STARBASE CORP (SBAS)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue increased in the three month period ended December 31, 1998 by $1,260,000 or 192%, to $1,917,000, from $657,000 in the same three month period of the previous year. This was due to an increase in product, maintenance and training revenue ($1,302,000), partially offset by a slight decrease in license and royalty revenue from the Company's Roundtable product ($42,000). Total revenue for the nine month period ended December 31, 1998, increased to $4,714,000 from $1,361,000 in the same period of the prior year. The increase in product revenue has been favorably affected by the February 1998 release of the StarTeam 3.0 family of products.
Cost of Sales increased to $105,000 from $14,000 in the three month period ended December 31, 1998 over the same quarter of the previous year and to $441,000 from $69,000 for the nine month period ended December 31, 1998 over the same period of the previous year due to the increase in product shipments. Cost of sales consists primarily of manufacturing and related costs such as media, documentation, product assembly and third party royalties. The Company out-sources manufacturing for all software products, with the exception of the Company's Roundtable product.
Operating expenses in the three month period ended December 31, 1998 increased to $3,636,000 from $2,189,000 in the same quarter of the previous year. For the nine month period ended December 31, 1998, operating expenses increased to $10,922,000 from $5,615,000. These increases were primarily due to the building of the sales & marketing and research & development infrastructures. At December 31, 1998, the Company had 90 full-time employees, which consisted of 29 in sales & marketing, 46 in research & development and 15 in general & administrative. At December 31, 1997, the Company had 54 employees, which consisted of 15 in sales & marketing, 30 in research & development and 9 in general & administrative.
Research and development expenses. Research & development expenses include personnel and other such direct and overhead expenses incurred in the development of the Company's products. StarBase continues to make significant investments in research and development intended to bring its products to market and to support existing products. In the three month period ended December 31, 1998 overall research and development expenses increased to $1,013,000 compared to $817,000 for the same period in the prior year and for the nine month period ended December 31, 1998 increased to $3,151,000 compared to $1,922,000 for the same period in the prior year primarily as a result of the increase in development staff.
Selling, general and administrative expenses. Selling, general & administrative expenses for the three months ended December 31, 1998 increased approximately $1,251,000 over the same period in the prior year. For the nine month period ended December 31, 1998 selling, general & administrative expenses increased to $7,771,000 from $3,693,000 in the corresponding period of the prior year. The increase was mainly the result of additional sales and marketing personnel coupled with the advertising and promotion programs to launch the StarTeam 3.0 family of products.
INTEREST INCOME/EXPENSE
Interest income for the three month period ended December 31, 1998 decreased to $4,000 compared to $25,000 for the same period in the prior year.
Interest expense for the three month period ended December 31, 1998 decreased to $7,000 compared to $578,000 for the same period in the prior year. Prior period's interest expense was a result of the non-cash accrued interest and debt discount amortization on convertible debentures issued in August and September 1997.
INCOME TAXES
The Company has not recorded a current or deferred provision for federal income taxes for any period to date, as a result of losses incurred since its inception. Any provision for income taxes represents the minimum required for state taxes.
NON-CASH DIVIDEND
Non-cash dividend for the three month period ended December 31, 1998 was $57,000 due to the beneficial conversion feature of the Series G Preferred Stock and warrants issued. There was no non-cash dividend for the three month period ended December 31, 1997.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY EFFECT FUTURE RESULTS
The following discussion contains forward-looking statements within the meaning of Sections 21E and 27A of the Securities Exchange Act of 1934. These forward- looking statements are subject to risks and uncertainties. There are several important factors that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in the following discussion. Such factors include, but are not limited to, the growth rates of certain market segments, the timing of software product introductions, market acceptance of product introductions, the positioning of the Company's products in those segments, price pressures and the rapidly changing competitive environment in the software industry, success in technological advances and their implementation, business conditions and the general economy, the Company's ability to manage its business in its evolution from a development stage company, and the Company's ability to establish strategic alliances. Additional information on these and other risk factors which could affect the Company's financial results is included in the Company's Annual Report for the fiscal year ended March 31, 1998 on Form 10-KSB/A on file with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents on hand as of December 31, 1998 totaled $62,000 and $4,167,000 as of March 31, 1998. At December 31, 1998 the Company had positive working capital of $1,393,000, compared to $3,632,000 at March 31, 1998.
During the nine months ended December 31, 1998, the Company used $8,021,000 for operations, an increase of approximately $3,848,000 over the amount used for operations in the prior year. The increase was primarily due to the building of the Company's infrastructure. Capital expenditures were approximately $624,000 and $256,000 during the nine months ended December 31,1998 and December 31, 1997, respectively.
The Company warrants products against defects for 90 days and has a policy permitting the return of products within 30 days. Warranty costs and returns, which are not significant, have historically been within management's expectations. The Company has reserved approximately $112,000 at December 31, 1998 compared to $89,000 at March 31, 1998 for future returns and other collection issues. The increase is due to greater revenue.
THE YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs that have date-sensitive software may recognize a date using "00" as the calendar year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
The Company believes that it has no exposure to Year 2000 issues for the products it has sold, as the products were designed with four digit year recognition.
The Company has begun its assessment of its internal systems affected by the Year 2000 Issue and anticipates that it will not be required to modify or replace significant portions of its software so that its computer systems will properly utilize dates past December 31, 1999.
The Company has initiated communications with its significant suppliers and customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company.
NEW ACCOUNTING STANDARDS
In October 1997 and March 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition" and SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition," respectively, which provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and is effective for the Company's transactions entered into subsequent to March 31, 1998. AcSEC is currently deliberating the potential permanent deferral of certain provisions of SOP 97-2. The Company does not believe that implementation of SOP 97-2 and SOP 98-4 will have a material adverse affect on expected revenues or earnings.
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