain liabilities under the federal securities laws, relating to, or
arising out of, its engagement.
First Security Van Kasper acted as StarBase's financial advisor in
connection with the merger. Pursuant to the terms of its engagement, StarBase
has agreed to pay FSVK certain fees for its financial advisory services provided
in connection with the merger. In addition, StarBase has agreed to indemnify
FSVK and certain related persons against certain liabilities, including certain
liabilities under the federal securities laws, relating to, or arising out of,
its engagement.
NEITHER STARBASE NOR OBJECTSHARE HAS AUTHORIZED ANY DEALER, SALESPERSON OR
ANY OTHER PERSON TO GIVE ANY INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED
IN THIS PROXY STATEMENT/PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED
INFORMATION. THIS PROXY STATEMENT/PROSPECTUS DOES NOT OFFER TO SELL OR BUY ANY
SHARES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS IS CURRENT AS OF MARCH 6, 2000.
OTHER MATTERS
ObjectShare knows of no other business that will be presented for action by
its stockholders at the special meeting. If other business is properly presented
for consideration at the special meeting, the enclosed proxy authorizes the
person named therein to vote the shares in their discretion.
WHERE YOU CAN FIND MORE INFORMATION
StarBase and ObjectShare are subject to the informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act"), and, in accordance
therewith, file periodic reports, proxy statements and other information with
the SEC relating to their business, financial statements and other matters. You
can inspect and copy reports and proxy and information statements filed pursuant
to Sections 14(a) and 14(c) of the Exchange Act and other information filed with
the SEC as well as copies of the Registration Statement, of which this Proxy
Statement/Prospectus is a part, at the public reference facilities maintained by
the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, and at the following Regional Offices of the SEC: Midwest Regional
Office, 500 West Madison Avenue, Suite 1400, Chicago, Illinois 60661; and
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. You can also obtain copies of such material at prescribed rates from the
Public Reference Section of the SEC at its principal office at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549, (800) 732-0330. In addition, the
SEC maintains a Web site that contains
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reports, proxy and information statements and other information that StarBase
and ObjectShare file electronically with the SEC. The SEC's Web site address is
http:\ \www.sec.gov.
StarBase has filed with the SEC a Registration Statement on Form S-4 with
respect to the securities to be issued to ObjectShare' stockholders in the
merger. This Proxy Statement/Prospectus also constitutes the prospectus of
StarBase filed as part of the Registration Statement and does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. Statements made in this Proxy Statement/Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, we refer you to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. You may
inspect and copy the Registration Statement and any amendments thereto,
including exhibits filed as part thereof, at the SEC's offices as described
above.
StarBase and ObjectShare incorporate herein by reference additional
documents that either company may file with the SEC between the date of this
Proxy Statement/Prospectus and the date of the ObjectShare special meeting.
These documents include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
You can obtain any of the documents incorporated by reference in this
document from StarBase or ObjectShare, as the case may be, or from the SEC
through the SEC's web site at the address provided above. Documents incorporated
by reference are available from the companies without charge, excluding any
exhibits to those documents unless the exhibit is specifically incorporated by
reference as an exhibit in this Proxy Statement/Prospectus. You can obtain
documents incorporated by reference in this Proxy Statement/Prospectus by
requesting them in writing or by telephone from the appropriate company at the
following addresses.
<TABLE>
<S> <C>
FOR STARBASE DOCUMENTS: FOR OBJECTSHARE DOCUMENTS:
StarBase Corporation MacKenzie Partners, Inc.
4 Hutton Centre Drive, Suite 800 156 Fifth Avenue
Santa Ana, California, 92707 New York, New York 10010
(714) 445-4400 (212) 929-5500 (Call Collect) or
CALL TOLL-FREE (800) 322-2885
</TABLE>
If you would like to request documents related to either ObjectShare or
StarBase, please do so by April 5, 2000 in order to receive them before the
ObjectShare special meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS TO VOTE ON THE MERGER. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS IS
DATED MARCH 6, 2000. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THE
PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND
NEITHER THE MAILING OF THE PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS NOT THE
ISSUANCE OF STARBASE COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO
THE CONTRARY.
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of November 3, 1999 (the
"Agreement"), by and among STARBASE CORPORATION, a Delaware corporation
("StarBase"); OBJS ACQUISITION CORP., a Delaware corporation and a wholly-owned
subsidiary of StarBase ("Subsidiary"); and OBJECTSHARE, INC., a Delaware
corporation ("OBJS").
W I T N E S S E T H :
WHEREAS, OBJS is engaged in the provision of software related customer
support, training and consulting services, either on its own accord or acting
through its subsidiaries or affiliates set forth in Schedule 2.3 hereof (the
"Business");
WHEREAS, the Boards of Directors of StarBase and of Subsidiary, and
StarBase, as the sole stockholder of Subsidiary, as well as the Board of
Directors of OBJS and the stockholders of OBJS have (or shall have on or before
the Effective Date) (a) determined that it is in the best interests of their
respective companies for OBJS to be merged with and into Subsidiary upon the
terms and subject to the conditions set forth herein and (b) approved the merger
of OBJS with and into Subsidiary (the "Merger") in accordance with the General
Corporation Law of the State of Delaware ("Delaware Law"), and upon the terms
and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto do hereby agree as follows:
1. The Merger.
1.1. The Merger. At the Effective Date (as defined in Section 1.2), and
subject to and upon the terms and conditions of this Agreement and Delaware Law,
OBJS shall be merged with and into Subsidiary, the separate corporate existence
of OBJS shall cease, and Subsidiary shall continue as the surviving corporation.
Subsidiary, as the surviving corporation after the Merger, is hereinafter
sometimes referred to as the "Surviving Corporation."
1.2. Effective Date. StarBase, Subsidiary and OBJS shall cause the Merger
to be consummated by filing a Certificate of Merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware and making such
other filing as may be required by Delaware Law, in such form as required by and
executed in accordance with such laws (the time of the last such filings to be
made being the "Effective Date").
1.3. Effect of the Merger. At the Effective Date, the effect of the Merger
shall be as provided in the applicable provisions of Delaware Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Date, all the rights, privileges, powers, franchises and all property (real,
personal and mixed) of OBJS and all debts due OBJS shall vest in Subsidiary, and
all debts, liabilities, obligations and duties of OBJS shall become the debts,
liabilities, obligations and duties of Subsidiary.
1.4. Certificate of Incorporation; By-Laws.
(a) The Certificate of Incorporation of Subsidiary, as in effect
immediately prior to the Effective Date, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law or such Certificate of Incorporation.
(b) The By-Laws of Subsidiary, as in effect immediately prior to the
Effective Date, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of the
Surviving Corporation or By-Laws.
1.5. Directors and Officers of the Surviving Corporation. The officers and
directors of the Subsidiary immediately prior to the Effective Date shall be the
officers and directors of Surviving Corporation immediately after consummation
of the Merger, which directors and officers shall serve as such in accordance
with applicable law, the Certificate of Incorporation and By-Laws of the
Surviving Corporation until their resignation, removal or replacement.
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<PAGE> 99
1.6. Conversion of Securities. At the Effective Date, by virtue of the
Merger and without any action on the part of StarBase, Subsidiary or OBJS:
(a) Each issued and outstanding share of the OBJS Stock (as defined in
Section 2.2 hereof), other than Dissenting Stock (as defined below) or
shares of OBJS Stock held in treasury of OBJS as of the Effective Date,
shall be automatically converted into the right to receive consideration
per share (the "Merger Consideration") consisting of that number of shares
of StarBase Common Stock (as defined in Section 3.2 hereof), determined by
dividing (i) a fraction, (A) the numerator of which shall be the OBJS
Enterprise Value (as defined below), as adjusted, and (B) the denominator
of which shall be the number of issued and outstanding shares of OBJS Stock
(including Dissenting Stock, if any, but excluding that number of shares of
OBJS Stock, if any, issued pursuant to Section 4.16 hereof) other than
shares of OBJS Stock held in treasury by (ii) $2.00, subject to adjustment
as appropriate to account for any split, combination or reclassification
with respect to the StarBase Common Stock. Anything to the contrary
contained herein notwithstanding, the Merger Consideration shall not be (x)
less than the quotient determined by a dividing a fraction, the numerator
of which shall be $6,150,000 and the denominator which shall be the number
of outstanding shares of OBJS Stock (including Dissenting Stock, if any,
but excluding that number of shares of OBJS Stock, if any, issued pursuant
to Section 4.16 hereof), by the average closing price of StarBase Common
Stock as reported on the Nasdaq SmallCap Market for the three (3) trading
days immediately prior to that date which is one (1) business day prior to
the Effective Date (the "StarBase Closing Market Price") or (y) greater
than the quotient determined by dividing a fraction, the numerator of which
shall be $8,850,000 and the denominator which shall be the number of
outstanding shares of OBJS Stock (including Dissenting Stock, if any, but
excluding that number of shares of OBJS Stock, if any, issued pursuant to
Section 4.16 hereof), by the StarBase Closing Market Price. The number of
StarBase Common Stock (or portion thereof) issuable for each share of OBJS
Stock as herein provided shall be hereinafter referred to as the "Merger
Exchange Ratio."
For purposes hereof, the "OBJS Enterprise Value" shall equal
$7,500,000 less the Enterprise Value Adjustment Amount (as defined herein),
if any. "Enterprise Value Adjustment Amount" shall mean the amount by which
the sum of OBJS' (on a consolidated basis): (1) accounts receivable (net of
allowances for doubtful accounts consistent with generally accepted
accounting principles ("GAAP") and OBJS' prior practices) and (2) cash and
cash equivalents minus (A) indebtedness for borrowed money minus (B)
accounts payable, (C) accrued liabilities (including employee severance not
to exceed $500,000 in aggregate value, OBJS' portion of the premiums with
respect to each Insurance Policy (as defined in Section 4.14 hereof) but
excluding capitalized leases and deferred revenue) and (D) to the extent
that the cash proceeds realized from any European Transaction (as defined
in Section 4.8 hereof), net of any expenses incurred in connection
therewith, are less than $1.8 million, an amount equal to the difference
between $1.8 million and the actual net proceeds realized with respect to
such European Transaction (each of items (1), (2) and (A) - (D) an
"Enterprise Value Factor"), each as determined in accordance with GAAP and
as evidenced by the balance sheet for OBJS on a consolidated basis at two
business days prior to the Effective Date (the "Closing Balance Sheet"),
exceeds a negative balance of $1,600,000. For purpose of calculating the
OBJS Enterprise Value, "cash and cash equivalents" shall also include all
cash proceeds received by OBJS from the holders of OBJS Options (as defined
in Section 1.6(c) hereof) with respect to the exercise of their respective
OBJS Options on or before the date of the Closing Balance Sheet.
Notwithstanding the provisions of this paragraph, the Closing Date Balance
Sheet shall reflect the assets and liabilities of the European operations
as of the day prior to the European Transaction as though such assets and
liabilities were part of OBJS as of the Closing Date Balance Sheet and an
amount equal to the net proceeds received by OBJS from the European
Transaction shall be treated as an accrued liability on the Closing Date
Balance Sheet.
(b) All shares of the OBJS Stock surrendered in exchange for shares of
StarBase Common Stock, shall be canceled and extinguished by OBJS.
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<PAGE> 100
(c) Any option exercisable or exchangeable into shares of OBJS Stock
and outstanding as of the Effective Date (the "OBJS Options"), a complete
and accurate list of which is set forth in Schedule 2.2(c), shall be
canceled and extinguished without any conversion thereof and no payment
shall be made with respect thereto; it being acknowledged hereby that
StarBase may grant, on a case by case basis, options to purchase shares of
StarBase Common Stock (the "StarBase Merger Options") to certain holders of
OBJS Options in connection with this Merger. As of the Effective Date,
StarBase shall have reserved sufficient shares of StarBase Common Stock for
issuance of the required number of shares of StarBase Common Stock pursuant
to the exercise of any StarBase Merger Options.
(d) Any shares of the capital stock of OBJS held in the treasury of
OBJS shall be canceled and extinguished without any conversion thereof and
no payment shall be made with respect thereto.
(e) No fractional shares of StarBase Common Stock shall be issued in
connection with the Merger but, in lieu thereof, each holder of OBJS Stock
who would otherwise be entitled to a fraction of a share of StarBase Common
Stock (after aggregating all fractional shares of StarBase Common Stock to
be received by such holder) will be entitled to receive from StarBase an
amount of cash (rounded to the nearest whole US $0.01) equal to the product
of (i) such fraction of a share multiplied by (ii) the StarBase Closing
Market Price.
(f) From and after the Effective Date, the holders of certificates
evidencing ownership of OBJS Stock shall cease to have any rights with
respect to such stock, except as otherwise provided herein or by law.
(g) Notwithstanding any provision of this Agreement to the contrary,
shares of the OBJS Stock with respect to which appraisal rights have been
demanded and perfected in accordance with Section 262(d) of Delaware Law
(the "Dissenting Stock") shall not be converted into the right to receive
the Merger Consideration at or after the Effective Date, and the holder
thereof shall be entitled only to such rights as are granted by Delaware
Law. Notwithstanding the preceding sentence, if any holder of shares of the
OBJS Stock who demands appraisal of such shares under Delaware Law shall
effectively withdraw his demand for such appraisal (in accordance with
Section 262(k) of Delaware Law) or becomes ineligible for such appraisal
(through failure to perfect or otherwise) then, as of the Effective Date or
the occurrence of such event, whichever is the last to occur, such holder's
Dissenting Stock shall cease to be Dissenting Stock and shall be converted
into and represent the right to receive the Merger Consideration, without
interest thereon, as provided in this Section 1.6. OBJS shall give StarBase
and Subsidiary (i) prompt notice of any written demands for appraisal,
withdrawals of demands for appraisal and any other instrument served
pursuant to Section 262 of Delaware Law received by OBJS and (ii) the
opportunity to participate in all negotiations and proceedings with respect
to demands for appraisal under such Section.
(h) Each share of the capital stock of Subsidiary issued and
outstanding at the Effective Date shall remain outstanding as fully paid
and nonassessable shares of the common stock of the Surviving Corporation.
(i) The Merger Exchange Ratio shall be adjusted as may be necessary
and appropriate to reflect any and all stock splits, reverse stock splits,
reclassifications and similar capital events that affect the StarBase
Common Stock.
1.7. Closing of Transfer Books. At the Effective Date, the stock transfer
books of OBJS shall be closed and there shall be no further registration of
transfers of any shares of the capital stock of OBJS thereafter on its records.
1.8. Exchange of Certificates. At least five days prior to the mailing of
the Proxy Statement (as defined in Section 4.7 hereof), Subsidiary shall,
subject to the reasonable approval of OBJS, designate an exchange agent (the
"Exchange Agent") to effect the exchange for StarBase Common Stock of
certificates that, prior to the Effective Date, represented shares of OBJS Stock
entitled to the Merger Consideration. As soon as practicable after the Effective
Date, the Exchange Agent shall send a notice and
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transmittal form to each holder of record of OBJS Stock immediately prior to the
Effective Date advising such holder of the effectiveness of the Merger and the
procedure for surrendering to the Exchange Agent (who may appoint forwarding
agents with the approval of Subsidiary) the certificates to be exchanged
pursuant to the Merger. Upon the surrender for exchange of such a certificate,
together with instructions thereto and such other documents as may be required
pursuant to such instructions, the holder shall receive the Merger
Consideration. After the Effective Date, until so surrendered and exchanged,
each certificate which immediately prior to the Effective Date represented
outstanding shares of the OBJS Stock (other than Dissenting Stock) shall
represent solely the right to receive the Merger Consideration.
2. Representations and Warranties as to OBJS.
OBJS hereby represents and warrants to StarBase and Subsidiary, as follows:
2.1. Organization, Standing and Power.
(a) OBJS is a corporation duly organized, validly existing and in good
standing under the laws of Delaware, with full corporate power and authority to
own, lease and operate its properties and to carry on the Business, as presently
conducted by it. Except as set forth on Schedule 2.1, OBJS is duly qualified and
is in good standing as a foreign corporation in all states or jurisdictions in
which the character and location of any of the properties owned or leased by
OBJS, or the conduct of its Business, makes it necessary for it to qualify to do
business as a foreign corporation and where it has not so qualified, except for
those jurisdictions in which the failure to so qualify would not have a Material
Adverse Effect (as defined in Section 2.5 hereof) on the Business or operations
of OBJS. Copies of the Certificate of Incorporation of OBJS and all amendments
thereof and the By-laws of OBJS, as amended to date, have been made available to
StarBase and are complete and correct. OBJS's minute books heretofore made
available to StarBase contain complete and accurate records of all meetings and
other corporate actions of its stockholders and board of directors (including
committees of its Board of Directors).
(b) Each of the OBJS Subsidiaries (as defined in Section 2.3 hereof) is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its formation, with full power and authority to own, lease and
operate its properties and to carry on the Business, as presently conducted by
it. Except as set forth on Schedule 2.1, each of the subsidiaries set forth on
Schedule 2.3 is duly qualified and/or licensed in all states or jurisdictions in
which the character and location of any of the properties owned or leased by it,
or the conduct of its Business, makes it necessary for it to be so qualified
and/or licensed, except for those jurisdictions in which the failure to so
qualify would not have a Material Adverse Effect on the Business or operations
of such subsidiary. Copies of the constituent documents of each such subsidiary
and all amendments to date thereof, have been made available to StarBase and are
complete and correct.
2.2. Capitalization.
(a) The authorized capital stock of OBJS consists of 30,000,000 shares of
common stock, par value $0.001 per share (the "OBJS Stock") and 3,000,000 shares
of preferred stock, $0.001 par value (the "OBJS Preferred"), of which 12,459,000
shares of OBJS Stock and no shares of Preferred Stock are issued and
outstanding, as of the date hereof. Except for 2,303,772 shares of OBJS Stock
reserved for issuance upon the exercise of the OBJS Stock Options, there are no
outstanding options, warrants, rights, calls, commitments, conversion rights,
puts, plans or other agreements of any character to which OBJS is a party or
otherwise bound which provide for the acquisition or disposition of any of the
OBJS Stock or any of the securities of OBJS. Schedule 2.2 sets forth a true and
complete list of the holders of all outstanding OBJS Options and the amount of
shares of OBJS Stock issuable upon exercise of such OBJS Options, as of the date
hereof. Except as set forth on Schedule 2.2 and except for the transactions
contemplated by this Agreement, there are (a) no options, warrants or other
rights, agreements, arrangements or commitments of any character obligating OBJS
to issue or sell any shares of capital stock of or other equity interests in
OBJS, (b) no outstanding contractual obligations or other commitments or
arrangements of OBJS to: (i) repurchase, redeem or otherwise acquire any shares
of the capital stock of OBJS (or any interest therein) or (ii) provide funds to
or make any investment (in the form of a loan,
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capital contribution or otherwise) in any other entity, or (iii) issue or
distribute to any person any capital stock of OBJS, or (iv) issue or distribute
to holders of any of the capital stock of OBJS any evidences of indebtedness or
assets of OBJS, and (c) no preemptive rights with regard to the capital stock of
OBJS, and no right-of-first refusal or similar catch-up rights with regard to
such capital stock. All of the outstanding securities of OBJS have been issued
and sold by OBJS in full compliance with applicable federal and state securities
laws. All of the outstanding OBJS Stock has been duly and validly issued and is
fully paid and nonassessable.
2.3. Interests in Other Entities. Except for the subsidiaries and
affiliates set forth on Schedule 2.3 (the "OBJS Subsidiaries"), OBJS does not:
(a) own, directly or indirectly, of record or beneficially, any shares of voting
stock or other equity securities of any other entity; (b) have any ownership
interest, direct or indirect, of record or beneficially, in any unincorporated
entity; or (c) have any obligation, direct or indirect, present or contingent,
(i) to purchase or subscribe for any interest in, advance or loan monies to, or
in any way make investments in, any person or entity, or (ii) to share any
profits or capital investments or both from any entity.
2.4. Authority.
(a) The execution and delivery by OBJS of this Agreement and of all of the
agreements to be executed and delivered by it pursuant hereto (the "OBJS
Documents"), the performance by OBJS of its obligations hereunder and
thereunder, and the consummation of the transactions contemplated hereby and
thereby, have been duly and validly authorized by its Board of Directors and
(other than the approval and adoption of this Agreement by the holders of a
majority of the then outstanding shares of OBJS Stock, as provided in Section
4.7 hereof, the filing and recordation of appropriate merger documents as
required by Delaware Law and the receipt of the opinion of its financial
advisors that the Merger and other transactions contemplated by this Agreement
are fair, from a financial point of view, to the stockholders of OBJS (the
"Fairness Opinion")) no other corporate proceedings on the part of OBJS or its
stockholders are necessary to authorize the execution and delivery of this
Agreement by OBJS or the consummation of the transactions contemplated hereby.
In that regard, OBJS hereby represents that its Board of Directors has: (i)
determined that the Merger is fair to and in the best interests of its
stockholders; (ii) approved the Merger; and (iii) resolved to recommend in the
Proxy Statement adoption of this Agreement and authorization of the Merger by
its stockholders, such matters to be subject to the fiduciary duties of such
directors and to the receipt of the Fairness Opinion.
(b) This Agreement is, and when executed and delivered by OBJS, the OBJS
Documents to be delivered by it pursuant hereto will be, the valid and binding
obligation of OBJS, enforceable in accordance with their respective terms,
subject to the effect of applicable bankruptcy, reorganization, insolvency,
moratorium and other similar laws of general application relating to, limiting
or affecting the enforcement of creditors' rights generally and general
principles of equity that may limit the enforceability of the remedies,
covenants or other provisions of this Agreement or the OBJS Documents and the
availability of injunctive relief or other equitable remedies.
2.5. Noncontravention. Except as set forth on Schedule 2.5, neither the
execution and delivery by OBJS of this Agreement or the OBJS Documents pursuant
hereto, nor the consummation of any of the transactions contemplated hereby or
thereby, nor the performance by OBJS of its obligations hereunder or thereunder,
will (nor with the giving of notice or the lapse of time or both would): (a)
conflict with or result in a breach of any provision of the Certificate of
Incorporation or By-laws of OBJS; or (b) in any manner which would materially
affect the ability of OBJS to consummate or perform the transactions
contemplated hereby or have a material adverse effect on the business, assets,
liabilities, properties, prospects, results of operations or financial condition
of OBJS or the OBJS Subsidiaries (hereinafter, a "Material Adverse Effect"), (i)
give rise to a default, or any right of termination, cancellation or
acceleration, or otherwise be in conflict with or result in a loss of
contractual benefits to either OBJS or the OBJS Subsidiaries or under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which OBJS or the OBJS
Subsidiaries is a party or by which OBJS or the OBJS Subsidiaries may be bound
or to which OBJS, the OBJS
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Subsidiaries or the Business may be subject, or require any consent, approval or
notice under the terms of any such document or instrument, or (ii) violate any
order, writ, injunction, decree, law, statute, rule or regulation of any court
or governmental authority which is applicable to OBJS, the OBJS Subsidiaries or
the Business, or (iii) result in the creation or imposition of any lien, adverse
claim, security interest, pledge, mortgage, charge or encumbrance, of any nature
whatsoever (a "Lien"), upon any of the properties or assets of OBJS or of the
OBJS Subsidiaries ; or (c) interfere with or otherwise adversely affect the
ability of the Surviving Corporation to carry on the Business after the
Effective Date on substantially the same basis as is now conducted; or (d)
require the consent, waiver, approval, authorization, license, certificate or
franchise, of or any filing by OBJS or the OBJS Subsidiaries with a third party
or public authority (other than (y) in connection with, or in compliance with,
the provisions of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Securities Act of 1933, as amended (the "Securities Act"), Delaware
Law, or the "takeover" or "blue sky" or "public utility" laws of various states,
and (z) any other filings and approvals expressly contemplated by this
Agreement).
2.6. Litigation.
(a) Except as disclosed on Schedule 2.6, there are no suits or actions, or
administrative, arbitration or other proceedings or governmental investigations,
pending or, to the knowledge of OBJS, threatened, against or relating to OBJS,
the OBJS Subsidiaries or the Business. There are no judgments, orders,
stipulations, injunctions, decrees or awards in effect which relate to OBJS, the
OBJS Subsidiaries, the Business or the operation of OBJS, which if decided
against OBJS would have a Material Adverse Effect.
(b) Schedule 2.6 also lists all products liability claims made or, to the
best of the knowledge of OBJS, threatened against OBJS or the OBJS Subsidiaries
in any of OBJS's last three fiscal years.
2.7. Compliance with Law. Neither OBJS nor any of the OBJS Subsidiaries is
engaging in any activity or omitting to take any action as a result of which (a)
it is in violation of any law, rule, regulation, zoning or other ordinance,
statute, order, injunction or decree, or any other requirement of any court or
governmental or administrative body or agency, applicable to OBJS, the OBJS
Subsidiaries, their respective assets or the Business ("Laws"), which would have
a Material Adverse Effect, which Laws include, but are not limited to, those
relating to: the use, storage, handling, transport or disposal of pollutants,
contaminants, pesticides, petroleum or petroleum product, asbestos, hazardous or
toxic materials or wastes, or any substance, whether solid, liquid or gaseous,
that is listed, defined or regulated as a "hazardous substance", "hazardous
waste" or "solid waste" or otherwise classified as hazardous or toxic, in or
pursuant to any Environmental Law (as defined herein), causing or posing a
threat to cause contamination or adverse effect to the environment ("Hazardous
Substances"); occupational safety and health; business practices and operations;
labor practices; employee benefits; and zoning and other land use, and (b) to
the knowledge of OBJS, either OBJS, the OBJS Subsidiaries or the Business or any
of the assets of OBJS or of the OBJS Subsidiaries have been or may be materially
and adversely affected. For purposes hereof, "Environmental Laws" means all
federal, state and local laws, rules, regulations, permits, orders, judgments,
injunctions and decrees relating to Hazardous Substances applicable to the
Business and the facilities of OBJS or the OBJS Subsidiaries (whether or not
owned by them). Such laws and regulations include, without limitation, the
Resource Conservation and Recovery Act of 1976 ("RCRA"); the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"); the
Toxic Substances Control Act; the Clean Water Act; and the Clean Air Act, all as
amended from time to time; state and federal superlien and environmental cleanup
programs; and the regulations of the U.S. Department of Transportation (with
respect to hazardous materials transportation) and the Nuclear Regulatory
Commission.
2.8. Financial Statements; SEC Filings; Books and Records.
(a) OBJS has delivered or made available to StarBase and Subsidiary via
EDGAR (i) its most recent report on Form 10-K, containing audited financial
statements, (ii) its quarterly report on Form 10-Q for the period ended June 30,
1999, (iii) an unaudited interim consolidated balance sheet at August 31, 1999
and the related unaudited statements of cash flow and income for the five (5)
months then ended, and (iv) all other forms, reports, statements and documents
required to be, and having been,
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filed by OBJS with the Securities and Exchange Commission ("SEC") since January
1, 1998, as listed on Schedule 2.8 (the audited and unaudited interim financial
statements and such other reports filed with the SEC are collectively
hereinafter referred to as the "OBJS Reports"). Each of the OBJS Reports
complied in form in all material respects with the applicable requirements of
the Securities Act or the Exchange Act, as applicable, each as in effect on the
date so filed. None of the OBJS Reports (including but not limited to any
financial statements or schedules included or incorporated by reference therein)
filed by OBJS, when filed (except to the extent revised or superseded by a
subsequent filing with the SEC) contained any untrue statement of a material
fact or omitted to state any material fact necessary in order to make the
statements therein contained not misleading.
(b) Each of the financial statements contained in the OBJS Reports has been
prepared in accordance with generally accepted accounting principles ("GAAP"),
applied on a consistent basis throughout the periods involved (except as may
otherwise be indicated in the notes thereto or, in the case of unaudited
financial statements, as permitted by the SEC) and each presents fairly the
financial position of OBJS as at the dates thereof and the results of operations
and the cash flow for the periods indicated, subject, in the case of unaudited
interim financial statements, to normal recurring year-end adjustments.
(c) The books and records of OBJS are materially complete and correct, have
been maintained in accordance with good business practices, and accurately
reflect the basis for the financial condition, results of operations and cash
flow of OBJS as set forth in the financial statements contained in the OBJS
Reports.
2.9. Absence of Undisclosed Liabilities. Neither OBJS nor any of the OBJS
Subsidiaries has material liabilities or obligations of any nature whatsoever,
whether accrued, absolute, contingent or otherwise, which have not been (a) in
the case of liabilities and obligations of a type customarily reflected on a
corporate balance sheet prepared in accordance with GAAP, (1) set forth on the
audited balance sheet of OBJS at March 31, 1999 (the "March 1999 Balance Sheet")
or (2) incurred in the ordinary course of business since the date of the March
1999 Balance Sheet, or (b) in the case of other types of liabilities and
obligations, described in Schedule 2.9 or any of the other schedules delivered
pursuant hereto or omitted from said schedules in accordance with the terms of
this Agreement.
2.10. Accounts Receivables; Inventories.
(a) The accounts receivable, net of the allowance for doubtful accounts
applicable thereto (which allowance is established on a basis consistent with
GAAP) included in the March 1999 Balance Sheet, have already been collected or
are at the date hereof collectible in full over the period of usual trade terms
(by use of the normal collection methods of OBJS and the OBJS Subsidiaries), and
there do not exist any defenses, counterclaims and set-offs which would
materially adversely affect such receivables representing obligations for the
total dollar amount thereof shown on the books of OBJS and the OBJS
Subsidiaries. OBJS and the OBJS Subsidiaries has performed all obligations with
respect thereto which they were obligated to perform to the date hereof.
(b) The inventories reflected on the audited financial statements of OBJS
and the OBJS Subsidiaries for the period ended March 31, 1999 (the "March 1999
Financial Statements") consist of items of a quality and quantity usable or
saleable in the ordinary course of business, except for obsolete materials,
slow-moving items, materials of below standard quality and not readily
marketable items, all of which (i) have been written down to net realizable
value or (ii) have been adequately reserved against on the books and records of
OBJS and the OBJS Subsidiaries or (iii) are to be marked-down pursuant to the
existing inventory practices and the OBJS Subsidiaries, consistently applied.
All inventories are stated at the lower of cost or market in accordance with
GAAP.
2.11. Properties. Except as set forth on Schedule 2.11, Each of OBJS and
each of the OBJS Subsidiaries has good and valid title to all of the properties
and assets that are necessary for the conduct of the Business, as reflected on
the March 1999 Financial Statements as owned by each of them or thereafter
acquired, except properties or assets sold or otherwise disposed of in the
ordinary course of business, free and clear of any and all Liens (including
liens for current Taxes (as defined in Section 2.15
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hereof)), of any nature whatsoever. Except as set forth on Schedule 2.11, all
plants, structures and equipment which are utilized in the Business, or are
material to the condition (financial or otherwise) of OBJS are owned or leased
by OBJS or the OBJS Subsidiaries. Schedule 2.11 sets forth all (1) real property
which is owned, leased (whether as lessor or lessee) or subject to contract or
commitment of purchase or sale or lease (whether as lessor or lessee) by OBJS or
the OBJS Subsidiaries, or which is subject to a title retention or conditional
sales agreement or other security device, and (2) tangible personal property
which is owned, leased (whether as lessor or lessee) or subject to contract or
commitment of purchase or sale or lease (whether as lessor or lessee) by OBJS or
the OBJS Subsidiaries.
2.12. Intellectual Property.
(a) Schedule 2.12 identifies (by a summary description) the Intellectual
Property (as defined below) of OBJS and the OBJS Subsidiaries which Schedule
encompasses: (i) all United States and foreign patents, trademark and trade name
registrations, trademarks and tradenames, brandmarks and brand name
registrations, servicemarks and servicemark registrations, assumed names and
copyrights and copyright registrations, owned in whole or in part or used by
OBJS or the OBJS Subsidiaries, and all applications therefor, (ii) all material
inventions, discoveries, improvements, processes, formulae, technology, know-
how, processes and other intellectual property, proprietary rights and trade
secrets relating to the Business and (iii) all licenses and other agreements
(the "Licenses") to which OBJS or any of the OBJS Subsidiaries is a party or
otherwise bound which relate to any of the Intellectual Property or the use
thereof by OBJS or the OBJS Subsidiaries in connection with the Business
(collectively, the "Intellectual Property"). No violations of the material terms
of any of the aforesaid licenses and/or agreements have occurred.
(b) Except as disclosed on Schedule 2.12, (i) either OBJS or the OBJS
Subsidiaries owns or is authorized to use in connection with the Business all of
the Intellectual Property; (ii) no proceedings have been instituted, are
pending, or to the knowledge of OBJS, are threatened which challenge the rights
of OBJS or the OBJS Subsidiaries with respect to the Intellectual Property or
its use thereof in connection with the Business and/or the assets and properties
of OBJS or the OBJS Subsidiaries or the validity thereof and, to the knowledge
of OBJS, there is no valid basis for any such proceedings; (iii) neither OBJS's
or the OBJS Subsidiaries' ownership of the Intellectual Property nor their use
thereof in connection with the Business and/or the assets and properties of OBJS
or the OBJS Subsidiaries violates any Laws, or has at any time infringed upon or
violated any rights of others or, to the knowledge of OBJS, is being infringed
by others; (iv) none of the Intellectual Property, or use thereof by OBJS or the
OBJS Subsidiaries in connection with the Business and/or the assets and
properties of OBJS or the OBJS Subsidiaries is subject to any outstanding order,
decree, judgment, stipulation or any Lien except as set forth on Schedule 2.11;
and (v) neither OBJS nor the OBJS Subsidiaries has granted any license to third
parties with regard to the Intellectual Property.
2.13. Systems and Software. OBJS and the OBJS Subsidiaries own or have the
right to use pursuant to lease, license, sublicense, agreement, or permission
all computer hardware, software and information systems listed on Schedule 2.13
and necessary for the operation of the Business as presently conducted
(collectively, "Systems"). Except as set forth on Schedule 2.13, each System
owned by OBJS or the OBJS Subsidiaries immediately prior to the Effective Date
will be owned by the Surviving Corporation or the OBJS Subsidiaries on identical
terms and conditions immediately subsequent to the Effective Date. Except as set
forth on Schedule 2.13, with respect to each System owned by a third party and
used by OBJS or the OBJS Subsidiaries pursuant to lease, license, sublicense,
agreement or permission: (a) the lease, license, sublicense agreement or
permission covering the System is legal, valid, binding, enforceable, and in
full force and effect with regard to OBJS or the OBJS Subsidiaries, and to the
knowledge of OBJS, with regard to the other party thereto; (b) the lease,
license, sublicense, agreement or permission will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the Effective Date with regard to OBJS or the OBJS Subsidiaries , and to the
knowledge of OBJS, with regard to the other party thereto; (c) neither OBJS nor
the OBJS Subsidiaries nor, to the knowledge of OBJS, any party to any such
lease, license, sublicense, agreement or permission is in breach or default, and
no event has occurred which with notice or lapse of time would constitute a
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breach or default, and permit termination, modification or acceleration
thereunder; (d) neither OBJS nor the OBJS Subsidiaries nor, to the knowledge of
OBJS, any party or any such lease, license, sublicense, agreement or permission
has repudiated any provision thereof; (e) neither OBJS nor the OBJS Subsidiaries
has granted any sublicense, sublease or similar right with respect to any such
lease, license, sublicense, agreement or permission; (f) to the knowledge of
OBJS, use and continued use by OBJS or the OBJS Subsidiaries of such System does
not and will not interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any intellectual property rights of third parties as a
result of the continued operation of the Business.
2.14. Insurance. Annexed hereto as Schedule 2.14 is a complete and correct
list and summary description of all material policies of insurance relating to
the Business or in which OBJS or any of the OBJS Subsidiaries is an insured
party, beneficiary or loss payable payee, including without limitation any
products liability insurance. Such policies are in full force and effect, all
premiums due and payable with respect thereto have been paid, and no notice of
cancellation or termination has been received by OBJS or the OBJS Subsidiaries
with respect to any such policy.
2.15. Tax Matters.
(a) Except as set forth in Schedule 2.15,
(i) OBJS and the OBJS Subsidiaries have (A) duly and timely filed or
caused to be filed with the appropriate branch, office, department, agency
or other instrumentality engaged in the monitoring, collection and
enforcement of Taxes (as defined below) (the "Tax Authority") each return,
declaration or statement, and any amendment thereto (the "Tax Return") that
is required to be filed by or on behalf of the OBJS or the OBJS
Subsidiaries or that includes or relates to OBJS's income, sales, assets or
business, which Tax Return is true, correct and complete in all material
respects, (B) duly and timely paid in full, caused to be paid in full, all
Taxes due and payable in respect of all Tax periods up to and including the
date of this Agreement, and (C) has properly accrued on the books and
records of OBJS in accordance with GAAP a provision for the payment of all
Taxes due or claimed to be due or for which OBJS or the OBJS Subsidiaries
otherwise is or may be liable, except for Taxes which the failure to pay
would not have a Material Adverse Effect;
(ii) OBJS and the OBJS Subsidiaries have complied in all respects with
all applicable material laws relating to the payment, collection or
withholding of any Tax, and the remittance thereof to any and all Tax
Authorities, including, but not limited to, Code sections 1441, 1442, 1445
and 3402;
(iii) there is no Lien for Taxes upon any of the assets or properties
of OBJS or the OBJS Subsidiaries (except for any statutory Lien for any Tax
not yet due);
(iv) no Tax Return filed by or on behalf of OBJS or the OBJS
Subsidiaries or that includes or relates to their income, sales, assets or
the Business, has ever been examined, audited or reviewed by any Tax
Authority;
(v) no audit, examination, investigation, reassessment or other
administrative or court proceeding is pending, proposed, or to the
knowledge of OBJS, threatened with regard to any Tax or Tax Return or the
payment, collection or withholding of any Tax;
(vi) neither OBJS nor any of the OBJS Subsidiaries has received a
ruling from any Tax Authority or signed an agreement with any Tax Authority
or has requested a ruling from or an agreement with any Tax Authority, and
there is no outstanding subpoena or request for information or documents
from any Tax Authority, with respect to any Tax for which OBJS or any of
the OBJS Subsidiaries is or may be liable or with respect to OBJS's income,
sales, assets or the Business;
(vii) the statute of limitations for the assessment or collection of
any Tax for which OBJS is or may be liable or with respect to OBJS's
income, sales, assets or the Business, has never been extended or waived;
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(viii) neither OBJS nor any of the OBJS Subsidiaries has requested an
extension of time within which to file any material Tax Return in respect
of any Tax period which has not since been filed;
(ix) all Taxes assessed or proposed to be assessed with respect to
OBJS's income, sales, assets or the Business or for which OBJS or any of
the OBJS Subsidiaries is or may be liable have been paid;
(x) any deficiency or adjustment related to or in connection with any
Tax for which OBJS or any of the OBJS Subsidiaries is or may be liable or
with respect to OBJS's income, sales, assets or the Business that is or was
required to be reported to any Tax Authority has been so reported, and any
additional Taxes owed with respect thereto have been paid or accrued,
except for such Taxes which the failure to pay would not have a Material
Adverse Effect;
(xi) there is no closing agreement, within the meaning of Code section
7121 or any analogous provision of applicable law relating to any Tax for
which OBJS is or may be liable or with respect to OBJS's income, sales,
assets or business;
(xii) neither OBJS nor any of the OBJS Subsidiaries has, or is
expected to have, any material liability in respect of any Tax as a
transferee or successor of any Person (including, but not limited to,
liability arising under Treas. Reg. Section 1.1502-6), and OBJS is not, and
never has been, a party to any Tax allocation, Tax indemnification or Tax
sharing contract or agreement;
(xiii) there is no power of attorney in effect relating to any Tax for
which OBJS or any of the OBJS Subsidiaries is or may be liable or with
respect to OBJS's income, sales, assets or the Business;
(xiv) neither OBJS nor any of the OBJS Subsidiaries is a party to any
contract, agreement or other arrangement that would result, alone or in
conjunction with any other contract, agreement or other arrangement, in the
payment of any amount that would not be deductible by reason of Code
sections 162, 280G or 404 or any similar provision of applicable law;
(xv) neither OBJS nor any of the OBJS Subsidiaries is a "consenting
corporation" within the meaning of Code section 341(f) or any similar
provision of applicable law and has not agreed to have Code section
341(f)(2) apply to any disposition of a subsection (f) asset (as such term
is defined in Code section 341(f)(4)) owned by OBJS of the OBJS
Subsidiaries;
(xvi) neither OBJS nor any of the OBJS Subsidiaries has any
"tax-exempt use property" within the meaning of Code sections 168(g) or (h)
or any similar provision of applicable law with respect to OBJS's income,
sales, assets or the Business;
(xvii) none of the assets of OBJS or any of the Subsidiaries is
required to be treated as being owned by any other Person pursuant to any
provision of applicable law, including, but not limited to, the "safe
harbor" leasing provisions of Code section 168(f)(8) as in effect prior to
the repeal of those "safe harbor" leasing provisions;
(xviii) no election under Code section 338 or any similar provision of
applicable law has been made or required to be made by or with respect to
OBJS or the OBJS Subsidiaries;
(xix) neither OBJS nor any of the OBJS Subsidiaries is, nor has it
been, a "United States real property holding corporation" within the
meaning of Code section 897(c)(2) at any time during the applicable period
referred to in Code section 897(c)(1)(A)(ii);
(xx) neither OBJS nor the OBJS Subsidiaries has ever been classified
as an "S" corporation, a partnership or other pass-through entity for
purposes of any Tax;
(xxi) no jurisdiction where OBJS or any of the OBJS Subsidiaries files
a Tax Return has made or, to the knowledge of OBJS, threatened to make a
claim that OBJS or any of the OBJS Subsidiaries is required to file a Tax
Return for such jurisdiction;
(xxii) neither OBJS nor any of the OBJS Subsidiaries has changed any
method of accounting, received a ruling from any Tax Authority or signed an
agreement with any Tax Authority;
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(xxiii) neither OBJS nor any of the OBJS Subsidiaries (A) is required
to include in income any adjustment pursuant to Code section 481(a) (or any
similar provision of applicable law) by reason of a change in accounting
method, and no Tax Authority has proposed any such adjustment or change of
accounting method, and (B) none has deferred any income to a period after
the Effective Date that has economically accrued or is otherwise
attributable to a period prior to the Effective Date or has accelerated any
deductions into a period ending on or before the Effective Date that will
or may economically accrue after the Effective Date; and
(xxiv) Schedule 2.15 sets forth a list of all jurisdictions (both
foreign and domestic) in which any Tax Returns have been filed by or on
behalf of OBJS or the OBJS Subsidiaries, respectively, or with respect to
OBJS's income, sales, assets or the Business since the Latest Balance Sheet
Date and a description of each such Tax Return and the period for which it
was filed; and OBJS has provided to StarBase (A) a copy of all Tax Returns
for the past three (3) years, and (B) all audit reports, closing
agreements, letter rulings, or technical advice memoranda relating to any
Tax for which OBJS or any of the OBJS Subsidiaries is or may be liable with
respect to OBJS's income, sales, assets or the Business.
(b) For purposes hereof, "Code" or "IRC" shall mean the Internal Revenue
Code of 1986, as amended, and "Tax" or "Taxes" shall mean any tax, charge, fee,
levy, deficiency or other assessment of whatever kind or nature including,
without limitation, any net income, gross income, profits, gross receipts,
excise, real or personal property, sales, ad valorem, withholding, social
security, retirement, excise, employment, unemployment, minimum, estimated,
severance, stamp, property, occupation, environmental, windfall profits, use,
service, net worth, payroll, franchise, license, gains, customs, transfer,
recording and other tax, customs duty, fee assessment or charge of any kind
whatsoever, imposed by any Tax Authority, including any liability therefor as a
transferee (including without limitation under section 6901 of the Code or any
similar provision of applicable law), as a result of Treasury Regulation Section
1.1502-6 or any similar provision of applicable law, or as a result of any tax
sharing or similar agreement, together with any interest, penalties or additions
to tax relating thereto.
2.16. Employee Arrangements.
(a) Except as disclosed on Schedule 2.16(a), neither OBJS nor any of the
OBJS Subsidiaries has outstanding any employment agreement with any officer or
employee of OBJS or any of the OBJS Subsidiaries or any bonus, incentive
compensation, deferred compensation, profit sharing, stock option, stock bonus,
stock purchase, savings, severance, salary continuation, consulting, retirement
(including health and life insurance benefits provided after retirement) or
pension plan (including Employee Benefit Plans as defined in Section 2.16(b)
hereof) or arrangement with or for the benefit of any officer, employee or other
person, or for the benefit of any group of officers, employees or other persons
that provides for payment of more than $100,000 in annual benefits. Neither OBJS
nor any of the OBJS Subsidiaries has made, or entered into any agreement to
make, any payment that becomes payable as a result of the consummation of this
transaction which would be treated as an "excess parachute payment" as defined
in Section 280G of the Code. There are no such agreements, plans or other
arrangements entered into with or provided for any independent contractors with
whom OBJS or any of the OBJS Subsidiaries has a business relationship.
(b) Set forth on Schedule 2.16(b) are all of the employee benefit plans as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), but without regard to whether any such plan is in fact
subject to ERISA, that is sponsored, or is being maintained or contributed to,
by OBJS or the OBJS Subsidiaries that provides for payment of more than $25,000
in annual benefits (the "Employee Benefit Plan"). None of the Employee Benefit
Plans are "multiemployer plans" as defined in Section 3(37) of ERISA. OBJS has
furnished or made available or will promptly after the date hereof make
available to Subsidiary and StarBase (i) a true and complete copy of the plan
document and summary plan description for each Employee Benefit Plan, (ii) a
true and complete copy of the most recently filed Form 5500 (including the
related schedules) with respect to Employee Benefit Plan for which such form is
required to be filed, (iii) a true and complete copy of any trust agreement,
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insurance contract or other agreement or arrangement serving as source of
funding any benefits payable under any Employee Benefit Plan, and (iv) the most
recently issued financial statement and actuarial report, if any, for each
Employee Benefit Plan. No "prohibited transactions" (as such term is defined in
Section 4975 of the IRC, or in Part 4 of Subtitle B of Title I of ERISA) have
occurred with respect to any Employee Benefit Plan that could result in the
imposition of taxes or penalties that, in the aggregate, could have a Material
Adverse Effect. With respect to each of the Employee Benefit Plans that is
intended to qualify for favorable income tax treatment under Section 401(a) of
the IRC, (x) the Internal Revenue Service ("IRS") has issued a favorable
determination letter with respect to such plan; (y) except as set forth on
Schedule 2.16(b), OBJS has furnished StarBase and Subsidiary with a copy of the
determination letter most recently issued by the IRS with respect to such plan
and the application filed with the IRS for such determination letter; and (z) to
the knowledge of OBJS, no event has occurred from the date of each such
favorable determination letter that would adversely effect the tax-qualified
status of the plan in question. Each Employee Benefit Plan has been administered
in compliance with the applicable requirements of ERISA and the IRC, and in
compliance with all other applicable provisions of law, except for such
noncompliance, if any, that, in the aggregate would not have a Material Adverse
Effect. With respect to each Employee Benefit Plan, neither OBJS nor any of the
OBJS Subsidiaries has incurred liabilities which, in the aggregate, could have a
Material Adverse Effect as a result of the violation of or the failure to comply
with any applicable provision of ERISA, the IRC, any other applicable provision
of law, or any provision of such plan. None of the Employee Benefit Plans which
is an "employee pension benefit plan", as that term is defined in Section 3(2)
of ERISA (a "Company Employee Pension Benefit Plan"), has incurred an
"accumulated funding deficiency," within the meaning of Section 302 of ERISA or
Section 412 of the IRC which, in the aggregate, could have a Material Adverse
Effect. Neither OBJS nor any of the OBJS Subsidiaries has failed to make any
contribution to, or to make any payment under, any Employee Benefit Plan that it
was required to make pursuant to the terms of the plan or pursuant to applicable
law in any amount which, in the aggregate, could have a Material Adverse Effect.
To the knowledge of OBJS, no "reportable events," with respect to which a notice
must be filed with the Pension Benefit Guaranty Corporation ("PBGC"), has
occurred with respect to any Employee Pension Benefit Plan subject to Title IV
of the ERISA which events, in the aggregate, could have a Material Adverse
Effect. No proceedings by the PBGC to terminate any Employee Pension Benefit
Plan pursuant to Subtitle C of Title IV of ERISA have to the best of the OBJS's
knowledge, been instituted or threatened which, in the aggregate, could have a
Material Adverse Effect. Except for any liabilities in an amount which, in the
aggregate, would not have a Material Adverse Effect, OBJS and the OBJS
Subsidiaries (1) has not incurred any liability to the PBGC in connection with
any Employee Pension Benefit Plan, including any liability under Section 4069 of
ERISA and any penalty imposed under Section 4071 of ERISA, (2) has not
terminated any Employee Pension Benefit Plan, or ceased operations at any
facility or withdrawn from any Employee Pension Benefit Plan, in a manner that
could subject it to liability or any liens under Section 4062, 4063, 4064 or
4068 of ERISA or (3) has no knowledge as to the existence of any state of facts,
or as to the occurrence of any transactions, that might reasonably be
anticipated to result in any liability of OBJS or the OBJS Subsidiaries to the
PBGC under any other provision of Title IV of ERISA. There is no pending or, to
the knowledge of OBJS, threatened legal action, proceeding or investigation
against or involving any Employee Benefit Plan which could result in liabilities
to the Plan, OBJS or the OBJS Subsidiaries that, in the aggregate could have a
Material Adverse Effect. Except as disclosed on Schedule 2.16(b), the present
value of accrued benefits of each Employee Benefit that is a defined benefit
plan as defined in Section 3(35) of ERISA does not exceed the value of the
assets of such plan available to pay such benefits by an amount that, in the
aggregate for all such plans, could have a Material Adverse Effect.
(c) Except as disclosed on Schedule 2.16(c), there are no pending, or to
the best of the knowledge of OBJS, threatened, labor negotiations, work
stoppages or work slowdowns involving or affecting the Business, and no union
representation questions exist, and there are no organizing activities, in
respect of any of the employees of OBJS or of the OBJS Subsidiaries.
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2.17. Certain Business Matters and Practices
(a) Except as set forth on Schedule 2.17(a), neither OBJS nor any of the
OBJS Subsidiaries is not a party to or bound by any material distributorship,
dealership, sales agency, franchise or similar agreement which relates to the
Business. Neither OBJS nor any of the OBJS Subsidiaries provides any warranties
on its respective products and has no greater obligations than to replace the
product sold or as is otherwise customary in the industry.
(b) Set forth on Schedule 2.17(b) is a description of (i) the rebate and
volume discount practices and obligations of OBJS and the OBJS Subsidiaries,
(ii) the allowance and customer return practices and obligations of OBJS and the
OBJS Subsidiaries, (iii) the co-op advertising and other promotional practices
of OBJS and the OBJS Subsidiaries, (iv) price protection agreements, and (v)
return policies and historical return rates, as each of the foregoing relate to
the customers and suppliers of OBJS and the OBJS Subsidiaries.
2.18. Certain Contracts. (a) Set forth on Schedule 2.18 is a complete and
correct list of all material contracts, commitments, obligations and
understandings which are not set forth in any other schedule delivered hereunder
and to which OBJS or any of the OBJS Subsidiaries is a party or otherwise bound,
except for each of those which (a) was made in the ordinary course of business,
and (b) either (i) is terminable by OBJS or the OBJS Subsidiaries (and will be
terminable by the Surviving Corporation) without liability, expense or other
obligation in excess of $5,000 on thirty (30) days' notice or less, or (ii) may
be anticipated to involve aggregate payments to or by OBJS or the OBJS
Subsidiaries of $5,000 (or the equivalent) or less calculated over the full term
thereof, and (c) is not otherwise material to the Business. Except as set forth
in the immediately preceding sentence, there are no agreements or arrangements
in effect with respect to the Business entered into by OBJS or the OBJS
Subsidiaries with any independent salesperson, distributor, sublicensor or other
remarketer or sales organization.
(b) Complete and correct copies of all contracts, commitments, obligations
and undertakings set forth on any of the Schedules delivered pursuant to this
Agreement have been furnished or made available by OBJS to StarBase and
Subsidiary, and (i) each of them is in full force and effect, no person or
entity which is a party thereto or otherwise bound thereby is in default
thereunder, and no event, occurrence, condition or act exists which does (or
which with the giving of notice or the lapse of time or both would) give rise to
a default or right of cancellation, acceleration or loss of contractual benefits
thereunder; (ii) there has been no threatened cancellations thereof, and (iii)
there are no outstanding disputes thereunder; except, in any of the foregoing
cases, where such default, cancellation, dispute or the like would not have a
Material Adverse Effect.
2.19. Customers and Suppliers. (a) Schedule 2.19(a) sets forth a complete
and correct list, as of August 31, 1999, of (i) the 10 largest customers of the
Business and the amount for which each such customer is invoiced, and (ii) the
10 largest suppliers of the Business and the amount of goods and services
purchased from each such supplier.
(b) Except as set forth on Schedule 2.19(b), neither OBJS nor any of the
OBJS Subsidiaries has received any notice that any of the suppliers or customers
listed on Schedule 2.19(a) have any disputes with OBJS, the OBJS Subsidiaries or
the Business or intend to cease selling or rendering services to, or dealing
with, as applicable, OBJS or the OBJS Subsidiaries on substantially the same
basis as of the date hereof, nor has any information been brought to its
attention which might reasonably lead it to believe any such suppliers or
customers intend to alter in any material respect the amount of sales or
services or the extent of dealings with OBJS and the OBJS Subsidiaries, or would
alter in any material respect the sales or services or dealings in the event of
the consummation of the Merger. Neither OBJS nor any of the OBJS Subsidiaries
has any information which might reasonably indicate, nor has any information
been brought to any of their attention which might reasonably lead any of them
to believe, that any supplier of OBJS or the OBJS Subsidiaries will not be able
to fulfill outstanding or currently anticipated purchase orders placed by, or
service obligations to, OBJS or the OBJS Subsidiaries.
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2.20. Approvals/Consents. Except as set forth on Schedule 2.20, no
governmental, administrative or third-party consents, permits, appointments,
approvals, licenses, certificates or franchises are necessary for the operation
of the Business (the "Permits"). All such Permits are in full force and effect
and will, upon the consummation of the Merger, remain in full force and effect
without the payment of any penalty, the incurrence of any additional debt or
liability or the change of any term. No material violations of the terms thereof
have heretofore occurred or are known by OBJS to exist as of the date hereof.
There are no proceedings pending or, to the knowledge of OBJS, threatened, or
any basis therefor, seeking to cancel, terminate or limit such Permits.
2.21. Registration Statement; Blue Sky Filings; Proxy Statement; Other
Information. The Proxy Statement and the information supplied or to be supplied
in writing by OBJS for inclusion in the Registration Statement and any other
documents to be filed with the SEC or any other regulatory agency in connection
with the transactions contemplated hereby will not, at the respective times such
documents are filed, or, as applicable, declared effective, and on the Effective
Date, and, with respect to the Proxy Statement, when first published, sent or
given to stockholders of OBJS, be false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein not misleading or, in the case of the Proxy Statement or any
amendment thereof or supplement thereto, at the time of the meeting of the
stockholders of OBJS provided for in Section 4.7 hereof, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of any proxy for such meeting. If, at any time prior to the
Effective Date, any event relating to OBJS or any of its affiliates, officers or
directors is discovered by OBJS that should be set forth in an amendment to the
Registration Statement or a supplement thereto will be promptly delivered to
StarBase for subsequent filing with the appropriate regulatory agency and
dissemination to the stockholders of OBJS, to the extent required by applicable
securities laws. All documents which OBJS files or is responsible for filing
with any regulatory agency in connection with the Merger (including, without
limitation, the Proxy Statement) will comply as to form and content in all
material respects with the provisions of applicable law and regulations.
Notwithstanding the foregoing, OBJS does not make any representations or
warranties with respect to any information that has been supplied in writing by
StarBase or Subsidiary, or their respective auditors, attorneys, financial
advisors, specifically for use in the Proxy Statement, or in any other documents
to be filed with any regulatory agency in connection with the transactions
contemplated hereby.
2.22. Transactions with Affiliated Parties. Schedule 2.22 sets forth a
true and complete list and description of all transactions engaged in between
OBJS or any of the OBJS Subsidiaries and any director, officer, employee,
stockholder, partner or agent of OBJS or the OBJS Subsidiaries, as the case may
be, or any of their respective spouses or children, any trust of which any such
person is the grantor, trustee or beneficiary, any corporation of which any such
person or party is a stockholder, employee, officer or director, or any
partnership or other person in which any such person or party owns an interest
(each such person, trust, corporation and partnership, an "Affiliated Party").
No Affiliated Party is a party to any agreement, contract or commitment with
OBJS or the OBJS Subsidiaries except as set forth in Schedule 2.22.
2.23. Information as to OBJS. None of the representations or warranties
made by OBJS in this Agreement or in any agreement executed and delivered by or
on behalf of it pursuant hereto are false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein contained not misleading.
3. Representations and Warranties as to Starbase and Subsidiary.
StarBase and Subsidiary, as applicable, hereby represent and warrant to
OBJS, as follows:
3.1. Organization, Standing and Power. Each of StarBase and Subsidiary is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, with full corporate power and authority to own,
lease and operate its respective properties and to carry on its respective
business as presently conducted by it. There are no states or jurisdictions in
which the character and location of any of the properties owned or leased by
StarBase or Subsidiary, or the conduct of their
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respective businesses makes it necessary for them to qualify to do business as a
foreign corporation and where they have not so qualified, except for those
jurisdictions in which the failure to so qualify would not have a materially
adverse effect on the their respective businesses or operations. Copies of the
Certificates of Incorporation of StarBase and Subsidiary and all amendments
thereof and the By-laws of StarBase and Subsidiary, as amended to date, have
been heretofore made available to OBJS.
3.2. Capitalization. The authorized capital stock of StarBase consists of
80,000,000 shares of common stock, $.01 par value (the "StarBase Common Stock")
and 10,000,000 shares of blanket preferred stock, par value of $.01 per share.
As of the date hereof: (1) 32,495,283 shares of StarBase Common Stock are issued
and outstanding, all of which are duly authorized, validly issued, fully paid
and nonassessable; (2) an aggregate of 3,865,885 shares of Series E, H and I
preferred stock are issued and outstanding, all of which are duly authorized,
validly issued, fully paid and nonassessable; (3) 5,980,474 shares of StarBase
Common Stock are reserved for future issuance upon exercise of options granted
by StarBase (of which options to purchase up to 2,327,668 shares of StarBase
Common Stock are exercisable as of the date hereof); and (4) 4,626,668 shares of
StarBase Stock are reserved for future issuance upon exercise of warrants
granted by StarBase.
3.3. Merger Consideration. The Merger Consideration, when issued and
delivered in accordance with the terms and provisions of this Agreement, will be
(1) duly authorized and validly issued, fully paid and non-assessable, (2) free
and clear of any security interests, pledges, mortgages, claims, liens and
encumbrances of any kind whatsoever, and (3) issued in compliance with all
applicable federal and state securities laws.
3.4. Authority.
(a) The execution and delivery by StarBase and Subsidiary of this Agreement
and of each agreement, document and instrument to be executed and delivered by
either or both of them pursuant hereto (the "StarBase Documents"), the
performance by either or both of them of their respective obligations hereunder
and thereunder, and the consummation of the transactions contemplated hereby and
thereby, have been duly and validly authorized by its Board of Directors and
(other than the filing and recordation of appropriate merger documents as
required by Delaware Law and the receipt by StarBase of the opinion of its
financial advisors that the Merger and other transactions contemplated by this
Agreement are fair, from a financial point of view, to the stockholders of
StarBase) no other corporate proceedings on the part of either StarBase or
Subsidiary (or its stockholders) are necessary to authorize the execution and
delivery of this Agreement by StarBase and Subsidiary or the consummation of the
transactions contemplated hereby. In that regard, StarBase and Subsidiary each
hereby represents that its Board of Directors has determined that the Merger is
in the best interests of its stockholders and has approved the Merger, such
matters to be subject to the fiduciary duties of such directors.
(b) This Agreement is, and when executed and delivered by each of StarBase
and Subsidiary, the StarBase Documents to be executed and delivered by either or
both of them pursuant hereto will be, the valid and binding obligation of
StarBase and Subsidiary, enforceable in accordance with their respective terms,
subject to the effect of applicable bankruptcy, reorganization, insolvency,
moratorium and other similar laws of general application relating to, limiting
or affecting the enforcement of creditors' rights generally and general
principles of equity that may limit the enforceability of the remedies,
covenants or other provisions of this Agreement or the StarBase Documents and
the availability of injunctive relief or other equitable remedies.
3.5. Noncontravention. Neither the execution and delivery by StarBase or
Subsidiary of this Agreement or the StarBase Documents pursuant hereto, nor the
consummation of the transactions contemplated hereby or thereby, nor the
compliance by StarBase or Subsidiary with the provisions hereof and thereof, (a)
will (nor with the giving of notice or the lapse of time or both, would)
conflict with or result in a violation of any provision of the Certificates of
Incorporation or By-laws of StarBase and Subsidiary, or (b) in any manner which
would materially affect the ability of StarBase or Subsidiary to consummate the
transactions contemplated hereby, (i) give rise to a default, or any right of
termination, cancellation or acceleration, or otherwise be in conflict with or
result in a loss of contractual benefits to
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StarBase or Subsidiary or under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, license, agreement or other instrument or
obligation to which either of them is a party or by which either of them may be
bound or to which StarBase or Subsidiary may be subject, or require any consent,
approval or notice under the terms of any such document or instrument, or (ii)
violate any order, writ, injunction, decree, law, statute, rule or regulation of
any court or governmental authority which is applicable to StarBase or
Subsidiary, or (iii) result in the creation or imposition of any Lien upon any
of the properties or assets of StarBase or Subsidiary, or (c) require the
consent, waiver, approval, authorization, license, certificate or franchise of
or any filing by StarBase or Subsidiary with a third party or public authority
(other than (y) in connection with or in compliance with the provisions of the
Exchange Act, the Securities Act, Delaware Law, or the "takeover" or "blue sky"
or "public utility" laws of various states, and (z) and any other filings and
approvals expressly contemplated by this Agreement).
3.6. Securities and Exchange Commission Filings; Financials.
(a) Since January 1, 1998, StarBase has filed on EDGAR all forms, reports,
statements and documents required to be filed with the SEC (collectively, the
"StarBase SEC Reports"), as set forth in Schedule 3.6, each of which has
complied in form in all material respects with the applicable requirements of
the Securities Act or the Exchange Act, as applicable, each as in effect on the
date so filed. None of such reports (including but not limited to any financial
statements or schedules included or incorporated by reference therein) filed by
StarBase, when filed (except to the extent to the extent revised or superseded
by a subsequent filing with the SEC) contained any untrue statement of a
material fact or omitted to state any material fact necessary in order to make
the statements therein contained not misleading.
(b) Each of the financial statements contained in the StarBase SEC Reports
has been prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may otherwise be indicated in the
notes thereto) and each presents fairly, in all material respects, the financial
position of StarBase as at the respective dates thereof and the results of its
operations and cash flow position for the periods indicated.
(c) Except as and to the extent set forth on the balance sheet of StarBase
as at March 31, 1999, including the notes thereto, StarBase does not have any
liabilities or obligations, whether or not accrued, contingent or otherwise,
that would be required to be included on a balance sheet prepared in accordance
with GAAP, except for liabilities or obligations incurred in the ordinary course
of business since March 31, 1999, none of which would, individually or in the
aggregate, have a material adverse effect on the financial condition, or results
of the operations or cash flows of StarBase.
3.7. Registration Statement; Blue Sky Filings; Proxy Statement; Other
Information. The Registration Statement and the information supplied or to be
supplied in writing by either StarBase or Subsidiary for inclusion in the Proxy
Statement and any other documents to be filed with the SEC or any other
regulatory agency in connection with the transactions contemplated hereby will
not, at the respective times such documents are filed, or, as applicable,
declared effective by the SEC, and on the Effective Date, and, with respect to
the Proxy Statement, when first published, sent or given to stockholders of
OBJS, be false or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein not
misleading or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the meeting of the stockholders of OBJS
provided for in Section 4.7 hereof, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for such meeting. All documents which either StarBase or Subsidiary files
or is responsible for filing with the SEC and any other regulatory agency in
connection with the Merger (including, without limitation, the Registration
Statement) will comply as to form and content in all material respects with the
provisions of applicable law and regulations. Notwithstanding the foregoing,
neither StarBase nor Subsidiary make any representations or warranties with
respect to any information that has been supplied in writing by OBJS, or its
auditors, attorneys, financial advisors, specifically for use in the
Registration
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Statement, or in any other documents to be filed with the SEC or any other
regulatory agency in connection with the transactions contemplated hereby.
3.8. Litigation.
(a) Except as disclosed on Schedule 3.8, there are no suits or actions, or
administrative, arbitration or other proceedings or governmental investigations,
pending or, to the knowledge of StarBase, threatened, against or relating to
StarBase. There are no judgments, orders, stipulations, injunctions, decrees or
awards in effect which relate to StarBase or the operation of StarBase, which if
decided against StarBase would materially affect the ability of StarBase or
Subsidiary to consummate the transactions contemplated hereby.
(b) Schedule 3.8 also lists all products liability claims made or, to the
best of the knowledge of StarBase, threatened against StarBase in any of
StarBase's last three fiscal years.
3.9. Compliance with Law. StarBase is not engaging in any activity or
omitting to take any action as a result of which (a) it is in violation of any
law, rule, regulation, zoning or other ordinance, statute, order, injunction or
decree, or any other requirement of any court or governmental or administrative
body or agency, applicable to StarBase, its assets or the operation of its
business, which would materially affect the ability of StarBase or Subsidiary to
consummate the transactions contemplated hereby including, but are not limited
to, laws relating to: the use, storage, handling, transport or disposal of
pollutants, contaminants, pesticides, petroleum or petroleum product, asbestos,
hazardous or toxic materials or wastes, or any Hazardous Substances;
occupational safety and health; business practices and operations; labor
practices; employee benefits; and zoning and other land use, and (b) to the
knowledge of StarBase, either StarBase or any of the assets of StarBase have
been or may be materially and adversely affected.
3.10. Absence of Undisclosed Liabilities. StarBase has no material
liabilities or obligations of any nature whatsoever, whether accrued, absolute,
contingent or otherwise, which have not been (a) in the case of liabilities and
obligations of a type customarily reflected on a corporate balance sheet
prepared in accordance with GAAP, (1) set forth on the audited balance sheet of
StarBase at March 31, 1999 or (2) incurred in the ordinary course of business
since the date of such balance sheet, or (b) in the case of other types of
liabilities and obligations, described in Schedule 3.10 or any of the other
schedules delivered pursuant hereto or omitted from said schedules in accordance
with the terms of this Agreement.
3.11. Information as to StarBase and Subsidiary. None of the
representations or warranties made by StarBase or Subsidiary in this Agreement
or in any agreement executed and delivered by or on behalf of either or both of
them pursuant hereto are false or misleading with respect to any material fact,
or omit to state any material fact necessary in order to make the statements
therein contained not misleading.
4. Covenants
4.1. Investigation.
(a) Between the date hereof and the earlier of the Effective Date or the
termination date of this Agreement, StarBase and/or Subsidiary, on the one hand,
and OBJS, on the other hand (each an "Investigating Party"), may, directly and
through their respective representatives, make such investigation of the other
parties (including, with respect to any investigation of OBJS, the OBJS
Subsidiaries) and their respective businesses and assets as such Investigating
Party reasonably deems necessary or advisable; provided, that such investigation
shall not affect any of the representations and warranties contained herein or
in any instrument or document delivered pursuant hereto. In furtherance of the
foregoing, the Investigating Party shall have reasonable access, upon reasonable
advance notice, during normal business hours after the date hereof, to all
properties, books, contracts, commitments and records of StarBase and/or
Subsidiary, on the one hand, or OBJS and the OBJS Subsidiaries, on the other
hand, and the party being investigated hereunder shall furnish such financial
and operating data and other information as may from time to time be reasonably
requested relating to the transactions contemplated by this Agreement. The party
being investigated hereunder, and its respective management, employees,
accountants and attorneys, shall cooperate fully with the Investigating Party in
connection with any such investigation.
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(b) The Investigating Party (and its officers, directors, affiliates and
other representatives) shall use its best efforts to hold in strict confidence
and not to disclose or use any confidential information which it obtains in
connection with any investigation pursuant hereto to the detriment of the other
party. In the event that the Merger is not consummated for any reason
whatsoever, the Investigating Party shall return to the other parties all
documents, work papers and other written materials which were obtained by it
during the course of such investigation which constitute confidential
information.
4.2. Consummation of Transaction. Each of the parties hereto hereby agrees
to use all reasonable efforts to cause all conditions precedent to his or its
obligations (and to the obligations of the other parties hereto) to consummate
the transactions contemplated hereby to be satisfied, including, but not limited
to, using all reasonable efforts to obtain all required (if so required by this
Agreement) consents, waivers, amendments, modifications, approvals,
authorizations, novations and licenses; provided, however, that nothing herein
contained shall be deemed to modify any of the absolute obligations imposed upon
or rights of any of the parties hereto under this Agreement or any agreement
executed and delivered pursuant hereto. No party hereto will take any action for
the purpose of delaying impairing or impeding the receipt of any required
consent, authorization, order or approval or the making of any required filing
or registration.
4.3. Cooperation/Further Assurances.
(a) Each of the parties hereto hereby agrees to fully cooperate with the
other parties hereto in preparing and filing any notices, applications, reports
and other instruments and documents which are required by, or which are
desirable in the reasonable opinion of any of the parties hereto, or their
respective legal counsel, in respect of, any statute, rule, regulation or order
of any governmental or administrative body in connection with the transactions
contemplated by this Agreement.
(b) Each of the parties hereto hereby further agrees to execute,
acknowledge, deliver, file and/or record, or cause such other parties to the
extent permitted by law to execute, acknowledge, deliver, file and/or record
such other documents as may be required by this Agreement and as StarBase and/or
Subsidiary, on the one hand, and/or OBJS, on the other, or their respective
legal counsel may reasonably require in order to document and carry out the
transactions contemplated by this Agreement.
4.4. Accuracy of Representations, Notification.
(a) Each party hereto agrees that prior to the Effective Date it will enter
into no transaction and take no action, and will use its best efforts to prevent
the occurrence of any event (but excluding events which occur in the ordinary
course of business and events over which such party has no control), which would
result in any of its representations, warranties or covenants contained in this
Agreement or in any agreement, document or instrument executed and delivered by
him or it pursuant hereto not to be true and correct, or not to be performed as
contemplated, at and as of the time immediately after the occurrence of such
transaction or event.
(b) Each party hereto shall give prompt notice to the other parties hereto
of (i) the occurrence, or nonoccurrence, or any event the occurrence, or
nonoccurrence, of which would be likely to cause any representation contained in
this Agreement to be untrue or inaccurate in any material respect at or prior to
the Effective Date and (ii) any material failure by such party giving notice, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by him or it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 4.4 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
4.5. Broker. Each of the parties hereto represents and warrants to the
other parties that no broker or finder was engaged or dealt with in connection
with any of the transactions contemplated by this Agreement, and each of the
parties shall indemnify and hold the other harmless from and against any and all
claims or liabilities asserted by or on behalf of any alleged broker or finder
for broker's fees, finder's fees, commissions or like payments.
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4.6. Registration Statement. As promptly as practicable after the
execution of this Agreement, StarBase and Subsidiary will file with the SEC a
registration statement on Form S-4, including the Proxy Statement and related
prospectus (as amended or supplemented, the "Registration Statement") relating
to the registration under the Securities Act of the StarBase Common Stock to be
received in the Merger, and file with state securities administrators such
registration statements or other documents as may be required under applicable
blue sky laws to qualify or register such StarBase Common Stock in such states
as are designated by OBJS (the "Blue Sky Filings"). StarBase and Subsidiary will
use their reasonable best efforts to cause the Registration Statement to become
effective as soon as practicable and, upon registration, to cause such shares of
StarBase Common Stock to be listed with the Nasdaq SmallCap Market or such other
exchange on which the StarBase Common Stock is traded or listed, as applicable.
In the process of its preparation of the Registration Statement, StarBase will
provide OBJS and its advisors drafts of the Registration Statement and will
provide OBJS and its advisors a reasonable opportunity to participate in such
drafting process. StarBase will notify OBJS promptly of the receipt of any
comments from the SEC or its staff or from any state securities administrators
and of any request by the SEC or its staff or by any state securities
administrators for amendments or supplements to the Registration Statement or
any Blue Sky Filings or for additional information, and will supply OBJS and its
legal counsel with copies of all correspondence between StarBase or any of its
representatives, on the one hand, and the SEC, its staff or any state securities
administrators, on the other hand, with respect to the Registration Statement.
4.7. Proxy Statement; Meeting. As promptly as practicable following the
execution of this Agreement, and after receipt by OBJS of the Fairness Opinion,
OBJS agrees that this Agreement shall be submitted at a meeting (the "Meeting")
of its stockholders duly called and held pursuant to Section 251(c) of Delaware
Law. As soon as practicable after the date of this Agreement, OBJS shall take
all action, to the extent necessary in accordance with applicable law, its
Certificate of Incorporation and By-Laws, to convene a meeting of its
stockholders promptly to consider and vote upon the approval of the Merger, OBJS
shall prepare and file with the appropriate regulatory agency, subject to the
prior approval of StarBase, such information as may be necessary to allow such
regulatory authority to approve the Merger (the "Regulatory Approval"),
preliminary and final versions of a proxy statement and proxy and other filings
relating to the Meeting as required by such regulatory authority and the
applicable regulations thereof. The term "Proxy Statement" shall mean such proxy
statement at the time it initially is mailed to stockholders and all duly filed
amendments or revisions made thereto, if any, similarly mailed. Notice of the
Meeting shall be mailed to the stockholders of OBJS along with the Proxy
Statement. OBJS will notify StarBase promptly of the receipt of any comments
from the regulatory authority with respect to the Proxy Statement and will
supply StarBase and its legal counsel with copies of all correspondence from or
to such and any other applicable regulatory authorities. OBJS, after
consultation with StarBase and its legal counsel, shall respond promptly to any
comments made by the regulatory authority with respect to the Regulatory
Approval and the Proxy Statement and cause the Proxy Statement and proxy to be
mailed to its stockholders at the earliest practicable time following the
execution hereof.
4.8. Conduct of the Business Prior to the Effective Date. Except as set
forth on Schedule 4.8, OBJS agrees that prior to the Effective Date, except as
otherwise consented to or approved in writing by StarBase or expressly permitted
by this Agreement:
(a) the Business shall be conducted only in the ordinary course and
consistent with past practice;
(b) OBJS shall not (i) amend its Certificate of Incorporation or By-Laws,
(ii) change the number of authorized, issued or outstanding shares of its
capital stock, except upon the exercise of Options outstanding on the date
hereof and in accordance with Section 4.16 hereof, (iii) declare, set aside or
pay any dividend or other distribution or payment in cash, stock or property in
respect of shares of its capital stock, (iv) make any direct or indirect
redemption, retirement, purchase or other acquisition of any of its capital
stock, or (v) split, combine or reclassify its outstanding shares of capital
stock;
(c) OBJS shall not, and shall cause the OBJS Subsidiaries not to, directly
or indirectly, (i) issue, grant, sell or pledge or agree or propose to issue,
grant, sell or pledge any shares of, or rights of any kind
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to acquire any shares of the capital stock of OBJS or the OBJS Subsidiaries,
except that OBJS may issue shares of OBJS Stock upon the exercise of OBJS
Options outstanding on the date hereof, (ii) other than in the ordinary course
of business and consistent with past practice, incur any material indebtedness
for borrowed money, except indebtedness incurred under its existing credit
facility with Silicon Valley Bank, (iii) waive, release, grant or transfer any
rights of material value, except in the ordinary course of business consistent
with past practices or (iv) transfer, lease, license, sell, mortgage, pledge,
dispose of or encumber any material assets of OBJS of the OBJS Subsidiaries
other than in the ordinary course of business and consistent with past practice;
provided, however, that notwithstanding anything to the contrary contained in
this Section 4.8, StarBase shall permit OBJS to negotiate and enter into an
agreement to sell the stock or substantially all of the business and assets of
OBJS' European subsidiaries, ObjectShare GmbH, ObjectShare (UK) Limited and
ObjectShare AG (the "European Transaction"), subject to the following terms and
conditions: (A) consideration paid shall be cash only (including escrowed cash
and/or any promissory notes), in an amount not less than $1.5 million; (B) the
terms of any agreements, documents and instruments to be executed and delivered
with respect to any European Transaction shall be in form and substance
acceptable to StarBase, in its reasonable discretion; it being understood that
OBJS shall provide StarBase with copies of all drafts of such agreements,
documents and instruments and keep StarBase apprised of all negotiations with
respect thereto; and (C) the proceeds realized from any such sale shall be used
first to repay any outstanding indebtedness owing from OBJS to StarBase and
thereafter for working capital purposes only.
(d) other than respect to any European Transaction, OBJS shall use its
reasonable commercial efforts, and shall cause the OBJS Subsidiaries to use
their reasonable commercial efforts, to preserve intact it or their respective
business organizations, to keep available the services of its or their
respective operating personnel and to preserve the goodwill of those having
business relationships with each of them, including, without limitation,
suppliers and customers;
(e) OBJS will not, and shall cause the OBJS Subsidiaries not to, directly
or indirectly, (i) increase the compensation payable or to become payable by any
of them to any of their respective employees, officers or directors, except in
accordance with welfare and benefit plans set forth on Schedule 2.16(b) and
except, with respect to employees who are not directors or officers, for
increases in the ordinary course of business, consistent with past practice,
(ii) adopt additional, or make any payment or provision, other than as required
by existing plans or agreements, including provisions and actions under existing
stock option plans in connection with the Merger, in the ordinary course of
business and consistent with prior practice, with respect to any stock option,
bonus, profit sharing, pension, retirement, deferred compensation, employment or
other payment or employee compensation plan, agreement or arrangement for the
benefit of employees of OBJS or the OBJS Subsidiaries, (iii) in the ordinary
course, grant any stock options or stock appreciation rights or issue any
warrants; provided, however, in the event that StarBase fails to give or to
withhold, in writing, its consent or approval to OBJS within five (5) business
days of written notice (in the manner provided in Section 7.3 hereof) from OBJS
to StarBase requesting permission to grant or issue any such options, rights or
warrants, as the case may be, with respect to the OBJS Stock, then StarBase
shall be deemed to have given the requisite consent or authorization to so grant
or issue such options, rights or warrants; (iv) enter into or amend any
employment or severance agreement or arrangement or (v) make any loan or advance
to, or enter into any written contract, lease or commitment with, any officer or
director of OBJS of the OBJS Subsidiaries;
(f) OBJS shall not, and shall cause the OBJS Subsidiaries not to, directly
or indirectly, assume, guarantee, endorse or otherwise become responsible for
the obligations of any other individual, firm or corporation or make any loans
or advances to any individual, firm or corporation except in the ordinary course
of its business and consistent with past practices;
(g) OBJS shall not, and shall cause the OBJS Subsidiaries not to, make any
investment of a capital nature either by purchase of stock or securities,
contributions to capital, property transfers, acquisition or financing of
equipment or otherwise, other than in the ordinary course of business, by the
purchase of any property or assets of any other individual, firm or corporation;
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(h) OBJS shall not, and shall cause the OBJS Subsidiaries not to, enter
into modify or amend in any material respect or take any action to terminate any
of its material contracts, except in the ordinary course of business;
(i) OBJS shall not, and shall cause the OBJS Subsidiaries not to, take any
action, other than reasonable and usual actions in the ordinary course of
business and consistent with past practice, with respect to accounting policies
or procedures, except for changes required by GAAP;
(j) OBJS shall not, and shall cause the OBJS Subsidiaries not to, settle or
compromise any material federal, state, local or foreign Tax proceeding;
(k) OBJS will, and shall cause the OBJS Subsidiaries to, promptly advise
StarBase in writing of any Material Adverse Effect or any breach of the
representations or warranties of OBJS, or any material breach of a covenant
contained herein of which has knowledge; and
(l) OBJS shall not, and shall cause the OBJS Subsidiaries not to, enter
into an agreement or arrangement to do any of the foregoing actions.
4.9. No Shop.
(a) Following the execution of this Agreement by OBJS, neither OBJS nor its
directors, officers, attorneys, financial advisors, or its other authorized
persons shall, directly or indirectly, solicit, initiate or participate in
discussions or negotiations with or the submission of any offer or proposal by
or provide any information to, any corporation, partnership, person, or other
entity or group (other than StarBase and Subsidiary or any officer or other
authorized representative of StarBase or Subsidiary) concerning any Third Party
Transaction (as defined below) or, except as provided in Section 6.1(d) hereof,
or as may be consistent with fiduciary responsibilities under applicable law,
participate in any negotiation regarding any Third Party Transaction or
otherwise cooperate in any way with any effort or attempt by any other person to
effectuate a Third Party Transaction.
(b) Notwithstanding the foregoing, the Board of Directors of OBJS may
furnish such information to or enter into discussions and/or negotiations with
any corporation, partnership, person or other entity or group that makes an
unsolicited offer to engage in a Third Party Transaction with OBJS that the
Board of Directors of OBJS in good faith determines, with the assistance of its
financial advisor, may represent a transaction more favorable to OBJS
Stockholders when compared to the Merger and the Merger Consideration if, and
only to the extent that, the Board determines after consultation with outside
legal counsel that the failure to take such action would be inconsistent with
the compliance by the Board of Directors with its fiduciary duties to the OBJS
Stockholders under applicable law, provided that such party shall enter into a
confidentiality agreement with OBJS, OBJS shall notify StarBase as to the
contents of information being provided to such party and OBJS shall diligently
enforce its rights under such confidentiality agreement. For purposes of this
Agreement, a "Third Party Transaction" shall mean a bona fide arm's length
proposal, whether solicited or unsolicited, to acquire (by means of a tender or
exchange offer, merger, consolidation, business combination or otherwise) all or
a substantial portion of the outstanding shares of OBJS Stock or of the assets
of OBJS.
(c) OBJS represents and warrants that it is not currently involved in
discussions or negotiations with any third party with respect to a Third Party
Transaction. OBJS will promptly communicate to StarBase the identity of any
potential third party purchaser making any such proposal or contact and, prior
to the execution of any agreement relating to any such Third Party Transaction,
shall also communicate the proposed terms and conditions thereof. OBJS agrees
not to release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which OBJS is a party.
4.10. Certification of Stockholder Vote. At or prior to the Effective
Date, OBJS shall deliver to StarBase a certificate of the secretary of OBJS
setting forth (i) the number of shares of OBJS Stock voted in favor of adoption
of this Agreement and consummation of the Merger and the number of shares of
OBJS Stock voted against adoption of the Agreement and consummation of the
Merger and (ii) the number of shares of Dissenting Stock.
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4.11. Smith Employment/Goda Stock Options.
(a) At or prior to the Effective Date, the Surviving Corporation shall
enter into an employment agreement (the "Employment Arrangement") with James H.
Smith ("Smith"), upon terms and conditions mutually agreeable; it being
acknowledged hereby that fair consideration shall be given by StarBase to
include, but not be limited to, the granting of options to purchase shares of
StarBase Common Stock in connection with such Employment Arrangement, taking
into account, among other factors, the vesting schedule under any OBJS Options
formerly held by Smith.
(b) Notwithstanding paragraph (a) hereto and Section 1.6(c), the
outstanding options to purchase 650,000 shares of OBJS Stock held by Eugene L.
Goda ("Goda"), issued pursuant to that certain stock option agreement, dated
June 10, 1997 (the"Goda Option Agreement") shall be assumed by StarBase (the
"Assumed Options"). Each Assumed Option shall continue to have, and be subject
to, the same terms and conditions set forth in the Goda Option Agreement,
immediately prior to the Effective Time, except that (i) such options will be
exercisable for that number of whole shares of StarBase Common Stock equal to
the product of 650,000 multiplied by the Merger Exchange Ratio and, in the case
of fractional shares, such number shall be rounded down to the nearest whole
share of StarBase Common Stock unless such fractional share of 0.5 of a share or
above, in which case such number shall be rounded up to the nearest whole share
of StarBase Common Stock, and (ii) the per share exercise price for each share
of StarBase Common Stock issuable upon exercise of each of the Assumed Options
will be equal to the quotient determined by dividing $1.0625 (the exercise price
per share of OBJS Stock at which such Assumed Option was exercisable immediately
prior to the Effective Date) by the Merger Exchange Ratio, rounded to the
nearest whole cent. As soon as practicable after the Effective Date but in no
event later than sixty days after the Effective Date, StarBase shall file a
registration statement on Form S-8 registering the shares underlying the Assumed
Options with the SEC and file with the Nasdaq Stock Market a supplemental
listing application for such shares.
4.12. OBJS Voting Agreement. Senior management of OBJS shall enter into a
voting arrangement to vote to the extent of their combined shares of OBJS Stock,
if any, at the Meeting in favor of the Merger and the transactions contemplated
by this Agreement.
4.13. Fees and Expenses. StarBase, on the one hand, and OBJS, on the other
hand, shall be responsible for, and shall pay, the fees and expenses incurred by
each of StarBase and Subsidiary, and OBJS, respectively, in connection with the
Merger and the transactions contemplated by this Agreement.
4.14. Insurance/Indemnity Agreements. At the Effective Date and for two
years thereafter, StarBase shall procure and maintain for any present or former
director, officer, employee or agent of OBJS (each, an "Indemnitee") insured
against liability by OBJS as of the date hereof an insurance policy (each, an
"Insurance Policy") with respect to any liability to OBJS existing at the
Effective Date by reason of the fact that such Indemnitee holds or held such
position. The cost to procure and maintain each Insurance Policy shall be shared
equally by StarBase and OBJS. In accordance therewith, OBJS shall have accrued
for an amount equal to 50% of the cost incurred by StarBase and/or Subsidiary to
procure and maintain for the two year period each Insurance Policy. StarBase
further agrees that all provisions with respect to indemnification by OBJS or
with respect to liability to OBJS existing at the Effective Date in favor of any
Indemnitee, as set forth in OBJS's Certificate of Incorporation, as amended, or
By-laws or the agreements in effect on the date hereof with respect to each of
Eugene L. Goda, Jos Henkens, Lester "Buck" Hill, Sam M. Inman III, Edward B.
Marino, James H. Smith and James F. Sutter, shall survive the Merger and shall
continue in full force and effect for a period of two years.
4.15. OBJS Subsidiaries' Bank Accounts and Corporate Books and Records. At
the Effective Date, certain senior management of StarBase shall be designated or
appointed pursuant to applicable law (contractual or otherwise) as "authorized
signatories" to execute and deliver on behalf of the OBJS Subsidiaries their
respective bank accounts and other institutional or custodial arrangements,
together with all rights associated therewith. Prior to the Effective Date, OBJS
shall, and shall cause the OBJS Subsidiaries to, take all steps necessary to
effect the foregoing.
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i.1. Severance Payments.
(a) Anything to the contrary contained in this Agreement notwithstanding,
OBJS shall be permitted to issue immediately prior to the Merger OBJS Stock to
each of Goda, Samuel Inman ("Inman") and Edward B. Merino ("Merino") in an
amount having a value equal to the severance amount which would be otherwise
owing to each of them as a result of the Merger -- i.e. $240,000, $50,000 and
$25,000, respectively (the "Severance Amount"). Goda, Inman and Merino shall
each be issued the number of shares of OBJS Stock determined by dividing (i) a
fraction, (A) the numerator of which shall be the applicable Severance Amount,
and (B) the denominator of which shall be StarBase Closing Market Price, by (ii)
the Merger Exchange Ratio and, in the case of fractional shares, such number
shall be rounded down to the nearest whole share of OBJS Stock unless such
fractional share is 0.5 of a share or above, in which case such number shall be
rounded up to the nearest whole share of OBJS Stock.
(b) Anything to the contrary contained in this Agreement notwithstanding,
on account of the severance amount which would be otherwise owing to Smith as a
result of the Merger, OBJS shall be permitted (i) to issue immediately prior to
the Merger that number of OBJS Stock to Smith determined by dividing (A) a
fraction, (1) the numerator of which shall $50,000 (constituting fifty percent
(50%) the applicable severance amount otherwise owing to Smith) and (2) the
denominator of which shall be StarBase Closing Market Price, by (B) the Merger
Exchange Ratio and, in the case of fractional shares, such number shall be
rounded down to the nearest whole share of OBJS Stock unless such fractional
share is 0.5 of a share or above, in which case such number shall be rounded up
to the nearest whole share of OBJS Stock and (ii) to pay to Smith the aggregate
sum of $50,000, payable at the Effective Date.
i.2. Lock-Up Arrangement. Anything contained herein to the contrary
notwithstanding, Smith shall enter into an arrangement as of the Effective Date
pursuant to which Smith shall, for a period of six (6) months after the
Effective Date, lock up and not sell or transfer any StarBase Common Stock
issued to Smith pursuant to the Merger or any of the StarBase Merger Options (as
well as the StarBase Common Stock underlying any such options) granted to Smith
in connection with the Merger; it being understood that stock certificates with
respect to the StarBase Common Stock issued to Smith, either in connection with
the Merger or upon Smith's exercise of StarBase Merger Options, shall bear a
restrictive legend to such effect.
i.3. Rule 16b-3 Exemption. StarBase's Board of Directors, upon approving
the Merger but prior to the consummation of the Merger, shall also approve, in
such form as is required by Rule 16b-3 promulgated by the SEC under the Exchange
Act and is acceptable to OBJS, the deemed acquisition of shares of StarBase
Common Stock issued in connection with the Merger and of StarBase Merger
Options, as applicable, by Smith (including the shares of StarBase Common Stock
issued pursuant to the conversion of OBJS Stock acquired under Section 4.16
hereof) and any other officers of OBJS, if any, who will be (a) exchanging OBJS
Options for the StarBase Merger Options and (b) functioning as officers of
StarBase following the Merger.
5. Conditions of Merger.
5.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of the parties hereto to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Date of the following
conditions:
(a) Litigation. No order of any court or administrative agency shall
be in effect which restrains or prohibits the transactions contemplated
hereby, and no claim, suit, action, inquiry, investigation or proceeding in
which it will be, or it is, sought to restrain, prohibit or change the
terms of or obtain damages or other relief in connection with this
Agreement or any of the transactions contemplated hereby, shall have been
instituted or threatened by any person or entity, and which, upon the
advice of either counsel to the parties hereto (based on the reasonable
likelihood of success and material consequences of such claim, suit,
action, inquiry or proceeding), makes it inadvisable to proceed with the
consummation of such transactions.
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(b) Injunctions. No Federal or state governmental authority or other
agency or commission or court of competent jurisdiction shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
injunction or other order (whether temporary, preliminary or permanent)
which is in effect and has the effect of making the acquisition of OBJS
Stock by Subsidiary illegal or otherwise prohibiting consummation of the
transactions contemplated by this Agreement.
(c) Vote. This Agreement and the Merger contemplated hereby shall
have been approved and adopted by the requisite vote of the holders of the
outstanding shares of OBJS Stock entitled to vote thereon at the Meeting.
(d) Merger Certificate. Confirmation, in the form satisfactory to the
parties hereto, from the State of Delaware or a filing service (jointly
chosen by the parties hereto) that the Certificate of Merger of OBJS with
and into Subsidiary has been filed with the Secretary of State of Delaware,
together with a copy of the executed form of such agreement.
(e) Registration Statement. The Registration Statement shall have
been declared effective, and no stop order suspending the effectiveness of
the Registration Statement shall have been issued by the SEC or shall be
continuing to be in effect, and no proceedings for that purpose shall have
been initiated or threatened by the SEC.
(f) Consents. All consents, waivers, approvals, licenses and
authorizations by third parties and governmental and administrative
authorities (and all amendments or modifications to existing agreements
with third parties) required as a precondition to the performance by either
StarBase, Subsidiary or OBJS of their respective obligations hereunder and
under any agreement delivered pursuant hereto shall have been duly obtained
and shall be in full force and effect.
(g) Date of Consummation. The Merger shall have been consummated on
or prior to April 17, 2000, or such later date as the parties shall agree
by a written instrument signed by all of them.
5.2. Conditions to the Obligation of OBJS to Effect the Merger. The
obligation of OBJS to effect the Merger shall be subject to the fulfillment at
or prior to the Effective Date of the following additional conditions:
(a) Each of StarBase and Subsidiary shall have performed in all
materials respects their respective obligations under this Agreement
required to be performed by either or both of them on or prior to the
Effective Date pursuant to the terms hereof.
(b) All representations or warranties of StarBase and Subsidiary in
this Agreement which are qualified with respect to a material adverse
effect or materiality shall be true and correct, and all such
representations or warranties that are not so qualified shall be true and
correct in all material respects, in each case as if such representation or
warranty was made as of the Effective Date, except to the extent that any
such representation or warranty is made as of a specified date, in which
case such representation or warranty shall have been true and correct as of
such specified date.
(c) Each of StarBase and Subsidiary shall have delivered to OBJS a
certificate dated the Effective Date and executed by their respective
Chairman of the Board, President or Vice President to the effect set forth
in paragraphs (a) and (b) of this Section 5.2.
(d) Each of StarBase and Subsidiary shall have delivered to OBJS a
certificate of the secretary of such party, setting forth a copy of their
respective Certificates of Incorporation, resolutions adopted by the Board
of Directors approving the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, together with a
signature and incumbency certificate.
(e) OBJS shall have received from Parker Chapin Flattau & Klimpl, LLP,
counsel to StarBase and Subsidiary, an opinion dated the Effective Date in
the form reasonably agreed to by the parties hereto.
A-24
<PAGE> 122
(f) Since the date of this Agreement, there shall not have been any
material adverse change in the financial condition, results of operations,
assets, properties, liabilities, business or prospects of StarBase.
5.3. Conditions to Obligations of StarBase and Subsidiary to Effect the
Merger. The obligations of StarBase and Subsidiary to effect the Merger shall
be subject to the fulfillment at or prior to the Effective Date of the following
additional conditions:
(a) OBJS shall have performed in all material respects each of its
obligations under this Agreement required to be performed by it on or prior
to the Effective Date pursuant to the terms hereof.
(b) All representations or warranties of OBJS in this Agreement which
are qualified with respect to a Material Adverse Effect or materiality
shall be true and correct, and all representations or warranties that are
not so qualified shall be true and correct in all material respects, in
each case as if such representation or warranty were made as of the
Effective Date except to the extent that any such representation or
warranty is made as of a specified date, in which case such representation
or warranty shall have been true and correct as of such specified date.
(c) Since the date of this Agreement, there shall not have been any
material adverse change in the financial condition, results of operations,
assets, properties, liabilities, business or prospects of OBJS.
(d) OBJS shall have delivered to StarBase and Subsidiary a certificate
of its Chairman of the Board, President or Vice President to the effect set
forth in paragraphs (a), (b) and (c) to this Section 5.3.
(e) OBJS shall have delivered to StarBase and Subsidiary a certificate
of the secretary of OBJS, setting forth a copy of its Certificate of
Incorporation, By-laws and the resolutions having been adopted by the Board
of Directors approving the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, together with a
signature and incumbency certificate.
(f) StarBase shall have received from Paul, Hastings, Janofsky &
Walker LLP, counsel to OBJS, an opinion dated the Effective Date in the
form reasonably agreed to by the parties hereto.
6. Termination, Amendment and Waiver.
6.1. Termination. Notwithstanding anything to the contrary contained in
this Agreement, this Agreement may be terminated and the Merger contemplated
hereby abandoned at any time prior to the Effective Date and before approval by
the stockholders of OBJS, as follows:
(a) by mutual consent of the parties hereto;
(b) by any party hereto if any of the conditions set forth in Section
5.1 hereto are not waived or satisfied on or before the Effective Date;
provided that neither party may terminate under this paragraph (b) if such
failure has been caused by that party's material breach of this Agreement;
(c) by either OBJS, on the one hand, or StarBase and Subsidiary, on
the other hand, if (i) any of the conditions set forth in Section 5.2 or
5.3 hereto, respectively, are not satisfied or waived or (ii) any time
prior to or on the fifteenth (15th) business day after the date hereof
(which date may be extended by five (5) business days) provided that the
parties are in good faith proceeding with respect to the due diligence
inquiry, in connection with its due diligence review pursuant to Section
4.1 hereof, as the Investigating Party, OBJS or StarBase and Subsidiary,
the case may be, shall discover any fact, event or condition with respect
to the other party which in such Investigating Party's sole judgment makes
it inadvisable for it to consummate the Merger on the terms and conditions,
including the consideration, provided for herein; provided that neither
party may terminate under this paragraph (c) if such failure has been
caused by that party's material breach of this Agreement;
A-25
<PAGE> 123
(d) by OBJS, if (i) the stockholders of OBJS shall have failed to vote
in favor of this Agreement and the Merger or (ii) the Board of Directors of
OBJS shall have failed to recommend, or withdrawn, modified or amended in
any respect its approval or recommendation of the Merger and of the
transactions contemplated hereby, or such Board of Directors shall have
resolved to do any of the foregoing, by reason of a Third Party Transaction
and, in which case, OBJS having paid to StarBase the Termination Fee (as
defined in Section 6.2 hereof).
(e) by StarBase, if (i) the sum of the Enterprise Value Factors exceed
a negative balance of $2,500,000, (ii) the number of shares of StarBase
Common Stock to be issued as Merger Consideration will exceed 4,750,000
shares of StarBase Common Stock, unless OBJS is otherwise willing to
consummate the transactions contemplated by this Agreement for an aggregate
Merger Consideration of 4,750,000 shares of StarBase Common Stock, which
aggregate number of shares shall be adjusted as appropriate to account for
any split, combination or reclassification with respect to the StarBase
Common Stock, (iii) the aggregate amount of Dissenting Stock equals or
exceeds five percent (5%) of the issued and outstanding shares of OBJS
Stock as of the record date with respect to the Meeting to be held pursuant
to Section 4.7 hereof, or (iv) there is a breach of any of the
representations and warranties of OBJS which are qualified with respect to
a Material Adverse Effect or materiality or if OBJS shall have breached in
any material respect any of such representations or warranties which are
not so qualified, or if OBJS fails to comply in any material respect with
any of its covenants or agreements contained herein, which breaches or
failures, as the case may be, are, in the aggregate, material in the
context of the transactions contemplated by this Agreement;
(f) by OBJS, if there is a breach of any of the representations and
warranties of either StarBase or Subsidiary which are qualified with
respect to a material adverse effect or materiality or if either StarBase
or Subsidiary shall have breached in any material respect any of their
respective representations or warranties which are not so qualified, or if
either StarBase or Subsidiary fails to comply in any material respect with
any of their respective covenants or agreements contained herein, which
breaches or failures, as the case may be, are, in the aggregate, material
in the context of the transactions contemplated by this Agreement; or
(g) by any party hereto if the Effective Date of the Merger is not on
or before April 17, 2000, or such later date as may be agreed upon by the
parties hereto in writing; provided that neither party may terminate under
this paragraph (g) if such failure has been caused by that party's material
breach of this Agreement.
In the event of termination and abandonment pursuant to this Section 6.1,
this Agreement shall, except as otherwise provided in Section 7.1 hereof,
forthwith become null and void and there shall be no liability on the part of
any party hereto under any provision hereof; provided, however, that
notwithstanding the provisions of the foregoing sentence, nothing in this
Agreement shall relieve any party from liability for any wilful breach of the
terms hereof.
6.2. Termination Fee. If this Agreement is terminated by OBJS pursuant to
Section 6.1(d)(ii) as a result of a Third Party Transaction, then OBJS shall,
simultaneously with such termination, pay to StarBase by wire transfer of
immediately available funds the sum of $500,000, together with any and all
reasonable legal, accounting, investment banking and other such fees and
expenses incurred by StarBase and Subsidiary in connection with the transactions
contemplated by this Agreement, which other such fees and expenses shall not
exceed, in the aggregate, $200,000 (collectively, the "Termination Fee").
6.3. Waiver. At any time prior to the Effective Date, any party hereto may
(a) extend the time for the performance of any of the obligations or other acts
of the other parties hereto, (b) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered pursuant hereto and
(c) waive compliance with any of the agreements or conditions contained herein.
Any such extension or waiver shall be valid if set forth in an instrument in
writing signed by the party or parties to be bound thereby.
A-26
<PAGE> 124
7. General Provisions.
7.1. Survival. All representations, warranties and agreements contained in
this Agreement or in any instrument delivered pursuant to this Agreement shall
terminate and be extinguished at the Effective Date or the earlier date of
termination of this Agreement pursuant to Section 6.1, as the case may be,
except that the agreements set forth in Article I and in Sections 4.1(b), 4.2,
4.3, 4.5 and 7.2 hereof will survive the Effective Date indefinitely and those
set forth in Sections 4.13, 6.2 and 7.2 hereof will survive the termination of
this Agreement indefinitely, and other than any covenant the breach of which has
resulted in the termination of this Agreement.
7.2. Publicity. StarBase, Subsidiary and OBJS shall consult with each
other prior to issuing any press release or otherwise making any public
statement with respect to the contents of this Agreement or the transactions
contemplated hereby, and none of the parties hereto shall issue any such press
release or make any such public statement prior to having such consultation and
using the best efforts to obtaining the consent of the other parties hereto,
except as may be required by law or applicable stock exchange or NASDAQ
regulations.
7.3. Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date received. Notices shall be either delivered personally, deposited
with courier, sent by telecopy, or mailed by registered or certified mail
(postage prepaid, return receipt requested), to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
If to StarBase or Subsidiary:
StarBase Corporate
4 Hutton Drive, Suite 800
Santa Ana, CA 92707
Attn: Doug Norman
Fax: (714) 445-4482
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attn: Martin Weisberg, Esq.
Fax: (212) 704-6228
If to OBJS:
ObjectShare, Inc.
16811 Hale Avenue, Suite A
Irvine, CA 92606
Attn: Eugene Goda
Fax: (949) 253-3720
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
695 Town Center Drive
Costa Mesa, CA 92626-1924
Attn: William J. Simpson, Esq.
Fax: (714) 979-1921
7.4. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such
A-27
<PAGE> 125
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the greatest extent possible.
i.1. Specific Performance. Each of the parties hereto acknowledges and
agrees that the other parties hereto would be irreparably damaged in the event
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. Accordingly, each of the
parties hereto agrees that they each shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and conditions hereof in any
action instituted in any court of the United States or any state having
competent jurisdiction, in addition to any other remedy to which such party may
be entitled, at law or in equity.
i.2. Definition of Knowledge. As used in this Agreement, "knowledge" with
respect to OBJS shall mean the knowledge, after due inquiry, of the officers and
directors of OBJS.
7.5. Entire Agreement. This Agreement and the agreements referred to
herein constitute the entire agreement, and supersede all prior agreements,
representations and undertakings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof.
7.6. Amendment. Subject to the applicable provisions of Delaware Law, this
Agreement may be amended by the parties hereto solely by action taken by their
respective Boards of Directors. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
7.7. No Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefits of the parties hereto and their
respective successors and permitted assigns. Neither this Agreement nor any of
the rights, interests or obligations shall be assigned by any of the parties
hereto without the prior written consent of the other parties, provided that the
rights and duties of Subsidiary hereunder may be assigned to another
wholly-owned subsidiary of StarBase, which assumes all of Subsidiary's duties
and obligations. This Agreement is not intended to confer upon any other person
any rights or remedies hereunder.
7.8. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the law of the State of Delaware, without regard to its choice
of law principles.
i.1. Headings. The headings contained are for convenience of reference
only and shall in no way be deemed to limit or affect the meaning or
interpretation of any of the terms or provisions hereof.
7.9. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement.
[SIGNATURE PAGE FOLLOWS]
A-28
<PAGE> 126
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first written above.
STARBASE CORPORATION
By: /s/ DOUGLAS S. NORMAN
------------------------------------
Name: Douglas S. Norman
Title: Director of Finance
OBJS ACQUISITION CORP.
By: /s/ DOUGLAS S. NORMAN
------------------------------------
Name: Douglas S. Norman
Title: Director of Finance
OBJECTSHARE, INC.
By: /s/ EUGENE L. GODA
------------------------------------
Name: Eugene L. Goda
Title: President and CEO
A-29
<PAGE> 127
APPENDIX B
FINANCIAL STATEMENTS
OF
STARBASE CORPORATION
INDEX
<TABLE>
<S> <C>
YEAR-END FINANCIAL STATEMENTS (AUDITED)
Independent Auditors' Report................................ B-2
Report of Independent Accountants........................... B-3
Balance Sheets at March 31, 1999 and 1998................... B-4
Statements of Operations for the years ended March 31, 1999
and 1998.................................................. B-5
Statements of Cash Flows for the years ended March 31, 1999
and 1998.................................................. B-6
Statements of Stockholders' Equity for the years ended March
31, 1999 and 1998......................................... B-8
Notes to Financial Statements............................... B-9
FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED
DECEMBER 31, 1999 (UNAUDITED)
Balance Sheets as of December 31, 1999 (unaudited) and March
31, 1999 (audited)........................................ B-21
Statements of Operations for the three and nine months ended
December 31, 1999 and 1998................................ B-22
Statements of Comprehensive Loss for the three and nine
months ended December 31, 1999 and 1998................... B-23
Cash Flows for the nine months ended December 31, 1999 and
1998...................................................... B-24
Notes to Financial Statements............................... B-25
</TABLE>
B-1
<PAGE> 128
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and
Stockholders of StarBase Corporation
We have audited the accompanying balance sheet of StarBase Corporation (the
Company) as of March 31, 1999, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of StarBase Corporation at March 31, 1999, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's working capital is insufficient to support
the Company's projected operating needs. Additionally the Company has
experienced recurring losses from operations. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning this matter are described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
DELOITTE & TOUCHE LLP
Costa Mesa, California
June 18, 1999
B-2
<PAGE> 129
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and
Stockholders of StarBase Corporation
In our opinion, the balance sheet and the related statements of operations,
of stockholders' equity and of cash flows as of and for the year ended March 31,
1998 present fairly, in all material respects, the financial position, results
of operations and cash flows of StarBase Corporation as of and for the year
ended March 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
June 26, 1998
B-3
<PAGE> 130
STARBASE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,363 $ 4,167
Restricted cash........................................... 39 --
Marketable securities..................................... 121 --
Accounts receivable, net of allowances of $155 (1999) and
$89 (1998)............................................. 2,528 464
Notes and other receivables............................... 9 45
Inventories............................................... 51 57
Prepaid expenses and other assets......................... 214 113
-------- --------
Total current assets................................... 4,325 4,846
Property and equipment, net............................... 987 747
Developed technology, net................................. 971 --
Note receivable from officer.............................. 94 76
Long-term restricted cash................................. 79 --
Other non-current assets.................................. 149 13
-------- --------
Total assets........................................... $ 6,605 $ 5,682
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 1,264 $ 941
Deferred revenue.......................................... 658 263
Current portion of long-term debt......................... 95 10
-------- --------
Total current liabilities.............................. 2,017 1,214
Long-term liabilities:
Long-term debt, less current portion...................... 116 38
Other long-term liabilities............................... 10 --
-------- --------
Total long-term liabilities............................ 126 38
-------- --------
Total liabilities...................................... 2,143 1,252
Commitments and contingencies Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized, 588,993 and 3,772,952 shares issued and
outstanding at March 31, 1999 and March 31, 1998;
liquidation preference of $4,916 (March 31, 1999) and
$4,716 (March 31, 1998)................................ 6 38
Common stock, $.01 par value; 50,000,000 shares
authorized; 28,636,362 and 18,580,499 shares issued and
outstanding at March 31, 1999 and March 31, 1998....... 286 186
Additional paid-in capital................................ 56,208 46,287
Accumulated deficit....................................... (52,038) (42,081)
-------- --------
Total stockholders' equity............................. 4,462 4,430
-------- --------
Total liabilities and stockholders' equity............. $ 6,605 $ 5,682
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-4
<PAGE> 131
STARBASE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues:
License................................................... $ 5,262 $ 1,481
Maintenance, training and consulting...................... 868 276
Royalty................................................... 702 382
-------- --------
Total revenues......................................... 6,832 2,139
Cost of Revenues:
Products, licenses and other.............................. 508 162
-------- --------
Gross margin................................................ 6,324 1,977
Operating Expenses:
Research and development.................................. 4,437 2,762
Selling, general and administrative....................... 10,601 5,370
-------- --------
Total operating expenses............................... 15,038 8,132
-------- --------
Operating loss............................................ (8,714) (6,155)
Total interest and other income expense................ 32 (877)
-------- --------
Loss before income taxes.................................... (8,682) (7,032)
Provision for income taxes................................ 1 1
-------- --------
Net loss.................................................... (8,683) (7,033)
Non-cash dividend and accretion of beneficial conversion
feature................................................ 1,277 2,832
-------- --------
Net loss applicable to common stockholders.................. $ (9,960) $ (9,865)
======== ========
Per share data:
Basic and diluted net loss per common share............... $ (0.49) $ (0.70)
======== ========
Basic and diluted weighted average number of common shares
outstanding............................................ 20,526 14,126
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-5
<PAGE> 132
STARBASE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................. $(8,683) $(7,033)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash interest...................................... -- 933
Depreciation and amortization.......................... 386 238
Provision for doubtful accounts........................ 66 24
Loss on disposition of property, equipment and capital
lease................................................. 7 --
Deferred revenue....................................... 397 160
Stock option compensation expense...................... 177 --
Other adjustments...................................... -- 19
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,130) (370)
Notes and other receivables.......................... 36 38
Inventories.......................................... 6 (23)
Prepaid expenses..................................... 150 199
Other non-current assets............................. (156) (6)
Accounts payable and accrued liabilities............. 314 159
------- -------
Net cash used in operating activities....................... (9,430) (5,662)
Cash Flows from Investing Activities:
Increase in restricted cash............................... (118) --
Increase in marketable securities......................... (121) --
Capital expenditures...................................... (600) (407)
------- -------
Net cash used in investing activities....................... (839) (407)
Cash Flows from Financing Activities:
Proceeds from sale of preferred stock..................... 7,053 4,950
Proceeds from issuance of common stock:
Private placements..................................... 60 --
For payment of expenses................................ 152 --
Exercise of options.................................... 61 181
Exercise of warrants................................... 581
Proceeds from convertible debentures...................... -- 3,100
Payment of financing related costs........................ (358) (711)
Payments on capitalized lease obligations................. (84) (6)
------- -------
Net cash provided from financing activities................. 7,465 7,514
------- -------
Net increase in cash and cash equivalents................... (2,804) 1,445
Cash and cash equivalents, beginning of year................ 4,167 2,722
------- -------
Cash and cash equivalents, end of year...................... $ 1,363 $ 4,167
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-6
<PAGE> 133
STARBASE CORPORATION
SUPPLEMENTAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Interest paid in cash....................................... $ 16 $ 11
====== ======
Income taxes paid........................................... $ 5 $ 1
====== ======
Non-cash investing and financing transactions:
Non-cash preferred stock and common stock dividends (Note
7)..................................................... $1,277 $4,492
Conversion of preferred stock to common stock (Note 7).... 85 8
Conversion of debentures to equity (Note 7)............... -- 2,875
Conversion of warrants to common stock (Note 7)........... -- 16
Capitalized lease financing............................... 16 54
Capitalized insurance financing........................... 252 --
Options for services provided............................. -- 28
Issuance of common stock for developed technology (Note
7)..................................................... 987 --
</TABLE>
B-7
<PAGE> 134
STARBASE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON ADDITIONAL
---------------- ---------------- STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SUBSCRIBED CAPITAL
------ ------ ------ ------ ---------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1997.............. 25 $ -- 13,319 $133 $-- $33,414
Preferred stock conversion to common... (710) (7) 855 9 -- (2)
Preferred stock issued -- Series D..... 1,200 12 -- -- -- 1,347
Preferred stock issued -- Series E..... 2,873 29 -- -- -- 3,105
Preferred stock issued -- Series F..... 385 4 -- -- -- 477
Warrants converted to common stock..... -- -- 1,581 16 -- (16)
Debentures converted to common stock... -- -- 2,704 27 -- 3,263
Stock options exercised................ -- -- 121 1 -- 179
Options for services provided.......... -- -- -- -- -- 28
Non-cash dividend...................... -- -- -- -- -- 4,492
Net loss............................... -- -- -- -- -- --
------ ---- ------ ---- -- -------
BALANCE AT MARCH 31, 1998.............. 3,773 38 18,580 186 -- 46,287
------ ---- ------ ---- -- -------
Preferred stock conversion to common
stock................................ (3,191) (32) 8,500 85 -- (53)
Preferred stock issued -- Series D..... -- -- -- -- -- (8)
Preferred stock issued -- Series E..... -- -- -- -- -- (26)
Preferred stock issued -- Series F..... -- -- -- -- -- (4)
Preferred stock issued -- Series G..... 3 -- -- -- -- 2,866
Preferred stock issued -- Series H..... 3 -- -- -- -- 2,938
Preferred stock issued -- Series I..... 1 -- -- -- -- 884
Options and warrants issued for
services provided.................... -- -- -- -- -- 177
Common stock issued:
Exercise of options.................. -- -- 49 -- -- 61
Exercise of warrants................. -- -- 688 7 -- 623
Asset Purchase & Sale................ -- -- 625 6 -- 981
Private Placement.................... -- -- 38 -- -- 58
Payment of liabilities............... -- -- 156 2 -- 150
Non-cash dividend...................... -- -- -- -- -- 1,277
Net loss............................... -- -- -- -- -- --
------ ---- ------ ---- -- -------
BALANCE AT MARCH 31, 1999.............. 589 $ 6 28,636 $286 $-- $56,208
====== ==== ====== ==== == =======
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE AT MARCH 31, 1997.............. $(30,556) $ 2,991
Preferred stock conversion to common... -- --
Preferred stock issued -- Series D..... -- 1,359
Preferred stock issued -- Series E..... -- 3,134
Preferred stock issued -- Series F..... -- 481
Warrants converted to common stock..... -- --
Debentures converted to common stock... -- 3,290
Stock options exercised................ -- 180
Options for services provided.......... -- 28
Non-cash dividend...................... (4,492) --
Net loss............................... (7,033) (7,033)
-------- -------
BALANCE AT MARCH 31, 1998.............. (42,081) 4,430
-------- -------
Preferred stock conversion to common
stock................................ -- --
Preferred stock issued -- Series D..... -- (8)
Preferred stock issued -- Series E..... -- (26)
Preferred stock issued -- Series F..... -- (4)
Preferred stock issued -- Series G..... -- 2,866
Preferred stock issued -- Series H..... -- 2,938
Preferred stock issued -- Series I..... -- 884
Options and warrants issued for
services provided.................... -- 177
Common stock issued:
Exercise of options.................. -- 61
Exercise of warrants................. -- 630
Asset Purchase & Sale................ -- 987
Private Placement.................... -- 58
Payment of liabilities............... -- 152
Non-cash dividend...................... (1,277) --
Net loss............................... (8,683) (8,683)
-------- -------
BALANCE AT MARCH 31, 1999.............. $(52,038) $ 4,462
======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-8
<PAGE> 135
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
StarBase Corporation, a Delaware corporation (the "Company"), is a leading
provider of advanced Internet and intranet based technical collaboration
products for web site application production and software configuration
management (SCM). The Company develops, markets and supports team-oriented
development software that targets the evolving needs of corporate information
technology (IT) structures which support projects requiring technical
collaboration on an enterprise level. The Company's current product line
consists of the recently launched products StarTeam(R) 4.0 and Enterprise Suite,
as well as StarSweeper, StarContent, RoundTable(R) and Versions(R).
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Restricted cash
On September 17, 1998, the Company pledged $118,000 of cash for an
irrevocable letter of credit related to the lease of new office space that was
classified as restricted cash on the balance sheet. The letter of credit will be
reduced by 33.33% each year and will expire on July 2, 2001.
Accounts receivable
The Company sells its products worldwide. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains reserves for potential credit losses and those losses have
been within management's expectations. Allowance for product returns and price
protection are included in accounts receivable on the accompanying balance
sheets.
One customer represented 10% of total revenue for the year ended March 31,
1999, and 18% of total revenue for the year ended March 31, 1998. At March 31,
1999 and March 31, 1998 no one customer comprised greater than 10% of
outstanding accounts receivable.
Marketable securities
The Company accounts for marketable securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. This
standard requires the Company to classify and account for investments in equity
securities that have readily determinable fair values and all debt securities as
follows: (1) debt securities that the Company has the intent and the ability to
hold to maturity are classified as held-to-maturity securities and are reported
at amortized cost; (2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near-term are classified as
trading securities and are reported at fair value, with unrealized gains and
losses included in earnings; and (3) debt and equity securities not classified
as held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earning and reported as a separate component of
stockholders' equity.
Inventories
Inventories consist of the Company's software products and packaging and
are stated at the lower of cost (first-in, first-out) or market.
B-9
<PAGE> 136
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are calculated under the
straight-line basis over the shorter of the estimated useful lives of the
respective assets, generally three to seven years, or the related lease term. At
March 31, 1999, and March 31, 1998, property and equipment included equipment
under capital lease, net of accumulated amortization, of $60,000 and $51,000
respectively.
Impairment of long-lived assets
The Company accounts for the impairment and disposition of long-lived
assets in accordance with Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." In accordance with SFAS 121, long-lived
assets to be held are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of long-lived assets to determine
whether or not an impairment to such value has occurred and has determined based
on its most recent assessment that there was no impairment at March 31, 1999.
Developed technology
Developed technology (net of accumulated amortization of $16,500 at March
31, 1999) is amortized on a straight-line basis over 5 years.
Revenue recognition
During October 1997, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 97-2, Software Revenue Recognition, which
provides guidance in recognizing revenue on software transactions. SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997, and supersedes SOP 91-1. The Company adopted this statement, as
amended, during the year ended March 31, 1999.
Software license revenue is recognized upon shipment of packaged products.
Software maintenance revenue is recorded as deferred revenue and recognized
ratably over the contractual maintenance period, generally twelve months.
Revenue from training, which is recognized after the related services have been
performed, totaled $72,000 for the year ended March 31, 1999 and $12,000 for the
year ended March 31, 1998. Royalty revenue pertains to sales of the Company's
Roundtable Total Software Management System licensed to a distributor for
resale. Such revenue is recorded at the time the distributor sells the licensed
product.
Warranties and returns
The Company warrants products against defects for 90 days and has a policy
permitting the return of products within 30 days. Warranty costs and returns,
which are not significant, have historically been within management's
expectations.
Research and development
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," technological feasibility is typically established when a working
model is completed and its consistency with product design has been confirmed by
testing. As technological feasibility typically is established immediately prior
to first customer shipment, capitalizable research and development costs are
insignificant. Consequently research and
B-10
<PAGE> 137
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
development costs related to the development of the Company's software systems
are expensed as incurred.
Income taxes
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements and tax returns.
Deferred tax assets and liabilities are determined based upon the difference
between the financial statement and tax bases of assets and liabilities, using
the enacted tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is provided when it is more likely
than not that deferred tax assets will not be realized.
Fair value of financial instruments
Financial instruments of the Company consist of cash and cash equivalents,
marketable securities, accounts, notes and other receivables, accounts payable
and accrued liabilities, and capital lease obligation. The carrying amount of
the Company's capital lease obligation approximates fair market value based on
prevailing market rates. The Company's other financial instruments generally
approximate their fair values at March 31, 1999 and 1998 based on the short-term
nature of these instruments.
Stock-based compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees."
Net loss per share
Basic loss per share applicable to common stockholders is computed using
the weighted average number of common shares outstanding during the periods
presented. Diluted loss per share applicable to common stockholders is computed
using the weighted average number of common and common equivalent shares
outstanding during the periods presented assuming the exercise of the Company's
stock options, warrants, and potential shares (Escrow Shares). Common equivalent
shares have not been included where inclusion would be antidilutive. Escrow
Shares can be released to the founders upon attaining certain defined cash flow
requirements. The release of the Escrow Shares will be deemed compensatory and,
accordingly, will result in charges to earnings equal to the fair market value
of these shares recorded ratably over the period beginning on the date when
management determines that the cash flow requirements are probable of being met
and ending on the date when the goal is attained, causing the Escrow Shares to
be released. At the time a goal is attained, previously unrecognized
compensation expense will be adjusted by a one-time charge based on the then
fair market value of the shares released from escrow. Such charges could
substantially reduce the Company's net income or increase the Company's loss for
financial reporting purposes in the periods such charges are recorded. Based
upon historical results, the attainment of the goal is not probable at this
time. However, this does not preclude the attainment of the goal with future
results.
B-11
<PAGE> 138
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC AND DILUTED LOSS PER SHARE
Net loss....................................... $(8,683)
Non-cash dividend.............................. (1,277)
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE.... (9,960) 20,526 $(0.49)
======
Effect of Dilutive Securities.................. -- --
------- ------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER
SHARE........................................ $(9,960) 20,526 $(0.49)
======= ====== ======
</TABLE>
FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC AND DILUTED LOSS PER SHARE
Net loss....................................... $(7,033)
Non-cash dividend.............................. (2,832)
-------
BASIC LOSS TO COMMON STOCKHOLDERS PER SHARE.... (9,865) 14,126 $(0.70)
======
Effect of Dilutive Securities.................. -- --
------- ------
DILUTIVE LOSS TO COMMON STOCKHOLDERS PER
SHARE........................................ $(9,865) 14,126 $(0.70)
======= ====== ======
</TABLE>
Common stock equivalents, which consist of options to purchase 2,091,067
shares of common stock at prices ranging from $0.625 to $3.44 per share,
warrants to purchase 2,984,388 shares of common stock at prices ranging from
$0.59 to $3.25 per share, and 1,418,638 common shares held in escrow were not
included in the computation of diluted loss per share because such inclusion
would have been antidilutive for the year ended March 31, 1999. Common stock
equivalents, which consist of options to purchase 3,420,527 shares of common
stock at prices ranging from $0.84 to $3.44 per share, warrants to purchase
2,177,722 shares of common stock at prices ranging from $1.25 to $1.80 per
share, and 1,418,638 common shares held in escrow were not included in the
computation of diluted loss per share because such inclusion would have been
antidilutive for the year ended March 31, 1998.
Reporting currency
The accompanying financial statements are reported in the currency of the
United States of America. Certain warrants are denominated in Canadian dollars
and are indicated as CDN$.
Use of estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the amounts and disclosures reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Comprehensive income
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income." This
statement established standards for the reporting of comprehensive income and
its components. Comprehensive
B-12
<PAGE> 139
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. For each of the years ended March 31, 1999 and 1998,
there was no difference between net loss and comprehensive loss.
Operating Segment
In accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and related information, the Company has determined that is has one
operating segment which operates in North America.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which the Company
is required to adopt effective in its fiscal year 2000. SFAS No. 133 will
require the Company to record all derivatives on the balance sheet at fair
value. The Company does not currently engage in hedging activities but will
continue to evaluate the effect of adopting SFAS No. 133. The Company will adopt
SFAS No. 133 in its fiscal year 2000.
2. BASIS OF PRESENTATION
Management believes based upon projected operating needs that the Company's
working capital is insufficient for the Company to maintain its current level of
operating activities through March 31, 2000. The Company has also experienced
recurring losses from operations. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The Company is
currently in the process of negotiating additional financing through the private
placement of common and/or convertible Preferred stock. The Company believes
that proceeds from the sale of debt and equity securities during fiscal year
2000, combined with operating revenues, will be sufficient to allow the Company
to conduct its operations during the fiscal year ended March 31, 2000. While the
Company has successfully raised equity capital in the past, there can be no
assurance that the Company will be successful in their efforts to obtain
additional financing in the future.
B-13
<PAGE> 140
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
PROPERTY AND EQUIPMENT:
Computer hardware........................................... $ 1,337 $1,110
Furniture and fixtures...................................... 315 255
Computer software........................................... 199 269
Leasehold improvements...................................... 198 40
------- ------
2,049 1,674
Less accumulated depreciation and amortization.............. (1,062) (927)
------- ------
$ 987 $ 747
======= ======
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Trade accounts payable...................................... $ 640 $ 390
Accrued professional fees................................... 86 255
Accrued wages and benefits.................................. 493 205
Other accrued expenses...................................... 45 91
------- ------
$ 1,264 $ 941
======= ======
</TABLE>
4. MARKETABLE SECURITIES
At March 31, 1999, the Company's marketable securities represent
available-for-sale securities that have been recorded at fair value and are
comprised of one equity stock for which its fair value approximates its cost.
5. CAPITAL LEASE AND LONG-TERM OBLIGATIONS
The Company is the lessee of certain office equipment under capital leases
that expire in 2002 and 2003. The assets are depreciated over their estimated
useful life.
The future annual minimum lease payments under the capital leases are as
follows:
<TABLE>
<S> <C>
Years ending March 31: (in thousands)
2000...................................................... $ 21
2001...................................................... 21
2002...................................................... 20
2003...................................................... 3
2004...................................................... 2
----
Total minimum lease payments................................ 67
Less amount representing interest........................... (15)
----
Present value of minimum lease payments..................... 52
Less current maturities..................................... (14)
----
$ 38
====
</TABLE>
B-14
<PAGE> 141
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In September 1998, the Company financed the renewal of its commercial
insurance (1 year policy) and director's and officer's insurance (3 year
policy). The asset is amortized over the life of the policies and the
amortization is included in general and administrative expense.
The future annual minimum payments under the financing are as follows:
<TABLE>
<S> <C>
Years ending March 31: (in thousands)
2000...................................................... $ 92
2001...................................................... 81
----
Total minimum payments...................................... 173
Less amount representing interest........................... (14)
----
Present value of minimum payments........................... 159
Less current maturities..................................... (81)
----
$ 78
====
</TABLE>
6. INCOME TAXES
The Company has recorded a valuation allowance equal to the current and
deferred provision for federal income tax benefit for all periods to date, as a
result of losses incurred since its inception. The provision for income taxes
represents the minimum required for state taxes. At March 31, 1999, the Company
had net operating loss carryforwards of approximately $36.8 million and $17.6
million for federal and state income tax purposes, respectively, expiring in
varying amounts through the year 2019 which are available to offset future
federal and state taxable income. The ability of the Company to utilize the
federal and state net operating loss carryforwards may be subject to annual
limitations under certain provisions of the Internal Revenue Code, as a result
of ownership changes.
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 14,451 $ 11,995
State taxes................................................. (711) --
Accounts and notes receivable allowances.................... 34 28
Accrued expenses............................................ 188 26
Deferred income............................................. 289 109
Credits..................................................... 990 --
Deferred tax asset valuation allowance...................... (15,241) (12,158)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
</TABLE>
7. EQUITY TRANSACTIONS
The Company has authorized 50,000,000 shares of common stock and 10,000,000
shares of preferred stock with a par value of $0.01 per share. Of the preferred
stock, 584,808 shares of Series E, 3,185 shares of Series H and 1,000 shares of
Series I are outstanding at March 31, 1999.
The Company accounts for the beneficial conversion feature of convertible
preferred stock in accordance with Emerging Issues Task Force Topic No. D-60.
Under Topic No. D-60, the beneficial conversion feature of convertible preferred
stock is recognized as a dividend and additional paid-in capital. The amount of
the beneficial conversion feature is measured at the date of issue of the
convertible security
B-15
<PAGE> 142
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
as the difference between the conversion price and the market value of the
common stock into which the security is convertible. This amount is recorded as
a non-cash dividend, with a corresponding increase to additional paid-in capital
and is recognized over the period from issuance date to the date the preferred
stock is first convertible. Thus, there is non effect on total stockholders'
equity.
Activity for year ended March 31, 1999
During the year ending March 31, 1999, 900,000 shares of Series D Preferred
Stock, 2,288,145 shares of Series E Preferred Stock, and 3,100 shares of Series
G Preferred Stock were converted into 1,068,982, 2,288,145 and 5,142,550 shares
of common stock, respectively.
Effective July 31, 1998, the Company completed a private placement of 3,100
shares of Series G Preferred Stock for $3,000,000. The Series G Preferred Stock
is not redeemable and has a liquidation preference of $1,000 per share. The
holders of Series G Preferred Stock are not entitled to receive any dividends
nor, except as provided by law, vote upon any matter relating to the business or
affairs of the Company. Each share of Series G Preferred Stock is convertible,
after 120 days, into the Company's common stock, at a conversion rate which is
determined by dividing $1,000 by the Conversion Price. The Conversion Price
shall be the lesser of (a) $1.66 or (b) 95% of the average closing bid price of
the three lowest bid prices of common stock as reported by Bloomberg, L.P. for
shares traded in the United States during the 22 consecutive trading days
preceding the conversion date. In conjunction, the Company issued 805,234
warrants related to the Series G Preferred Stock. Of these warrants, 635,034 are
exercisable for one share of common stock at $0.75 through August 31, 2000,
after which the warrants will expire and 170,200 warrants are exercisable for
one share of common stock at a range of $0.59 to $0.84, expiring from November
10, 2000 to January 4, 2001. The fair value of these warrants using the
Black-Scholes pricing model at the date of grant was $201,354 and was recorded
as a non-cash dividend at the time of issuance.
During November 1998, the Company entered into agreements to complete a
three phase private placement consisting of 3,185 shares of Series H Preferred
Stock for $3,000,000. The first phase closed in November 1998, the second phase
closed in December 1998 and the third phase closed in February 1999. The Series
H Preferred Stock is not redeemable and has a liquidation preference of $1,000
per share. The holders of Series H Preferred Stock are not entitled to receive
any dividends nor, except as provided by law, vote upon any matter relating to
the business or affairs of the Company. Each share of Series H Preferred Stock
is convertible, after 120 days, into the Company's common stock, at a conversion
rate which is determined by dividing $1,000 by the Conversion Price. The
Conversion Price shall be the lesser of (a) 110% of the average of the closing
bid prices of the common stock for the five-day trading period on the trading
date immediately preceding each Closing Date (the "Closing Price") or (b) the
average of the two (2) lowest closing bid prices of the common stock during the
thirty (30) trading days preceding the conversion date. In conjunction, the
Company issued 323,025 warrants with the Series H Preferred Stock. One-third of
the warrants is exercisable for one share of common stock at $0.95 through
November 24, 2003, one-third of the warrants is exercisable for one share of
common stock at $0.73 through December 20, 2003, and one-third of the warrants
is exercisable for one share of common stock at $1.93 through February 8, 2004
after which the warrants will expire. The fair value of these warrants using the
Black-Scholes pricing model at the date of grant was $177,642.
Effective January 26, 1999, the Company completed a private placement of
37,736 shares of restricted Common Stock for $60,000 to Company executives. The
Company also issued 7,548 warrants to purchase shares of common stock at $1.59
through January 26, 2001.
On January 19, 1999, the Company entered into an accounts receivable
purchase agreement with Silicon Valley Bank for up to $2,000,000 of receivables.
In conjunction with the agreement, the Company
B-16
<PAGE> 143
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
issued 55,452 warrants to purchase shares of common stock at $1.08 exercisable
through January 19, 2004. At March 31, 1999, the Company has not sold any of its
receivables pursuant to this agreement.
Effective March 16, 1999, the Company completed a private placement of
1,000 shares of Series I Preferred Stock for $1,000,000. The Series I Preferred
Stock is not redeemable and has a liquidation preference of $1,000 per share.
The holders of Series I Preferred Stock are not entitled to receive any
dividends nor, except as provided by law, vote upon any matter relating to the
business or affairs of the Company. Each share of Series I Preferred Stock is
convertible, after 120 days, into the Company's common stock, at a conversion
rate which is determined by dividing $1,000 by the Conversion Price. The
Conversion Price shall be the lesser of (a) $1.50 or (b) 90% of the average
closing bid price of the two lowest closing bid prices of common stock during
the thirty (30) consecutive trading days preceding the conversion date. In
conjunction, the Company issued 253,333 warrants with the Series I Preferred
Stock. Each warrant is exercisable for one share of common stock at $1.50
through March 16, 2002, after which the warrants will expire. The fair value of
these warrants using the Black-Scholes pricing model at the date of grant was
$198,360.
On March 17, 1999, the Company completed the purchase of certain intangible
assets of Site Technologies, Inc. for 625,000 shares of restricted Common Stock
valued at $987,500. The purchase price was allocated to intangible assets. The
purchase provides for the exclusive ownership and distribution rights of Site
Technologies core technology assets including the SiteSweeper, SiteMaster,
QuickSite, WebTools and SiteMarks products and related assets. The technologies
will be integrated with the Company's StarTeam product line, to produce a
next-generation technical collaboration and content management solution for
e-commerce application development.
Activity for the year ended March 31, 1998
In June 1997, the Company offered to exchange its common stock for then all
outstanding warrants. Holders of 4,743,534 warrants tendered, thereby receiving
1,581,178 shares of Common Stock. Warrant holders received one share of common
stock for every three warrants. The differential value of the stock on the offer
date over the calculated value of the warrants, aggregated $1,660,000 and has
been reflected as a non-cash dividend, with a corresponding increase in
additional paid-in capital.
In August and September 1997, the Company issued $3,100,000 in convertible
6% debentures. The conversion benefit applicable to the debentures, calculated
at $870,000, has been accounted for as a non-cash interest charge, with a
corresponding addition to additional paid-in capital. The sale of the debentures
included the issuance of an aggregate of 82,668 warrants to purchase the
Company's common stock. The warrants are exercisable into the Company's common
stock at prices ranging from $1.58 to $1.80 and expire after three years. The
estimated value of the warrants, utilizing the Black-Scholes Model, was $85,000
and is being amortized over the two-year life of the debentures as additional
interest. In conjunction, 117,167 warrants were issued as finders' fees to the
selling group on the same terms, valued at approximately $120,000. During the
year, holders of $2,630,000 debentures converted their debentures into 2,703,823
shares of the Company's common stock. When the debentures were converted, the
corresponding unamortized warrant value and debt issuance costs were offset to
additional paid-in capital.
The remaining holders of $470,000 debentures exchanged their debentures for
384,715 shares of Series F convertible preferred stock and warrants to acquire
12,533 shares of common stock at $1.25 per share for three years. The value of
the Series F preferred stock and warrants approximated the carrying value of the
convertible debentures on the date of the exchange. Additionally, the Series F
preferred stock had the same conversion terms as the convertible debentures. The
conversion benefit applicable to the Series F preferred stock was calculated at
$226,000 and has been amortized and accounted for as a non-cash dividend, with a
corresponding increase to additional paid-in capital as of March 31, 1998. The
B-17
<PAGE> 144
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Series F convertible preferred stock was subsequently converted into 411,019
shares of the Company's common stock.
During January and March 1998, the Company issued units consisting of
1,200,000 shares of Series D preferred stock and 500,000 warrants. The Series D
preferred stock is convertible into the Company's common stock over the two
years after the issuance date and is automatically converted upon the second
anniversary of the issuance date. The warrants are exercisable into common stock
at $1.50 per share for five years. During the year ended March 31, 1998, 300,000
preferred shares were exchanged for 300,000 shares of common stock. The
conversion benefit applicable to the Series D preferred stock was calculated at
$1,209,000 of which $1,030,000 has been amortized and accounted for as a
non-cash dividend, with a corresponding increase to additional paid-in capital
as of March 31, 1998.
In January and February 1998, the Company issued units consisting of
2,872,953 shares of Series E preferred stock and 1,436,686 warrants. This stock
is convertible into the Company's common stock. The conversion benefit
applicable to the Series E preferred stock was calculated at $1,576,000 and has
been amortized and accounted for as a non-cash dividend, with a corresponding
increase to additional paid-in capital as of March 31, 1998. The warrants are
exercisable at $1.80 per share during the first year and $2.00 per share through
the second year. If the twenty-day average close price of the common stock as
reported by Bloomberg, LP, is not at least $2.50 one year after issuance date,
then the exercise price will be reduced to $1.00. The warrants expire at the end
of the second year. At March 31, 1998, none of the shares had been converted.
Warrants to acquire common stock
Warrant activity for the year ended March 31, 1998 and the year ended March
31, 1999 is as follows:
<TABLE>
<CAPTION>
SHARES WARRANT PRICE PER SHARE
---------- -----------------------
<S> <C> <C>
OUTSTANDING AT MARCH 31, 1997...................... 4,833,534
Issued in connection with stock and debenture
offerings........................................ 2,177,722 US$1.25 - $1.80
Exchanged.......................................... (4,743,534) US$2.50, CDN$8.22
Expired............................................ (90,000) US$2.50, CDN$8.22
----------
OUTSTANDING AT MARCH 31, 1998...................... 2,177,722
Issued in connection with stock offerings.......... 1,494,592 US$0.59 - $3.25
Exercised.......................................... (687,926) US$0.75 - $1.00
----------
OUTSTANDING AT MARCH 31, 1999...................... 2,984,388
==========
</TABLE>
8. EMPLOYEE BENEFIT PLAN
Effective April 1, 1992, the Company adopted a 401(k) savings plan covering
all employees. Employees who work for the Company are eligible for participation
after three months of service. Company contributions to the savings plan are
made at the discretion of the Company's Board of Directors. The Company made no
contributions for the fiscal periods ending March 31, 1998 and March 31, 1999.
9. STOCK OPTION PLANS
The Company's stock option plan (the "1996 Plan") provides for the grant of
non-qualified and incentive stock options to directors, officers and employees
of the Company. Options are granted at exercise prices equal to the fair market
value of the common stock on the date of grant. Generally, twenty-five percent
of the options are available for exercise at the end of one year, while the
remainder of
B-18
<PAGE> 145
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the grant is exercisable ratably over the next thirty-six month period, provided
the optionee remains in service to the Company. The weighted-average remaining
contractual life of options outstanding at March 31, 1999 was nine years. A
total of 2,833,333 shares of common stock have been authorized under the 1996
Plan, of which 2,317,560 were outstanding at March 31, 1999. In addition, the
Company has granted non-qualified stock options, of which 4,229,851 were
outstanding at March 31, 1999.
Stock option activity for the year ended March 31, 1998 and the year ended
March 31, 1999 is as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE (US$)
--------- ---------------
<S> <C> <C>
OUTSTANDING AT MARCH 31, 1997............................. 2,082,042 1.43 - 5.46
Granted................................................... 2,045,827 0.84 - 3.44
Lapsed or canceled........................................ (586,552) 1.25 - 5.46
Exercised................................................. (120,790) 1.25 - 1.75
---------
OUTSTANDING AT MARCH 31, 1998............................. 3,420,527 0.84 - 3.44
Granted................................................... 3,873,160 0.625 - 3.24
Lapsed or canceled........................................ (696,747) 0.625 - 3.24
Exercised................................................. (49,529) 0.84 - 1.63
---------
OUTSTANDING AT MARCH 31, 1999............................. 6,547,411 0.625 - 3.44
=========
Exercisable at March 31, 1999............................. 2,091,067
=========
</TABLE>
Of the options exercisable at March 31, 1999, weighted average prices of
$0.7212 related to 358,491 options, $1.4029 related to 1,571,326 options,
$2.1713 related to 158,750 options and $3.4400 related to 2,500 options.
In May 1997, the Board of Directors authorized a repricing of employee
stock options then outstanding, to $1.25, which was above market value.
Accounting for stock-based compensation
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company is required to disclose the effects on the net loss and per share data
as if the Company had elected to use the fair value approach to account for all
its employee stock-based compensation plans. Had the compensation cost for the
Company's plan been determined using the fair value method, the compensation
expense would have had the effect of increasing the Company's net loss
applicable to common stockholders for the year ended March 31, 1999 and 1998 to
the pro forma amounts of $10,611,000 and $10,739,000, respectively, with a
corresponding pro forma net loss per common share of $0.52 and $0.76,
respectively. These pro forma amounts were determined estimating the fair value
of each option on its grant date using the Black-Scholes option-pricing model.
Assumptions of no dividend yield, the average of the Federal Reserve Board's 3
year and 5 year treasury constant maturity interest rate for the month of grant,
4 years expected life and an expected rate of volatility of 55.0% were applied
to all grants for the year ended March 31, 1998. Assumptions of no dividend
yield, the average of the Federal Reserve Board's 3 year and 5 year treasury
constant maturity interest rate for the month of grant, 4 years expected life
and an expected rate of volatility of 100.0% were applied to all grants for the
year ended March 31, 1999. The weighted-average fair value at grant date for the
options granted during the year ended March 31, 1999 and 1998 was $0.78 and
$0.53 per option, respectively.
B-19
<PAGE> 146
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
In July 1998, the Company entered into a sub-lease for new office space.
The new offices consist of 17,000 square feet costing approximately $27,000 per
month through February 22, 2000. Simultaneously, the Company also entered into a
lease agreement for 4,100 contiguous square feet beginning January 1999 through
September 2003 at a rate of approximately $8,000 per month. In addition, the
Company entered into a lease agreement for the 17,000 square feet beginning
February 23, 2000 through September 2003 at a rate of approximately $41,000 per
month.
Minimum rental commitments under lease agreements at March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
NON-CANCELABLE
YEAR ENDING MARCH 31, OPERATING LEASES
- --------------------- ----------------
(IN THOUSANDS)
<S> <C>
2000...................................... $ 455
2001...................................... 599
2002...................................... 599
2003...................................... 594
2004...................................... 467
------
Total payments.............................. $2,714
======
</TABLE>
Rent expense for the year ended March 31, 1999 and 1998 totaled $387,710
and $200,000, respectively.
11. RELATED PARTIES
In fiscal 1995, the Board of Directors authorized the Company to loan
William Stow III, President and CEO of StarBase, the sum of $126,000. Principal
and accrued interest aggregated $94,259 and $89,447, at March 31, 1999 and 1998,
respectively. The loan is evidenced by a promissory note and is collateralized
by shares of the Company's common stock, which are owned by Mr. Stow. The note
bears interest at a rate of 6.34% per annum, payable at maturity. The maturity
date was originally November 4, 1998, and during the year ended March 31, 1999,
the maturity date on the note was extended to November 4, 2000.
B-20
<PAGE> 147
STARBASE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
<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 Dec 31,
1999 and $155 at Mar 31, 1999.......................... 4,273 2,528
Notes and other receivables, net of allowance of $702 at
Dec 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
B-21
<PAGE> 148
STARBASE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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
B-22
<PAGE> 149
STARBASE CORPORATION
STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<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
B-23
<PAGE> 150
STARBASE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------
1999 1998
------- -------
(UNAUDITED)
(IN THOUSANDS)
<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 and cash equivalents........ 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............................................. $ 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
B-24
<PAGE> 151
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 applications 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 StarSweeper(TM),
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.
B-25
<PAGE> 152
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<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
<TABLE>
<CAPTION>
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<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
<TABLE>
<CAPTION>
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<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>
B-26
<PAGE> 153
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NET LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<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.
3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
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
B-27
<PAGE> 154
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
WARRANT PRICE
SHARES PER SHARE
---------- -------------
<S> <C> <C>
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
==========
</TABLE>
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
B-28
<PAGE> 155
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 EXERCISE
SHARES 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-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE EXERCISE AVERAGE 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>
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.
B-29
<PAGE> 156
STARBASE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
-------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
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
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
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>
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
B-30
<PAGE> 157
APPENDIX C
CONSOLIDATED FINANCIAL STATEMENTS
OF
OBJECTSHARE, INC.
INDEX
<TABLE>
<S> <C>
YEAR-END FINANCIAL STATEMENTS
Report of Independent Auditors.............................. C-2
Consolidated Balance Sheets at March 31, 1999 and 1998...... C-3
Consolidated Statement of Operations for the years ended
March 31, 1999, 1998 and 1997............................. C-4
Consolidated Statements of Stockholder's Equity for the
years ended March 31, 1999, 1998 and 1997................. C-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997............................. C-6
Notes to Consolidated Financial Statements.................. C-7
Quarterly Financial Information (Unaudited)................. C-21
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER
ENDED DECEMBER 31, 1999 (UNAUDITED)
Condensed Consolidated Balance Sheets as of December 31,
1999 and March 31, 1999................................... C-22
Condensed Consolidated Statements of Operations for the
three and nine months ended December 31, 1999 and 1998.... C-23
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the three and nine months ended December 31,
1999 and 1998............................................. C-24
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 1999 and 1998................... C-25
Notes to Condensed Consolidated Financial Statements........ C-26
</TABLE>
C-1
<PAGE> 158
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ObjectShare, Inc.
We have audited the accompanying consolidated balance sheets of
ObjectShare, Inc. as of March 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ObjectShare, Inc. at March 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1999, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, the
Company's recurring losses from operations and net working capital deficiency
raise substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are also described in Note 2. The 1999
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Orange County, California
June 14, 1999
C-2
<PAGE> 159
OBJECTSHARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,675 $ 5,134
Marketable securities..................................... -- 600
Accounts receivable, net of allowances of $205 in 1999 and
$622 in 1998........................................... 3,988 5,166
Prepaid expenses and other current assets................. 456 983
-------- --------
Total current assets................................... 6,119 11,883
Property and equipment:
Computers and other equipment............................. 4,927 4,696
Furniture and fixtures.................................... 614 636
Leasehold improvements.................................... 804 719
-------- --------
Property and equipment at cost......................... 6,345 6,051
Less: Accumulated depreciation and amortization........... (5,392) (4,853)
-------- --------
Net property and equipment............................. 953 1,198
Capitalized software development costs, net of accumulated
amortization of $11 in 1999............................... 511 --
Other assets................................................ 129 174
-------- --------
Total assets...................................... $ 7,712 $ 13,255
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 1,000 $ --
Accounts payable.......................................... 1,309 1,134
Accrued payroll and related expenses...................... 893 1,088
Note payable and current portion of capital lease
obligations............................................ 103 --
Accrued restructuring costs............................... -- 534
Accrued royalties......................................... 489 686
Other accrued liabilities................................. 1,104 1,806
Deferred revenue.......................................... 2,587 3,215
-------- --------
Total current liabilities.............................. 7,485 8,463
Capital lease obligations................................... 103 --
Commitments and contingencies (Notes 2, 4 and 9)............
Stockholders' equity:
Common stock, $0.001 par value: Authorized
shares -- 30,000 Issued and outstanding
shares -- 12,383 in 1999 and 12,199 in 1998............ 12 12
Additional paid-in capital................................ 50,160 49,992
Accumulated deficit....................................... (49,772) (44,933)
Accumulated other comprehensive loss...................... (276) (279)
-------- --------
Total stockholders' equity............................. 124 4,792
-------- --------
Total liabilities and stockholders' equity............. $ 7,712 $ 13,255
======== ========
</TABLE>
See accompanying notes.
C-3
<PAGE> 160
OBJECTSHARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1999 1998 1997
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues:
Service.................................................. $10,426 $12,068 $ 17,138
License.................................................. 5,380 8,172 20,148
------- ------- --------
Total net revenues.................................... 15,806 20,240 37,286
Cost of net revenues:
Service.................................................. 5,705 7,569 10,379
License.................................................. 1,737 1,626 5,537
------- ------- --------
Total cost of net revenues............................ 7,442 9,195 15,916
------- ------- --------
Gross profit............................................... 8,364 11,045 21,370
Operating expenses:
Sales and marketing...................................... 6,719 7,684 19,465
Research and development................................. 3,542 4,648 8,904
General and administrative............................... 3,281 3,956 7,436
Acquired research and development........................ -- -- 3,513
Restructuring and merger-related costs................... (166) 2,621 5,162
------- ------- --------
Total operating expenses.............................. 13,376 18,909 44,480
------- ------- --------
Loss from operations....................................... (5,012) (7,864) (23,110)
Interest and other income, net............................. 160 313 725
------- ------- --------
Loss before provision for income taxes..................... (4,852) (7,551) (22,385)
Provision (benefit) for income taxes....................... (13) 31 95
------- ------- --------
Net loss................................................... $(4,839) $(7,582) $(22,480)
======= ======= ========
Basic and diluted net loss per share....................... $ (0.39) $ (0.63) $ (1.91)
======= ======= ========
Shares used in computing basic and diluted net loss per
share.................................................... 12,308 12,022 11,775
======= ======= ========
</TABLE>
See accompanying notes.
C-4
<PAGE> 161
OBJECTSHARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT LOSS EQUITY
------ ------ ---------- ----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996........ 11,532 $12 $48,392 $(14,871) $ (29) $ 33,504
Translation adjustment........... -- -- -- -- (158) (158)
Unrealized loss on investments... -- -- -- -- (65) (65)
Net loss......................... -- -- -- (22,480) -- (22,480)
--------
Comprehensive loss............. (22,703)
Exercise of stock options........ 196 -- 699 -- -- 699
Issuance of common stock under
Employee Stock Purchase Plan... 201 -- 604 -- -- 604
Stock options assumed in business
combinations................... -- -- 168 -- -- 168
------ --- ------- -------- ----- --------
BALANCE AT MARCH 31, 1997........ 11,929 12 49,863 (37,351) (252) 12,272
Translation adjustment........... -- -- -- -- (27) (27)
Net loss......................... -- -- -- (7,582) -- (7,582)
--------
Comprehensive loss............. (7,609)
Exercise of stock options........ 250 -- 120 -- -- 120
Issuance of common stock under
Employee Stock Purchase Plan... 20 -- 9 -- 9
------ --- ------- -------- ----- --------
BALANCE AT MARCH 31, 1998........ 12,199 12 49,992 (44,933) (279) 4,792
Translation adjustment........... -- -- -- -- 3 3
Net loss......................... -- -- -- (4,839) -- (4,839)
--------
Comprehensive loss............. (4,836)
Exercise of stock options........ 83 -- 85 -- -- 85
Issuance of common stock under
Employee Stock Purchase Plan... 101 -- 83 -- -- 83
------ --- ------- -------- ----- --------
BALANCE AT MARCH 31, 1999........ 12,383 $12 $50,160 $(49,772) $(276) $ 124
====== === ======= ======== ===== ========
</TABLE>
See accompanying notes.
C-5
<PAGE> 162
OBJECTSHARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1999 1998 1997
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(4,839) $(7,582) $(22,480)
Adjustments to reconcile net loss to net cash used in
operating activities:
Write-off of unamortized capitalized software development
costs.................................................. 372 -- --
Depreciation and amortization............................. 673 783 3,707
Provision for doubtful accounts........................... 257 106 939
Restructuring costs....................................... -- 165 1,887
Acquired research and development......................... -- -- 3,513
Changes in operating assets and liabilities:
Accounts receivable.................................... 921 314 5,440
Other current assets................................... 572 183 315
Accounts payable and accrued liabilities............... (919) (753) (3,472)
Accrued restructuring costs............................ (534) (533) 1,067
Deferred revenue....................................... (628) (1,851) (310)
------- ------- --------
Net cash used in operating activities....................... (4,125) (9,168) (9,394)
INVESTING ACTIVITIES
Capitalized software development costs...................... (1,017) -- --
Purchases of property and equipment......................... (88) (254) (1,564)
Maturities of marketable securities......................... 600 6,438 23,239
Purchases of marketable securities.......................... -- -- (16,479)
Business combinations....................................... -- -- (3,699)
Decrease (increase) in other assets......................... -- 598 (197)
------- ------- --------
Net cash provided by (used in) investing activities......... (505) 6,782 1,300
FINANCING ACTIVITIES
Borrowings on line of credit................................ 1,000 -- --
Proceeds from issuance of common stock, net of repurchase... 168 129 1,303
------- ------- --------
Net cash provided by financing activities................... 1,168 129 1,303
Effect of exchange rate changes on cash and cash
equivalents............................................... 3 (27) (158)
------- ------- --------
Net decrease in cash and cash equivalents................... (3,459) (2,284) (6,949)
Cash and cash equivalents at beginning of year.............. 5,134 7,418 14,367
------- ------- --------
Cash and cash equivalents at end of year.................... $ 1,675 $ 5,134 $ 7,418
------- ------- --------
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Equipment acquired under note payable issued in exchange for
leasehold improvements.................................... $ 40 $ -- $ --
Capital lease obligations................................... $ 166 $ -- $ --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for taxes......................................... $ 21 $ 24 $ 82
Cash paid for interest...................................... $ 29 $ -- $ --
</TABLE>
See accompanying notes.
C-6
<PAGE> 163
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
ObjectShare, Inc. (the Company) a Delaware corporation, develops, markets,
and supports object-oriented application development tools for the
client/server/web computing market. The Company also provides customer support,
training, on-site assistance and consulting.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries in France (through the period of
ownership), Germany, Switzerland and the United Kingdom after eliminating all
significant inter-company accounts and transactions.
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 52 (SFAS), Foreign Currency
Translation. Gains and losses from translation are recorded as components of
accumulated other comprehensive loss in stockholders' equity. The effect of
foreign currency transaction gains and losses on the consolidated statements of
operations is insignificant for all years presented.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates. Significant
estimates made in preparing the consolidated financial statements include the
allowance for doubtful accounts receivable, product returns, sales allowances,
certain other accrued liabilities, and estimates of future net cash flows
developed to determine whether conditions indicating asset impairment are
present.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Short-term
marketable securities consist principally of debt instruments with maturities
between three and twelve months.
At March 31, 1999, the Company did not have any marketable securities. At
March 31, 1998, all of the Company's debt securities were classified as
available-for-sale and were carried at fair market value with unrealized gains
and losses recorded in stockholders' equity. The cost of the securities is based
upon the specific identification method.
C-7
<PAGE> 164
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such investments consist of the following:
<TABLE>
<CAPTION>
FAIR MARKET
VALUE AT
MARCH 31,
--------------
1999 1998
---- ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash equivalents -- corporate debt securities............... $-- $3,074
=== ======
Short-term marketable securities (maturing through March
1999 -- U.S. treasury securities and obligations of U.S
government agencies....................................... $-- $ 600
=== ======
</TABLE>
Realized gains and losses from the sale of such investments were not
material in fiscal 1999, 1998 and 1997. At March 31, 1998, the estimated fair
value of cash equivalents and marketable securities approximated cost and the
amount of unrealized gains or losses were not significant.
Property and Equipment
Equipment is stated at cost. Depreciation and amortization are computed
using the straight-line method over estimated useful lives of three to five
years. Assets under capital leases of $196,000 included in computers and other
equipment are amortized over the shorter of the asset life or the remaining
lease term. At March 31, 1999 accumulated depreciation on capital lease
equipment amounted to $23,000. Amortization of capital lease equipment is
included in depreciation and amortization expense.
Long Lived Assets
The Company reviews for impairment long-lived assets and certain
intangibles held and used whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The recoverability
test is performed at the lowest level at which undiscounted net cash flows can
be directly attributable to long-lived assets.
Capitalized Software
The Company's policy is to capitalize software development costs incurred
subsequent to the time the products reach technological feasibility. Based on
the Company's product development process, technological feasibility is
generally established upon completion of a working model. Capitalized internally
developed software is stated at the lower of amortized cost or net realizable
value. Amortization of capitalized software development commences when the
products are available for general release to new customers and is determined
using the straight-line method over the expected useful life of the related
product.
During fiscal 1999, the Company capitalized $1,017,000 of software
development costs related to its VisualWorks 5i and VEOS products. The Company
evaluates recoverability of its capitalized software development costs at each
reporting period based upon its estimates of related product sales to be
realized in future periods. As a result, during the fourth quarter ended March
31, 1999, the Company wrote off $372,000 of capitalized software development
costs related to the VEOS product. In addition, normal amortization of
capitalized software development costs aggregated $134,000 during the year ended
March 31, 1999.
C-8
<PAGE> 165
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in SFAS 109, Accounting for Income Taxes. Under the liability method,
deferred taxes are determined based on the differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates.
Revenue Recognition
In October 1997, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) No. 97-2, Software Revenue Recognition, which
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. SOP 97-2 is intended to reduce the
diversity in accounting for software revenue recognition and changes certain of
the specific criteria for recognizing revenue related to software licensing
arrangements. Specifically, the new SOP contains more restrictive revenue
recognition provisions for software arrangements containing multiple elements
(i.e. upgrades, enhancements, implementation and other services) similar to the
arrangements entered into by the Company. Effective April 1998, the Company
implemented the provisions of the new SOP for transactions recognized for fiscal
1999 and thereafter.
License revenue is recognized on delivery of product, provided persuasive
evidence of an agreement exists, no significant vendor obligations remain and
collection of the resulting receivable is deemed probable. Insignificant vendor
obligations are accrued upon recognition of revenue. License revenue also
includes revenue from the sale of software manufactured by a third party.
Service revenue includes training, consulting, and customer support. Revenues
from training and consulting are recognized at the time the service is
performed.
Deferred revenue relates primarily to software support contracts and
training coupons sold under separate arrangements with customers. The term of
the software support contracts is generally one year, and the Company recognizes
the associated revenue on a pro rata basis over the life of the contract.
Potential sales returns are covered by the Company's allowance for sales
returns and doubtful accounts. The Company provides for the costs of warranty
when specific problems are identified. The Company has not experienced
significant warranty claims to date.
Research and Development Costs
Research and development costs are expensed as incurred.
Concentration of Credit Risk
The Company sells its products to various companies across several
industries. The Company performs ongoing credit evaluations of its customers and
maintains an allowance for potential credit losses, which have been within
management's expectations. The Company generally requires no collateral from its
customers.
Loss Per Share
SFAS 128, "Earnings Per Share," requires the presentation of both basic and
diluted net income (loss) per share for financial statement purposes. Basic net
income (loss) per share is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares outstanding.
Diluted net income (loss) per share includes the effect of the potential shares
outstanding, including dilutive stock options and warrants using the treasury
stock method. Because the impact of options and warrants are antidilutive, there
is no difference between the loss per share amounts computed for basic and
diluted purposes.
C-9
<PAGE> 166
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segments of a Business Enterprise
Effective March 31, 1999, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, SFAS 131 superseded
SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual consolidated financial statements
and requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS No. 131 did not affect the consolidated results
of operations or financial position of the Company.
Impact of Recently Issued Accounting Standards
In April 1998, the Company adopted Financial Accounting Standard Board
(FASB) SFAS 130, Reporting Comprehensive Income, which establishes standards for
the reporting and display of comprehensive income and its components in
financial statements. Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments by and/or
distributions to shareholders. SFAS 130 requires unrealized gains or losses on
the Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. All periods presented have
been reclassified to conform to the requirements of SFAS 130.
In April 1998, the Company adopted SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
capitalization of certain costs incurred in connection with developing or
obtaining internal use software. The adoption of SOP No. 98-1 had no material
effect on the Company's consolidated financial position as of March 31, 1999 or
its consolidated results of operations for the year then ended.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 2000. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on its consolidated financial position
or consolidated results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform with current
year presentation.
Derivative Financial Instruments
The Company sells its products to its European customers in local
currencies. There may be potential risks caused by economic and political
instability; foreign exchange translation and transaction exposure; and the
burdens of complying with a wide variety of foreign laws. When considered
appropriate, the Company enters into forward foreign exchange contracts
primarily to hedge against the short-term impact of foreign currency
fluctuations from invoices denominated in foreign currencies. The maturities of
the forward foreign exchange contracts are short-term in nature, generally 90
days. The contracts are recorded at fair market value as of each balance sheet
date. Gains and losses from these contracts are recorded in interest and other
income. At March 31, 1999, the Company had no such contracts. At March 31, 1998,
the Company had contracts to exchange various European currencies to U.S.
dollars in the amounts of $1,072,000. The fair value (quoted market price) of
these contracts was $1,072,000 at March 31, 1998. Net foreign currency
transaction gains and losses have not been material.
C-10
<PAGE> 167
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. OPERATIONS
The Company's operations have resulted in net losses of $4.8 million, $7.6
million and $22.5 million during each of the three years ended March 31, 1999,
1998 and 1997, respectively. As of March 31, 1999, the Company has an
accumulated deficit of $49.8 million and the Company's current liabilities
exceed its current assets by $1.4 million. During fiscal 1999 and 1998,
management implemented certain cost reduction and product development actions to
improve the Company's revenues and profitability. These actions included
leveraging and redirecting the Company's technology and consulting resources and
revising the marketing strategy to implement more of a solutions and
services-oriented business model. However, the Company continues to experience
operating losses which have seriously eroded cash reserves.
Management of the Company anticipates implementing additional cost cutting
measures in 1999 to attempt to reduce the Company's cost structure to be
commensurate with estimated revenues. Such cost cutting measures could have the
initial effect of increasing expenses for the period during which such actions
are taken. Although management's goal is to reduce losses and, ultimately,
return the Company to profitability, there can be no assurance that these
actions will allow the Company to achieve profitability. After giving effect to
the planned cost cutting measures, management believes that the Company will
still need to obtain additional sources of financing to satisfy the Company's
near-term operating requirements.
During December 1998, the Company entered into a $5 million line of credit
with a commercial bank that expires in December 1999. At March 31, 1999, the
Company was not in compliance with the covenants in the line of credit that
requires the Company to maintain a certain level of tangible net worth and a
minimum quick ratio. As a result, the bank may demand repayment of $1.0 million
($606,000 on June 14, 1999) borrowed in January 1999 and has the right to
terminate the credit facility. There is no assurance that the Company will be
able to cure the covenant violation or that it will be able to obtain
alternative financing in the event that the credit agreement is terminated.
The Company is actively pursuing various sources of debt and equity
financing. However, there is no assurance the Company will be able to obtain
additional debt or equity financing on terms acceptable to the Company or at
all. Failure to obtain sufficient levels of additional financing will result in
material liquidity problems for the Company. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
3. DEBT
Line of Credit
The Company has a credit agreement with a commercial bank that provides a
revolving line of credit for borrowings, limited to 70% of eligible accounts
receivable, up to a maximum of $5,000,000. The credit agreement also provides
letters of credit subject to certain condition for borrowings up to a maximum
amount of $500,000. Maximum aggregate borrowings under the credit agreement is
$5,000,000. The credit agreement expires on December 9, 1999. Interest accrues
at prime plus a variable percentage, adjusted monthly, ranging from .75% to
1.75% (9.50% at March 31, 1999). At March 31, 1999, borrowings under the line of
credit and letters of credit were $1.0 million and no additional borrowings were
available. The credit agreement is secured by all of the Company's assets
including intellectual property. At March 31, 1999, the Company was in violation
of certain financial covenants. No waiver has been obtained for such violation,
therefore, the bank may at any time demand repayment of the outstanding
borrowings which were $1.0 million on March 31, 1999 and $606,000 on June 14,
1999.
Capital Leases
Obligations under capital leases have terms of three to five years. Certain
leases provide the Company with a guaranteed purchase option at lease
expiration. At March 31, 1999, assets with a cost of $196,000
C-11
<PAGE> 168
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were financed under capital leases. Total obligations under capital leases as of
March 31, 1999 were $166,000 with the current portion of the capital lease
obligations of $63,000. Future required payments of the obligations under
capital leases as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
2000.............................................. $ 78,000
2001.............................................. 54,000
2002.............................................. 40,000
2003.............................................. 22,000
2004.............................................. 11,000
--------
Total........................................ 205,000
Less amount representing interest................. 39,000
--------
Present value of minimum lease payment............ $166,000
========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under non-cancelable
operating leases that expire through 2004. Rental expense was $730,000,
$1,682,000 and $1,763,000 for fiscal 1999, 1998 and 1997 respectively. Minimum
rental commitments under all non-cancelable leases with an initial term in
excess of one year are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
2000............................................. $ 562,000
2001............................................. 432,000
2002............................................. 315,000
2003............................................. 301,000
2004............................................. 234,000
----------
Total....................................... $1,844,000
==========
</TABLE>
5. STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-based Compensation, requires use of option valuation models that were
not developed for use in valuing employee stock options and employee stock
purchase plans. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
The Company has two current stock option plans: the 1993 Stock Plan, which
provides for the grant of stock options to the Company's employees and
consultants, and the 1995 Director Stock Option Plan, which provides for the
grant of stock options to the Company's Directors. The Company also has two
other stock option plans which have terminated but under which stock options
remain outstanding: the 1989 Stock Option Plan, the Incentive and Non-statutory
Stock Option Plan adopted by Digitalk in 1992 (as to which the Company assumed
all outstanding options at the time of the merger in August 1995), and the 1995
Stock Option/Stock Issuance Plan of Objectshare Systems, Inc. (as to which the
Company assumed all outstanding options at the time of the acquisition in July
1996). No further options may be
C-12
<PAGE> 169
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted under these terminated plans. In addition, the Company granted options
in fiscal 1998 to the new executive officers hired in June 1997. Because of the
number of option shares and the terms required in the employment agreements with
such individuals, the options were granted outside of the existing stock plans.
Under the 1993 Stock Plan, the vesting and exercise provisions of option
grants are determined by the Board of Directors. As of March 31, 1999, the 1993
Stock Plan provides for the issuance of incentive stock options and nonqualified
stock options to purchase up to 3,300,664 shares of common stock (including
97,122 shares already issued upon exercise of options and not including 9,063
shares that could be added under the terms of the plan if outstanding options
covering such shares under the 1989 plan are cancelled in the future). There
were 987,190 shares available for option grants under this plan at March 31,
1999.
Under the 1995 Director Stock Option Plan, options are automatically
granted to non-employee Directors. The Director Stock Option Plan provides for
the issuance of nonqualified stock options to purchase up to 200,000 shares of
common stock. There were 108,000 shares available for option grants under this
plan at March 31, 1999.
Generally, options granted under the plans vest over a three or four-year
period and have a term of ten years from the date of grant, subject to continued
service to the Company, although certain grants under the 1995 Director Stock
Option Plan vest over a longer period.
In July 1996 and November 1997, the Board of Directors approved stock
option repricing programs pursuant to which employees of the Company (excluding
all executive officers) could elect to exchange their then outstanding employee
stock options for new employee stock options having an exercise price per share
equal to the then fair market value of the common stock, with exercisability
generally prohibited for six months after the exchange. Under the July 1996
re-pricing, 747,098 options with exercise prices ranging from $4.875 to $18.25
per share were exchanged for options with an exercise price of $4.375 per share.
Under the November 1997 repricing, 513,868 options with exercise prices ranging
from $1.0625 to $4.6875 per share were exchanged for options with an exercise
price of $1.00 per share. The exchange of all such options is included in grants
and cancellations is shown in the table below.
Activity under these stock option plans is set forth below. Options assumed
in the Digitalk merger are included as historically granted, adjusted for the
exchange ratio for the merger. Options assumed in the Objectshare acquisition
are included as assumed in fiscal 1997, adjusted for the exchange ratio for that
merger.
C-13
<PAGE> 170
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED-
AVERAGE
NUMBER OF PRICE PER
SHARES PRICE PER SHARE SHARE
--------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE AT MARCH 31, 1996...................... 2,468 $0.22 - $22.50 $7.90
Granted........................................ 2,198 $1.50 - $13.81 $3.97
Assumed (acquisition).......................... 104 $ 3.21 $3.21
Canceled....................................... (2,277) $0.22 - $22.50 $8.10
Exercised...................................... (196) $0.22 - $ 9.88 $3.58
------ -------------- -----
BALANCE AT MARCH 31, 1997...................... 2,297 $0.44 - $18.25 $4.09
Granted........................................ 3,891 $0.63 - $ 3.81 $1.03
Canceled....................................... (2,495) $0.44 - $18.25 $3.82
Exercised...................................... (250) $0.44 - $ 1.06 $0.56
------ -------------- -----
BALANCE AT MARCH 31, 1998...................... 3,443 $0.63 - $11.50 $1.17
Granted........................................ 916 $0.44 - $ 4.88 $2.15
Canceled....................................... (745) $0.66 - $ 9.00 $2.38
Exercised...................................... (83) $1.00 - $ 1.00 $1.00
------ -------------- -----
BALANCE AT MARCH 31, 1999...................... 3,531 $0.44 - $11.50 $1.17
====== ============== =====
</TABLE>
At March 31, 1999, an aggregate of 4,625,826 shares were reserved for
future issuance under the plans, including 3,530,636 shares subject to
outstanding options and 1,095,190 available for grant.
The following table summarizes information about the Company's stock
options outstanding at March 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER NUMBER
OUTSTANDING AT WEIGHTED-AVERAGE WEIGHTED- EXERCISABLE AT WEIGHTED-
RANGE OF MARCH 31, REMAINING AVERAGE MARCH 31, AVERAGE
EXERCISE PRICE 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISE PRICE
- -------------- -------------- ---------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.44 - $ 0.97 152 8.71 $0.79 49 $ 0.79
$1.00 1,457 7.73 $1.00 668 $ 1.00
$1.03 394 9.39 $1.03 -- $ --
$1.06 1,289 3.63 $1.06 1,197 $ 1.06
$1.09 - $ 1.13 33 9.76 $1.12 -- $ --
$1.16 - $ 1.66 43 9.41 $1.12 2 $ 1.66
$2.19 - $ 2.41 45 9.30 $2.38 7 $ 2.40
$2.50 - $ 3.50 41 9.23 $2.66 1 $ 3.00
$3.56 - $ 3.94 39 9.06 $3.65 -- $ --
$4.88 - $11.50 38 7.16 $8.82 23 $11.07
-----
$0.44 - $11.50 3,531 6.54 $1.17 1,947 $ 1.16
=====
</TABLE>
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock purchase plan and employee stock options granted subsequent to
March 31, 1995 under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model for the single option approach with the following assumptions for fiscal,
1999, 1998, and 1997: risk-free
C-14
<PAGE> 171
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rates of 5%, 6%, and 7%, respectively, volatility factors of the
expected market price of the Company's common stock of 1.5, 1.4, and 0.9,
respectively, and, for all years, an expected life of the options of 3 years
from the grant date and a dividend yield of zero.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and employee stock
purchase plan have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options and the employee stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options' vesting period. The
Company's historical and pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1999 1998 1997
------- ------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Loss
Historical................................. $(4,839) $(7,582) $(22,480)
Pro Forma.................................. $(6,041) $(8,697) $(24,496)
Basic and diluted
Net loss per share
Historical................................. $ (0.39) $ (0.63) $ (1.91)
Pro Forma.................................. $ (0.49) $ (0.72) $ (2.08)
</TABLE>
Stock Purchase Plan
The Company's 1993 Employee Stock Purchase Plan allows eligible employees,
through payroll deductions, to purchase shares of the Company's stock at the
lower of 85% of the fair market value of the stock on the first or last day of a
six-month offering period or such other offering period determined by the Board
of Directors. The plan provides for the issuance of up to 800,000 shares of the
Company's common stock. In fiscal 1999, 1998, and 1997, the Company issued
101,625, 19,944, and 200,867 shares, respectively, under the plan. At March 31,
1999, 520,739 cumulative shares have been issued under the plan, and 279,261
remained available for future issuance.
Common Stock Reserved
At March 31, 1999, a total of 4,905,087 shares of the Company's common
stock was reserved for future issuance under the Company's stock option and
employee stock purchase plans.
6. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan covering substantially
all of its employees. Participants may elect to contribute up to 20% of their
compensation to this plan (up to the statutory maximum amount). The Company can
make discretionary contributions to the plan determined solely by the Board of
Directors. The Company made no contributions to the plan through March 31, 1999.
Effective April 1, 1999, the Company matches $0.50 for every dollar its
employees contribute up to 6% of their salary deferral.
C-15
<PAGE> 172
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1999 1998 1997
----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
State................................................ $ -- $40
Foreign.............................................. (13) 31 55
---- --- ---
Total............................................. $(13) $31 $95
==== === ===
</TABLE>
A reconciliation of income tax provision at the U.S. federal statutory rate
(34%) to the income tax provision at the effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at the federal statutory
rate........................................ $(1,656) $(2,577) $(7,600)
Losses without benefit........................ 1,643 2,577 6,405
Acquired research and development costs with
no tax basis................................ -- -- 1,195
State taxes, net of federal benefit........... -- -- 40
Foreign income and withholding taxes.......... -- 31 55
------- ------- -------
$ (13) $ 31 $ 95
======= ======= =======
</TABLE>
As of March 31, 1999, the Company has federal and state net operating loss
carryforwards of approximately $46,100,000 and $13,500,000, respectively, that
will expire in the fiscal years 2000 through 2019. The Company also has federal
and state research and experimentation credits of approximately $1,300,000 and
$700,000, respectively, that will expire in the fiscal years 2003 through 2019.
In addition, the Company has a federal foreign tax credit carryforward of
approximately $243,000 that will expire in the fiscal years 2000 through 2002.
Finally, the Company also has federal alternative minimum tax credit carry
forwards of approximately $60,000 that do not expire.
Utilization of these net operating losses and credits may be subject to an
annual limitation due to ownership change constraints provided by the Internal
Revenue Code of 1986 and similar state tax provisions.
C-16
<PAGE> 173
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred income taxes consist of
the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets(liabilities):
Net operating loss carryforwards....................... $16,491 $11,708
Research credit carryforwards.......................... 1,955 1,991
Foreign tax credit..................................... 243 243
Allowances for sales returns........................... -- 30
Accrued vacation pay................................... -- 128
Other individually immaterial items.................... (1,062) 616
------- -------
Total deferred tax assets........................... 17,627 14,716
Valuation allowance.................................... (17,627) (14,716)
------- -------
Net deferred tax assets.................................. $ -- $ --
======= =======
</TABLE>
Approximately $744,000 of the deferred tax asset described above (and a
similar amount of valuation allowance) relates to tax benefits of stock option
exercises that may be realized in future years. When realized, these benefits
will be allocated to paid-in capital.
Under Statement of Financial Accounting Standards No. 109, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company has provided a full valuation allowance against
its deferred tax assets due to uncertainties surrounding their realization
resulting primarily from the Company's history of operating losses.
The income before provision for income taxes provided by foreign operations
was not material for any period presented, and the undistributed earnings of the
Company's foreign subsidiaries were not material at March 31, 1999.
8. BUSINESS COMBINATIONS
In February 1996, the Company acquired all the assets of AMiGO S.A, a
French-based distributor of the Company's VisualWorks product. In September
1997, the Company decided to spin-off the entity to its management. At the time
of the acquisition, which was accounted for as a purchase, the Company made an
initial payment of $688,000. In the second quarter of fiscal 1998, the Company
paid an additional $150,000 in satisfaction of its "earnout" obligation under
the acquisition agreement, in connection with revenues in France determined in
accordance with the agreement for the specified time period. The Company also
provided an additional $100,000 to the spin-off entity as working capital. Most
of the initial purchase price, which included transaction costs, was allocated
to intangible assets (included in other assets), a portion of which was
amortized in fiscal 1997 and the balance of which was written off in connection
with the spin-off. The results of operations of AMiGO, which have not been
material in relation to those of the Company, are included in the consolidated
results of operations for the period of ownership by the Company.
On July 31, 1996, the Company acquired ObjectShare Systems, Inc. ("OSI"), a
privately held corporation that developed and marketed add-on products for
Smalltalk tools. The acquisition was accounted for as a purchase in which the
Company paid $3.0 million in cash and assumed options for the purchase of
104,086 shares of the Company's common stock. In connection with the
acquisition, the Company recorded intangible assets of $363,000 and charged to
operations $2.9 million for acquired
C-17
<PAGE> 174
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
research and development. In connection with the restructuring of operations
(Note 10), the Company charged to operations the unamortized portion of the
intangible assets. The operating results of OSI have been included in the
Company's consolidated results of operations from the date of acquisition.
On October 1, 1996, the Company acquired Polymorphic Software, Inc.
("PSI"), a privately held corporation which developed and marketed Smalltalk
tools and provided related consulting services. This acquisition was accounted
for as a purchase in which the Company agreed to pay approximately $1.0 million
in cash, of which $700,000 was paid during the third quarter, in exchange for
all outstanding shares of PSI common stock. The operating results of PSI are
included in the Company's consolidated results of operations from the date of
acquisition. In connection with the acquisition, the Company recorded intangible
assets of $403,000 and charged to operations $646,000 for acquired research and
development. In connection with the restructuring of operations (Note 10), the
Company charged to operations the unamortized portion of the intangible assets.
9. LEGAL PROCEEDINGS
During the quarter ended December 31, 1996, the Company and its insurers
agreed to settle a securities class action lawsuit filed against the Company and
certain of its officers and directors on October 11, 1995, in the U.S. District
Court for the Northern District of California. Under the terms of the
settlement, a settlement fund of $3.1 million was established, of which
$2,850,000 was paid by the Company's insurers and $250,000 was paid by the
Company. The amount paid by the Company is included in interest and other income
(expense) in the consolidated statement of operations for fiscal 1997. The
settlement was approved by the court in March of 1997.
The Company may be subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse affect on the Company's consolidated results of operations, financial
position or cash flows.
10. RESTRUCTURING CHARGES AND MERGER RELATED COSTS
Restructuring and merger related expenses reflect charges recorded in
connection with the restructuring of operations in the second quarter of fiscal
1998, and in the third and fourth quarters of fiscal 1997. In the
restructurings, the Company reduced its total headcount by an aggregate of
approximately 160 people, including employees and contractors, down to 112 at
March 31, 1998. These actions were taken in an effort to reduce the Company's
ongoing operating expenses. The Company recorded restructuring charges in the
second quarter of fiscal 1998 of $2.6 million and in the third and fourth
quarters of fiscal 1997 of approximately $2.2 million and $3.0 million,
respectively, to cover severance benefits, the closing of excess facilities,
write-down of acquired intangible assets related to discontinued products, and
the write-down of excess computer equipment and office furniture.
C-18
<PAGE> 175
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fiscal 1998 restructuring costs and 1999 utilization and related
liabilities are summarized below:
<TABLE>
<CAPTION>
WRITE-DOWNS, WRITE-DOWNS,
PAYMENTS, AND ACCRUED PAYMENTS, AND ACCRUED
1998 RECLASSIFICATIONS RESTRUCTURING RECLASSIFICATIONS RESTRUCTURING
RESTRUCTURING THROUGH COSTS AT THROUGH COSTS AT
COSTS MARCH 31, MARCH 31, MARCH 31, MARCH 31,
PROVISION 1998 1998 1999 1999
------------- ----------------- ------------- ----------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Severance benefits........... $ 550 $ 550 $ -- $ --
Closing of excess
facilities................. 1,395 881 514 514 --
Intangible assets
write-down................. 584 564 20 20 --
Equipment and furniture
write-down................. 68 68 -- -- --
Other........................ 24 24 -- -- --
------ ------ ---- ---- ----
Total................... $2,621 $2,087 $534 $534
====== ====== ==== ==== ====
</TABLE>
Cash payments included in the above table and charges to the restructuring
cost provision were $348,000 and $1.4 million in fiscal 1999 and 1998,
respectively. In fiscal 1999, the Company completed these restructuring
activities and reversed to operations $166,000 of excess accruals related to the
closing of excess facilities against operations.
11. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company markets its products in the United States and in foreign
countries through its sales personnel, dealers, distributors, and its
subsidiaries. License and service revenue from external customers attributed to
United States and other foreign countries, based on the customers' residence,
are summarized by license and service as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1999 1998
------------------ ------------------
SERVICE LICENSE SERVICE LICENSE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
United States................................. $ 7,782 $3,124 $ 8,478 $5,545
Europe........................................ 1,937 1,892 3,104 1,899
Other International........................... 707 364 486 728
------- ------ ------- ------
Total.................................... $10,426 $5,380 $12,068 $8,172
======= ====== ======= ======
</TABLE>
Long-lived assets located in the United Stated and other foreign countries
are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
United States............................................ $6,235 $5,434
International............................................ 761 791
Depreciation/Amortization................................ (5,403) (4,853)
------ ------
$1,593 $1,372
====== ======
</TABLE>
License and service revenue amounts and long lived asset amounts related to
fiscal 1997 are not present as it was impracticable to determine such
information.
C-19
<PAGE> 176
OBJECTSHARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS
Disposition of Assets
On April 8, 1999, the Company completed the sale of certain rights and
assets to a software company "the Buyer" in exchange for approximately $725,000
in cash and the assumption of liabilities in the approximate amount of $96,000.
The rights and assets consisted of, among other things: the Company's
proprietary computer software application development environments, including
VisualSmalltalk and PARTS for Java, a visual programming environment based on
Java programming language; products currently in development to support
Enterprise JavaBeans and legacy software system integration; all technology,
warranties, documentation and other intellectual property rights of the Company
related to such software; as well as certain personal property. Pursuant to a
software license agreement between the Company and the Buyer, the Buyer will
license back to the Company: the rights to continue to provide support and
maintenance and to sell the VisualSmalltalk product line; and the rights to (i)
sell, for a period of one year, and (ii) provide support and maintenance,
perpetually, the PARTS for Java product line.
C-20
<PAGE> 177
OBJECTSHARE, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH TOTAL
QUARTER(2) QUARTER(2) QUARTER QUARTER YEAR
---------- ---------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Fiscal 1999:
Net revenues................................. $ 3,703 $ 3,903 $ 3,982 $ 4,218 $15,806
Gross profit................................. $ 2,446 $ 2,348 $ 1,852 $ 1,718 $ 8,364
Loss from operations......................... $ (958) $ (500) $(1,201) $(2,353) $(5,012)
Net loss..................................... $ (778) $ (490) $(1,106) $(2,465) $(4,839)
Basic and diluted net loss per share......... $ (0.06) $ (0.04) $ (0.09) $ (0.20) $ (0.39)
Shares used in computing basic and diluted net
loss per share............................... 12,231 12,303 12,331 12,369 12,308
Fiscal 1998:
Net revenues................................. $ 5,122 $ 4,752 $ 4,935 $ 5,431 $20,240
Gross profit................................. $ 2,773 $ 2,380 $ 2,645 $ 3,247 $11,045
Income (loss) from operations(1)............. $(2,615) $(5,031) $ (533) $ 315 $(7,864)
Net income (loss)............................ $(2,515) $(4,977) $ (417) $ 327 $(7,582)
Basic net income (loss) per share............ $ (0.21) $ (0.42) $ (0.03) $ 0.03 $ (0.63)
Shares used in computing basic net income
(loss) per share............................. 11,925 11,925 12,075 12,126 12,022
Diluted net income (loss) per share............ $ (0.21) $ (0.42) $ (0.03) $ 0.02 $ (0.63)
Shares used in computing diluted net income
(loss) per share............................. 11,925 11,925 12,075 15,570 12,022
</TABLE>
- ---------------
(1) The second quarter of fiscal 1998 included $2,621,000 of restructuring costs
as described in Note 10 to the consolidated financial statements.
(2) The Company has restated its 10-Q's for the three months ended June 30 and
September 30, 1998. The above quarterly financial data is derived from the
restated Form 10-Q's as applicable.
C-21
<PAGE> 178
OBJECTSHARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED) [NOTE 1]
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 780 $ 1,675
Accounts receivable, net of allowance of $70 at December
31 and $205 at March 31................................ 500 3,988
Inventories............................................... 24
Other current assets...................................... 24 432
-------- --------
Total current assets................................... 1,304 6,119
Property and equipment:
Property and equipment.................................... 3,161 6,345
Less accumulated depreciation............................. (2,882) (5,392)
-------- --------
Net property and equipment............................. 279 953
Deposits and other assets................................... 59 129
Capitalized software........................................ 522
Less accumulated amortization............................. (11)
-------- --------
511
-------- --------
Total assets........................................... $ 1,642 $ 7,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 778 $ 1,309
Accrued compensation and related expenses................. 122 893
Note payable.............................................. -- 40
Capital lease obligation-short term....................... 49 63
Other accrued liabilities................................. 385 1,593
Deferred revenue.......................................... -- 2,587
Line of credit............................................ -- 1,000
-------- --------
Total current liabilities.............................. 1,334 7,485
Commitments and contingencies
Capital lease obligation-long term.......................... 74 103
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares -- 30,000
Issued and outstanding shares --
12,471 at December 31 and 12,383 at March 31........... 12 12
Additional paid-in capital............................. 50,239 50,160
Accumulated deficit.................................... (50,017) (49,772)
Accumulated other comprehensive loss................... (276)
-------- --------
Total stockholders' equity........................... 234 124
-------- --------
Total liabilities and stockholders' equity........... $ 1,642 $ 7,712
======== ========
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------- --------------------
1999 1998 1999 1998
-------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues:
Service............................................ $ 823 $ 2,899 $ 4,897 $ 7,958
License............................................ 1,083 1,464 3,630
------ ------- ------- -------
Total net revenues................................... 823 3,982 6,361 11,588
Cost of net revenues:
Service............................................ 454 1,813 3,040 4,180
License............................................ 317 543 762
------ ------- ------- -------
Total cost of net revenues........................... 454 2,130 3,583 4,942
------ ------- ------- -------
Gross profit......................................... 369 1,852 2,778 6,646
Operating expenses:
Sales and marketing................................ 328 1,429 2,794 4,592
Research and development........................... 857 824 2,881
General and administrative......................... 943 767 2,634 1,998
Restructuring...................................... (166)
------ ------- ------- -------
Total operating expenses............................. 1,271 3,053 6,252 9,305
------ ------- ------- -------
Loss from operations................................. (902) (1,201) (3,474) (2,659)
Interest and other income/expense (net).............. 127 115 3,229 256
------ ------- ------- -------
Loss before income taxes............................. $ (775) $(1,086) $ (245) $(2,403)
Provision/(benefit) for income taxes................. 20 (29)
------ ------- ------- -------
Net loss............................................. $ (775) $(1,106) $ (245) $(2,374)
====== ======= ======= =======
Basic and diluted net loss per share................. $(0.06) $ (0.09) $ (0.02) $ (0.19)
====== ======= ======= =======
Shares used in computing basic and diluted net loss
per share.......................................... 12,471 12,331 12,451 12,289
====== ======= ======= =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- --------------------
1999 1998 1999 1998
------- --------- ------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss............................................... $(775) $(1,106) $(245) $(2,374)
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustment.............. 218 (4) 276 64
----- ------- ----- -------
Comprehensive income (loss)............................ $(557) $(1,110) $ 31 $(2,310)
===== ======= ===== =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (245) $(2,374)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 496 477
Gain on sale of assets.................................... (3,223)
Changes in operating assets and liabilities:
Accounts receivable, net............................... 2,987 2,002
Inventories............................................ 19 99
Other assets........................................... 212 467
Accounts payable and accrued liabilities............... (2,319) (2,454)
Accrued restructuring costs............................ (513)
Deferred revenue....................................... (757) (1,119)
------- -------
Net cash used in operating activities....................... (2,830) (3,415)
INVESTING ACTIVITIES:
Net disposals of property and equipment..................... (7) (94)
Maturities of marketable securities......................... 600
Capitalized software........................................ (767)
Proceeds from Java Transaction.............................. 725
Proceeds from Cincom Transaction............................ 425
Proceeds from European Transaction.......................... 1,175
Increase in other assets.................................... (5)
------- -------
Net cash provided by (used in) investing activities......... 2,318 (266)
FINANCING ACTIVITIES:
Decrease in line of credit.................................. (1,000)
Proceeds from receivables financing......................... 595
Proceeds from StarBase line of credit....................... 200
Repayments on StarBase line of credit....................... (200)
Payments on capital lease obligations....................... (43)
Decrease of note payable.................................... (3)
Proceeds from issuance of common stock, net of
repurchases............................................... 79 121
------- -------
Net cash provided by (used in) financing activities......... (372) 121
Effect of exchange rate changes on cash and cash
equivalents............................................... (11) 64
------- -------
Net decrease in cash and cash equivalents................... (895) (3,496)
------- -------
Cash and cash equivalents at beginning of period............ 1,675 5,134
------- -------
Cash and cash equivalents at end of period.................. $ 780 $ 1,638
======= =======
</TABLE>
See accompanying notes.
C-25
<PAGE> 182
OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the United
States Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the audited financial statements included
elsewhere herein.
In the opinion of management the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of the operations for the interim periods presented. The
operating results for the nine months ended December 31, 1999 are not
necessarily indicative of the results expected for the full fiscal year ending
March 31, 2000.
The balance sheet at March 31, 1999 has been derived from the audited
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
As described below (Note 6 -- "Disposition of Assets"), the Company
disposed of its European subsidiaries during November, 1999. At December 31,
1999, the Company has one subsidiary, a foreign sales corporation.
2. EARNINGS (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding. Diluted net income (loss) per share includes the effect of the
potential shares outstanding, including dilutive stock options and warrants
using the treasury stock method.
3. CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
4. RESTRUCTURING COSTS
The Company recorded restructuring costs in the second quarter of fiscal
1998 and in the third and fourth quarters of fiscal 1997. During the first and
second quarters of fiscal 1999, the Company made payments of $267,000 and
recorded a return to operations of reserves of $166,000 provided in prior years
for events that were completed in such periods. In the third quarter of fiscal
1999, the Company made payments of $80,000 related to severance costs and
reduced its reserve by such amount. The Company utilized the remaining reserve
during fiscal 1999.
5. FINANCING AGREEMENTS
At March 31, 1999, the Company had a credit agreement with a commercial
bank that provided a revolving line of credit for borrowings, limited to 70% of
eligible accounts receivable, up to a maximum of $5,000,000. This line was
terminated in November 1999.
On October 28, 1999, the Company repaid substantially all of the
indebtedness under the above credit agreement using the proceeds from the sale
of certain receivables to the bank under an Accounts
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OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Receivable Purchase Agreement. The Accounts Receivable Purchase Agreement
provides the facility to sell up to $1,000,000 of eligible receivables to the
bank. The bank will pay 80% of the face value upon the sale and the balance
after subsequent collection by the bank. The Company remains contingently liable
for the collection of these receivables. The Company's obligations are secured
by substantially all of the Company's assets. Fees include an administrative fee
of 0.5% of the amount sold and 1.5% per month on the uncollected balance of the
receivables sold. During the quarter ended December 31, 1999, the Company
incurred total interest and related fees of $10,000. At December 31, 1999, the
Company was contingently liable for $25,000 related to receivables sold to the
bank that remained uncollected by the bank as of that date. This amount was
received by the bank during January 2000. In connection with this contingent
liability $7,000 of cash was held in a restricted account at the bank at
December 31, 1999.
In connection with the proposed merger [Note 8 -- "Pending Merger"]
StarBase has provided the Company a $500,000 line of credit. This line bears
interest at prime plus 0.75%, is secured by all assets of the Company, and
matures on October 31, 2000 subject to earlier maturity based upon specified
events. On November 5, 1999, the Company borrowed $200,000 under this line and
repaid it from the proceeds of the Valtech transaction [Note 6 -- "Disposition
of Assets"] in December 1999.
6. DISPOSITIONS OF ASSETS
On November 24, 1999, the Company completed the sale of all of the stock of
ObjectShare, GmbH, a German corporation, and ObjectShare (U.K.) Limited, an
English corporation (collectively, the "Subsidiaries"), to Valtech S.A. a French
societe anonyme and its wholly-owned subsidiary Valtech Limited, respectively,
in exchange for total consideration of (a) approximately $1,600,000 in cash and
(b) the cancellation of certain intercompany indebtedness owed by the
Subsidiaries to ObjectShare Inc. As a result of this transaction, the Company
has no operations in Europe, with its remaining operations consisting primarily
of providing training and consulting services in the United States. The sale of
these subsidiaries resulted in a gain of $254,000 for the Company which is
included in Other Income for the three and nine months ended December 31, 1999.
Other Income for the three months ended December 31, 1999 also includes certain
additional expenses related to the previous transactions below. These financial
statements include the results of operations for these subsidiaries through the
date of sale.
On August 30, 1999, the Company completed the sale of certain rights and
assets to Cincom Systems, Inc. ("Cincom"), in exchange for approximately
$425,000 in cash, the assumption of certain liabilities, and guaranteed
royalties of approximately $500,000. The Rights and Assets consisted of, among
other things, the Registrant's proprietary computer software known generally as
Smalltalk, and other intellectual property rights of the Registrant related to
such software and certain personal property. Pursuant to this transaction,
Cincom will license back to the Registrant the rights to continue to use the
software for training and consulting purposes and to sell the Smalltalk product
line. In addition, Cincom assumed the future obligations under certain other
agreements. The liabilities assumed by Cincom included ongoing maintenance and
support, certain capital leases, and accrued vacation and others, which were
recorded on the books of the Company at approximately $2,100,000. The actual
cost to perform these obligations may be less than the amounts recorded. The
sale of these assets resulted in a gain of $2,486,000 for the Company which is
included in Other Income for the nine months ended December 31, 1999.
On April 8, 1999, the Company completed the sale of certain rights and
assets to a software company "the Buyer" in exchange for approximately $725,000
in cash and the assumption of liabilities in the approximate amount of $96,000.
The rights and assets consisted of, among other things: the Company's propriety
computer software application development environments, including
VisualSmalltalk and PARTS for Java, a visual programming environment based on
Java programming language; products currently in development to support
Enterprise JavaBeans and legacy software system integration; all technology,
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<PAGE> 184
OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
warranties, documentation and other intellectual property rights of the Company
related to such software; as well as certain personal property. Pursuant to a
software license agreement between the Company and the Buyer, the Buyer licensed
back to the Company: the rights to continue to provide support and maintenance
and to sell the VisualSmalltalk product line; and the rights to (i) sell, for a
period of one year, and (ii) provide support and maintenance, perpetually, the
PARTS for Java product line. The sale of these assets resulted in a gain of
$483,000 for the Company which is included in Other Income for the nine months
ended December 31, 1999.
As a result of the above transactions, the Company's remaining operations
consist primarily of providing training and consulting services in the United
States.
7. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended December 31, 1999, the Company paid cash of
$36 thousand for interest. There were no payments for interest during the same
period in the prior year.
8. PENDING MERGER
On November 4, 1999, the Company signed a definitive agreement to merge
with StarBase Corporation ("StarBase"). Under the merger, StarBase will issue
its stock in exchange for the Company's 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, among other things, the average trading price of StarBase stock
prior to the closing. The transaction, which is subject to shareholders'
approval and certain other conditions, is expected to be completed in early
2000. In addition, StarBase has provided the Company a $500,000 line of credit
[Note 5 -- "Financing Agreements"].
9. LIQUIDITY
It is anticipated that cash on hand and cash flow from operations will not
be sufficient to support the Company's operations beyond the anticipated
timeframe for completion of the merger with StarBase. In the event the merger
with StarBase is not completed, the Company will need to obtain additional
capital. However, there is no assurance the Company will be able to obtain
additional capital on terms acceptable to the Company or at all. Failure to
obtain sufficient levels of additional capital will result in material liquidity
problems for the Company. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
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<PAGE> 185
APPENDIX D
SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW
DELAWARE CORPORATIONS CODE
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
Section 262. Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
D-1
<PAGE> 186
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
D-2
<PAGE> 187
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors,
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<PAGE> 188
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial upon the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the list filed
by the surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted his certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings until it
is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 189
APPENDIX E
OPINION OF DUFF & PHELPS, LLC
November 3, 1999
Board of Directors
ObjectShare, Inc.
16811 Hale Avenue, Suite A
Irvine, CA 92606-5020
To the Board of Directors of ObjectShare, Inc.:
Duff & Phelps, LLC ("Duff & Phelps") has been engaged by ObjectShare, Inc.
("ObjectShare" or the "Company"), as financial advisor to the Board of Directors
of the Company in connection with a transaction (the "Transaction") involving
the merger of ObjectShare with and into OBJS Acquisition Corp., a subsidiary of
StarBase Corporation ("StarBase"). Specifically, Duff & Phelps has been engaged
to provide an opinion (the "Opinion") as to whether the Transaction is fair to
the Company and its stockholders from a financial point of view. It is our
understanding that ObjectShare common stock will be exchanged for StarBase
common stock pursuant to the merger exchange ratio calculated as set forth in
the Agreement and Plan of Merger dated as of November 3, 1999, by and among
StarBase Corporation, OBJS Acquisition Corp. and ObjectShare, Inc.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. Met with certain members of senior management of ObjectShare at the
Company's headquarters in Irvine, California, to discuss the history,
financial condition, future prospects and projected performance of the
Company;
2. Met with certain members of senior management of StarBase at its
headquarters in Santa Ana, California, to discuss the history, financial
condition, future prospects and projected performance of StarBase;
3. Reviewed the Agreement and Plan of Merger dated as of November 3, 1999,
by and among StarBase Corporation, OBJS Acquisition Corp. and
ObjectShare, Inc;
4. Reviewed the Asset Purchase Agreement by and between Cincom Systems,
Inc., and ObjectShare, Inc., dated August 27, 1999;
5. Reviewed ObjectShare's and StarBase's annual reports and forms 10-K and
10-KSB for the year ended March 31, 1999, including the financial
statements contained therein;
6. Reviewed ObjectShare's and StarBase's forms 10-Q and 10-QSB for the
quarter ended June 30, 1999, including the financial statements
contained therein;
7. Reviewed ObjectShare's unaudited financial statements for the six months
ended September 30, 1999;
8. Reviewed projections prepared by ObjectShare and StarBase management and
their representatives;
9. Reviewed the historical trading price and volume of ObjectShare and
StarBase common stock;
10. Reviewed certain articles and press releases regarding ObjectShare and
StarBase;
11. Reviewed miscellaneous SEC filings for ObjectShare and StarBase;
12. Reviewed ObjectShare's Board of Directors minutes from February 1,
1996, through August 26, 1999;
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<PAGE> 190
Board of Directors
ObjectShare, Inc.
November 3, 1999
Page 2
13. Reviewed other operating and financial information provided by
management of ObjectShare and StarBase; and
14. Reviewed economic and industry information and conducted such studies,
analyses and investigations as we deemed appropriate.
Our Opinion assumes the accuracy and completeness of the information
provided to us. Duff & Phelps has not independently verified the accuracy and
completeness of the information supplied to us with respect to the Company and
does not assume any responsibility with respect to it. Furthermore, we have
assumed that there has been no material change in the assets, financial
condition, business, or prospects of the Company since the date of the most
recent financial statements made available to us. Furthermore, industry
information and data on comparable companies used as background for our analysis
were obtained from regularly published sources. We did not independently verify
the accuracy and completeness of the information obtained from published
sources.
CONCLUSIONS
Based on our analysis and relying upon the accuracy and completeness of all
information provided to us, it is our opinion that as of this date, the
Transaction is fair to ObjectShare and its stockholders from a financial point
of view.
Respectfully submitted,
DUFF & PHELPS, LLC
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<PAGE> 191
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law allows companies to
indemnify their directors and officers against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement under the conditions and
limitations described in the law. However, Delaware law provides that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to a company unless and
only to the extent that the Court of Chancery of the State of Delaware or any
other court in which such action was brought determines such person is fairly
and reasonable entitled to indemnity for such expenses.
StarBase's certificate of incorporation provides that a director is not
personally liable for monetary damages to it or its stockholders for breach of
his or her fiduciary duties as a director. A director will be held liable for a
breach of his or her duty of loyalty to StarBase or its stockholders, his or her
intentional misconduct or willful violation of law, actions or in actions not in
good faith, an unlawful stock purchase or payment of a dividend under Delaware
law, or transactions from which the director derives an improper personal
benefit. This limitation of liability does not affect the availability of
equitable remedies against the director including injunctive relief or
rescission. StarBase's certificate of incorporation authorizes it to indemnify
its officers, directors and other agent to the fullest extent permitted under
Delaware law.
StarBase has entered into an indemnification agreement with each of its
directors and officers. In some cases, the provisions of the indemnification
agreement may be broader than the specific indemnification provisions contained
in StarBase's certificate of incorporation or otherwise permitted under Delaware
law. Each indemnification agreement may require StarBase to indemnify an officer
or director against liabilities that may arise by reason of his status or
service as an officer or director, or against liabilities arising from the
director's willful misconduct of a culpable nature. The indemnification
agreement may also require StarBase to obtain directors' and officers' liability
insurance, if available on reasonable terms. StarBase currently maintain a
directors and officers liability policy with Lloyds of London and General Star
Indemnity Corporation that contains an aggregate limit of liability of
$5,000,000 through 2001.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to its directors, officers and controlling persons
pursuant to these provisions, or otherwise, StarBase has been advised that, in
the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --- -----------
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 3, 1999
among StarBase Corporation, OBJS Acquisition Corp. and
ObjectShare, Inc. (included as Appendix A to the Proxy
Statement/ Prospectus contained in this Registration
Statement).
3.1 Certificate of Incorporation of OBJS Acquisition Corp.
Incorporated by reference to Exhibit 3.1 to the original
filing of this registration statement, file number
333-30260.
3.2 Bylaws of OBJS Acquisition Corp. Incorporated by reference
to Exhibit 3.2 to the original filing of this registration
statement, file number 333-30260.
4.1 Specimen StarBase Common Stock Certificate (incorporated
herein by reference to an Exhibit to the StarBase
Corporation Registration Statement filed on Form SB-2 with
the Securities and Exchange Commission on November 2, 1993
(File No. 33-68228))
</TABLE>
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<PAGE> 192
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --- -----------
<C> <S>
5.1 Opinion of Parker Chapin, LLP regarding the validity of the
securities being registered. Incorporated by reference to
Exhibit 5.1 to the original filing of this registration
statement, file number 333-30260.
10.1 Fairness Opinion, dated November 3, 1999, of Duff & Phelps,
LLP. (included as Appendix E to the Proxy
Statement/Prospectus contained in this Registration
Statement).
10.2 Secured Promissory Note, dated November 3, 1999, from
ObjectShare, Inc. to StarBase Corporation. Incorporated by
reference to Exhibit 10.2 to the original filing of this
registration statement, file number 333-30260.
10.3 Employment Agreement, dated November 3, 1999, between
StarBase Corporation and James H. Smith. Incorporated by
reference to Exhibit 10.3 to the original filing of this
registration statement, file number 333-30260.
10.4 Lease, dated October 3, 1997 between ParcPlace Digitalk,
Inc. and Hale Property Ltd., L.P. Incorporated by reference
to Exhibit 10.4 to the original filing of this registration
statement, file number 333-30260.
10.5* SubLease, dated March 26, 1997, between ParcPlace Digitalk,
Inc. and Carollo Engineers, an Arizona partnership.
10.6 Form of Stock Option Agreement granted to Messrs. James H.
Smith, Eugene L. Goda and specific employees of ObjectShare,
Inc. in connection with the merger. Incorporate by reference
to Exhibit 10.6 to the original filing of this registration
statement, file number 333-30260.
10.7 Lock Up Letter dated as of November 3, 1999 from James H.
Smith. Incorporated by reference to Exhibit 10.7 to the
original filing of this registration statement, file number
333-60230.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Deloitte & Touche LLP.
23.3* Consent of Ernst & Young LLP, independent auditors.
23.4 Consent of Parker Chapin, LLP (included in the opinion filed
as Exhibit 5.1 to this Registration Statement). Incorporated
by reference to Exhibit 23.4 to the original filing of this
registration statement, file number 333-60230.
99.1 Form of ObjectShare, Inc. Proxy Card. Incorporated by
reference to Exhibit 99.1 to the original filing of this
registration statement, file number 333-60230.
</TABLE>
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* Filed herewith.
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE> 193
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to its registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Santa Ana, state
of California, on the 3rd day of March, 2000.
STARBASE CORPORATION
By: /s/ DOUGLAS S. NORMAN
------------------------------------
Douglas S. Norman,
Chief Financial Officer
II-3
<PAGE> 194
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --- -----------
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 3, 1999
among StarBase Corporation, OBJS Acquisition Corp. and
ObjectShare, Inc. (included as Appendix A to the Proxy
Statement/ Prospectus contained in this Registration
Statement).
3.1 Certificate of Incorporation of OBJS Acquisition Corp.
Incorporated by reference to Exhibit 3.1 to the original
filing of this registration statement, file number
333-30260.
3.2 Bylaws of OBJS Acquisition Corp. Incorporated by reference
to Exhibit 3.2 to the original filing of this registration
statement, file number 333-30260.
4.1 Specimen StarBase Common Stock Certificate (incorporated
herein by reference to an Exhibit to the StarBase
Corporation Registration Statement filed on Form SB-2 with
the Securities and Exchange Commission on November 2, 1993
(File No. 33-68228))
5.1 Opinion of Parker Chapin, LLP regarding the validity of the
securities being registered. Incorporated by reference to
Exhibit 5.1 to the original filing of this registration
statement, file number 333-30260.
10.1 Fairness Opinion, dated November 3, 1999, of Duff & Phelps,
LLP. (included as Appendix E to the Proxy
Statement/Prospectus contained in this Registration
Statement).
10.2 Secured Promissory Note, dated November 3, 1999, from
ObjectShare, Inc. to StarBase Corporation. Incorporated by
reference to Exhibit 10.2 to the original filing of this
registration statement, file number 333-30260.
10.3 Employment Agreement, dated November 3, 1999, between
StarBase Corporation and James H. Smith. Incorporated by
reference to Exhibit 10.3 to the original filing of this
registration statement, file number 333-30260.
10.4 Lease, dated October 3, 1997 between ParcPlace Digitalk,
Inc. and Hale Property Ltd., L.P. Incorporated by reference
to Exhibit 10.4 to the original filing of this registration
statement, file number 333-30260.
10.5* SubLease, dated March 26, 1997, between ParcPlace Digitalk,
Inc. and Carollo Engineers, an Arizona partnership.
10.6 Form of Stock Option Agreement granted to Messrs. James H.
Smith, Eugene L. Goda and specific employees of ObjectShare,
Inc. in connection with the merger. Incorporate by reference
to Exhibit 10.6 to the original filing of this registration
statement, file number 333-30260.
10.7 Lock Up Letter dated as of November 3, 1999 from James H.
Smith. Incorporated by reference to Exhibit 10.7 to the
original filing of this registration statement, file number
333-60230.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Deloitte & Touche LLP.
23.3* Consent of Ernst & Young LLP, independent auditors.
23.4 Consent of Parker Chapin, LLP (included in the opinion filed
as Exhibit 5.1 to this Registration Statement). Incorporated
by reference to Exhibit 23.4 to the original filing of this
registration statement, file number 333-60230.
99.1 Form of ObjectShare, Inc. Proxy Card. Incorporated by
reference to Exhibit 99.1 to the original filing of this
registration statement, file number 333-60230.
</TABLE>
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* Filed herewith.
<PAGE> 1
EXHIBIT 10.5
SUBLEASE
This Sublease is entered into this 26th day of March, 1997, between
Carollo Engineers, an Arizona partnership ("Sublessor") and ParcPlace Digitalk,
a Delaware corporation ("Sublessee").
Sublessor is the Tenant under a Lease from Spieker Properties,
successor-in-interest to VFT Real Estate Corp. IV, a Delaware corporation,
Landlord, dated March 3, 1994 (the "Lease"). The lease covers approximately
2,862 rentable sq. ft. in the building located at 5100 SW Macadam Avenue, Suite
350, Portland Oregon. A complete copy of the Lease is attached hereto as
Exhibit A.
Sublessee wishes to sublease from Sublessor, all of the premises
covered by the Lease.
NOW THEREFORE, Sublessor hereby subleases the premises described in the
attached Exhibit B (the "Premises"), an area of approximately 2,862 rentable sq.
ft. and Sublessee agrees to sublease the Premises from Sublessor on the
following terms:
1. Term The term of this Sublease shall commence on April 15,
1997, and shall continue through and including June
29, 2000.
2. Rent Sublessee shall pay to Sublessor base rent in the sum
of 53,458.25 per month from April 15, 1997 through
June 30, 1997, and $3,577.50 per month from July 1,
1997 through June 29, 2000 on the first day of each
month of the lease term. Base rent shall be escalated
at the same time and in the same amount per square
foot as the rent paid by Sublessor to the Landlord
under Sections 19.1 & 19.4, Excavation Provisions, in
the Maters Lease dated march 4, 1994. Sublessor shall
pay to the Landlord under the Lease all rent and
other charges required to be paid by Sublessor under
the Lease.
3. Sublessee
Consideration Sublessee shall pay the sum of $0 as sublease
consideration. Sublessor may apply the sublease
consideration to pay the cost of performing any
obligation which Sublessee fails to perform within
the time required by this Sublease, but such
application by Sublessor shall not be the exclusive
remedy for Sublessee's default. If the sublease
consideration is applied by Sublessor, Sublessee
shall on demand pay the sum necessary to replenish
the sublease consideration to its original amount. To
the extent not applied by Sublessor to cure defaults
by Sublessee, the sublease consideration shall be
applied against the rent payable for the last month
of the term. The sublease consideration shall not be
refundable.
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<PAGE> 2
4. Obligations of
Sublessee Sublessee shall perform all of the obligations of
Tenant under the Lease (except the obligation to pay
rent and other obligations inconsistent with this
Sublease) as if Sublessee were the Tenant under the
Lease and Sublessor was the Landlord under the Lease.
The terms of the Lease are hereby expressly
incorporated as part of this Sublease. In the event
Sublessee fails to comply with such terms, or the
terms of this Sublease, Sublessor shall be entitled
to all of the remedies granted to Landlord in the
Lease, together with any other rights Sublessor might
otherwise have. All provisions in the Lease dealing
with indemnity and liability shall be applicable as
between Sublessor and Sublessee and Sublessees and
the Landlord under the Lease. Sublessee shall name
both Sublessor and the Landlord and Landlord's
managing agent under the Lease as named insured in
the insurance policies it is required to obtain
hereunder.
5. Representations
of Sublessor Sublessor represents and warrants that the Lease is
in good standing and that Sublessor has, to the best
of its knowledge, complied with all of its
obligations thereunder through the date hereof.
Sublessor shall make all rental and other payments
required by the Lease.
6. Condition of
Premises Unless otherwise expressly provided herein, the
Premises are leased as in the condition now existing
with no additional work to be performed by Sublessor
or Landlord.
7. Notices With respect to notices between Sublessor and
Sublessee, the addresses for notice shall be the
addresses stated in this Sublease.
8. Waiver of
Subrogation Neither Sublessor, Sublessee nor the Landlord under
the Lease (nor Landlord's managing agent) shall have
any claim against the other for any loss or damage of
a type which is coverable by fire and extended
coverage insurance, including water damage or
sprinkler leakage, regardless of negligence.
9. Sublessee
Improvements Sublessee improvements to space shall be at the sole
cost and responsibility of Sublessee. All
improvements to said space shall be approved by
Sublessor and Landlord.
10. Option to
Terminate As per paragraph 23 of the Addendum to the Master
Lease dated March 3, 1994, Carollo Engineers agrees,
so long as Sublessee is not in default, not to
terminate this lease through June 29, 2000.
11. Additional
Provisions This Sublease incorporates the terms and conditions
contained in the following Exhibits:
Exhibit A - The Lease
Exhibit B - Description of the Premises
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<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Sublease as of the
day and year first written above.
SUBLESSOR: By:_________________________
Carollo Engineers, an Arizona Gary Deis, Partner
partnership
Address for notices:
c/o Bob Eimsead
Carollo Engineers
5100 SW Masadarm Avenue, Suite 440
Portland, OR 97201
SUBLESSEE: By:___________________________
ParcPlace Digitalk, Inc., a Delaware
corporation Title:________________________
Address for notices:
999 E. Arguas
Sunnyvale, CA 94086
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
our report dated June 26, 1998 relating to the financial statements, which
appears in such Registration Statement. We also consent to the reference to us
under the heading "Experts" and "Selected Financial Data" in such Registration
Statement.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
February 11, 2000
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of StarBase
Corporation on Form S-4 of our report dated June 18, 1999 (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to substantial doubt about the ability of StarBase Corporation to continue as a
going concern, as described in Note 2 to the financial statements), appearing in
the Prospectus, which is part of this Registration Statement.
We also consent to the references to us under the headings "Experts,"
"Selected Historical Financial Data," "Comparative Historical and Pro Forma Per
Share Data" and "Selected Unaudited Pro Forma Combined Financial Information" in
such Prospectus.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 2, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Named Experts",
"Selected Historical Financial Data", "Comparative Historical and Pro Forma Per
Share Data", "Selected Unaudited Pro Forma Condensed Financial Information" and
ObjectShare, Inc.'s "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and to the use of our report dated June 14, 1999, in
Amendment No. 1 to the Registration Statement (Form S-4 No. 333-30260) and
related Proxy Statement/Prospectus of StarBase Corporation for the registration
of 651,535 shares of its common stock.
/s/ ERNST & YOUNG LLP
Orange County, California
February 29, 2000
