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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1995, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ______ to ______.
Commission file number: 0-21010
GUPTA CORPORATION
(DOING BUSINESS AS CENTURA SOFTWARE COMPANY)
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2874178
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1060 MARSH ROAD, MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 321-9500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period than the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES NO X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $38,828,780 as of June 30, 1996, based upon the
closing sale price on the NASDAQ National Market reported for such date. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of June 30, 1996, there were 12,600,842 shares of the Registrant's Common
Stock outstanding.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the matters
discussed in this document are forward-looking statements that involve certain
risks and uncertainties, including the risks and uncertainties under "Risk
Factors."
THE COMPANY
Gupta Corporation (the "Company"), currently doing business as Centura
Software Corporation, provides application development and deployment software
to organizations building large-scale client server applications. The Company's
products include development environments, compact databases, and connectivity
products that enable teams of developers to build and deploy, scalable
client/server applications. The Company offers four product lines: CENTURA a
product line that helps customers develop and deploy 32-bit, next generation
client/server applications. Created specifically to meet the needs of
organizations seeking the power to move from workgroup and enterprise pilot
projects into large enterprise applications, Centura delivers client/server
application scalability, Internet integration, and drag and drop data
replication facilities. SQLWINDOWS is an open client/server development
environment for creating multi-database applications on desktop platforms.
SQLBASE consists of small-footprint database products that help businesses
deploy decentralized applications easily and cost-effectively. SQLHOST allows
organizations to integrate DB2 or legacy data into a client/server environment
without compromising performance, control, or security.
Gupta's products enable customers to obtain the benefits of PC
client/server computing, while preserving their investments in corporate data
sources. The Company has established stratified distribution channels that
provide broad market coverage for its products and address the specific needs of
its varied customer segments worldwide. The Company's products are used in at
least 75 countries by organizations including ADP, The British Army, Bankers
Trust, Citibank, Daimler-Benz, Ford Motor Company, Illinois Power, Mobil Oil,
Mutualite Fonction Publique, NASA, Nabisco, New Zealand Post, Norfolk Southern,
Ontario Hydro, ORE-IDA Foods, The Southern Company, United Airlines, UPS,
Westinghouse, and the States of Alaska and Delaware.
INDUSTRY BACKGROUND
Over the past few decades, organizations have increasingly used their
computing systems to improve their management of mission-critical business
functions, such as manufacturing, distribution, customer support, finance and
administration. In the 1970's and 1980's, computing environments for such
applications were dominated by large computer systems with a mainframe or
minicomputer acting as a host processor for terminals with very limited
computing power. These traditional host-based systems are expensive to install
and maintain, and related software development is typically time consuming. In
addition, management of and access to the critical information resources
residing on these systems is generally limited to a staff of dedicated MIS
professionals and relatively inaccessible to a broader base of users.
In the late 1980s, a new architecture for information processing called
"client/server" computing emerged to address the many shortcomings of host-based
systems. Client/server computing typically provides increased functionality at
a lower hardware and software cost, an easier-to-use operating environment and
information access by a broader base of users. A client/server system typically
consists of multiple intelligent desktop client computers linked in a network
with high performance server computers. The client replaces the dumb terminal
employed in host-based systems
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and has resident software that manages the user interface and performs local
data access and manipulation. The server performs many of the functions
previously performed by the host in a host-based system, such as network
management, data storage, printing, communications and data security and
integrity.
The widespread use of increasingly powerful PCs has made it possible for
organizations to deploy client/server systems based on local area networks
("LANs"), thereby increasing the benefits of the large existing installed base
of PCs. A LAN is a group of computers connected for the purpose of sharing data
and networked resources such as printers and data storage devices. PC
client/server computing combines the benefits of host-based systems with the
cost-effectiveness and ease of use of PCs. Other factors increasing the
deployment of PC client/server systems include the continued decline in the
costs of high-performance PCs and improvements to PC operating systems,
including easy-to-use graphical user interfaces such as those incorporated in
Microsoft's Windows and Windows 95, and IBM's OS/2 operating systems. In
addition, connectivity software is available to enable PC clients to access
varied data sources, including existing mainframes and minicomputers, thereby
protecting an organization's investment in these host-based systems.
A PC client/server system can be deployed as a stand-alone system in a
small or medium sized organization or as a departmental system within a larger
organization. There is also an increasing trend toward disconnected or so-
called "mobile" applications where a stand-alone or laptop PC manages data
locally and may be connected asynchronously to centralized, host-based data
sources. Such systems can also be deployed as part of an overall enterprise
system combining stand-alone PC's, multiple PC client/servers and enterprise-
wide servers.
The increase in the deployment of PCs is fueling demand by organizations,
application software vendors and software consultants for specialized systems
software utilizing PC, object-oriented and client/server technologies. The
software required to implement PC client/server systems includes end user and
programmer tools, relational database management systems ("RDBMS") and
connectivity software. End user tools facilitate the access of data stored
throughout the network. Programmer tools are used to create application
programs for client PCs, while object-oriented technologies increase the
productivity of programmers and programming teams and reduce the life-cycle cost
of maintenance of such applications. RDBMS software facilitates data sharing in
a network while maintaining data integrity and security through a sophisticated
data access language called structured query language ("SQL"). Connectivity
software enables the transfer of information between clients and servers as well
as between PC client/servers and host-based information systems. A number of
software companies have addressed specific segments of the PC client/server
systems software market with software originally designed for other computing
environments. However, a need has emerged for an integrated software solution
that addresses all segments of this market and is specifically optimized for the
PC client/server environment. See "Risk Factors--Market Acceptance of PC
Client/Server Systems."
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THE GUPTA PC CLIENT/SERVER SOLUTION
Gupta was founded to provide cost-effective software solutions developed
and deployed on PC clients and servers. As these products have matured, they
have been augmented by three-tier applications, an object repository, 32-bit
architecture, and heterogeneous data replication. In addition to offering these
enhanced technologies, the Company continues to support and improve its existing
product lines to provide customers with a smooth transition to next-generation
client/server development. The Company's top line products are optimized for
the "next generation" of client/server, which requires large-scale applications
that can accommodate a decentralized business environment and the new challenges
of the Internet and web-enabled applications (i.e., accessing the World-Wide Web
or corporate internal webs or "Intranets"). The Centura products include web-
enabled application development tools, a relational database, and connectivity
software.
As computing evolves into the next century, the reliance of businesses on
information systems is expected to increase. More than ever before, information
is a strategic corporate asset that can be translated into a significant
competitive advantage. To fully harness the power of information in today's
highly competitive economy, better information systems need to be built in less
time. In the late 1980s and early 1990s, client/server technology spawned a
revolution in information systems delivery. These systems have demonstrated
business benefits that are driving the adoption of client/server for a broader
and more challenging set of information system functions. To help businesses use
information better than they have ever before, the next generation of
client/server applications is required.
The next generation of client/server systems needs to meet three business
needs. First, these systems should automate more complex business processes and
reliably support more end users. In other words, they need to scale up to
deliver more functional and more widely deployed business solutions. Second,
they need to encourage teamwork within the organization and help strengthen
relationships with customers, suppliers, distributors and others outside the
organization. Therefore, they should reach out to all entities involved in the
business process, ranging from the customer to the CEO. Finally, they need to
work together in a highly integrated manner to place all information resources
at the command of decision makers and staff members. To do that, next generation
systems should connect it all, i.e., integrate the disparate pieces of
information technology throughout the organization, and thereby deliver greater
business value than if they were used apart. In summary, Gupta believes the next
generation client/server systems need to scale up, reach out and connect it all,
to deliver business benefits that result in a measurable and sustainable
competitive advantage.
In 1996, Gupta introduced its next-generation product line for building and
deploying large-scale 32-bit-client/server applications. The new product line,
Centura, builds on the Company's decade-plus of technology leadership to help
customers move to the next generation of client/server. With support for three-
tier applications, an object repository, 32-bit architecture, and heterogeneous
data replication, this new product line provides the productivity, flexibility,
and scalability needed to build large-scale, multi-database applications. At the
same time, the Company continues to support its existing product lines to
provide customers with a smooth transition to next-generation client/server
development. See "Risk Factors -- New Product Risks; Rapid Technological
Change."
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COMPANY STRATEGIES
The Company's objective is to be one of the leading suppliers of systems
software for development and deployment of PC client/server applications. As
part of this objective, the Company announced a restructuring of its
organization and business strategies to reflect new positioning and to meet
emerging market opportunities in next-generation client/server computing. Key
elements of its strategies are highlighted below:
INTEGRATED PRODUCT LINE
The Company develops software specifically for development and deployment
of PC client/server applications. The Company's products provide users with the
benefits of an integrated, cost-effective solution that supports three-tier
applications, an object repository, 32-bit architecture, heterogeneous data
replication, object-oriented front-end tools, database servers and engines and
connectivity software. This product strategy distinguishes the Company from
some software vendors that offer only a single product type such as front-end
tools. Each of the Company's products is designed to be competitive with stand-
alone products offered by other vendors. The Company also believes that its
focus on PC client/server applications development and deployment provides it
with a competitive advantage over vendors that use software originally developed
for larger computer systems. In addition, the ability of each product to
operate separately and compatibly with products from other vendors also enables
the Company to sell its software to those customers who may acquire part of the
solution from other vendors. See "Risk Factors--Competition" and --New Product
Risks; Rapid Technological Change."
PRICE/PERFORMANCE
The Company provides software with advanced functionality and performance
necessary for implementing client/server systems, but at prices targeted for PCs
and PC networks rather than minicomputers or mainframes. The Company offers its
database server products at prices generally lower than RDBMS server products
designed for minicomputers. This pricing is designed to appeal both to entry-
level programmers who are new to object-oriented application development as well
as to teams of programmers in large organizations who need to build enterprise-
wide applications.
The Company believes that value-oriented pricing models will continue to be
necessary even as applications scale up to the multi-location and even multi-
national enterprise. See "Risk Factors--Competition."
DISTRIBUTION CHANNELS, PARTNERSHIPS AND STRATEGIC ALLIANCES
The Company distributes its products using a blended distribution model
that provides incentives for its direct sales force to work closely with
business partners. The Synergy Partner Program is designed to meet the needs of
businesses that include resellers, commercial application developers,
consultants, independent software vendors (ISVs), and complementary tools
providers. A number of companies, including SQL Financials and PeopleSoft, have
strategic alliances with Gupta to provide superior client/server solutions based
on Centura technology. See "Risk Factors--Dependence upon Distribution Channels"
and "Dependence on Third Party Organizations."
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GLOBAL MARKET FOCUS
The Company has designed its products and established its marketing and
sales channels to address the global market opportunities for PC client/server
systems. The Company has established operations that have exclusive rights
through subsidiaries and operations on six continents. Approximately sixty
percent of the Company's net revenues for 1995 were derived from sales
outside North America, and its products are installed in at least 75
countries. The Company generally launches new products on a worldwide basis.
In addition, Gupta has established an international distribution network
through strategic partners, distributors and foreign subsidiaries. Gupta's
software products support international data conventions, and certain
products have been localized into French, German and Japanese language
editions.
SUPPORT PROGRAMS
The Company provides product support services directly and through third-
party vendors to enable easy customer implementation of its client/server
systems. The Company provides a variety of programs to support customers ranging
from small development groups to those who require access to qualified support
engineers 24 hours a day, seven days a week. Traditional service offerings are
augmented with an informal support network through a forum on CompuServe, an
Internet news group, and a strong presence on the World Wide Web.
Gupta-certified training partners offer courses each year, assuring Gupta
customers of the right mix of classroom or on-site training. They can also opt
to study at their own pace with a specially developed computer-based training
course.
PRODUCTS
The Company's development environments, compact database, and family of
connectivity products enable teams of developers to build and deploy scalable
client/server applications. The Company's major products include:
Centura - The Centura product line helps customers develop and deploy 32-
bit, next-generation client/server applications. Created specifically to meet
the needs of organizations seeking the power to move from workgroup and
enterprise pilot projects into large enterprise applications, Centura delivers
client/server application scalability, new Internet integration, and drag-and-
drop replication facilities. The product line includes Centura Team Developer,
Centura Application Server, Centura Web Developer, and Centura Ranger.
SQLWindows - SQLWindows is an open client/server development environment
for creating, multi-database applications on desktop platforms. The Component
Developer's Kit (CDK), sold as an add-on, is a set of object-oriented interfaces
into SQLWindows that helps developers create reusable objects. SQLWindows is
available on Microsoft desktop and server platforms as well as on the Sun
Solaris platform. The product family includes SQLWindows, SQLWindows for
Microsoft SQL Server 6, and SQLWindows for the Solaris Operating Environment.
SQLBase - The SQLBase family consists of small-footprint database products
that help businesses deploy decentralized applications easily and cost-
effectively. These products - SQLBase Server and SQLBase Desktop - help
organizations store data on machines ranging from mobile and single-user PCs to
workgroup servers and company-wide database servers.
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SQLHost - The SQLHost product line allows organizations to integrate DB2 or
legacy data into a client/server environment without compromising performance,
control or security. SQLHost for Visual Basic allows Visual Basic applications
to access host-based data.
END USERS AND APPLICATIONS
No customer accounted for more than 10% of net revenues during the fiscal
years ended December 31, 1995, 1994 or 1993.
The Company's products are used by end users in a wide variety of industries for
different applications:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------
Industry Application
<S> <C>
- - ------------------------------------------------------------------------------------------
Aerospace Engineering information tracking and analysis
- - ------------------------------------------------------------------------------------------
Automotive Products Multi-media-based information management
- - ------------------------------------------------------------------------------------------
Consulting Services Information and human resource management
- - ------------------------------------------------------------------------------------------
Consumer Products Sales tracking
Central repository for corporate financial data
- - ------------------------------------------------------------------------------------------
Financial Services Various commercial real estate applications
Portfolio and credit tracking
Decision support for insurance underwriters
Tax preparation automation
- - ------------------------------------------------------------------------------------------
Government Child welfare case management
- - ------------------------------------------------------------------------------------------
Industrial Products Sales administration and analysis
- - ------------------------------------------------------------------------------------------
Non-profit Missionary information tracking
- - ------------------------------------------------------------------------------------------
Petroleum and Chemicals Chemical hazard assessment and evaluation
- - ------------------------------------------------------------------------------------------
Pharmaceuticals Document creation and management
- - ------------------------------------------------------------------------------------------
Retail, Wholesale and Distribution Enterprise security
On-line help desk telecommunications maintenance
Mission-critical pricing and production management
- - ------------------------------------------------------------------------------------------
Systems Integration Services Document-image processing
- - ------------------------------------------------------------------------------------------
Telecommunications Call tracking for technical support
Human resources management
- - ------------------------------------------------------------------------------------------
Transportation Economic analysis
- - ------------------------------------------------------------------------------------------
Utilities Decision-support for purchasing
Marketing contact and customer support
- - ------------------------------------------------------------------------------------------
</TABLE>
MARKETING AND SALES
The Company's marketing and sales efforts are targeted to worldwide users
of PC client/server systems. These users, ranging from individual PC
application developers to MIS departments of large corporations, typically
purchase client/server software through different channels and require different
levels of support. The Company has stratified its sales organization by size
and type of sale to address the distinct needs of the Company's diverse customer
segments, as shown in the table below.
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STRATIFIED DISTRIBUTION STRATEGY
- - -------------------------------------------------------------------------------
Sales Organization Size of Sale Type of Sale
- - -------------------------------------------------------------------------------
Corporate Sales Large Enterprise
Organization Projects
- - -------------------------------------------------------------------------------
Channel Sales Small/Medium Departmental
Organization Projects
- - -------------------------------------------------------------------------------
Gupta pursues similar distribution strategies internationally, tailoring
those strategies to the specific requirements of particular foreign markets.
Sales outside of North America represented approximately 61%, 56% and 55% of the
Company's net revenues during 1995, 1994 and 1993, respectively. Certain risks
are inherent in international operations. See "Risk Factors--International
Sales and Operations and --Potential Fluctuations in Quarterly Results."
CORPORATE SALES ORGANIZATION
The Company's corporate sales organization focuses primarily on customers
establishing large, sophisticated, enterprise-wide client/server systems. These
customers typically request support from either the Company or technically
sophisticated third parties in establishing these systems. To address these
requirements, the Company has established a modest internal sales force, which
operates from seven sales locations in North America as well as offices located
in France, Germany, Italy, Switzerland, Austria, Australia, Hong Kong, Mexico,
the Netherlands, Belgium, and the United Kingdom.
To complement its internal sales force, the Company has increasingly
focused energies on developing marketing arrangements with third parties, such
as vertical software partners, hardware original equipment manufacturers
("OEMs") and systems integrators. The Company's vertical software partners
develop and sell applications software for use with the Company's products and
include Learmonth and Burchett Management Systems PLC (CASE tools), Artemis
International (project management), PeopleSoft (human resources), Project
Software & Development, Inc. (facilities management), Aurum Software Inc. (sales
management) and Spectrum Associates (manufacturing). In addition, the Company
has an architecture which enables independent software vendors to use the
Company's products to co-engineer enterprise-wide client/server applications or
deliver add-on software. Hardware OEMs purchase the Company's products and
bundle them with their personal computer hardware or applications software for
resale to their customers. The Company currently has OEM relationships with
AT&T Global Information Systems (formerly NCR), Computer Associates, IBM,
Siemens-Nixdorf Informations Systeme AG ("Siemens-Nixdorf"), and other computer
vendors. The Company has entered into cooperative arrangements with system
integrators, such as Electronic Data Systems and Andersen Consulting, that build
large, custom turnkey solutions for their corporate customers using the
Company's products.
CHANNEL SALES ORGANIZATION
The Company's channel sales organization focuses on customers who need
outside services to specify, design, build and deploy client/server systems.
Increasingly, these customers include both medium and large size businesses.
The Company reaches these customers through an indirect distribution channel,
consisting of resellers, application developers, distributors, VARs and
consultants.
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The Company also distributes its products through major independent
distributors that may in turn sell such products to smaller VARs, resellers and
dealers. The Company presently has distribution agreements with Ingram Micro,
Inc. and Techdata, Inc., for distribution of the Company's products in North
America. The Company also has a network of international distributors, including
Computer 2000 AG GmbH in Europe and Mitsubishi in Japan. Many of the Company's
distributors carry competing product lines. The Company's distributors may from
time to time be granted stock exchange or rotation rights. Such returns or
exchanges are generally offset by an immediate replacement order of equal or
greater value. Although the Company believes that, to date, it has provided
adequate allowances for exchanges and returns, there can be no certainty that
actual returns will not exceed the Company's allowances, particularly in
connection with introduction of new products or enhancements.
In a number of markets, including rapidly growing client/server markets
such as Japan, Korea, China/Hong Kong and Brazil, the Company has entered into
quasi-exclusive multi-year agreements with independent companies that have also
licensed the use of the Company's name. These organizations are in place to
increase the Company's opportunities and penetration in such markets where the
rapid adoption of client/server technologies is anticipated. While the Company
believes that to date these agreements have increased the Company's penetration
in these markets, there can be no certainty that this performance will continue
nor that these relationships will remain in place. The Company has the option
to acquire 100% of the outstanding stock of one of its foreign distributors,
using a purchase price formula based on net profits and revenues.
The Company also sells its products through a worldwide network of VARs and
consultants that specialize in developing customized solutions for smaller,
departmental networks. These VARs bundle the Company's products and products of
other software vendors into systems that are sold directly to end users. The
Company has certified over 1,000 VARs marketing to industries such as financial
services, telecommunications, publishing, transportation and health care.
TELESALES ORGANIZATION
The Company's telesales organization is focused on sales of service and
support agreements for existing customers. In 1995, North American telesales
efforts were integrated into the field sales organization.
MARKETING
To support its sales organizations, the Company conducts comprehensive
marketing programs and cooperative selling arrangements with the Company's
strategic partners. The Company's marketing programs include direct mail,
public relations, advertising, seminars, trade shows and ongoing customer
communication programs. The Company has entered into cooperative selling
arrangements with strategic partners, including AT&T GIS, Hewlett-Packard
Company, ICL Personal Systems, Microsoft, Siemens-Nixdorf and Sun MicroSystems
that provide joint marketing or network solutions for incorporating their
products with the Company's products. The Company has cooperative selling
arrangements with Microsoft and IBM for the AS/400 computing environment. The
Company also cooperates with suppliers of competitive client/server software,
such as Oracle and Sybase, when customers desire large-scale, joint solutions
that include front-end tools from the Company.
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The majority of the Company's revenues have been derived from the licensing
of software products for PC client/server systems, and such products are
expected to continue to account for substantially all of the Company's revenues
for the foreseeable future. Accordingly, broad market acceptance of PC
client/server systems is critical to the Company's future success. Failure of
the Company to successfully implement its sales and marketing strategies, or the
loss of one or more resellers, distributors, vertical software partners or other
marketing partners, could have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--
Dependence Upon Distribution Channels and --Market Acceptance of PC
Client/Server Systems."
CUSTOMER SUPPORT AND SERVICE
The Company is committed to providing timely, high-quality technical
support, which the Company believes is critical to maintaining customer
satisfaction in the PC client/server market.
Customer requirements for support and service vary depending on factors
such as the number of different hardware and software vendors involved in an
installation, the complexity of the application and the nature of the hardware
configuration. The Company offers flexible multi-tiered technical support
programs tailored to these specific customer needs. The Company offers a
Licensed Maintenance Service to all its customers to provide timely bug fixes
and software enhancements. In addition, the Company provides technical support
through a telephone hotline service. For the large enterprise-wide customer,
Gupta offers comprehensive premium support programs. The Company also maintains
an interactive electronic bulletin board that facilitates real-time access
between Gupta and its customers. The Company broadens its support coverage
through its worldwide network of authorized support centers, certified business
partners and authorized consultants. See "Risk Factors - Dependence on Third
Party Organizations."
PRODUCT DEVELOPMENT
Since inception, the Company has made substantial investments in research
and product development. The Company's products have been developed by its
internal product development staff and, in certain instances, by strategic use
of outside consultants. The Company believes that timely development of new
products and enhancements to existing products is essential to maintain its
competitive position.
The Company is committed to continued development of new technologies for
PC client/server computing. The Company supports or intends to support major
advanced 32-bit operating systems, including Microsoft Windows 95, Microsoft
Windows NT, Novell NetWare and SUN Solaris. In addition, the Company plans to
continue to offer upgrades to its products. Delays or difficulties associated
with new products or product enhancements could have a material adverse effect
on the Company's business, operating results and financial condition. See "Risk
Factors--New Product Risks; Rapid Technological Change and --Componentized
Markets"
During 1995, 1994, and 1993, the Company's expenditures in research and
development, net of capitalized software, were $14.4 million, $11.2 million and
$7.9 million, representing 22%, 20% and 17% of net revenues, respectively. As
of December 31, 1995, the Company had 86 employees engaged in product
development activities.
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COMPETITION
The market for client/server system software is intensely competitive and
rapidly changing. The Company's products are specifically targeted at the
emerging portion of this market relating to PC client/server software, and the
Company's current and prospective competitors offer a variety of solutions to
address this market segment. The Company's competitors include providers of
sophisticated database software originally designed and marketed primarily for
use with mainframes and minicomputers. These competitors include IBM, Informix,
Ingres, Oracle and Sybase. The Company also faces competition from the
providers of PC-based software products, including Microsoft and Borland. These
competitors offer database server products and front-end tools designed for
stand-alone PCs but may currently or may in the future offer additional
integrated PC client/server software. In addition, the Company faces competition
from providers of software specifically developed for the PC client/server
market, including tools competitors, such as Sybase's Powersoft Division,
Microsoft, and Forte, and connectivity software competitors, such as IBI
Systems, Inc. and Sybase's Micro DecisionWare Division. The Company also faces
potential competition from vendors of applications development tools based on
4GLs or CASE technologies.
Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger installed base, than
the Company. In addition, many competitors have established relationships with
customers of the Company. The Company's competitors could in the future
introduce products with more features and lower prices than the Company's
offerings. These companies could also bundle existing or new products with more
established products to compete with the Company. Furthermore, as the PC
client/server market expands, a number of companies with significantly greater
resources than the Company, could attempt to increase their presence in this
market by acquiring or forming strategic alliances with competitors of the
Company or by introducing products specifically designed for the PC
client/server market.
The principal competitive factors affecting the market for the Company's
products include product architecture, performance, functionality, price,
product quality, customer support, breadth of distribution and name recognition.
The Company experienced increased competition in 1995 and 1994, resulting in
loss of market share. The Company must continue to introduce enhancements to
its existing products and offer new products on a timely basis in order to
remain competitive. However, even if the Company introduces such products in
this manner, it may not be able to compete effectively because of the
significantly larger resources available to many of the Company's competitors.
There can be no assurance that the Company will be able to compete successfully
or that competition will not have a material adverse effect on the Company's
business, operating results and financial condition. See Risk Factors
"Competition" and "Market Acceptance of PC Client/Server Systems."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company currently has one patent issued on its SQLWINDOWS product and
relies on a combination of trademark, copyright and trade secret protection and
nondisclosure agreements to establish and protect its proprietary rights.
Policing unauthorized use of the Company's technology is expensive and
difficult, and there can be no assurance that these measures will be successful.
While the Company's competitive position may be affected by its ability to
protect its proprietary information, the Company believes that ultimately
factors such as technical expertise and innovative skill of the Company's
personnel, its name recognition and ongoing product support and enhancements may
be more significant in maintaining the Company's competitive position.
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The Company provides its software products to customers under non-
exclusive, non-transferable license agreements. As is customary in the software
industry, to protect its intellectual property rights, the Company does not sell
or transfer title to its software products to customers. Under the Company's
current standard form of end user license agreement, licensed software may be
used solely for the customer's internal operations and, except for limited
deployment rights provided in certain of its SQLWINDOWS packages, only on
designated computers at specified sites. The Company relies primarily on
"shrink-wrap" licenses for the protection of certain products. A "shrink-wrap"
license agreement is a printed license agreement included within packaged
software that sets forth the terms and conditions under which the purchaser can
use the product, and binds the purchaser by its acceptance and purchase of the
software products to such terms and conditions. Shrink-wrap licenses typically
are not signed by the licensee and therefore may be unenforceable under the laws
of certain jurisdictions.
The Company has entered into source code escrow agreements with a number of
resellers and end users that require release of source code to such parties with
a limited, nonexclusive right to use such code in the event that there is a
bankruptcy proceeding by or against the Company, the Company ceases to do
business or the Company breaches its contractual obligations to the customer.
The Company has, in certain cases, licensed its source code to customers for
specific uses.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products or that any such assertion may not result in costly litigation or
require the Company to obtain a license to intellectual property rights of third
parties. There can be no assurance that such licenses will be available on
reasonable terms, or at all. As the number of software products in the industry
increases and the functionality of these products further overlap, the Company
believes that software developers may become increasingly subject to
infringement claims. Any such claims, with or without merit, can be time
consuming and expensive to defend.
EMPLOYEES
As of December 31, 1995, the Company had 299 full-time employees, after
giving effect to the restructuring, including 86 in research and development, 7
in manufacturing, 107 in sales and marketing, 54 in technical services and 45 in
finance and administration. The Company maintains competitive compensation,
benefits, equity participation and work environment policies to assist in
attracting and retaining qualified personnel. None of the Company's employees
are covered by collective bargaining agreements. The Company believes its
relationship with its employees is good. The Company believes that the success
of its business will depend in large part on its ability to attract and retain
qualified personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in attracting and retaining
such personnel.
RISK FACTORS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of certain of
the risk factors set forth below and elsewhere in this Annual Report on Form 10-
K. In evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information presented in
this report.
12
<PAGE>
CONTINUING LOSSES. The Company had a net loss of approximately $44.1
million for fiscal year 1995 and a net loss of approximately $31.8 million in
1994 (refer to Note 12 discussing restatement of prior year Financial
Statements). On January 2, 1996, the Company announced a restructuring of its
organization and its business strategies. This process is intended to improve
the Company's financial results. However, the process has only recently been
commenced, and is still evolving. There can be no assurance that the
restructuring of the Company's business strategies and tactics will be
successful or that the Company will be able to achieve profitability on a
quarterly basis or, if achieved, whether the Company will be able to sustain any
such profitability.
CENTURA PRODUCTS. The Company's strategy, including a proposed change in
the Company's name, is centered on the successful delivery and market acceptance
of its Centura product line. The initial release of the Centura products
occurred in May 1996, with additional products scheduled for delivery throughout
1996. The failure to deliver these products as scheduled or their failure to
achieve early market acceptance could have a material adverse affect on the
Company's business, operating results and financial condition.
NEED FOR ADDITIONAL FINANCING. Additional financing may be necessary to
meet NASDAQ minimum net worth requirements. Furthermore, the Company is
dependent upon achieving a reasonable operating performance to satisfy its
current and future financing needs. During 1995, the Company completed a
private debt placement with Computer Associates International of approximately
$10 million dollars. If the Company needs further financing, there can be no
assurance that it will be available on reasonable terms or at all. Any
additional equity financing will result in dilution to the Company's
stockholders.
DEPENDENCE ON THIRD PARTY ORGANIZATIONS. The Company is increasingly
dependent on the efforts of third party "partners" (e.g., consultants, system
houses, software developers, etc.) to implement, service and support the
Company's products. These third parties increasingly have opportunities to
select from a very broad range of products from the Company's competitors, many
of whom have greater resources and market acceptance than the Company. In order
to succeed, the Company must actively recruit and sustain relationships with
these third parties. There can be no assurance that the Company will be
successful in recruiting new partners or in sustaining its relationships with
its existing partners
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in large
part on the continued service of its key product development, technical, sales,
marketing and management personnel and on its ability to continue to attract,
motivate and retain highly qualified employees. The Company depends on teams of
programmers, and competition for these skilled employees is intense. The loss
of services of key technical or management personnel could have a material
adverse effect upon the Company's current business, new product development
efforts and prospects. Competition for qualified software development, sales
and other personnel is intense and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. The Company does
not have employment or non-competition agreements with any employees, except for
Sam Inman, the Company's CEO and President.
COMPETITION. The market for client/server system software is intensely
competitive and characterized by rapidly changing technology, evolving industry
standards, and changing customer requirements. The Company's competitors
include providers of sophisticated database software including IBM, Informix
Corporation, Ingres, Oracle Corporation and Sybase, Inc. The Company also faces
competition from the providers of PC-based software products, including
Microsoft Corporation and Borland International. In addition, the Company faces
competition from providers of software
13
<PAGE>
specifically developed for the PC client/server market, including front-end
tools offered by Sybase's Powersoft Division, Microsoft, and Forte, and
potentially from vendors of applications development tools based on fourth-
generation languages or computer-aided software engineering technologies. Many
of the Company's competitors have longer operating histories and greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition and a larger installed base, than the Company. Furthermore,
these competitors could attempt to increase their presence in this market by
acquiring or forming strategic alliances with competitors or bundling existing
or new products with other, more established products. The Company's products
experienced increased competition in 1995 and 1994, resulting in price
reductions and loss of market share. There can be no assurance that the Company
will be able to compete successfully or that competition will not have a
material adverse effect in the future.
NEW PRODUCT RISKS; RAPID TECHNOLOGICAL CHANGE. The market for the
Company's software products and services is characterized by dynamic customer
demands, rapid technological and marketplace changes, and frequent new product
introductions. The Company believes that its future success will depend on its
ability to enhance its existing products and introduce new products on a timely
and cost-effective basis that meet dynamic customer requirements. The Company
has experienced delays in introducing new products and enhancements which
resulted in loss or delays of product revenues. In addition, programs as
complex as the software products offered by the Company may contain undetected
errors or bugs when they are first introduced which could adversely affect
commercial acceptance of such products. The Company's success will also depend
on the ability of its products to perform well with existing and future leading,
industry-standard application software products intended to be used in
connection with RDBMSs. There can be no assurance that the Company will be able
to respond effectively to technological changes or product announcements by
competitors. Furthermore, the Company may announce new products, capabilities
or technologies that have an immediate adverse impact on the Company's existing
product offerings. Commercial acceptance of the Company's products and services
could be adversely affected by critical or negative statements or reports by
industry and financial analysts concerning the Company and its products, or
other factors such as the Company's financial performance.
DEPENDENCE UPON DISTRIBUTION CHANNELS. The Company increasingly relies on
strategic relationships with value-added resellers and distributors for a
substantial portion of its sales and revenues. Some of the Company's resellers
and distributors also offer competing products. Most of the Company's resellers
and distributors are not subject to any minimum purchase requirements, can cease
marketing the Company's products at any time, and may from time to time be
granted stock exchange or rotation rights. The introduction of new and enhanced
products may result in higher product returns and exchanges. Any product
returns or exchanges in excess of recorded allowances could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company also maintains relationships with a number of vertical
software "partners" and strategic marketing "partners" for marketing or resale
of the Company's products. The loss of one or more resellers, distributors,
vertical software partners or other marketing partners, or failure of such
parties to renew agreements with the Company on expiration, could have a
material adverse effect on the Company.
Since 1994 the Company has reduced its resources devoted to North American
corporate sales and also decreased its expenditures on corporate and product
marketing. The Company expects to rely increasingly on third-party channels for
sales of packaged product while focusing its corporate sales efforts on larger
opportunities. Failure of the Company to successfully implement, support and
manage these sales strategies could have a material adverse effect on the
Company.
14
<PAGE>
In a number of markets, including rapidly growing client/server markets
such as Japan, Korea, China/Hong Kong and Brazil, the Company has entered into
quasi-exclusive multi-year agreements with independent companies that have also
licensed the use of the Company's name. These organizations are in place to
increase the Company's opportunities and penetration in such markets where the
rapid adoption of client/server technologies is anticipated. While the Company
believes that to date these agreements have increased the Company's penetration
in these markets, there can be no certainty that this performance will continue
nor that these relationships will remain in place. The Company's future cost of
maintaining its business in these markets could increase substantially if these
agreements are not renewed.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's revenues and
operating results have fluctuated and may vary substantially from period to
period. The product licensing arrangements which are subject to sell through
revenue recognition makes estimation of revenues dependent on customer
reporting. Thus, estimation of operating results prior to the end of a quarter
becomes extremely uncertain. The Company has operated historically with little
or no backlog of traditional boxed product shipments. Gupta has experienced a
seasonal pattern of product revenue decline between the fourth quarter and the
succeeding first quarter, contributing to lower worldwide product revenues and
operating results. The Company has generally realized lower European product
revenues in the third quarter as compared to the second quarter of each year.
The Company has experienced a pattern of recording a substantial portion of its
revenues in the third month of a quarter. As a result, product revenues in any
quarter are substantially dependent on orders booked in the last month. Because
the Company's operating expenses are based on projected annual and quarterly
revenue levels, operating results for a particular period may be adversely
affected by delays in or loss of orders. Additional factors have caused and may
in the future cause, the Company's revenues and operating results to vary
significantly from period to period. These factors include: delays in
introduction of products or product enhancements; size and timing of individual
orders; software "bugs" or other product quality problems; competition and
pricing in the software industry; sales mix among distribution channels;
customer order deferrals in anticipation of new products; market acceptance of
new products; reduction in demand for existing products and shortening of
product life cycles as a result of new product introductions; changes in
operating expenses; changes in Company strategy; personnel changes; foreign
currency exchange rates; mix of products sold; inventory obsolescence; product
returns and rotations; and general economic conditions.
COMPONENTIZED MARKETS. The advent of so-called componentized software may
alter the way in which customers buy software. As specific software
functionality can be bundled into smaller units or objects rather than in broad,
highly functional products such as the Company's development tools, customers
may be less willing to buy such broad, highly functional products. If such a
trend continues, there can be no assurance that the Company will be able to
repackage and efficiently distribute its products in such componentized
packages. The costs and efforts necessary to package and distribute such
components are largely unknown. Failure of the Company to introduce
componentized products successfully and cost-effectively could have a material
adverse effect on the Company's business, operating results and financial
condition.
MARKET ACCEPTANCE OF PC CLIENT/SERVER SYSTEMS. Substantially all of the
Company's revenues have been derived from the licensing of software products for
PC client/server systems, and licenses of such products are expected to continue
to account for substantially all of the Company's revenues for the foreseeable
future. With the increasing focus on enterprise-wide systems, some customers
may opt for solutions that favor mainframe or mini-computer solutions.
Accordingly, companies may abandon use of PC client/server systems and such
decisions could be critical to the Company's future success.
15
<PAGE>
INTERNATIONAL SALES AND OPERATIONS. The Company expects that international
revenues, particularly in new and emerging markets, will continue to account for
a significant percentage of its total revenues. Certain risks are inherent in
international operations, including foreign currency fluctuations and losses,
governmental controls, export license requirements, restrictions on the export
of critical technology, political and economic instability, trade restrictions,
changes in tariffs and taxes, difficulties in staffing and managing
international operations, and possibility of difficulty in accounts receivable
collection. There can be no assurance that these or other factors will not have
a material adverse effect on the Company's future international sales and
operations.
LEGAL PROCEEDINGS. The Company operates in a complicated and volatile
industry in which disputes, litigation, regulatory proceedings and other actions
are a necessary risk of doing business. There can be no assurance that the
Company will not participate in such legal proceedings and that the costs and
charges will not have a material adverse impact on the Company's future success.
POSSIBLE VOLATILITY OF STOCK PRICE. The market for the Company's stock is
highly volatile. The trading price of the Company's common stock fluctuated
widely in 1995 and 1994 and may continue to be subject to wide fluctuations in
response to quarterly variation in operating and financial results and
announcements of new products or customer contracts by the Company or its
competitors. Any shortfall in revenue or operating results from levels
expected by securities analysts or others could have an immediate and
significant adverse effect on the trading price of the Company's common stock
in any given period. Additionally, the Company may not learn of, or be able
to confirm, revenue or earnings shortfalls until late in the fiscal quarter
or following the end of the quarter, which could result in an even more
immediate and adverse effect on the trading of the Company's common stock.
Finally, the Company participates in a highly dynamic industry, which often
results in significant volatility of the Company's common stock price.
16
<PAGE>
EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of the Company as of June 30, 1996, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- - ------------------------------- --------------------------------------
<S> <C> <C>
Samuel M. Inman III. . . . . . 45 President and Chief Executive Officer
(Principal Executive Officer)
Umang P. Gupta . . . . . . . . 46 Chairman and Founder
Richard A. Gelhaus . . . . . . 53 Chief Financial Officer (Principal
Financial and Accounting Officer) and
Senior Vice President of Finance and
Operations
Richard J. Heaps . . . . . . . 43 Senior Vice President, Business
Development and General Counsel
Earl M. Stahl. . . . . . . . . 41 Senior Vice President, Engineering and
Chief Technical Officer
Robert Bramley . . . . . . . . 37 Vice President, Technical Services
Michael K. Keddington. . . . . 36 Vice President, North American
Marketing and Sales
John G. McAughtry. . . . . . . 49 Vice President, Asia/Pacific and Latin
American Operations
Helmut G. Wilke. . . . . . . . 41 Vice President, European Operations
</TABLE>
Mr. Inman has served as President and Chief Executive Officer (Principal
Executive Officer) since December 1995, and President and Chief Operating
Officer since April 1995. Prior to joining the Company, Mr. Inman served as
President and Chief Operating Officer of Ingram Micro Inc., the largest
microcomputer products distributor worldwide, where he was responsible for
overseeing and managing Ingram's U.S. operations. Prior to joining Ingram, Mr.
Inman, a 21-year veteran of IBM, served as president of IBM's Personal Computer
Company for the Americas. He is a graduate of Purdue University, where he earned
his B.S. degree in mathematics.
Mr. Gupta is the Co-founder and Chairman, and served as CEO from 1984 to
December 1995. Prior to establishing the Company, Mr. Gupta spent three years as
a senior executive with Oracle Corporation. His last position with Oracle was
Vice President and General Manager of the microcomputer products division. Prior
to joining Oracle, Mr. Gupta was Director of Marketing for Magnuson Computers, a
manufacturer of IBM plug-compatible mainframes. Mr. Gupta began his career in
1973 with IBM, where he held several sales and marketing management positions.
Mr. Gupta holds a B.S. in chemical engineering from the Indian Institute of
Technology and an M.B.A. from Kent State University in Ohio.
Mr. Gelhaus joined the Company as Chief Financial Officer (Principal
Financial and Accounting Officer) and Senior Vice President of Finance and
Operations in January 1996. Prior to joining the Company, Mr. Gelhaus was
Senior Vice President Finance and Operations (CFO) of Spectrum HoloByte, Inc.
("Spectrum"), an entertainment software company. Previously, Mr. Gelhaus was the
Executive Vice President, Finance and Operations (CFO) and Secretary of Sierra
On-line, Inc. He has held executive-level positions with Safeway Inc., Levi
Strauss & Co., and Ernst & Young. Mr. Gelhaus holds a B.S. in chemical
engineering from South Dakota School of Mines and Technology and an M.B.A. from
The University of Michigan. He is a registered C.P.A.
17
<PAGE>
Mr. Heaps joined the Company in 1987, and has served as Senior Vice
President, Business Development and General Counsel since 1995. Mr. Heaps has
served in various capacities at the Company, including Vice President of
Business Development, Vice President of Intercontinental Operations, Director of
Business Development, and Director of Technical Services and Marketing. Prior to
joining the Company, Mr. Heaps was a Strategic Accounts Manager of UniSoft
Corporation, a computer software corporation, from 1986 to 1987. From 1983 to
1985, Mr. Heaps held various positions at Oracle Corporation, most recently as
Director of Personal Computer Sales. Mr. Heaps holds an M.B.A. degree from
Stanford University Graduate School of Business, a J.D. degree from Stanford
School of Law, and a B.A. in Economics and Mathematics from Yale University.
Mr. Stahl joined the Company in 1989, and presently serves as Chief
Technology Officer and Senior Vice President for the Products organization. Mr.
Stahl has held various key positions within the Company's development
organization, including spearheading the Company's client/server tools
development effort. Prior to joining the Company, Mr. Stahl managed development
projects at Bell Northern Research, Dest Corporation, and VisiCorp. He holds a
B.S. in Computer Science from San Diego State University.
Mr. Bramley joined the Company in January 1994 and presently serves as Vice
President, Technical Support Services. Mr. Bramley has served as Senior
Director of North American Technical Support. Prior to joining the Company, he
held the position of Vice President of Technical Services at Verity, a full text
retrieval software company from November 1991 to September 1993, and held
director-level positions in support and development at Oracle Corporation from
March 1987 to November 1991.
Mr. Keddington joined the Company in July 1995 as Vice President, North
American Marketing and Sales. Mr. Keddington most recently was Vice President
of Sales with Pure Software, Inc., a software testing and development tools
company from July 1994 to April 1995; Vice President of Sales and Marketing,
Coactive Computing Corporation a networking company from January 1993 to July
1994; Americas Sales Manager, Reseller Channels Organization, Intel
Corporation, a semi-conductor manufacturer from December 1988 to January
1993. Mr. Keddington attended San Diego State University, where he
concentrated in marketing management.
Mr. McAughtry joined the Company in July 1993 as Vice President, Asia
Pacific. Prior to joining the Company, Mr. McAughtry served as President and COO
of the software division of P.D.S., Inc., a application software company, from
November 1992 to May 1993. Mr. McAughtry has held Vice President positions at
Knowledgeware, Inc., a application development software tools company, from
January 1992 to July 1991 and Intersolv, a software tools company, and Pansophic
Systems a mainframe software company. Mr. McAughtry received an M.B.A. from
the Cranfield School of Management in the U.K.
Dr. Wilke joined the Company in July 1991 and he presently serves as Vice
President, European Operations. He started the Company's operations in Central
Europe in 1991, and was then promoted to Vice President, Central Europe. Prior
to joining the Company, Dr. Wilke worked for SUP, a Frankfurt-based Gupta
partner, and served as the Managing Director of the German subsidiary of Ingres.
Dr. Wilke founded and managed his own software company, specializing in database
application development, and has lectured on statistical and empirical methods
and statistical computing. Dr. Wilke holds degrees in political and social
sciences from the Free University in Berlin.
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<PAGE>
The Board of Directors elects the Company's officers and such officers
serve at the discretion of the Board of Directors of the Company. There are no
family relationships among the officers or directors of the Company.
DIRECTORS OF REGISTRANT
The directors of the Company as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION DIRECTOR
--------------- --- -------------------- SINCE
--------
<S> <C> <C> <C>
Umang P. Gupta 46 Chairman of the Board of Directors 1983
D. Bruce Scott 43 Founder of inquiry.com Inc. 1984
William O. Grabe 58 General Partner of General Atlantic
Partners, an investment firm 1992
Max D. Hopper 61 Principal and Chief Executive Officer
of Max D. Hopper Associates, Inc.; retired
Senior Vice President of AMR Corporation
and retired Chairman of The SABRE Group 1995
Anthony Sun 43 General Partner of Venrock Associates, a
venture capital firm 1988
Kanwal S. Rekhi 49 Former Executive Vice President and Chief
Technology Officer of Novell, Inc. 1992
</TABLE>
Mr. Gupta is the Co-founder and Chairman, and served as CEO from 1984 to
December 1995. Prior to establishing the Company, Mr. Gupta spent three years as
a senior executive with Oracle Corporation. His last position with Oracle was
Vice President and General Manager of the microcomputer products division. Prior
to joining Oracle, Mr. Gupta was Director of Marketing for Magnuson Computers, a
manufacturer of IBM plug-compatible mainframes. Mr. Gupta began his career in
1973 with IBM, where he held several sales and marketing management positions.
Mr. Gupta holds a B.S. in chemical engineering from the Indian Institute of
Technology and an M.B.A. from Kent State University in Ohio.
Mr. Scott has served as a director since November 1984. In May 1995, Mr.
Scott co-founded inquiry.com Inc., an internet company. Effective April 30,
1995, Mr. Scott resigned as Senior Vice President of Database Products, in which
position he had served since January 1994. From July 1993 to January 1994, Mr.
Scott served as Senior Vice President, Research and Development, Database and
Connectivity Products for the Company. Prior to assuming this position,
Mr. Scott was Senior Vice President and General Manager of Database Server
Products from July 1992 to June 1993, Senior Vice President, Research and
Development from January 1989 to June 1992, and Vice President from December
1984 to January 1989. Prior to joining the Company, Mr. Scott served as Manager
of Database Development at Victor Technologies, a computer manufacturer
corporation, from 1982 to 1983. Mr. Scott served as Senior Member of Technical
Staff at Oracle Corporation from 1977 to 1982.
19
<PAGE>
Mr. Grabe has served as a director since July 1992. He has been a General
Partner of General Atlantic Partners, an investment firm, since April 1992.
From February 1984 until March 1992, Mr. Grabe was a Vice President at IBM.
Mr. Grabe is a director of Compuware Corporation, a computer systems software
corporation. Mr. Grabe is also a director of Integrated Systems Solutions
Corporation, a wholly-owned subsidiary of IBM, CODA Plc, a financial accounting
software company and Gartner Group, an information systems consulting company.
He is also a director of several other privately held companies in the computer
software and services industry.
Mr. Hopper has served as a director since April 1995. Mr. Hopper has been
Principal and Chief Executive Officer of Max D. Hopper Associates, Inc., a
consulting firm specializing in creating benefits from the strategic use of
advanced information technologies, since January 1995. Prior to forming Max D.
Hopper Associates, Inc., Mr. Hopper served at AMR Corporation, an air
transportation company and provider of information services to the travel and
transportation industry, as Senior Vice President from 1985 through January
1995, as well as Chairman of The SABRE Group from April 1993 through January
1995. Mr. Hopper served as Executive Vice President for Bank of America from
1982 through 1985. Mr. Hopper is also a director of the Gartner Group,
Computer Language Research, Inc., Bolt Beranek & Newman Inc., UTEL
Corporation, Scopus Technology, USData Corporation, MCC Corporation and
Worldtalk Corporation.
Mr. Sun has served as a director since September 1988. He has been at
Venrock Associates, a venture capital firm, since 1979. Previously he was
employed by Hewlett-Packard, TRW, and Caere Corporation. He is a director of
Cognex Corporation, a computer systems company, Conductus, Inc., a
superconductive electronics company, Inference Corporation, a client/server and
internet help desk software company, Komag, Inc., a computer storage component
company, Photonics Corporation, a computer peripherals company, StrataCom, Inc.,
a telecommunications company, and Worldtalk Communications Corporation, a
software application router company. He is also a director of several private
companies. Mr. Sun received S.B.E.E., S.M.E.E. and Engineer degrees from
Massachusetts Institute of Technology, and a Master of Business Administration
degree from Harvard University.
Mr. Rekhi has served as a director since July 1992. Mr. Rekhi also served
as a director of the Company from April 1990 to August 1991. Mr. Rekhi served
as a director of Novell, Inc. from June 1989 to September 1995 and served as an
Executive Vice President of Novell, Inc. from June 1989 until January 1995 and
as Corporate Technology Officer from July 1993 until January 1995. Mr. Rekhi
served as a director of Excelan, Inc., a networking company, since its inception
in April 1982, and as Chief Executive Officer since April 1988, until its
acquisition by Novell, Inc. in June 1989. Mr. Rekhi is also a director of
Rexon, Inc.
ITEM 2. PROPERTIES
The Company leases approximately 69,000 square feet of office, development
and warehousing space in facilities in Menlo Park, California.
As of June 30, 1996, the Company also has offices in the metropolitan areas
of Chicago, Dallas, New York, Washington D.C., Bruetten (Switzerland),
Duesseldorf, Frankfort, Leuven (Belgium), London, Sydney (Australia), Mexico
City, Milan, Maarssen (The Netherlands), Munich, Paris, Singapore, and Vienna.
The Company believes that its facilities are adequate for its current needs and
that suitable additional space will be available as needed.
20
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On May 2, 1994, a lawsuit was filed against the Company and certain of its
officers and directors, by a holder of the Company's common stock, on his own
behalf and purportedly on behalf of a class of others similarly situated. The
lawsuit was subsequently amended, and alleged that the Company made false and
misleading statements and failed to disclose material information relating to
existing business conditions and the Company's prospects and that officers and
directors violated the insider trading laws. The Company reached an
agreement in principle with plaintiff counsel in this lawsuit. (See Note 13
of Notes to Consolidated Financial Statements). Under the terms of the
settlement agreement, the Company will provide $3 million and 1,875,000
shares to a fund to be distributed among the members of the plaintiff class.
The Company also agreed to supplement this payment with up to 625,000
additional shares in the event the value of its common stock is less than
$6.00 per share at certain dates in the future. $2 million of the cash
contribution to the settlement fund will be paid by the Company's directors
and officers' liability insurer. As a result of the settlement, shares
outstanding will increase by approximately 15% based on the settlement price.
The actual and anticipated litigation costs related to this matter have been
accrued for as of December 31, 1995.
As of December 31, 1995, to the best of the Company's knowledge there were
no other pending actions, potential actions, claims or proceedings against the
Company that could result in potential damages in excess of $50,000. As noted
in the "Legal Proceedings" section under "Risk Factors" above, the Company
exists in a volatile legal and regulatory environment and it is not possible to
anticipate or estimate the potential adverse impact of unknown claims or
liabilities against the Company, its officers and directors, and as such no
estimate is made in the Company's financial statements for such unknown claims
or liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
a) STOCK LISTING. The Company's common stock is traded on the NASDAQ
National Market under the symbol "GPTA(1)e".
b) STOCK PRICE AND DIVIDEND POLICY. The following table sets forth for
the quarterly period indicated the range of high and low sales prices for the
Company's common stock during the last two fiscal years.
1994 High Low
Q1 31.75 18.25
Q2 30.25 8.25
Q3 14.50 6.75
Q4 13.875 9.75
1995 High Low
Q1 13.50 9.625
Q2 11.50 8.25
Q3 10.50 8.25
Q4 9.063 4.875
The Company has not paid any cash dividends. The Company currently does not
anticipate paying any cash dividends in the foreseeable future.
c) STOCK OWNERSHIP. As of June 30, 1996 there were approximately 494
shareholders of record (not including beneficial holders of stock held in street
name) of the Company's common stock.
- - ---------------------------
(1) Gupta Corporation began trading with a trailing E on May 7, 1996, as a
result of the Company's announcement on April 16, 1996 that it was delayed
in reporting its 1995 fiscal year end results due to on-going audits of its
1993, 1994 and 1995 fiscal year ends.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Annual Data
The following selected consolidated financial data should be read in
conjunction with the Company's financial statements and related notes included
elsewhere herein. The statement of operations data for the years ended December
31, 1995, 1994 and 1993 and the balance sheets data at December 31, 1995, 1994
and 1993 are derived from, and are qualified by reference to, the audited
financial statements of the Company included elsewhere in this Report on Form
10-K and should be read in conjunction with those financial statements and the
notes thereto, which have been audited by Price Waterhouse, LLP, independent
accountants, whose report is included elsewhere in this Report on Form 10-K. The
statement of operations data for the years ended December 31, 1992 and 1991 and
the balance sheet data at December 31, 1992 and 1991 are derived from audited
financial statements not included in this Report on Form 10-K. Following a
review of contractual terms of product licensing arrangements originating in
1993, 1994 and 1995 and related business practices, it was determined that
revenue recognition on such contracts should be based on sell through. See
Notes 1 and 8 of Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER 1995 1994 1993 1992 1991
SHARE DATA) ------- --------- --------- ------- ------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Net Revenues:
Product $49,408 $46,134 $41,655 $29,961 $19,574
Service 16,306 10,398 5,820 2,810 1,721
Net Revenues 65,714 56,532 47,475 32,771 21,295
Cost of revenues 19,640 17,146 11,407 6,688 3,817
Gross Profit 46,074 39,386 36,068 26,083 17,478
Operating income (loss) (42,993) (32,981) (1,858) 2,439 (107)
Net income (loss) (44,079) (31,841) (1,908) 1,762 59
Net income (loss) per share (3.62) (2.66) (0.17) 0.17 0.01
Number of shares used in 12,175 11,957 11,411 10,455 9,841
per share calculations
</TABLE>
23
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
(IN THOUSANDS) 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit) ($25,604) $599 $40,919 $7,372 $7,264
Total Assets 48,104 58,161 72,372 22,872 19,065
Long-term Obligations 11,744 1,939 477 1,365 1,388
Shareholders' Equity (Deficit) (24,057) 18,670 49,223 11,879 10,288
</TABLE>
QUARTERLY DATA
The following tables present selected consolidated statement of operations
data for each quarter in each of the last three fiscal years and selected
consolidated balance sheet data as of the end of each such quarter. This
information is unaudited, but in the opinion of the Company's management,
reflects all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair statement of the financial
positions and results of operations for all periods presented. The results
for any quarter are not necessarily indicative of results for any future
period. The Company has restated its financial statements for each of the
quarters for which data is presented, with the exception of the financial
statements for the quarter ended December 31, 1995.
24
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS AND SELECTED BALANCE SHEET DATA
<TABLE>
<CAPTION>
1995
----------------------------------------------------
(IN THOUSANDS, EXCEPT PER Fourth Third Second First
SHARE DATA) -------- -------- -------- -------
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Net Revenues:
Product $9,624 $13,053 $13,290 $13,441
Service 4,206 3,875 4,243 3,982
Net Revenues 13,830 16,928 17,533 17,423
Cost of Revenues 5,926 4,443 4,743 4,528
Gross Profit 7,904 12,485 12,790 12,895
Operating expenses:
Sales and Marketing 9,997 10,998 10,898 11,038
Research and Development 5,592 2,819 2,860 3,149
General and Administrative 4,906 1,764 2,040 2,333
Litigation expense 15,323
Restructuring expense 5,350
Total operating expenses 41,168 15,581 15,798 16,520
Operating loss (33,264) (3,096) (3,008) (3,625)
Net loss (34,016) (3,427) (2,949) (3,687)
Net loss per share (2.80) (0.28) (0.24) (0.30)
Number of shares used in per
share calculations 12,151 12,260 12,184 12,105
<CAPTION>
1995
----------------------------------------------------
(IN THOUSANDS) Fourth Third Second First
-------- -------- -------- -------
Working Capital (Deficit) $(25,604) $5,556 $8,670 $(1,925)
Total Assets 48,104 59,723 64,716 57,299
Long-term Obligations 11,744 11,768 11,583 1,930
Shareholder's Equity
(Deficit) (24,057) 9,621 12,875 15,607
25
<PAGE>
<CAPTION>
1994
----------------------------------------------------
(IN THOUSANDS, EXCEPT PER Fourth Third Second First
SHARE DATA) -------- -------- -------- -------
(Restated) (Restated) (Restated) (Restated)
Net Revenues:
Product $13,712 $13,406 $7,591 $11,425
Service 3,516 2,532 2,433 1,917
Net Revenues 17,228 15,938 10,024 13,342
Cost of Revenues 4,883 5,043 3,791 3,429
Gross Profit 12,345 10,895 6,233 9,913
Operating expenses:
Sales and Marketing 15,809 13,171 10,561 8,668
Research and Development 2,950 3,053 2,566 2,656
General and Administrative 2,960 2,472 5,495 2,006
Total operating expenses 21,719 18,696 18,622 13,330
Operating loss (9,374) (7,801) (12,389) (3,417)
Net loss (9,599) (7,373) (11,724) (3,145)
Net loss per share (0.79) (0.61) (0.99) (0.27)
Number of shares used in per
share calculations 12,198 12,002 11,875 11,753
<CAPTION>
1994
----------------------------------------------------
(IN THOUSANDS) Fourth Third Second First
-------- -------- -------- -------
Working Capital $599 $9,429 $18,761 $34,157
Total Assets 58,161 59,854 62,910 74,185
Long-term Obligations 1,939 100 176 312
Shareholder's Equity 18,670 27,942 35,240 46,599
26
<PAGE>
<CAPTION>
1993
----------------------------------------------------
(IN THOUSANDS, EXCEPT PER Fourth Third Second First
SHARE DATA) -------- -------- -------- -------
(Restated) (Restated) (Restated) (Restated)
Net Revenues:
Product $12,777 $9,822 $10,613 $8,443
Service 1,678 1,665 1,320 1,157
Net Revenues 14,455 11,487 11,933 9,600
Cost of Revenues 3,070 2,897 3,046 2,394
Gross Profit 11,385 8,590 8,887 7,206
Operating expenses:
Sales and Marketing 7,153 6,223 5,559 5,153
Research and Development 2171 1,771 2,193 1,776
General and Administrative 1,812 1,447 1,648 1,020
Total operating expenses 11,136 9,441 9,400 7,949
Operating income (loss) 249 (851) (513) (743)
Net loss (351) (611) (396) (550)
Net loss per share (0.03) (0.05) (0.03) (0.05)
Number of shares used in
per share calculations 11,545 11,494 11,351 11,253
<CAPTION>
1993
----------------------------------------------------
(IN THOUSANDS) Fourth Third Second First
-------- -------- -------- -------
Working Capital $40,919 $41,322 $43,080 $44,333
Total Assets 72,372 65,271 64,716 63,056
Long-term Obligations 477 647 860 1,110
Shareholder's Equity 49,223 48,339 48,945 49,502
</TABLE>
27
<PAGE>
RECONCILIATION OF RESTATEMENT
<TABLE>
<CAPTION>
1995
--------------------------------------
(IN THOUSANDS) Third Second First
-------- -------- -------
<S> <C> <C> <C> <C>
Net loss:
As originally reported ($4,680) ($2,877) ($1,078)
Adjustment 1,253 (72) (2,609)
-------- -------- --------
Restated ($3,427) ($2,949) ($3,687)
-------- -------- --------
-------- -------- --------
Net loss per share:
As originally reported ($0.38) ($0.24) ($0.09)
Adjustment (0.10) 0.00 (0.21)
-------- -------- --------
Restated ($0.28) ($0.24) ($0.30)
-------- -------- --------
-------- -------- --------
1994
-----------------------------------------------------
(IN THOUSANDS) Fourth Third Second First
-------- -------- -------- --------
Net loss
As originally reported ($5,883) ($6,226) ($11,493) ($271)
Adjustment (3,716) (1,147) (231) (2,874)
-------- -------- -------- --------
Restated ($9,599) ($7,373) ($11,724) ($3,145)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share:
As originally reported ($0.49) ($0.52) ($0.97) ($0.02)
Adjustment (0.30) (0.09) (0.02) (0.25)
-------- -------- -------- --------
Restated ($0.79) ($0.61) ($0.99) ($0.27)
-------- -------- -------- --------
-------- -------- -------- --------
1993
-----------------------------------------------------
(IN THOUSANDS) Fourth Third Second First
-------- -------- -------- --------
Net Income (loss):
As originally reported $2,988 $1,098 $892 $654
Adjustment (3,339) (1,709) (1,288) (1,204)
-------- -------- -------- --------
Restated ($356) ($611) ($396) ($550)
-------- -------- -------- --------
-------- -------- -------- --------
Net Income (loss) per share
As originally reported $0.23 $0.09 $0.07 $0.05
Adjustment (0.26) (0.14) (0.10) (0.10)
-------- -------- -------- --------
Restated ($0.03) ($0.05) ($0.03) ($0.04)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto, as well as "Business --
Risk Factors" included in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, certain
restated consolidated statements of operations data for the periods indicated
(subtotals not adjusted for rounding):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1995 1994 1993
------ ------ ------
(Restated) (Restated)
<S> <C> <C> <C>
Net revenues
Product 75% 82% 88%
Service 25% 18% 12%
------ ------ -----
Net revenues 100% 100% 100%
Cost of revenues
Product 14% 13% 13%
Service 16% 17% 11%
------ ------ -----
Cost of revenues 30% 30% 24%
------ ------ -----
Gross profit 70% 70% 76%
Operating expenses
Sales and marketing 65% 85% 51%
Research and development 22% 20% 17%
General & administrative 17% 20% 12%
Litigation expense 23% 3% -
Restructuring charges 8% - -
------ ------ -----
Operating loss (65%) (58%) (4%)
Other income, net - 2% 2%
Provision for income taxes 2% - 2%
------ ------ -----
Net loss (67%) (56%) (4%)
------ ------ -----
------ ------ -----
Gross Margins:
Gross margin on product revenues 82% 83% 86%
Gross margin on service revenues 34% 8% 7%
</TABLE>
NET REVENUES. During 1995, the Company restated revenues on certain
product licensing arrangements for fiscal years 1995, 1994, and 1993. For these
contracts the Company has deferred recognition of revenues until the customer
indicates that it has sublicensed or distributed the product. The restatement
resulted in a reduction of operating revenues of $ 8.0 million or $0.66 per
share in 1994 and $ 7.5 million or $0.61 per share in 1993, and a restatement of
revenues for all quarters in 1995, 1994 and 1993, with the exception of the
fourth quarter of 1995.
29
<PAGE>
Net revenues increased 16% to $ 65.7 million in 1995 from $56.5 million in
1994. In 1994 revenues increased by 19% from 1993 revenues of $47.5 million.
International revenues, primarily product revenues, accounted for 61%, 56% and
55% of net revenues in 1995, 1994 and 1993, respectively. The Company's
revenues are derived from two sources: fees from software licensing, including
software distributed as packaged products and licensing arrangements that permit
software reproduction; and fees for services, including maintenance, training,
consulting and technical support.
Product revenues increased 7% to $49.4 million in 1995 compared to $46.1
million in 1994 due to increased sales of database products. Increases in the
Company's product revenues to $46.1 million in 1994 from $41.7 million in 1993
were also attributable to data base products. Sales of tools and connectivity
software accounted for approximately 50%, 60% and 69% of product revenues in
1995, 1994 and 1993, respectively, while sales of database software accounted
for approximately 50%, 40% and 31% for the same respective periods. The mix of
product revenues between corporate sales and channel sales (including sales
through distributors and resellers) has fluctuated from period to period as a
result of product introductions and customer mix. Because corporate sales
typically involve large orders and the timing of such orders cannot be predicted
with accuracy, the Company may continue to incur period-to-period fluctuations
in the percentage of revenues attributable to each sales organization. Sales
through the channel sales organization accounted for 70%, 60% and 56% of net
revenues and sales through the corporate sales organization accounted for 30%,
40% and 44% of net revenues in 1995, 1994 and 1993, respectively. The increase
in channel sales reflects the Company's shift away from a direct sales model.
Service revenues increased 57% to $16.3 million in 1995 from $10.4 million
in 1994. In 1994 service revenues increased 79% from $5.8 million in 1993. The
increases were due primarily to increases in maintenance and training revenues
related to increases in the Company's installed customer base. Maintenance
contracts are typically paid in advance, and revenue is recognized ratably over
the period of the contract.
For all periods reported, the Company has recognized revenue in accordance
with the Statement of Position on Software Revenue Recognition (SOP 91-1),
issued by the American Institute of Certified Public Accountants. The Company's
distributors are generally permitted stock exchange or rotation rights, under
which they are granted rights to return to the Company a portion of the products
purchased by them in exchange for other products. Although the Company believes
that, to date, it has provided adequate allowances for exchanges and returns,
there can be no assurance that actual returns or exchanges will not exceed the
Company's allowances, particularly in connection with introduction of new
products or enhancements. The Company intends to introduce new and enhanced
products in the future, which may result in higher product returns and exchanges
due to the risks inherent in the introduction of such products.
COST OF PRODUCT. Cost of product includes the cost of subcontracted
production and the amortization of capitalized software. Cost of product varies
significantly by distribution channel. Channel sales typically involve sales of
packaged products and, as a result, generally have higher costs of production
than corporate sales, which generally involve software reproduction licenses.
Cost of product as a percentage of product revenues was 18%, 17% and 14% for
1995, 1994 and 1993, respectively. In December 1995, the Company completed a
financial restructuring which resulted in a decision to consolidate all
warehouse and manufacturing functions into a single new vendor. This resulted
in a non-recurring charge against cost of sales for an estimated write-off of
raw materials of approximately $0.6 million.
30
<PAGE>
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the costs of computer software to be sold, leased or
otherwise marketed", the Company capitalizes internal development costs on a
project when the technological feasibility of such project has been determined.
The Company ceases capitalizing such expenses when the products derived from the
project are released for sale. The capitalized costs are then amortized ratably
over the useful life of the products, generally estimated to be two to three
years. Amortization of capitalized software costs, which include the software
purchased from third parties, increased to $2,200,000 in 1995 from $1,476,000 in
1994 and $841,000 in 1993. See Notes 2 and 3 of Notes to Consolidated Financial
Statements.
COST OF SERVICES. Cost of services consists primarily of personnel costs
related to maintenance, training and technical support. Cost of services, as a
percentage of service revenues, decreased to 66% in 1995 from 92% in 1994 and
93% in 1993. In 1994 and 1993, the Company expanded its support services and
personnel to better serve current and prospective customers on a worldwide
basis, particularly in Europe. As a result of the investment the Company made
to grow this area, the Company has now experienced increased revenues relative
to the cost of providing service.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased to
$42.9 million in 1995 from $48.2 million in 1994. In 1994 sales and marketing
expenses increased 100% from $24.1 million in 1993. Sales and marketing
expenses represented 65%, 85% and 51% of net revenues in 1995, 1994 and 1993,
respectively. The decrease in sales and marketing expenses in 1995 was due to
reductions in marketing programs and staff reductions. The increase in sales
and marketing expenses in 1994 was the result of the Company's aggressive
marketing campaign to introduce its new products, which included free seminars
and product samples, and an investment to expand the Company's sales force in
the United States and Europe.
RESEARCH AND DEVELOPMENT EXPENSES. The table below sets forth gross
research and development expenses, capitalized internal software development
costs, and net research and development expenses in dollar amounts and as a
percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS) Year ended December 31,
-------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Dollar Amounts:
Gross research and development expenses $16,662 $12,880 $9,100
Capitalized internal software development costs (2,242) (1,655) (1,189)
-------- -------- --------
Net research and development expenses $14,420 $11,225 $7,911
-------- -------- --------
-------- -------- --------
As a Percentage of Net Revenues:
Gross research and development expenses 25% 23% 19%
Net research and development expenses 22% 20% 17%
</TABLE>
The increase in research and development expenses was due to increased
staffing and associated support costs required to develop the new Centura line
of products and to continued enhancement of the Company's product line. The
Company believes the development of new products, and the enhancement of
existing products, are essential to its continued success, and management
intends to continue to devote substantial resources to new product development.
31
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were approximately flat in 1995 at $11.0 million compared to $11.1 million in
1994. In 1994 general and administrative expenses increased by 88% from $5.9
million in 1993. These expenses represented 17%, 20% and 12% of net revenues,
in 1995, 1994 and 1993, respectively. In 1995, the Company began a program of
reducing administrative expenses by staff reductions, deferring MIS projects,
and reductions in discretionary spending. In 1994, the Company experienced
significantly higher European administrative expenses as a result of supporting
new locations for sales and technical support. In addition, in 1994, the
Company incurred a loss in excess of $1 million as a result of the bankruptcy of
a distributor.
RESTRUCTURING CHARGES: In December, 1995, the Company approved a plan to
restructure its operations to meet emerging market opportunities in next-
generation client/server computing. By taking these actions, the Company has
reduced its operating expense structure in 1996 and as a result, believes that
it has improved its ability to return to profitability. The restructuring
effected a reduction of the Company's operating expense structure through staff
reductions of 16%, closure of certain sales and marketing offices, product line
rationalization and write-off of certain other assets. Total restructuring
charges of approximately $5.4 million were taken in 1995, detailed as follows:
<TABLE>
<CAPTION>
Accrued Liability
Non- Balance at
Cash December 31,
Restructuring Costs 1995
------------- --------- --------------
<S> <C> <C> <C>
Severance and benefits $1,623 $ -- $1,623
Write-off of assets 2,205 2,205 --
Facility charges 1,029 -- 1,029
Other 493 -- 493
------------- --------- ------------
Total $5,350 $2,205 $3,145
------------- --------- ------------
------------- --------- ------------
</TABLE>
Severance and related costs related to the reduction of 59 employees on a
worldwide basis, primarily impacting sales and marketing. Asset charges
included a write-off of purchased technology and prepaid license fees associated
with discontinued product lines. The facilities charges included early
termination costs associated with the closing of certain domestic and
international sales offices. Other restructuring costs consisted primarily of
costs associated with the cancellation of distribution agreements.
Substantially all employee and lease termination payments have been paid by June
30, 1996.
In addition to the restructuring charges detailed above, the Company took
certain one-time charges that were reflected against operations in the 1995
results. These charges included $1.3 million in accounting and related
professional fees for audits of 1995, 1994 and 1993, charged to general and
administrative; $3.4 million in write-offs of capitalized software development,
charged to research and development; and $0.6 million in liquidation of
inventories, charged to cost of revenues. The Company expects that all payments
associated with the one-time charges will have been paid by June 30, 1996.
OTHER INCOME (EXPENSE), NET. Other income (expense), net is comprised of
interest income, net of interest expense, and gains or losses on foreign
currency transactions. The Company's gains or losses from foreign currency
transactions have fluctuated from period to period, primarily as a result of
fluctuating values of the U.S. dollar and recent instability in European
currency markets. In early 1993, the Company initiated a program of buying
forward contracts to hedge its outstanding European accounts receivable. The
Company sometimes purchases monthly contracts to protect against a substantial
portion of the outstanding exposure. Since the inception of this program the
costs of the
32
<PAGE>
currency hedging have been reflected in the reported gains and losses of foreign
currency transactions. The Company recorded a loss of $439,000 in 1995, a gain
of $306,000 in 1994 and a loss of $364,000 in 1993. The Company anticipates
that it will continue the hedging program in 1996. Nonetheless, a decrease in
the value of foreign currencies relative to the U.S. dollar could result in
losses from foreign currency transactions.
LITIGATION SETTLEMENT. The Company reached an agreement in principle
with plaintiff counsel in this lawsuit. (See Note 13 of Notes to
Consolidated Financial Statements). Under the terms of the settlement
agreement, the Company will provide $3 million and 1,875,000 shares to a fund
to be distributed among the members of the plaintiff class. The Company also
agreed to supplement this payment with up to 625,000 additional shares in the
event the value of its common stock is less than $6.00 per share at certain
dates in the future. $2 million of the cash contribution to the settlement
fund will be paid by the Company's directors and officers' liability insurer.
As a result of the settlement, shares outstanding will increase by
approximately 15% based on the settlement price.
In 1994 the Company settled a lawsuit, filed by a former distributor, for
the amount of $525,000.
PROVISION FOR INCOME TAXES. The provision for income taxes was $1.1
million in 1995, $0.2 million in 1994 and $0.8 million in 1993. The provision
for income taxes in 1995 related primarily to foreign withholding taxes. As of
December 31, 1995, the Company had net operating loss carryforwards of
approximately $13.6 million available to offset future federal taxable income
and $12.0 million available to offset future state taxes, which expire through
2010. The availability and timing of these carryforwards to offset future
taxable income may be limited due to the occurrence of certain events, including
certain changes in ownership interests. At December 31, 1995, 1994, and 1993,
the Company fully reserved its deferred tax assets due to the existence of
sufficient uncertainty on the ability to realize the deferred tax assets. See
Note 8 of Notes to Consolidated Financial Statements.
INFLATION. The Company believes that inflation has not had a material
impact on the Company's operating results and does not expect inflation to have
a material impact on the Company's operating results in 1996.
LIQUIDITY AND CAPITAL RESOURCES:
At December 31, 1995, the Company had a deficit working capital position of
$25.6 million due principally to the restatement which increased deferred
revenues by $20 million and litigation accruals by $12.3 million. The
settlement of the lawsuit requires the Company to spend $1 million with the
remainder of the settlement achieved by issuance of shares of common stock. The
deferring the product revenue of $21.2 million at December 31, 1995, is
simply a delayed timing in recognition of contractual agreements and requires
minimal resources of the Company.
A revolving unsecured bank line of credit, available for foreign currency
contracts and letters of credit expired on February 15, 1995. The Company
entered into an unsecured financing agreement with Computer Associates in March,
1995, for $10 million. The Company also has an outstanding promissory note of
$0.7 million.
33
<PAGE>
In 1995 the Company used $5.2 million of cash to fund its operations. Net
cash used by operating activities totaled $11.3 million in 1994. In 1993
operating activities provided $4.9 million of cash. For 1995 increases in
depreciation and amortization, deferred revenue, provision for sales returns
and allowances, accounts payable and accrued litigation, were offset by the net
loss. Inventories, which were located at the Company's third party turnkey
vendor, decreased by $1.1 million in 1995 following an increase of $1.2 million
in 1994. The 1995 decrease is due in part to planned reductions of inventories
and a consolidation of worldwide inventories into a single third party vendor
location.
Cash used in investing activities of $2.1 million in 1995 was utilized for
additions of $4.0 million of internally developed and purchased software and
$2.6 million in additions to property and equipment, primarily computer and
other capital equipment, partially offset by the sale of $5.4 million of short-
term investments, net of purchases. Cash provided by investing activities of
$1.2 million in 1994 was generated by the sale of $11.6 million of short-term
investments, net of purchases, which was offset by the capitalization of $4.5
million of software development costs and the purchase of $6.0 million of
property and equipment. Net cash provided by financing activities in 1995
totaled $10.1 million primarily as a result of the $10 million subordinated
convertible debt financing by Computer Associates. In 1994, the Company
generated cash of $1.2 million through financing activities, primarily related
to proceeds from a $1 million note payable to a bank and $1.1 million of
employee purchases of Company stock through both the Incentive Stock Option Plan
and the Employee Stock Purchase Plan. Net cash provided by financing activities
in 1993 totaled $38.1 million primarily as a result of the Company's initial
public offering, which was partially offset by the repurchase of $400,000 in
warrants and repayment of capital lease obligations in the amount of $1.2
million.
Additional financing may be necessary to meet NASDAQ minimum net worth
requirements. Furthermore, the Company is dependent upon achieving a reasonable
operating performance to satisfy its current and future financing needs. During
1995, the Company completed a private debt placement with Computer Associates
International of approximately $10 million. If the Company needs
further financing, there can be no assurance that it will be available on
reasonable terms or at all. Any additional equity financing will result in
dilution to the Company's stockholders.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Gupta Corporation:
In our opinion, the consolidated financial statements of Gupta Corporation
listed in the index to Consolidated Financial Statements and the index to
Financial Statements Schedules on page 63 and referred to under Item 14(a)(1)
and (2) present fairly (after the restatement described in Note 12), in all
material respects, the financial position of Gupta Corporation at December 31,
1995, 1994 and 1993 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, 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 audits. We conducted our
audits 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
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 12 to the consolidated financial statements, the Company
has restated its 1994 and 1993 financial statements (previously audited by other
independent accountants).
San Jose, California
July 15, 1996
35
<PAGE>
GUPTA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT PER SHARE DATA) December 31,
------------------------------------------
1995 1994 1993
---------- ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,865 $ 7,031 $15,642
Short-term investments 9,557 11,670 28,896
Accounts receivable, less allowances
of $3,475 in 1995, $2,891 in 1994 and $924 in 1993. 12,174 14,334 16,758
Inventories 218 1,314 162
Other current assets 2,999 3,802 2,133
---------- ---------- ----------
Total current assets 34,813 38,151 63,591
Property and equipment, at cost, net accumulated depreciation 5,881 8,580 5,496
Capitalized software, at cost, net of accumulated amortization 2,980 4,527 2,768
Long-term investments 2,354 5,634 -
Other assets 2,076 1,269 517
---------- ---------- ----------
Total assets $48,104 $58,161 $72,372
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilites:
Current portion of capital lease obligations $ 397 $ 872 $ 886
Accounts payable 6,152 7,801 4,608
Payable to related party - - 750
Accrued compensation and related expenses 3,168 3,650 1,720
Other accrued liabilities 7,572 3,350 2,447
Accrued litigation expenses 14,328 - -
Deferred revenue 28,800 21,879 12,261
---------- ---------- ----------
Total current liabilities 60,417 37,552 22,672
Long-term debt, less current portion 10,330 1,071 477
Other long-term liabilities 1,414 868 -
---------- ---------- ----------
Total liabilities 72,161 39,491 23,149
---------- ---------- ----------
Commitments and contingencies (Notes 6 and 12)
Shareholders' Equity (Deficit)
Preferred stock, no par value:
Authorized: 2,000 shares, none issued - - -
Common stock, $.01 par value:
Authorized: 60,000 shares
Issued and outstanding: 12,382 shares in 1995, 12,041 shares in 1994
and 11,620 shares in 1993 57,577 56,277 55,151
Cumulative translation adjustment (150) (202) (364)
Accumulated deficit (81,484) (37,405) (5,564)
---------- ---------- ----------
Total shareholders' equity (deficit) (24,057) 18,670 49,223
---------- ---------- ----------
Total liabilities and shareholders' equity (deficit) $48,104 $58,161 $72,372
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
GUPTA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT PER SHARE DATA) Year ended December 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(Restated) (Restated)
<S> <C> <C> <C>
Net revenues:
Product $49,408 $46,134 $41,655
Service 16,306 10,398 5,820
---------- ---------- ----------
Net revenues 65,714 56,532 47,475
---------- ---------- ----------
Cost of revenues:
Product 8,878 7,625 5,972
Service 10,762 9,521 5,435
---------- ---------- ----------
Cost of revenues 19,640 17,146 11,407
---------- ---------- ----------
Gross profit 46,074 39,386 36,068
---------- ---------- ----------
Operating expenses:
Sales and marketing 42,931 48,209 24,088
Research and development 14,420 11,225 7,911
General and administrative 11,043 11,136 5,927
Litigation expense 15,323 1,797 -
Restructuring expense 5,350 - -
---------- ---------- ----------
Total operating expenses 89,067 72,367 37,926
---------- ---------- ----------
Operating loss (42,993) (32,981) (1,858)
Other income (expense):
Interest income 1,127 1,188 1,381
Interest expense (701) (137) (308)
Foreign currency gain (loss) (439) 306 (364)
---------- ---------- ----------
Loss before income taxes (43,006) (31,624) (1,149)
Provision for income taxes 1,073 217 759
---------- ---------- ----------
Net Loss $(44,079) $(31,841) $(1,908)
---------- ---------- ----------
---------- ---------- ----------
Loss per share $(3.62) $(2.66) $(0.17)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares and equivalents 12,175 11,957 11,411
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANICAL
STATEMENTS.
<PAGE>
GUPTA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
Year ended December 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(Restated) (Restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (44,079) $ (31,841) $ (1,908)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,772 3,362 1,842
Amortization of and adjustments to capitalized software
development costs 5,580 1,476 841
Provision for doubtful accounts 1,708 2,470 277
Provision for sales returns and allowances 5,430 5,778 2,132
Non-cash restructuring charges 2,205 - -
Changes in assets and liabilities:
Accounts receivable (4,977) (5,824) (10,437)
Inventories 1,096 (1,152) (35)
Prepaid expenses and other current assets 168 (421) (1,151)
Accounts payable and accrued liabilities 2,099 5,413 3,603
Deferred revenue 6,921 9,618 9,653
Accrued litigation expense 14,328 - -
Other liabilities 546 (136) 96
---------- ---------- ----------
Net cash provided by (used in) operating activities (5,203) (11,257) 4,913
---------- ---------- ----------
Cash flows from investing activities:
Maturities of investments 11,422 71,368 16,808
Purchases of investments (6,029) (59,776) (42,579)
Capitalization of software costs (4,033) (4,484) (1,880)
Other assets (807) 117 (47)
Additions to property and equipment (2,652) (5,983) (3,665)
---------- ---------- ----------
Net cash provided by (used in) investing activities (2,099) 1,242 (31,363)
---------- ---------- ----------
Cash flows from financing activities:
Repayment of note payable (305) - -
Proceeds from notes payable 10,000 1,000 -
Repayment of capital lease obligations (911) (883) (1,196)
Proceeds from issuance of common stock, net 1,300 1,126 39,285
---------- ---------- ----------
Net cash provided by financing activities 10,084 1,243 38,089
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents 52 161 (84)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 2,834 (8,611) 11,555
Cash and cash equivalents at beginning of period 7,031 15,642 4,087
---------- ---------- ----------
Cash and cash equivalents at end of period $ 9,865 $ 7,031 $ 15,642
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 1,183 $ 274 $ 233
Cash paid for interest 142 138 308
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
GUPTA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
(IN THOUSANDS) Series A Series B Series C Cumulative
Preferred Stock Preferred Stock Preferred Stock Common Stock Translation (Accumulated
--------------- --------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount Adjustment Deficit) Total
------ ------ ------ ------ ------ ------- ------ ------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1992 1,221 $2,418 1,208 $2,991 1,657 $10,315 4,679 $149 ($338) ($3,656) $11,879
Common stock
issued upon
exercise of
stock options 317 313 313
Preferred stock
converted to
common stock (1,221) (2,418) (1,208) (2,991) (1,657) (10,315) 4,086 15,724 -
Common stock
issued upon
IPO, net of
issuance cost 2,380 38,840 38,840
Common stock
issued upon
exercise of
stock warrants 122 - - -
Warrants repurchased - (400) (400)
Employee Stock
Purchase Plan 36 525 525
Cumulative
translation
adjustment (26) (26)
Net Loss (Restated) (1,908) (1,908)
------ ------ ------ ------ ------ ------- ------ ------ ----------- ----------- -------
Balances,
December 31, 1993
(Restated) 11,620 55,151 (364) (5,564) 49,223
Common stock issued
upon exercise of
stock options 380 799 799
Employee Stock
Purchase Plan 41 327 327
Cumulative
translation
adjustment 162 162
Net Loss (Restated) (31,841) (31,841)
------ ------ ------ ------ ------ ------- ------ ------ ----------- ----------- -------
Balances,
December 31, 1994
(Restated) 12,041 56,277 (202) (37,405) 18,670
Common stock issued
upon exercise of
stock options 243 397 397
Employee Stock
Purchase Plan 98 903 903
Cumulative
translation
adjustment 52 52
Net Loss (44,079) (44,079)
------ ------ ------ ------ ------ ------- ------ ------ ----------- ----------- -------
Balances,
December 31, 1995 - $ - - $ - - $ - 12,382 $57,577 ($150) ($81,484) ($24,057)
------ ------ ------ ------ ------ ------- ------ ------ ----------- ----------- -------
------ ------ ------ ------ ------ ------- ------ ------ ----------- ----------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
GUPTA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND RISK FACTORS:
Gupta Corporation (the "Company") currently doing business as
Centura Software Corporation, develops, markets and supports an integrated
set of software solutions for the PC client/server system market.
The Company has experienced significant losses from operations during 1995 and
1994, and as a result its liquidity and capital resources have declined.
Management is in the process of implementing measures intended to improve its
operating results, including cost-cutting measures, new product introductions
and refocused marketing efforts. However, the Company's successful
implementation of its plans are subject to certain risks, including competition
from larger companies with greater financial resources, its ability to raise
additional financing, if needed, its ability to retain key personnel and its
ability to successfully develop, produce and market new products. Management
feels that the recent measures combined with the introduction of new product has
heightened the possibility of the Company achieving profitable operations.
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 and
reported amounts of revenues and expenses during the reported period. Actual
results could differ materially from those estimates.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
financial statements of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION: The Company receives fees from certain resellers (including
original equipment manufacturers) under product licensing arrangements. Such
fees are recorded as revenue on a sell through basis as reported by the
reseller. For licensing agreements with end-users, fees are recognized upon
shipment of product, if there are no significant post-delivery obligations and
collectibility is probable. Service revenues from customer maintenance fees for
ongoing customer support and product updates, including maintenance bundled with
software licenses, is recognized ratably over the period of the contract. When
licensing agreements terminate, the Corporation records any licensing fees
previously not recognized. Revenue from other services, including training, are
recognized as performed.
The Company enters into agreements with certain of its distributors involving
boxed product. Revenues from these distributors are recognized when the product
is shipped and are reduced by management's estimate of anticipated stock
exchanges based on historical experience.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS: The Company capitalizes internally
generated software development costs and purchased software in compliance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed". Capitalization of
internally generated software development costs begins upon the establishment of
technological feasibility of the product, which the Company defines as the time
when a complete product is available. The Company makes an ongoing assessment
of the recoverability of these costs which requires considerable judgment by
management with respect to certain external factors, including but not limited
to, anticipated future gross product revenue, estimated economic life and
changes in software and hardware technology. Internally generated software
development costs capitalized were $2,242,000, $1,655,000,and $1,189,000 for the
years ended December 31, 1995, 1994
40
<PAGE>
and 1993, respectively. The Company capitalized $1,791,000, $1,580,000, and
$691,000 of purchased software in 1995, 1994 and 1993, respectively.
Amortization of all capitalized software costs begins when a product is
available for general release to customers, and is computed separately for each
product as the greater of (a) current gross revenue for a product to the total
of current and anticipated gross revenue for the product, or (b) the
straight-line method over the remaining estimated economic life of the product,
up to three years. Amortization and adjustments are included in cost of
revenues in the accompanying consolidated statements of operations and amount to
$5,580,000, $1,476,000, and $841,000 for the years ended December 31, 1995, 1994
and 1993, respectively.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
FINANCIAL INSTRUMENTS: During the first quarter of 1994, the Company adopted
the Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." "SFAS No. 115" establishes standards
for financial accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. Each investment is classified into one of three categories:
held-to-maturity, available-for-sale or trading. Investments which the Company
has the intent and ability to hold until maturity are classified as
held-to-maturity and are recorded at amortized cost.
The Company's investments consist of the following (IN THOUSANDS):
December 31, 1995
--------------------------------
Title of Issue Cost Market Value
- - -------------- ------------- ----------------
Corporate bonds $ 5,407 $ 5,389
Municipal bonds 3,506 3,512
Other debt securities 4,645 4,453
Certificates of deposit 687 687
------------- ----------------
$14,245 $14,041
------------- ----------------
------------- ----------------
The Company has classified all of its securities as held-to-maturity, and
accordingly it only liquidates these investments upon their maturity.
Securities which mature during 1996 except those classified as cash equivalents
are classified as short-term investments on the accompanying balance sheets, and
those with maturities after 1996 are classified as long-term investments on the
accompanying balance sheets.
The Company sometimes enters into forward contracts to reduce the risks
associated with foreign currency fluctuations on net assets denominated in
foreign currencies. At December 31, 1995, the Company had no forward contracts.
At December 31, 1994 and 1993, the Company had $1,496,000 and $1.531,000 of
forward contracts denominated in Deutsche Marks and French Francs, respectively.
Foreign currency gains (losses) for 1995, 1994 and 1993 under these and similar
type contracts were immaterial.
It is not practical to estimate the fair value of the Company's subordinated
debt at December 31, 1995 since no quoted market price exists. The carrying
value of all other financial instruments approximate their respective fair
values.
INVENTORIES: Inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market, and consist principally of finished goods.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over estimated useful lives of three
to five years. Leasehold improvements are amortized over the life of the lease
or the estimated useful life, whichever is shorter.
41
<PAGE>
FOREIGN CURRENCY TRANSACTIONS: The functional currency of each foreign
subsidiary is the local currency. For these operations, assets and liabilities
are translated into U.S. dollars at period-end exchange rates, and income and
expense accounts are translated at a rate that approximates the average exchange
rate prevailing during the period. The resulting translation adjustments are
recorded as a separate component of shareholders' equity. Gains and losses from
foreign currency-denominated transactions effected by the Company's U.S.
operations are included in other income (expense), net, and were not material in
any of the periods presented.
NET LOSS PER SHARE: Net loss per share is computed using the weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares (using the treasury stock method) have been included in the computation
when dilutive. Debentures which are not common stock equivalents are also not
included in the calculation of loss per share because their effect is
antidilutive.
RECENT ACCOUNTING PRONOUNCEMENT: During 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which establishes a
fair value based method of accounting for compensation costs related to stock
option plans and other forms of stock based compensation plans as an alternative
to the intrinsic value based method of accounting defined under Accounting
Principles Board Opinion No. 25. Companies that do not elect the new method of
accounting beginning in 1996 will be required to provide pro forma disclosures
as if the fair value based method had been applied. The Company anticipates
that it will not elect the fair value based method of accounting and will
provide pro forma disclosure as required.
During 1995, FASB issued Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The new SFAS is required to be
adopted for the first quarter of 1996. The Company has evaluated the impact of
SFAS 121 and determined it will not have a significant effect on the
consolidated financial position or results of operation when adopted.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1994 and
1993 consolidated financial statements to conform to the 1995 presentation.
NOTE 3. BALANCE SHEET DETAIL:
Property and equipment consist of the following (IN THOUSANDS):
December 31,
------------------------------------
1995 1994 1993
-------- ------- -------
Computer equipment $ 15,882 $15,629 $10,261
Furniture and fixtures 1,902 1,716 1,007
Leasehold improvements 476 605 355
-------- ------- -------
18,260 17,950 11,623
Less accumulated depreciation and
amortization (12,379) (9,370) (6,127)
-------- ------- -------
$ 5,881 $ 8,580 $ 5,496
-------- ------- -------
-------- ------- -------
At December 31, 1995, 1994 and 1993 the net book value of equipment and other
assets acquired under capital leases included in property and equipment is
$114,000, $576,000 and $1,189,000, respectively.
42
<PAGE>
Software development costs capitalized consists of the following (IN THOUSANDS):
December 31,
------------------------------------
1995 1994 1993
-------- ------- -------
Internally developed software $ 4,259 $ 4,162 $ 3,574
Purchased software 2,827 2,271 1,054
-------- ------- -------
7,086 6,433 4,628
Less accumulated amortization (4,106) (1,906) (1,860)
-------- ------- -------
$ 2,980 $ 4,527 $ 2,768
-------- ------- -------
-------- ------- -------
Deferred revenue consists of the following (IN THOUSANDS):
December 31,
------------------------------------
1995 1994 1993
-------- ------- -------
Deferred product revenue $21,166 $17,239 $8,961
Deferred support revenue 7,634 4,640 3,300
-------- ------- -------
$28,800 $21,879 $12,261
-------- ------- -------
-------- ------- -------
NOTE 4. RESTRUCTURING CHARGES
In December 1995, the Company approved a plan to restructure its operations to
meet emerging market opportunities in next-generation client/server computing.
In connection with the restructuring, the Company reduced its worldwide
headcount by approximately 16% and consolidated facilities and operations to
improve efficiency. The following analysis sets forth the significant components
of the restructuring charge recorded in the fourth quarter of fiscal 1995
related to the restructuring (IN THOUSANDS).
<TABLE>
<CAPTION>
Accrued
Restructuring Non- Balance at
Expense Cash Costs December 31, 1995
----------------- ---------------- ---------------------
<S> <C> <C> <C>
Severance and benefits $ 1,623 $ -- $ 1,623
Write-off of assets 2,205 2,205 --
Facility charges 1,029 -- 1,029
Other 493 -- 493
----------------- ---------------- ---------------------
Total $ 5,350 $ 2,205 $ 3,145
----------------- ---------------- ---------------------
----------------- ---------------- ---------------------
</TABLE>
Severance and related costs represent the reduction of 59 employees on a
worldwide basis primarily impacting sales and marketing. Asset charges include
a write-off of purchased technology and prepaid license fees associated with
discontinued product lines. The facilities charges include early termination
costs associated with the closing of certain domestic and international sales
offices. Other restructuring costs consist primarily of costs associated with
the cancellation of distribution agreements
Substantially all employee and lease termination payments have been paid by June
30, 1996.
43
<PAGE>
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1995 1994 1993
--------------- ---------------- -----------------
<S> <C> <C> <C>
Subordinated note payable $10,000 $ -- $ --
Other note payable 695 1,000 --
Capital lease obligations 32 943 1,363
--------------- ---------------- -----------------
10,727 1,943 1,363
Less: current position 397 872 886
--------------- ---------------- -----------------
Long-term debt $10,330 $1,071 $477
--------------- ---------------- -----------------
--------------- ---------------- -----------------
</TABLE>
During the first quarter of 1995 the Company issued a $10,000,000 floating rate
convertible subordinated note to Computer Associates International, Inc. ("CA").
The note matures in 1998 and is convertible into common stock at the Company's
option on the maturity date with the number of shares based on the market price
at the time of conversion. Interest on the note is based on the one-month LIBOR
and is payable quarterly. LIBOR rate at December 31, 1995 was 5.8%. The
agreement also requires the Company to maintain a minimal market capitalization
of $40.0 million commencing on (and including) November 1, 1997, and continuing
through the duration of the note. At the Company's option interest payments may
be deferred until the principal is due. For the year ended December 31, 1995
the interest on the note was $559,000 and is included in other long-term
liabilities.
In December 1994, the Company signed a $1 million promissory note payable
with a bank. The note is collateralized by a municipal bond (classified as
4T investments) in the amount of $1.5 million, until certain profitability
levels have been achieved, and bears interest at a fixed rate of 10.5% per
annum. The note is due in 36 monthly installments of $32,000 through
December 1997. The Company must meet certain covenants in connection with
this note, with which it was in compliance as of December 31, 1995.
NOTE 6. COMMITMENTS:
At December 31, 1995 future minimum payments required under leases are as
follows (IN THOUSANDS):
1996 $2,082
1997 718
1998 152
1999 92
2000 92
------
$3,136
------
------
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
approximately, $3,524,000, $2,377,000 and $2,262,000, respectively.
NOTE 7. CAPITAL STOCK:
On February 4, 1993, the Company issued 2,380,000 shares of Common Stock in an
initial public offering ("IPO") and simultaneously converted 4,086,408 shares of
preferred stock to common stock. Total net proceeds from the offering were
approximately $38,840,000.
44
<PAGE>
INCENTIVE STOCK OPTION PLAN: Under the Company's Incentive Stock Option Plan
(the Plan), as amended, 5,000,000 shares of common stock have been reserved for
issuance to eligible employees, directors and consultants. Under the Plan,
incentive stock options or nonstatutory stock options may be granted at prices
not less than fair market value of the Company's common stock at the date of
grant (85% for nonstatutory options). The options generally vest over a four
year period, beginning one year after the date of grant. Unexercised options
expire one to three months after termination of employment with the Company.
Activity under the Plan is set forth below (IN THOUSANDS, EXCEPT PER SHARE
DATA):
<TABLE>
<CAPTION>
Options
-----------------------------------------------------------
Shares Shares Price Per Share
Available Outstanding
----------------- --------------- ---------------------
<S> <C> <C> <C>
Balances, December 31, 1992 751 1,961 $.10-$9.50
Options granted (597) 597 $10.75-$30.25
Options exercised -- (317) $0.10-$5.50
Options canceled 152 (152) $0.50-$22.50
----------------- ---------------
Balances, December 31, 1993 306 2,089 $.25-$30.25
Shares authorized 1,000 --
Options granted (1,819) 1,819 $10.75-$27.25
Options exercised -- (380) $.25-$11.00
Options canceled 1,195 (1,195) $1.25-$30.25
----------------- ---------------
Balances, December 31, 1994 682 2,333 $.25-$27.25
Shares authorized 1,000 --
Options granted (3,606) 3,606 $6.625-$13.125
Options exercised -- (243) $0.50-$10.75
Options canceled 2,163 (2,163) $0.50-$20.00
----------------- ---------------
Balances, December 31, 1995 239 3,533 $0.25 - $9.00
----------------- ---------------
----------------- ---------------
</TABLE>
Options to purchase 801,248 shares of common stock were exercisable at December
31, 1995.
DIRECTORS' STOCK OPTION PLAN: Under the 1992 Directors' Stock Option Plan,
100,000 shares of common stock have been reserved for issuance to non-employee
directors of the Company. The Plan provides that each new non-employee director
initially will be granted a nonstatutory stock option to purchase 20,000 shares
of common stock. Thereafter, on each anniversary of the effective date of the
Plan, each non-employee director may be granted an additional option to
purchase 5,000 shares of common stock if the director served on the Board for at
least six months. The options are generally exercisable over a four-year
period, beginning one year after the date of grant. Options under the Plan are
granted at a price equal to the fair market value of the Company's common stock
on the date of grant. Options granted under the Plan have a term of ten years.
No options were granted under the Plan in 1993. 20,000 options were granted in
1994, and none were granted in 1995.
Under the 1995 Directors' Stock Option Plan, 200,000 shares of common stock have
been reserved for issuance to non-employee directors of the Company. The Plan
provides that each outside Director will be automatically granted a
non-statutory stock option to purchase 25,000 shares of common stock on the
later of the following events occurring: (a) the effective date of the plan, or
(b) the date on which such person first becomes a non-employee Director,
provided that such Director agrees to cancel all option granted to such Director
from the Company's 1992 Director's Stock Option Plan, other than the initial
20,000 shares granted to the Director under such plan. The options are
exercisable over four years in installments of 25% on the anniversary of each of
the four years. Options under the grant are granted at a price equal to the
fair market value of the Company's common stock on the date of the grant.
Options granted under the Plan have a term of ten years. 125,000 options were
granted in 1995 under the Plan.
45
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN: Under the 1992 Employee Stock Purchase Plan (the
Plan), 300,000 shares of common stock have been reserved for issuance to
eligible employees. The Plan permits employees to purchase common stock through
payroll deductions, which may not exceed 10% of an employee's compensation, at a
price equal to the lower of 85% of the fair market value of the Company's common
stock at the beginning or end of the offering period. The Plan became effective
upon the Company's initial public offering and 37,841, 81,186 and 88,599
purchase rights were issued in 1993, 1994 and 1995, respectively.
WARRANTS: Warrants to purchase 189,623 shares of common stock were outstanding
prior to the Company's initial public offering. Concurrent with the IPO, the
Company repurchased 25,000 warrants for cash, and the holders of 164,623
warrants exercised their warrants on a net exercise basis in exchange for
122,450 shares of common stock.
REPRICING: In 1995 holders of stock options were given the opportunity
to exchange previously granted stock options for new stock options exercisable
at $9.00 per share, the fair market value of common stock on the date of the
exchange. During 1994, holders of stock options were given the opportunity to
exchange previously granted stock options for new stock options exercisable at
$10.75 per share, the fair market value of common stock on the date of the
exchange. The remaining original terms of the stock options were not changed.
Options to purchase 882,750 and 904,100 shares of common stock were exchanged in
1994 and 1995 repricing, respectively.
SHARES RESERVED FOR FUTURE ISSUANCE: The following table summarizes shares of
common stock reserved for future issuance as of December 31, 1995 (IN
THOUSANDS):
Incentive stock option plan 239
Directors' stock option plan 155
Employee stock purchase plan 92
----------
486
----------
----------
SHAREHOLDER RIGHTS PLAN: In August 1994, the Company adopted a Shareholder
Rights Plan pursuant to which one Preferred Share Purchase "Right"' was
distributed for each outstanding share of common stock. Each Right entitles
shareholders to purchase a fraction of a share of Preferred Stock at an exercise
price of $60.00 upon certain events. The Rights expire on August 3, 2004,
unless earlier redeemed by the Company.
The Rights become exercisable if a person acquires 15% or more of the Company's
common stock or announces a tender offer that would result in such person owning
15% or more of the Company's common stock. If the Rights become exercisable,
the holder of each Right (other than the person whose acquisition triggered the
exercisability of the Rights) will be entitled to purchase, at the Right's then
current exercise price, a number of shares of the Company's common stock having
a market value of twice the exercise price. In addition, if the Company were
to be acquired in a merger or the Company sells more than 50% of its assets or
earning power, each Right will entitle its holder to purchase, at the Right's
then current exercise price, common stock of the acquiring company having a
market value of twice the exercise price. The Rights are redeemable by the
Company at a price of $.01 per Right at any time within ten days after a person
has acquired 15% or more of the Company's common stock.
46
<PAGE>
NOTE 8. INCOME TAXES:
Domestic and foreign income before taxes, and details of the income tax
provision consist of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
Year End December 31
------------------------------------------
1995 1994 1993
------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C>
Operating income (loss):
Domestic ($41,096) ($34,787) ($18,296)
Foreign (1,897) 1,806 16,438
------------ ------------ ------------
($42,993) ($32,981) ($1,858)
------------ ------------ ------------
------------ ------------ ------------
Income Tax Provision:
Current:
Federal $ -- $ -- $ 90
State -- -- --
Foreign 1,073 217 669
------------ ------------ ------------
$ 1,073 $ 217 $ 759
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The difference between income taxes at the statutory federal income tax rate and
income taxes reported in the income statement are primarily the result of
foreign withholding taxes.
Deferred income taxes result from temporary differences in the recognition of
certain expenses for financial and income tax reporting purposes. The net
deferred tax asset consisted of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
Year End December 31
------------------------------------------
1995 1994 1993
------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses $13,627 $ 9,001 $ 219
Nondeductible reserves 5,499 1,439 781
Credit carryforwards 2,700 2,468 1,185
Deferred revenue 9,760 6,919 3,744
Depreciation 427 -- --
------------ ------------ ------------
Gross deferred tax asset 32,013 19,827 5,929
Less: valuation allowance (31,785) (18,971) (5,389)
------------ ------------ ------------
Net deferred tax asset 228 856 540
------------ ------------ ------------
------------ ------------ ------------
Deferred tax liabilities:
Software capitalization $ (228) $ (856) $ (540)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards of
approximately $37.5 million available to offset future federal taxable income
and $12.0 million available to offset future state taxes, which expire
through 2010. The availability and timing of these carryforwards to offset
future taxable income may be limited due to the occurrence of certain events,
including certain changes in ownership interests. At December 31, 1995,
1994, and 1993, the Company fully reserved its deferred tax assets due to the
existence of sufficient uncertainty with respect to its ability to realize
the deferred tax assets.
47
<PAGE>
NOTE 9. SEGMENT INFORMATION:
The Company participates in one industry segment: the development and marketing
of computer software and related services. No one customer has accounted for
more than 10% of consolidated annual revenues. The following table presents a
summary of operations by geographic region (IN THOUSANDS):
<TABLE>
<CAPTION>
Year ended December 31, 1993: NORTH AMERICA EUROPE REST OF WORLD TOTAL
----------------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Total revenues $21,480 $22,431 $3,564 $47,475
----------------- ------------ ----------------- -------------
Operating income(loss) (18,296) 13,828 2,610 (1,858)
----------------- ------------ ----------------- -------------
Identifiable assets 66,371 6,001 -- 72,372
----------------- ------------ ----------------- -------------
Year ended December 31, 1994:
----------------- ------------ ----------------- -------------
Total revenues $24,933 $24,065 $7,534 $56,532
----------------- ------------ ----------------- -------------
Operating income(loss) (34,076) (492) 1,587 (32,981)
----------------- ------------ ----------------- -------------
Identifiable assets 52,259 5,494 408 58,161
----------------- ------------ ----------------- -------------
Year ended December 31, 1995:
----------------- ------------ ----------------- -------------
Total revenues $25,644 $28,679 $11,391 $65,714
----------------- ------------ ----------------- -------------
Operating income(loss) (41,096) (4,061) 2,164 (42,993)
----------------- ------------ ----------------- -------------
Identifiable assets 40,482 7,124 498 48,104
----------------- ------------ ----------------- -------------
</TABLE>
Revenues have been allocated to geographic regions based primarily upon
destination of product shipment. Operating income (loss) represents total
revenue less operating expenses. In computing operating income (loss), all
general corporate expenses have been allocated to North American operations, and
cost of product revenues have been allocated based upon revenues attributable to
each region.
NOTE 10. EMPLOYEE BENEFIT PLAN:
The Company has a Savings Plan (the "Plan") as allowed under Section 401(k) of
the Internal Revenue Code. The Plan provides employees with tax deferred salary
deductions and a number of investment options. The Plan allows for
contributions by the Company as determined annually by the Board of Directors.
The Company has not contributed to the Plan since its inception.
NOTE 11. RELATED PARTY TRANSACTIONS:
In August 1992, the Company and Novell, which owns 8.39% of the Company's
common stock at December 31, 1995, entered into a reseller agreement under
which the Company agreed to pay Novell commissions and trademark license fees
on certain sales on a quarterly basis. In 1993, this agreement was extended
until September 1996. The commissions and fees prepaid under this agreement
at December 31,1994 and 1993 were $666,000 and $625,000, respectively.
Amounts accrued at December 31, 1993 were $750,000 and there were no
outstanding balances at December 31, 1995 and 1994. In the fourth quarter of
1995, the Company as a result of the restructuring plan, wrote off the
remaining prepaid balance of $338,000, which is included in restructuring
charges described in Note 4. The amounts expensed during the years ended
December 31, 1995, 1994 and 1993 were approximately $666,000, $209,000 and
$702,000, respectively.
The Company recognized revenue of $2,450,000 during 1995 from CA, the holder of
the floating rate subordinated convertible debenture.
48
<PAGE>
The Company has the option to acquire 100% of the outstanding stock of one of
its independent foreign distributors, using a purchase price formula based on
net profits and revenues. At December 31, 1995 and 1994 the Company had no
outstanding receivables from this distributor. The Company recognized
revenue of $2,007,000 for 1995, from this distributor.
NOTE 12. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS:
In 1993 and 1994 certain OEM and other resellers ("resellers") entered into
arrangements with the Company whereby they agreed to make non-refundable
prepayments for the cost of license fees that would result from their
subsequent resale of the Company's software products. The previously issued
financial statements for 1993 and 1994 reported revenue for such arrangements
as the resellers entered into those agreements, delivered the current product
master or first copy of the software and collection was deemed probable.
Following a review of contractual terms of product licensing arrangements
originating in 1993 and thereafter and related business practices, it was
determined that the revenue recognition methods on such contracts should be
revised to report revenue on a sell through basis, so as to reflect the
actual price and versions of software products ultimately licensed under the
agreements. The Company continues to recognize revenue from sale of finished
(boxed) products to distributors at the time of shipment net of amount
estimated for those distributors rights of return. This restatement effected
the previously reported net income(loss) as follows (IN THOUSANDS, EXCEPT PER
SHARE DATA):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993
---- ----
<S> <C> <C>
Net income(loss) previously reported ($23,873) $5,632
Adjustments:
Product revenues (7,966) (8,658)
Provision for income taxes 57 1,118
Foreign currency loss (59) --
----------- ------------
Net loss, as restated ($31,841) ($1,908)
----------- ------------
----------- ------------
Net income (loss) per share, as previously reported ($2.00) $0.44
Adjustment .66 (.61)
----------- ------------
Net loss per share, as restated ($2.66) ($0.17)
----------- ------------
----------- ------------
</TABLE>
NOTE 13. SUBSEQUENT EVENTS:
On May 2, 1994, a lawsuit was filed against the Company and certain of its
officers and directors, by a holder of the Company's common stock, on his own
behalf and purportedly on behalf of a class of others similarly situated. The
lawsuit was subsequently amended, and alleged that the Company made false and
misleading statements and failed to disclose material information relating to
existing business conditions and the Company's prospects and that officers and
directors violated the insider trading laws. The plaintiff was seeking damages
of an unstated amount.
The Company reached an agreement in principle with plaintiff counsel
in this lawsuit. Under the terms of the settlement agreement, the Company
will provide $3 million and 1,875,000 shares to a fund to be distributed
among the members of the plaintiff class. The Company also agreed to
supplement this payment with up to 625,000 additional shares in the event the
value of its common stock is less than $6.00 per share at certain dates in
the future. $2 million of the cash contribution to the settlement fund will
be paid by the Company's directors and officers' liability insurer. As a
result of the settlement, shares outstanding will increase by approximately
49
<PAGE>
15% based on the settlement price. The 1995 financial statements include a
charge of $12.3 million included in litigation expense as a result of the
agreement in principle.
50
<PAGE>
Schedule II
GUPTA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(amounts in thousands) Balance at Additions Balance at
Begining of Charged to End of
Description the Year Expenses Write-Offs the Year
--------------------------------------------- ------------- ------------ ------------ ------------
<C> <S> <C> <C> <C> <C>
1993 Allowance for doubtful accounts $230 $277 ($318) $189
Reserve for stock rotations 500 1,270 (1,395) 375
Reserve for sales returns & allowances 200 862 (702) 360
------------- ------------ ------------ ------------
$930 $2,409 ($2,415) $924
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
1994 Allowance for doubtful accounts $189 $2,470 ($1,652) $1,007
Reserve for stock rotations 375 4,403 (3,936) 842
Reserve for sales returns & allowances 360 1,375 (693) 1,042
------------- ------------ ------------ ------------
$924 $8,248 ($6,281) $2,891
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
1995 Allowance for doubtful accounts $1,007 $1,708 ($1,186) $1,529
Reserve for stock rotations 842 3,585 (3,723) 704
Reserve for sales returns & allowances 1,042 1,845 (1,645) 1,242
------------- ------------ ------------ ------------
$2,891 $7,138 ($6,554) $3,475
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company makes reference to its report on From 8-K as filed with the
Commission on October 11, 1995, as amended by the Form 8-K/A (Amendment No. 1)
as filed with the Commission on October 26, 1995 (the "Form 8-K/A"), in which
the Company reported that effective October 4, 1995, Arthur Andersen LLP
("Arthur Andersen") resigned as independent accountants to audit the financial
statements of the Company for the 1995 fiscal year. The Form 8-K/A also
describes the Company's disagreement with Arthur Andersen regarding the
Company's restatement of its financial results for its quarter ended March 31,
1994.
The Company also makes reference to its report on Form 8-K as filed with
the Commission on January 11, 1996, in which the Company reported that
subsequent to Arthur Andersen's resignation, the Company received a letter from
Arthur Andersen dated January 2, 1996 (the "January Letter"), in which Arthur
Andersen advised the Company that it had concluded that it was no longer willing
to rely on management's representations made in connection with Arthur
Andersen's audits of the Company's December 31, 1993 and December 31, 1994
financial statements and therefore had withdrawn its reports dated January 14,
1994 and January 23, 1995, issued with respect to the Company's December 31,
1993 and December 31, 1994 financial statements, respectively. A copy of the
January Letter was filed as Exhibit 16.4 to the January 11, 1996 Form 8-K. The
Company informed the Securities and Exchange Commission that Arthur Andersen did
not inform the Company either prior or subsequent to its resignation, except in
the context of the January Letter, that it was no longer able to rely on
management's representations made in connection with the above-referenced
audits, and that in accordance with instruction 5 to Item 304 of Regulation S-K,
the Company believed that no reportable event occurred within the meaning of
Item 304(a)(1)(v) of Regulation S-K. Furthermore, the Company believes that the
opinion of Arthur Andersen contained in the January Letter is unfounded.
During the two most recent fiscal years and subsequent interim periods
prior to October 4, 1995, there were no disagreements with Arthur Andersen LLP
on any matter of accounting principles or practices, financial statement
disclosure, auditing scope or procedure, or any reportable events, except the
Company's disagreement with Arthur Andersen regarding the Company's restatement
of its financial results for the quarter ended March 31, 1994, as described in
the Form 8K/A. The reports of Arthur Andersen LLP on the financial statements
of the Registrant for the years ended December 31, 1993 and December 31, 1994
contained no adverse opinion or other disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
Effective January 2, 1996, the Board of Directors of the Company engaged
the accounting firm of Price Waterhouse LLP ("Price Waterhouse") as independent
accountants to audit the Company's financial statements for the fiscal years
ended December 31, 1993, December 31, 1994, and December 31, 1995.
The Company has not consulted with the independent accounting and audit
group at Price Waterhouse LLP responsible for performing future independent
accounting work during the preceding two years or subsequent interim periods
through September 31, 1995 on (i) either the application of accounting
principles or type of opinion Price Waterhouse might issue on the Company's
financial statements or (ii) the Company's disagreement with Arthur Andersen
regarding the Company's restatement of its financial results for its quarter
ended March 31, 1994 as described in the Form 8-K/A. Through its outside
litigation counsel the Company previously engaged the Dispute Analysis and
Corporate Recovery Consulting Unit of Price Waterhouse as litigation consultants
and to provide expert witness testimony in connection with the securities class
action litigation filed against the Company and various of its officers and
directors in May 1994, as described in the Form 8-K dated January 11, 1996.
The Company requested Arthur Andersen to furnish a letter addressed to the
SEC stating whether Arthur Andersen LLP agrees with the above statements.
52
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company required by this item is
contained in Item 1 of Part I "Directors of Registrant". Information regarding
executive officers of the Company required by this item is contained in Item 1
of Part I of this report under Business - "Executive Officers of Registrant."
Section 16 (a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file with the Securities and Exchange Commission (the "SEC") initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors, and holders of more than
ten percent of the Company's Common Stock are required by SEC regulations to
furnish the Company with copies of all Section 16 (a) forms they file.
To the Company's knowledge, based solely upon review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1995, the
Company's officers, directors and holders of more than ten percent of the
Company's Common Stock complied with all applicable Section 16 (a) filing
requirements.
ITEM 11. EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE
GENERAL
The Company's executive compensation policies are determined by the
Compensation Committee of the Board of Directors. The Compensation Committee
(the "Committee") is composed of two nonemployee directors. The Chairman of the
Board of Directors served on the Committee during the formative years of the
Company, but resigned his membership on the Committee during 1993.
The objective of the Company's executive compensation program is to align
executive compensation with the Company's business objectives and performance,
and to enable the Company to attract, retain and reward executives who
contribute to the long-term business success of the Company. The Company's
executive compensation program is based on the same four basic principles that
guide compensation decisions for all employees of the Company:
- - - The Company compensates for demonstrated and sustained performance.
- - - The Company compensates competitively.
- - - The Company strives for equity and fairness in the administration of
compensation.
- - - The Company believes that each employee should understand how his or her
compensation is determined.
The Company believes in compensating its executives for demonstrated and
sustained levels of performance in their individual jobs. The achievement of
higher levels of performance and contribution are rewarded by higher levels of
compensation. In order to ensure that it compensates its executives
competitively, the Company regularly compares its compensation practices to
those of other companies of comparable size within similar industries. Through
the use of independent compensation surveys and
53
<PAGE>
analysis, employee compensation training, and periodic pay reviews, the Company
strives to ensure that compensation is administered equitably and fairly and
that a balance is maintained between how executives are paid relative to other
employees and relative to executives with similar responsibilities in comparable
companies.
The Committee meets at least twice annually: once late in the year to
establish the compensation program for the next fiscal year and once, mid-year,
to evaluate how effectively the program is meeting its objectives.
Additionally, the Committee may hold special meetings to approve the
compensation program of a newly hired executive or an executive whose scope of
responsibility has significantly changed. Each year, the Committee meets with
the CEO and the Director, Human Resources regarding executive compensation
projections for the next three years and proposals for executive compensation
for the next operating year. Compensation plans are based on compensation
surveys and assessments as to the demonstrated and sustained performance of the
individual executives. The Committee then independently reviews the performance
of the CEO and the Company, and develops the annual compensation plan for the
CEO based on competitive compensation data and the Committee's evaluation of the
CEO's demonstrated and sustained performance and its expectation as to his
future contributions in leading the Company. The Committee presents for
adoption its findings on the compensation of each individual executive at a
subsequent meeting of the full Board of Directors.
COMPENSATION OF EXECUTIVE OFFICERS
During 1995, the Company's executive compensation program was comprised of
the following key components:
BASE SALARY. The Company sets the base salaries of its executives at the
levels of comparably sized companies engaged in similar industries.
CASH-BASED INCENTIVES. The Company's executives participate in a cash
incentive program. The program includes all of the Company's executives and is
contingent on the achievement of specific Company-wide goals in the areas of
customer satisfaction, operating profit, revenue performance, asset management
and the achievement of specific individual performance goals that are measured
objectively, as well as individual performance goals that are measured
subjectively. Participants in this program include the CEO and vice presidents.
The Company's cash incentives are structured so that the total of base salary
and cash incentives when taken together, will compensate executives at market
levels when company-wide and individual goals are achieved. The cash incentive
elements are sensitive to performance achievement versus plan, and payment of
these cash bonuses ranges from no bonus payment when performance is below
established targets, to bonus amounts somewhat above market levels when
performance targets are exceeded.
EQUITY-BASED INCENTIVES. Stock options are an important component of the
total compensation of executives, and are designed to align the interests of
each executive with those of the shareholders. Each year the Committee
considers the grant to executives of stock option awards under the Company's
1986 Incentive Stock Option Plan and 1995 Stock Option Plan. The Committee
believes that stock options provide added incentive for the executives to
influence the strategic direction of the Company, and to create and increase
value for customers, shareholders and employees. The option grants typically
utilize four-year vesting periods to encourage executives to continue
contributing to the Company. The number of stock option shares that are granted
to individual executives is, in part, based on independent survey data
reflecting competitive stock option practices.
The CEO's base salary for 1995 was established by the Committee at levels
somewhat comparably to the base salaries of comparably sized companies engaged
in similar industries.
54
<PAGE>
REPORT ON REPRICED OPTIONS
In June 1994 and July 1995, the Committee determined that it was in the
best interests of the Company to offer to reprice the then-existing stock option
grants of the Company with exercise prices in excess of the then-current fair
market value of the Company's Common Stock. Excluded from the repricing actions
were the CEO and two senior vice presidents.
The objectives of the Company's Stock Option Plans (the "Stock Option
Plan") are to promote the interests of the Company by providing employees and
certain consultants or independent contractors an incentive to acquire a
proprietary interest in the Company and to continue to render services to the
Company. It was the view of the Committee that stock options with exercise
prices substantially above the current market price of the Company's Common
Stock were viewed negatively by most employees of the Company, and provided
little, if any, equity incentive to the optionees. The Committee thus concluded
that such option grants seriously undermined the specific objectives of the
Stock Option Plan and should properly be repriced. In making this decision, the
Committee also considered the fairness of such a determination in relation to
other shareholders. In the opinion of the Committee, the shareholders' long-
term best interests were clearly served by the retention and motivation of
optionees.
In this context, the Committee decided that effective June 14, 1994 and
July 27, 1995 (the "Grant Date") all Company employees (except executive
officers) holding stock options with exercise prices in excess of the fair
market value of the Company's Common Stock could receive a one-for-one repricing
of their then-existing unexercised stock options with a new exercise price set
at $10.75 per share, the fair market value of the Company's Common Stock on the
first Grant Date (June 14, 1994). The second repricing allowed employees to
receive a one-for-one repricing of their then-existing unexercised stock options
with a new exercise price set at $9.00 per share, the fair market value of the
Company's Common Stock on the second Grant Date (July 27, 1995). On January 5,
1996 the Company completed a repricing through a one-for-one stock option
exchange of unvested stock options for all employees.
None of the Company's non-employee members of the Board of Directors
received any repriced stock options. It is the opinion of the Committee that
this program succeeded in its objectives of building employee morale and
providing new incentives for the Company's employees and management.
COMPENSATION COMMITTEE
William Grabe
Anthony Sun
55
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Directors Grabe and Sun comprised the Compensation Committee of the Board
of Directors during 1995. None of these persons has ever been an officer or
employee of the Company or any of its subsidiaries, nor were there any
compensation committee interlocks or other relationships during 1995 requiring
disclosure under item 402(j) of Regulation S-K of the Securities and Exchange
Commission.
COMPENSATION OF EXECUTIVE OFFICERS
The table on the next page shows the compensation received by (a) the
individuals who served as the Company's Chief Executive Officer during 1995; (b)
the four other most highly compensated individuals who were serving as executive
officers of the Company at the fiscal year ended December 31, 1995; and (c) the
compensation received by each such individual for the Company's two preceding
fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term All Other
Other Annual Compensation Compensa
Salary Bonus Compensation Awards -tion
Name and Principal Position Year ($)(1) ($)(2) ($)(3) Stock Options ($)(4)
- - --------------------------- ---- ------ ------ ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Samuel M. Inman 1995 182,693 112,500 -- 479,999 --
President and Chief Executive 1994 -- -- -- -- --
Officer (Principle Executive 1993 -- -- -- -- --
Officer)
Umang P. Gupta 1995 211,250 -- -- 200,000 537
Chairman and Founder 1994 200,000 -- -- -- 522
1993 178,000 75,000 -- -- 1,016
Richard J. Heaps 1995 140,114 47,500 -- 20,000 189
Senior Vice President, Business 1994 125,908 13,000 -- 40,000 155
Development and General Counsel 1993 107,022 6,249 17,939 -- 61
Earl M. Stahl 1995 154,167 9,000 -- 85,000 205
Senior Vice President, 1994 134,750 23,500 -- 40,000 184
Engineering and 1993 119,587 9,600 -- -- 48
Chief Technical Officer
John G. McAughtry 1995 130,000 15,000 59,067 50,000 307
Vice President, Asia/Pacific 1994 125,000 62,100 66,780 -- 328
and Latin American Operations 1993 -- 22,115 -- 174
</TABLE>
(1) Includes amounts deferred under the Company's 401(k) plan.
(2) Includes bonus earned in the indicated year and paid in the subsequent
year. Excludes bonuses paid in the indicated year but earned in the
preceding year.
(3) Comprised of commissions paid to Mr. McAughtry in 1993, 1994 and 1995 and
to Mr. Heaps in 1993.
(4) Comprised of premiums paid by the Company under the Company's group term
life insurance policy.
56
<PAGE>
STOCK OPTION GRANTS IN 1995
The following table sets forth information for the executive officers named
in the Summary Compensation Table with respect to grants of options to purchase
Common Stock of the Company made in 1995 and the value of all options held by
such executive officers on December 31, 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL STOCK PRICE
OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM(2)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION --------------
NAME (SHARES)(1) FISCAL YEAR (PER SHARE) DATE 5% 10%
- - -------------------- ----------- ----------- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Umang P. Gupta 200,000 (3) 12% 10.75 4/3/05 1,352,123 3,426,546
Samuel M. Inman 239,999 (4) 14% 5.9375 4/10/05 1,547,074 3,920,590
240,000 (4) 14% 5.9375 12/14/05 999,942 2,534,051
Earl Stahl 40,000 (6) 2% 10.75 3/14/05 270,425 685,309
45,000 (6) 3% 6.6250 12/14/05 187,489 475,134
Richard J. Heaps 20,000 (5) 1% 9.00 7/14/05 113,201 286,874
John McAughtry 10,000 (7) 1% 9.00 1/16/05 56,601 143,437
53,000 (7) 3% 6.6250 12/14/05 220,821 559,603
</TABLE>
(1) All options were granted pursuant to the Company's 1995 Stock Option Plan.
No stock appreciation rights (SARs) were granted during 1995. The Company
granted options to employees for an aggregate of 1,713,699 shares of Common
Stock during 1995.
(2) Potential realizable values are reported net of the option exercise price
but before taxes associated with exercise. These amounts represent certain
assumed rates of appreciation only. Actual realized gains, if any, on
stock option exercises are dependent on future performance of the Company's
Common Stock, as well as the optionee's continued employment through the
vesting period.
(3) Granted April 3, 1995. Exercisable at the rate of 25% of the shares
subject to the option on each yearly anniversary of the date of grant.
(4) Granted April 3, 1995 and December 14, 1995, respectively. The April 3,
1995 option is exercisable at the rate of 12,000 shares per quarter
commencing July 1, 1995, and of which 48,000 shares will be considered by
the Board for certain accelerated vesting on the basis of Mr. Inman's job
performance. The December 14, 1995 option is exercisable at the rate of
25% of the shares subject to the option on the first yearly anniversary of
the date of grant and thereafter at the rate of 1/48th of such shares on
each monthly anniversary of the date of grant.
(5) Granted July 14, 1995. Each option is exercisable at the rate of
25% of the shares subject to such option on the first yearly
anniversary of the date of grant and thereafter at the rate of 1/48th
of such shares on each monthly anniversary of the date of grant.
(6) Granted March 14, 1995 and December 14, 1995, respectively. The March 14,
1995 option is exercisable at the rate of 25% of the shares subject to the
option on each yearly anniversary of the date of grant. The December 14,
1995 option is exercisable at the rate of 25% of the shares subject to the
option on the first yearly anniversary of the date of grant and thereafter
at the rate of 1/48th of such shares on each monthly anniversary of the
date of grant.
(7) Granted January 16, 1995 and December 14, 1995, respectively. Each option
is exercisable at the rate of 25% of the shares subject to such option on
the first yearly anniversary of the date of grant and thereafter at the
rate of 1/48th of such shares on each monthly anniversary of the date of
grant.
57
<PAGE>
AGGREGATED OPTION EXERCISES IN 1995
AND YEAR-END OPTION VALUES
The following table sets forth information for the executive officers named
in the Summary Compensation Table with respect to exercises in 1995 of options
to purchase Common Stock of the Company.
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT 12/31/95 12/31/95
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE REALIZED(1) UNEXERCISABLE)(2) UNEXERCISABLE)(3)
- - ----------------- ----------- ----------- ----------------- -----------------
Umang P. Gupta -- -- -- --
Samuel M. Inman -- -- -- --
Richard J. Heaps -- -- -- --
Earl Stahl 5,000 $42,500 43,542/116,458 $81,069/$15,181
John McAughtry -- -- -- --
________________
(1) Value realized is calculated based on the closing price of the Company's
Common Stock as reported in the NASDAQ National Market on the date of
exercise minus the exercise price of the option, and does not necessarily
indicate that the optionee sold such stock.
(2) No stock appreciation rights (SARs) were outstanding during 1995.
(3) Based on the closing price of the Company's Common Stock as reported on the
NASDAQ National Market on December 29, 1995 of $5 1/8 per share minus the
exercise price of the options.
The following table provides information regarding the repricing of certain
options held by the Company's executive officers during the last fiscal year.
OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF MARKET EX. PRICE NEW EXPIRATION
DATE OF SHARES PRICE AT AT TIME OF EXERCISE DATE OF
EMPLOYEE TITLE REPRICING UND. REP. REPRICING REPRICING PRICE ORIG. OPTION
- - -------- ----- --------- --------- --------- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert Bramley VP Tech. Ser. 6/14/94 10,000 $10.75 $16.88 $10.75 12/17/03
7/27/95 10,000 $9.00 $10.75 $9.00 12/17/03
Rich Heaps Sr. VP Gen Cn. 7/27/95 40,000 $9.00 $10.75 $9.00 6/14/04
Michael Keddington VP NA Sales 7/27/95 80,000 $9.00 $9.75 $9.00 7/14/05
John McAughtry VP APLA 6/14/94 30,000 $10.75 $20.00 $10.75 7/21/03
6/14/94 10,000 $10.75 $16.88 $10.75 12/17/03
7/27/95 30,000 $9.00 $10.75 $9.00 7/21/03
7/27/95 10,000 $9.00 $10.75 $9.00 12/17/03
Helmut Wilke VP Eur. Ops. 6/14/94 10,000 $10.75 $16.88 $10.75 12/17/03
7/27/95 10,000 $9.00 $10.75 $9.00 12/17/03
7/27/95 40,000 $9.00 $10.75 $9.00 6/14/04
</TABLE>
58
<PAGE>
PERFORMANCE GRAPH
The following graph summarizes cumulative total shareholder return data
(assuming reinvestment of dividends) for the period since the Company's stock
was first registered under Section 12 of the Securities Exchange Act of 1934
(February 4, 1993). The graph assumes that $100 was invested (i) on February 4,
1993 in the Common Stock of Gupta Corporation at a price per share of $18.00,
the price at which such stock was first offered to the public on that date,
(ii) on January 31, 1993 in the Standard & Poor's 500 Stock Index and (iii) on
January 31, 1993 in the S&P High Technology Composite Index. The stock price
performance on the following graph is not necessarily indicative of future stock
price performance.
COMPARISON OF 34 MONTH CUMLATIVE TOTAL RETURN*
AMONG GUPTA CORPORATION, THE S&P INDEX
AND THE S&P HIGH TECH COMPOSITE INDEX
[GRAPH]
* $100 Invested on 2/4/93 in stock or on 1/31/93 in Index - Including
reinvestment of Dividends.
Fiscal year ending December 31.
<TABLE>
<CAPTION>
2/4/93 6/30/93 12/31/93 6/30/94 12/31/94 6/30/95 12/31/95
------ ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Gupta Corporation. . . . . . . . . . . . .100 97 109 51 63 54 28
Standard & Poor's 500 Index. . . . . . . .100 104 109 105 111 133 152
S & P High Technology Composite Index. . .100 107 117 116 137 189 197
</TABLE>
59
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of June 30, 1996 as to (i) each person who is known by the
Company to beneficially own more than five percent of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each of the executive
officers named in the Summary Compensation Table and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
5% SHAREHOLDERS, DIRECTORS, OWNED (1)
NAMED EXECUTIVE OFFICERS, ---------
AND DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP NUMBER (2) PERCENT OF TOTAL
- - ----------------------------------------------- ---------- ----------------
<S> <C> <C>
Novell, Inc. (3) . . . . . . . . . . . . . . . . . 1,057,500 8.39%
2180 Fortune Drive
San Jose, CA 95131
Umang P. Gupta . . . . . . . . . . . . . . . . . . 2,199,774 17.21%
D. Bruce Scott (4) . . . . . . . . . . . . . . . . 619,401 4.91%
Anthony Sun (5). . . . . . . . . . . . . . . . . . 502,112 3.98%
Kanwal S. Rekhi (6). . . . . . . . . . . . . . . . 27,917 *
William O. Grabe (7) . . . . . . . . . . . . . . . 33,750 *
Max D. Hopper. . . . . . . . . . . . . . . . . . . 6,250 *
Samuel M. Inman (8). . . . . . . . . . . . . . . . 95,000 *
Richard J. Heaps . . . . . . . . . . . . . . . . . 58,346 *
Earl Stahl . . . . . . . . . . . . . . . . . . . . 75,209 *
Helmut G. Wilke . . . . . . . . . . . . . . . . . 70,204 *
John McAughtry . . . . . . . . . . . . . . . . . . 33,750 *
All directors and executive officers as group. . . 3,746,505 28.38%
(14 persons)
(3)(5)(6)(7)(8)(9)
</TABLE>
* Less than 1%
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Includes with respect to each named person the following shares subject to
stock options exercisable within 60 days of June 30, 1996: Mr. Gupta -
181,666; Mr. Scott - 6,250; Mr. Sun - 27,917; Mr. Rekhi - 27,917; Mr. Grabe
- 33,750; Mr. Hopper - 6,250; Mr. Inman - 80,000; Mr. Heaps - 40,973; Mr.
Stahl - 70,209; Mr. McAughtry - 33,750; Mr. Wilke - 68,403.
60
<PAGE>
(3) Novell, Inc. and the Company are parties to a marketing agreement to
promote the sale of the Company's products through Novell's authorized
resellers. See Note 11 of Notes.
(4) Includes 6,000 shares held for the benefit of Mr. Scott's children.
Excludes 4,500 shares held by members of Mr. Scott's family, as to which
Mr. Scott disclaims beneficial ownership. Excludes 477,758 shares
transferred to Mr. Scott's ex-wife pursuant to a final divorce decree dated
March 1, 1996, as to which Mr. Scott disclaims beneficial ownership. Mr.
Scott resigned his position as an executive officer in April 1995 and has
been on leave from the Company since January 1995.
(5) Includes 450,042 shares held by Venrock Associates. Because Mr. Sun, a
director of the Company, is a general partner of Venrock Associates, he may
be deemed to be a beneficial owner of such shares. Mr. Sun disclaims
beneficial ownership of such shares.
(6) Includes 4,000 shares held for the benefit of Mr. Rekhi's children. Mr.
Rekhi disclaims beneficial ownership of such shares.
(7) Includes 2,000 shares held for the benefit for Mr. Grabe's children.
(8) Mr. Inman has served as President and Chief Executive Officer (Principal
Executive Officer) since December 1995 and served as President and Chief
Operating Officer from April 1995 to December 1995
(9) Includes 598,752 shares subject to options held by directors and officers
that are exercisable within 60 days of June 30, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1992, the Company and Novell, which owns 8.39% at December 31,
1995, of the Company's common stock, entered into a reseller agreement under
which the Company agreed to pay Novell certain quarterly sales commissions
and trademark license fees. In 1993, this agreement was extended until
September 1996. The commissions and fees prepaid under this agreement at
December 31, 1994 and 1993 were $666,000 and $625,000, respectively. Amounts
accrued at December 31, 1993 were $750,000 and there were no outstanding
balances at December 31, 1995 and 1994. In the fourth quarter of 1995, the
Company as a result of the restructuring plan, wrote off the remaining
prepaid balance of $338,000, which is included in restructuring charges
described in Note 4. The amounts expensed during the years ended December
31, 1995, 1994 and 1993 were approximately $666,000, $209,000 and $702,000,
respectively.
The Company recognized revenue of $2,450,000 during 1995 from CA, the
holder of the floating rate subordinated convertible debenture.
The Company has the option to acquire 100% of the outstanding stock of one
of its foreign distributors, using a purchase price formula based on net profits
and revenues. At December 31, 1995 and 1994 the Company had no outstanding
receivables from this distributor. The Company recognized revenue of
$2,006,715, and $-0- for 1995 and 1994, respectively, from this distributor.
The Company has entered into indemnification agreements with each of its
directors and executive officers, which may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers, to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' liability insurance if
available on reasonable terms.
The Company has entered into an employment agreement with Sam Inman dated
April 10, 1995 with respect to Mr. Inman's employment as President and Chief
Operating Officer of the Company. Pursuant to this agreement, Mr. Inman
received a base salary of not less than $210,000 per year and is entitled to
earn a target bonus of $150,000 per year, based upon achievement of financial
and other goals, provided, however, that Mr. Inman is guaranteed a minimum bonus
of $150,000 during the initial year of this agreement. In addition, pursuant to
the agreement, Mr. Inman was granted an option to acquire up to 240,000 shares
of the Company's Common Stock at an exercise price of $10.25 per share, which
shares vest at the rate of 12,000 shares per quarter commencing July 1, 1995,
and of which 48,000 shares will be considered by the Board for certain
accelerated vesting on the basis of Mr. Inman's job
61
<PAGE>
performance. All shares subject to the option will vest on acquisition or
change of control of the Company. Upon the agreement, upon termination of Mr.
Inman's employment without cause, Mr. Inman is entitled to severance in the
amount of his base salary and any additional benefits provided under the
agreement for a period of one year.
The Company and Earl Stahl entered into a loan agreement dated August 31,
1995 pursuant to which Mr. Stahl borrowed $300,000 in connection with his
purchase of a new home. This loan will be forgiven at the rate of $40,000 of
principal on each yearly anniversary of the loan, provided, for such date, Mr.
Stahl is employed by the Company on such date. The loan is due in August, 1999,
or earlier, within six months after termination of Mr. Stahl's employment with
the Company for cause, except as provided below.
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS. The following financial statements of the
Company are contained in Item 8 of this Report on Form 10-K:
Report of Price Waterhouse LLP, Independent Accountants.
Consolidated Balance Sheets at December 31, 1995, 1994 and 1993.
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1995.
Consolidated Statements of Shareholders' Equity (Deficit) at December
31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1995.
Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULE. The following financial statement
schedule for the Company's fiscal year ended December 31, 1995, 1994
and 1993 is contained in Item 8 of this Report on Form 10-K:
II - Valuation and Qualifying Accounts
Report of Price Waterhouse LLP, Independent Accountants. Refer to
Item 8 above.
Schedules not listed above have been omitted because they are either
inapplicable or the required information has been given in
Management's Discussion and Analysis of Financial Condition and
Results of Operations or in the financial statements or the notes
thereto.
(3) EXHIBITS.
Refer to Item 14(c) below.
(b) REPORTS ON FORM 8-K.
The Company filed a Form 8-K reporting the resignation of Arthur Andersen
as independent accountants, dated October 11, 1995 as amended by Amendment
No. 1 dated October 25, 1995 ("Form 8-K/A").
The Company filed a Form 8-K, reporting the engagement of the accounting
firm of Price Waterhouse, LLP, as independent accountants to audit the
Company's financial statements for years ended December 31, 1993, 1994 and
1995, dated January 8, 1996 ("Form 8-K"). The Company also reported that
Arthur Andersen LLP had withdrawn its reports dated January 14, 1994, and
January 23, 1995, issued with respect to the Company's December 31, 1993
and December 31, 1994 financial statements.
63
<PAGE>
The Company filed an 8-K on April 17, 1996, announcing that its annual
report on form 10K would be delayed due to the fact that the Company's
audit for the periods ended December 31, 1993, 1994 and 1995 by Price
Waterhouse LLP was not yet complete.
The Company filed an 8-K on June 18, 1996, announcing that its annual
report on form 10K would be further delayed due to the fact that the
Company's audit for the periods ended December 31, 1993, 1994 and 1995 by
Price Waterhouse LLP was not yet complete.
(c) EXHIBITS.
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit
Number Description
- - ------ -----------
3(i)(2) Articles of Incorporation of Registrant, as amended to date.
3(ii)(2) Bylaws of Registrant.
10.1(1) Form of Directors' and Officers' Indemnification Agreement.
10.2(2)(5) 1986 Incentive Stock Option Plan, as amended, and forms of
agreements thereunder.
10.3(1) 1991 United Kingdom Sub Plan and forms of agreement thereunder.
10.4(2)** 1992 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.5(2) 1992 Directors' Stock Option Plan and forms of agreements
thereunder.
10.8(1) Lease Agreement dated February 4, 1992 between Registrant and
Bohannon Associates.
10.9 1996 Executive Officers' Compensation Plan
10.12(1) Forms of License Agreements.
10.14(10) 1995 Stock Option Plan and forms of agreement thereunder
10.15(10) 1995 Directors' Stock Option Plan and forms of agreement thereunder
10.16(10) Note Purchase Agreement dated March 31, 1995 between the Company
and Computer Associates International, Inc.
10.17(11) Executive Employment Agreement dated April 10, 1995 between the
Company and Sam M. Inman, III.
10.18(12) Loan Agreement Secured by Property and Securities dated August 31,
1995 between the Company and Earl and Ann Stahl
16(3)(6)(7) Letter regarding change in Certifying Accountant.
21 Subsidiaries of Registrant.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
64
<PAGE>
24.1 Power of Attorney. See page 66.
(1) Incorporated by reference from the Company's Registration Statement
on Form S-1 (No. 33-55566), declared effective by the Commission on
February 4, 1993.
(2) Incorporated by reference from the Company's Registration Statement
on Form S-8 (No. 33-62194) filed with the Commission on May 5,
1993.
(3) Incorporated by reference from the Company's Current Report on Form
8-K dated July 2, 1993 ("Form 8-K").
(4) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
(5) Incorporated by reference from the Company's Registration Statement
on Form S-8 (No. 33-83850) filed with the Commission on
September 9, 1994.
(6) Incorporated by reference from the Company's Current Report on Form
8-K dated October 11, 1995 as amended by Amendment No.1 dated
October 25, 1995 ("Form 8-K/A").
(7) Incorporated by reference from the Company's Current Report on Form
8-K dated January 8, 1996 ("Form 8-K").
(8) Incorporated by reference from the Company's Current Report on Form
8-K dated April 17, 1996 ("Form 8-K").
(9) Incorporated by reference from the Company's Current Report on Form
8-K dated June 18, 1996 ("Form 8-K").
(10) Incorporated by reference from the Company's Annual Report on Form
10-Q for the quarter ended March 31, 1995.
(11) Incorporated by reference from the Company's Annual Report on Form
10-Q for the quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Annual Report on Form
10-Q for the quarter ended September 30, 1995.
** Management compensatory plan or arrangement.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GUPTA CORPORATION
Date: By: /s/ Samuel M. Inman
-----------------------
Samuel M. Inman
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Umang P. Gupta and Samuel M. Inman, and
each of them, his attorneys-in-fact and agents, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact, or his substitute or substitutes may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
------------- --------- -------
/s/ Umang P. Gupta Chairman of the Board and Director July 16, 1996
- - ---------------------------
(Umang P. Gupta)
/s/ Samuel M. Inman President and Chief Executive July 16, 1996
- - ---------------------------- Officer (Principal Executive Officer)
(Samuel M. Inman)
/s/ Richard A. Gelhaus Chief Financial Officer (Principal July 16, 1996
- - ---------------------------- Financial and Accounting Officer) and
(Richard A. Gelhaus) Senior Vice President of Finance and
Operations
/s/ D. Bruce Scott Director July 16, 1996
- - ----------------------------
(D. Bruce Scott)
/s/ Max D. Hopper Director July 16, 1996
- - ----------------------------
(Max D. Hopper)
/s/ William O. Grabe Director July 16, 1996
- - ----------------------------
(William O. Grabe)
/s/ Kanwal S. Rekhi Director July 16, 1996
- - ----------------------------
(Kanwal S. Rekhi)
/s/ Anthony Sun Director July 16, 1996
- - ----------------------------
(Anthony Sun)
66
<PAGE>
GUPTA CORPORATION
Report on Form 10-K for
the year ended December 31, 1995
INDEX TO EXHIBITS*
Exhibit Sequentially
Number Exhibit Numbered Page
- - ------ ------- ----
10.9 1996 Executive Officers' Compensation Plan.
21 Subsidiaries of Registrant
23.1 Consent of Price Waterhouse LLP,
Independent Accountants
*Only exhibits actually filed are listed. Exhibits incorporated by reference
are set forth in the exhibit listing included in Item 14 of the Report on Form
10-K.
67
<PAGE>
EXHIBIT 10.9
<PAGE>
EXHIBIT 10.9
Gupta Corporation
1996 Executive Officers' Compensation Plan
The Company's Board of Directors will adopt individual bonus plans for each of
its executive officers for fiscal year 1996 that award cash and option bonuses
based upon both the executive officer's performance and the Company's
performance and commissions based on sales.
<PAGE>
EXHIBIT 21
<PAGE>
EXHIBIT 21
GUPTA CORPORATION
SUBSIDIARIES
Name of Entity Jurisdiction of Incorporation
- - -------------- -----------------------------
Gupta Australia Pty Ltd. Australia
Gupta France France
Gupta GmbH Federal Republic of Germany
Gupta Hong Kong Ltd. Hong Kong
Gupta Italia S.r.l. Italy
Gupta B.V. The Netherlands
Gupta GmbH Austria
Gupta U.K. Ltd. United Kingdom
Gupta AG Switzerland
Gupta Mexico S.A. De C.V. Mexico
Gupta Software PTE Ltd. Singapore
Gupta Software Canada, Ltd. Canada
<PAGE>
EXHIBIT 23.1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-83850) of Gupta Corporation of our report
dated July 15, 1996, appearing on page 35 of this Annual Report on Form 10-K.
We also consent to the reference to us under the heading "Selected Financial
Data" on Form 10-K insofar as it relates to each of the three years in the
period ended December 31, 1995. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Financial Data."
PRICE WATERHOUSE LLP
San Jose, California
July 17, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000895021
<NAME> GUPTA CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 9,865
<SECURITIES> 9,557
<RECEIVABLES> 15,649
<ALLOWANCES> 3,475
<INVENTORY> 218
<CURRENT-ASSETS> 34,813
<PP&E> 18,260
<DEPRECIATION> 12,379
<TOTAL-ASSETS> 48,104
<CURRENT-LIABILITIES> 60,417
<BONDS> 11,744
0
0
<COMMON> 57,577
<OTHER-SE> (81,634)
<TOTAL-LIABILITY-AND-EQUITY> 48,104
<SALES> 49,408
<TOTAL-REVENUES> 65,714
<CGS> 8,878
<TOTAL-COSTS> 19,640
<OTHER-EXPENSES> 89,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (426)
<INCOME-PRETAX> (43,006)
<INCOME-TAX> 1,073
<INCOME-CONTINUING> (44,079)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,079)
<EPS-PRIMARY> (3.62)
<EPS-DILUTED> (3.62)
</TABLE>
