<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
// TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD TO
Commission file number:
CENTURA SOFTWARE CORPORATION
(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 Number)
975 ISLAND DRIVE, REDWOOD SHORES, CALIFORNIA 94065
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 596-3400
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No X
----- -----
As of October 31, 1998, there were 29,598,932 shares of the Registrant's
Common Stock outstanding.
<PAGE>
CENTURA SOFTWARE CORPORATION
FORM 10-Q for the Quarter Ended September 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data
a) Condensed consolidated balance sheets at
September 30, 1998 and December 31, 1997 . . . 1
b) Condensed consolidated statements of
operations for the three months and nine
months ended September 30, 1998 and 1997 . . . 2
c) Condensed consolidated statements of cash
flows for the nine months ended September
30, 1998 and 1997 . . . . . . . . . . . . . . 3
d) Notes to condensed consolidated financial
Statements . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities and Use of Proceeds . . . . . 17
Item 3. Defaults in Senior Securities . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 18
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CENTURA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................... $ 7,728 $ 3,974
Accounts receivable, less allowances of $1,512 and $1,621................... 13,106 11,744
Inventory................................................................... 145 259
Other current assets........................................................ 3,421 3,089
-------- --------
Total current assets...................................................... 24,400 19,066
Property and equipment, at cost, net of accumulated depreciation............... 2,776 3,511
Capitalized software, at cost, net of accumulated amortization................. 1,824 2,573
Long-term investments.......................................................... 1,377 1,263
Other assets................................................................... 1,546 1,787
-------- --------
Total assets.............................................................. $ 31,923 $ 28,200
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Subordinated Notes Payable.................................................. $ -- $ 10,000
Accounts payable............................................................ 3,609 4,244
Accrued compensation and related expenses................................... 1,564 1,521
Short-term borrowings....................................................... 3,996 1,581
Other accrued liabilities................................................... 2,200 5,334
Deferred revenue............................................................ 12,816 14,618
-------- --------
Total current liabilities................................................. 24,185 37,298
Other long-term liabilities.................................................... 856 856
-------- --------
Total liabilities.................................................... $ 25,041 $ 38,154
Shareholders' Equity (Deficit):
Preferred stock, no par value; 2,000 shares authorized; none issued....... -- --
Common stock, par value $.01 per share; 60,000 shares authorized;
29,599 shares 15,784 shares issued and outstanding........................ 85,701 70,636
Cumulative translation adjustment......................................... (552) (484)
Accumulated deficit....................................................... (78,267) (80,106)
-------- --------
Total shareholders' equity (deficit)................................. 6,882 (9,954)
-------- --------
Total liabilities and shareholders' equity (deficit)................. $ 31,923 $ 28,200
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
1
<PAGE>
CENTURA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Revenues:
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,811 $ 9,371 $25,377 $30,675
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,310 4,327 14,563 12,727
------- ------- ------- -------
Net revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,121 13,698 39,940 43,402
Cost of revenues:
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,370 906 3,556 3,573
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,079 1,868 3,241 6,259
------- ------- ------- -------
Cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,449 2,774 6,797 9,832
------- ------- ------- -------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,672 10,924 33,143 33,570
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . 7,178 5,964 19,945 19,974
Research and development. . . . . . . . . . . . . . . . . . . . . . . . 1,674 2,512 4,574 7,933
General and administrative. . . . . . . . . . . . . . . . . . . . . . . 1,786 1,694 5,294 5,152
Restructuring Expense . . . . . . . . . . . . . . . . . . . . . . . . . - 563 - 563
Acquisition expense . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 530
------- ------- ------- -------
Total operating expenses. . . . . . . . . . . . . . . . . . . . . . . 10,638 10,733 29,813 34,152
------- ------- ------- -------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . 1,034 191 3,330 (582)
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 90 249 186
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . (113) (293) (428) (717)
Imputed value of warrants issued in connection with debt conversion . . - - (990) -
Foreign currency gain (loss). . . . . . . . . . . . . . . . . . . . . . 163 132 (118) (521)
------- ------- ------- -------
Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . . . 1,194 120 2,043 (1,634)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . 90 10 204 45
------- ------- ------- -------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,104 $ 110 $ 1,839 $(1,679)
------- ------- ------- -------
------- ------- ------- -------
Basic net income (loss) per share. . . . . . . . . . . . . . . . . . . . . $ 0.04 $ 0.01 $ 0.07 $ (0.11)
------- ------- ------- -------
------- ------- ------- -------
Basic weighted average common shares . . . . . . . . . . . . . . . . . . . 29,599 15,464 26,696 15,327
------- ------- ------- -------
------- ------- ------- -------
Diluted net income (loss) per share. . . . . . . . . . . . . . . . . . . . $ 0.04 $ 0.01 $ 0.07 $ (0.11)
------- ------- ------- -------
------- ------- ------- -------
Diluted weighted average common shares . . . . . . . . . . . . . . . . . . 29,714 16,149 27,191 15,327
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
<PAGE>
CENTURA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,839 $(1,679)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 2,666 3,913
Loss on disposal of fixed assets. . . . . . . . . . . . . . . . . . . 327 --
Provision for doubtful accounts, sales returns and allowances . . . . (109) 62
Issuance of stock warrants. . . . . . . . . . . . . . . . . . . . . . 990 102
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . (1,253) 4,644
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 --
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . (332) (773)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 (229)
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . (1,549) (2,105)
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,802) (6,367)
Accrued litigation expense. . . . . . . . . . . . . . . . . . . . . . -- 9
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . -- 392
------- -------
Net cash provided by (used in) operating activities . . . . . . . . 1,037 (2,031)
Cash flows from investing activities:
Maturities of investments . . . . . . . . . . . . . . . . . . . . . . . -- 2,065
Purchase of investments . . . . . . . . . . . . . . . . . . . . . . . . (114) --
Acquisitions of property and equipment. . . . . . . . . . . . . . . . . (908) (3,067)
Capitalization of software costs. . . . . . . . . . . . . . . . . . . . (428) (639)
Proceeds from sale of property and equipment. . . . . . . . . . . . . . -- 462
Capitalization of intangibles and other assets. . . . . . . . . . . . . (78) (179)
------- -------
Net cash used in investing activities . . . . . . . . . . . . . . . 1,528 (1,358)
Cash flows from financing activities:
Repayment of note payable . . . . . . . . . . . . . . . . . . . . . . . -- (180)
Proceeds from short-term borrowings . . . . . . . . . . . . . . . . . . 2,415 --
Proceeds from issuance of common stock, net . . . . . . . . . . . . . . 1,898 616
------- -------
Net cash provided by financing activities . . . . . . . . . . . . . 4,313 436
Effect of exchange rate changes on cash and cash equivalents . . . . . . . (68) 109
------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . 3,754 (2,844)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 3,974 6,669
------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 7,728 $ 3,825
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
CENTURA SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF PREPARATION. The condensed consolidated balance sheet as of
September 30, 1998, the condensed consolidated statements of operations for
the three and nine month periods ended September 30, 1998 and 1997, and cash
flows for the nine month periods ended September 30, 1998 and 1997 have been
prepared by Centura Software Corporation (the "Company") without audit. In
the opinion of management, all adjustments necessary for a fair statement of
the financial position, results of operations, and cash flows have been made
for all periods presented. The financial data should be reviewed in
conjunction with the audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997. The results of operations for the three and nine month periods ended
September 30, 1998, are not necessarily indicative of the operating results
to be expected for the full year.
The December 31, 1997 balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. Such disclosures are contained in the
Company's Annual Report on Form 10K.
DERIVATIVE INSTRUMENTS. During the first quarter of 1997, the Company
recognized a loss of $731,000 attributed to foreign currency fluctuations on
net assets denominated in foreign currencies. As a result, the Company enters
into short-term forward contracts to reduce the risks associated with such
foreign currency fluctuations. For the quarter ended September 30, 1998, the
Company recognized a gain of $163,000 related to foreign currency
fluctuations. At September 30, 1998, the Company had $5,778,000 in forward
contracts denominated in five currencies; German Deutsche Marks, British
Pound Sterling, Netherlands Guilders, Italian Lira and Australian Dollars.
The carrying value of the instruments approximate their fair value as the
Company records entries to "mark-to-market" the respective contracts on a
monthly basis. The respective gains and losses from forward contracts are
included in other income (expense).
NET INCOME (LOSS) PER SHARE. Basic earnings per share is computed using
the weighted average number of shares of common stock. Diluted earnings per
share is computed using the weighted average number of shares of common
stock, common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options and warrants (using the treasury
stock method). Common equivalent shares are excluded from the computation if
their effect is antidilutive.
4
<PAGE>
The following is a reconciliation of the computation for basic and
diluted EPS:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1998 1997 1998 1997
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income (loss) $ 1,104 $ 110 $ 1,839 $(1,679)
------- ------- ------- -------
Shares calculation
Average basic shares outstanding 29,599 15,464 26,696 15,327
Effect of dilutive securities Options 115 685 495 --
------- ------- ------- -------
Total shares used to compute
diluted earnings per share 29,714 16,149 27,191 15,327
------- ------- ------- -------
Earnings (loss) per basic share $ 0.04 $ 0.01 $ 0.07 $ (0.11)
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss) per diluted share $ 0.04 $ 0.01 $ 0.07 $ (0.11)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Antidilutive options and warrants to purchase 8,256,628 and 251,850 were
outstanding at September 30, 1998 and September 30, 1997, respectively. Debt
convertible to 4,382,017 shares of common stock was outstanding at September
30, 1997 and was antidilutive. No such debt was outstanding as of September
30, 1998.
REVENUE RECOGNITION. In October 1997, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Positions No 97-2
("SOP 97-2"), "Software Revenue Recognition," which the Company has adopted
for transactions entered into beginning January 1, 1998. SOP 97-2 provides
guidance for recognizing revenue on software transactions and supersedes SOP
91-1 "Software Revenue Recognition."
In March 1998, the AICPA issued Statement of Position No. 98-4 ("SOP
98-4") "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition". SOP 98-4 defers, for one year, the application of
certain passages in SOP 97-2 which limit what is considered vendor-specific
objective evidence ("VSOE") necessary to recognize revenue for software
licenses on multiple-element arrangements when undelivered elements exist.
Additional guidance is expected to be provided prior to adoption of the
deferred provision of SOP 97-2. The Company will determine the impact, if
any, the further guidance will have on current revenue recognition practices
when issued.
COMPREHENSIVE INCOME (LOSS). The Company has adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). This Statement requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in
an annual financial statement that is displayed with the same prominence as
other annual financial statements. SFAS 130 also requires that an entity
classify items of other comprehensive earnings by their nature in an annual
financial statement. Other comprehensive earnings consist of foreign currency
translation adjustments. Annual financial statements for prior periods will
be reclassified, as required. The Company's total comprehensive earnings were
as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
-------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $1,104 $ 110 $1,839 $(1,679)
Other comprehensive loss (gain) 32 (101) 68 (109)
------ ----- ------ -------
Total comprehensive income (loss) $1,136 $ 9 $1,907 $(1,788)
------ ----- ------ -------
------ ----- ------ -------
</TABLE>
5
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS. In September 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of An Enterprise and Related
Information" ("SFAS 131"). SFAS 131 revises information regarding the
reporting of operating segments. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company will adopt SFAS 131 for the fiscal year ending
December 31, 1998 and does not expect such adoption to have a material effect
on the consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. It also provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. The
Company has not yet determined the impact, if any, of adopting this
statement. The disclosures prescribed by SOP 98-1 will be effective for the
Company's consolidated financial statements for the fiscal year ending
December 31, 1999.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 establishes accounting and reporting
standards for derivative instruments, embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and
the resulting designation. The Company will adopt SFAS 133 in the first
quarter of the fiscal year ending December 31, 2000 and has not yet evaluated
the impact of adoption and its effects on the Company's results of
operations, financial position, capital resources or liquidity.
RECLASSIFICATIONS. In order to conform to the condensed consolidated
balance sheet and statement of cash flows for the nine months ended September
30, 1998, certain reclassifications have been made to the condensed
consolidated balance sheet at December 31, 1997 and statement of cash flows
for the nine months ended September 30, 1997.
2. LITIGATION
On September 17, 1997, Technology Venture (Software) Holdings Limited,
formerly known as Eagerquest Investments Limited ("Eagerquest") filed suit
against the Company in the United States District Court for the Central
District of California alleging that the Company acted improperly with
respect to its contract with Eagerquest for the distribution of the Company's
products in the territories of Hong Kong and China and that the Company's
actions illegally damaged Eagerquest. While the formal settlement document
has not yet been signed, the Company has reached an agreement in principle
with Eagerquest to resolve outstanding differences and to dismiss the
lawsuit. The Company does not believe this will have an adverse material
affect on the Company's financial situation or business prospects.
Other than the above, there are currently no material pending legal
proceedings against the Company or any of its subsidiaries. The Company
operates in an environment, however, where litigation may occur in the course
of its normal business operations. In the complex and volatile industry in
which the Company operates, 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 material adverse impact on the
Company's future success.
3. SHORT-TERM BORROWINGS
In January 1998, the Company entered into a $5,000,000 asset based loan
facility with Coast Business Credit, the "Facility." The loan provides for
borrowings of up to $5,000,000, secured by the Company's accounts receivable,
combined with a $500,000 capital equipment facility. The Facility bears
interest at 1.75% above the Bank of America Reference Rate, and provides for
the ability to reduce interest cost based on the achievement of certain
financial covenants. The Facility matures in January 2000 and provides for
the ability to extend the agreement for one year at the option of the
Company. The facility replaces an accounts receivable factoring agreement
entered into by the Company in June 1997. As of September 30, 1998 there
was $3,996,000 drawn against the $5,000,000 loan facility.
4. CONVERSION OF NOTE PAYABLE
In February 1998, Computer Associates, Inc. ("CA"), and Newport
Acquisition Company, LLP ("NAC") entered into a Note Purchase and Sale
Agreement (with the Company's consent) and the Company and NAC entered into a
Note Conversion Agreement (the "Agreements"). Under the terms of the
Agreements, a promissory note, plus accrued interest, in
6
<PAGE>
the amount of $12,251,000, payable to CA (the "CA Note") was acquired by NAC,
and immediately converted into 11,415,094 shares of the Company's common
stock (the "Shares"). In February 1998, in connection with the Agreements,
the Company entered into a Warrant Purchase Agreement with CA wherein the
Company sold and issued to CA, at an issuance price of $.001 per share, a
warrant to purchase 500,000 shares of the Company's common stock. The
warrant is exercisable at $1.906 per share and expires on February 27, 2004.
The warrants were valued at $300,000 using a risk-free rate of 5.5% and a
volatility factor of 65% and the related charge is included in other income
(expense) in the first quarter of 1998.
Also, in consideration of services rendered in connection with the
Conversion of Note Payable, the Company issued to Rochon Capital Group, Ltd.
warrants to purchase 283,019 shares of the Company's common stock at an
exercise price of $2.12 (the "Rochon Conversion Warrants"). The Rochon
Conversion Warrants expire on February 27, 2003. The warrants were valued at
$141,000.
Included with the Note Conversion Agreement is an Investor Rights
Agreement ("IRA") between the Company and NAC that carries certain
anti-dilution rights for two years. In June 1998, the Company and NAC
entered into an agreement to amend the IRA. The amendment included
modifications to the IRA that limit NAC's anti-dilution rights related to
certain transactions, including the grant of stock options to employees and
shares that may be issued as consideration in connection with certain
strategic transactions, such as, an acquisition, asset purchase, or license
agreement. In consideration for these modifications, the Company issued to
NAC warrants to purchase up to 893,320 shares of common stock at an exercise
price of $1.81 and up to 300,000 shares of common stock at an exercise price
of $2.09, both expiring on June 11, 2003. The warrants for the 893,320
shares were valued at $393,800 by an independent specialty investment banking
firm, using a modified Black Scholes method with a risk free rate of 5.51%
and a volatility factor of 62.77%. The warrants for the 300,000 shares were
valued at $155,300 by an independent specialty investment banking firm, using
a modified Black Scholes method with a risk-free rate of 5.48% and a
volatility factor of 62.77%. The related charges are included in other
income (expense) in the second quarter of 1998.
5. PRIVATE PLACEMENT
In February 1998, pursuant to the terms of Stock Purchase Agreements,
the Company completed a private placement of 2,330,191 shares of the
Company's common stock (the "Private Placement"), resulting in gross proceeds
to the Company of $2,470,000. In connection with the Private Placement the
Company issued warrants to purchase 582,548 shares of the Company's common
stock. The warrants are exercisable at $1.25 per share and expire on
February 28, 2003. Also, in consideration of services rendered in connection
with the Private Placement, the Company issued to Rochon Capital Group, Ltd.
warrants to purchase 71,698 shares of the Company's common stock at an
exercise price of $2.12 (the "Rochon Private Placement Warrants"). The Rochon
Private Placement Warrants expire on February 27, 2003. The Company
registered the foregoing shares and warrants under the Securities Act of
1933, as amended on a Form S-3 declared effective on May 18, 1998.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q 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
Quarterly Report on Form 10-Q. In evaluating the Company's business,
prospective investors should carefully consider the following factors in
addition to the other information presented in this report.
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto
included in Part I--Item 1 of this Quarterly Report, and the audited
consolidated financial statements and notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Results of Operations:
NET PRODUCT REVENUES. Net product revenues consist of product shipments
and license fees. Net product revenues decreased 6% to $8.8 million for the
quarter ended September 30, 1998, from $9.4 million for the quarter ended
September 30, 1997. Declines in Tools and Database product sales were
partially offset by increases in the connectivity and reporting product
sales. International sales accounted for $4.6 million or 52% and
$5.6 million or 59% of net product revenues for the quarters ended September
30, 1998 and 1997, respectively. The decline in international sales is
primarily attributable to decreased sales in Europe and the Asia-Pacific
region as compared with the third quarter of 1997.
Net product revenues decreased 17% to $25.4 million for the nine months
ended September 30, 1998, from $30.7 million for the nine months ended
September 30, 1997. International sales accounted for $13.0 million or 51%
and $19.2 million or 63% of net product revenues for the nine months ended
September 30, 1998 and 1997, respectively. The decrease in international
sales is primarily due to decreased sales in Europe.
NET SERVICE REVENUES. Net service revenues increased 23% to $5.3
million for the quarter ended September 30, 1998, from $4.3 million for the
quarter ended September 30, 1997. The increase was primarily due to increased
sales of license maintenance support. International sales accounted for 51%
and 50% of total net service revenues for the quarters ended September 30,
1998 and 1997, respectively. Net service revenues were $14.6 million and
$12.7 million for the nine months ended September 30, 1998 and 1997,
respectively. International sales accounted for 52% and 45% of total net
service revenues for the nine months ended September 30, 1998 and 1997,
respectively.
COST OF PRODUCT REVENUES. Cost of product revenues includes the cost of
production and the amortization of capitalized software. Cost of product
revenues increased 51% to $1.4 million for the quarter ended September 30,
1998, principally due to an increase in royalties expense as compared with
$0.9 million in the 1997 third quarter. Cost of product revenues remained
relatively consistent at $3.6 million over the nine month period ended
September 30, 1998 as compared with the same period in the prior year. Cost
of product revenues as a percentage of product revenues increased to 16% from
10% for the quarters ended September 30, 1998 and 1997, respectively. Cost of
product revenues as a percentage of product revenues also increased to 14%
from 12% for the nine months ended September 30, 1998 and 1997, respectively.
In accordance with Statement of Financial Accounting Standards 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, were $373,000
and $1,177,000 for the three and nine month periods ended September 30, 1998
compared with $627,000 and $1,864,000 for the same periods in 1997,
respectively.
COST OF SERVICE REVENUES. Cost of service revenues consists primarily
of personnel costs related to product license maintenance, training and
technical support. Cost of service revenues decreased to $1.1 million from
$1.9 million for the three month periods ended September 30, 1998 and 1997,
respectively. For the nine month period ending September 30, 1998 and 1997,
cost of services revenues were $3.2 million and $6.3 million, respectively.
Cost of service revenues as a percentage of net service revenues were 20% and
43% for the quarters ended September 30, 1998 and 1997, respectively, and 22%
and 49% for the nine month period ended September 30, 1998 and 1997,
respectively. These decreases were due principally to a reduction of the
Company's work force, outsourcing of front end telephone support, and the
streamlining of operations which took effect in the third quarter of 1997.
8
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $7.2
million, or 51% of net revenues, for the quarter ended September 30, 1998,
compared with $6.0 million, or 44% of net revenues, for the quarter ended
September 30, 1997. For the nine month period ended September 30, 1998, sales
and marketing expenses were $19.9 million, or 50% of net revenues, compared
with $20.0 million or 46% of net revenues for the nine month period ended
September 30, 1997. The increase in sales and marketing expense as a
percentage of net revenues is due to the Company's worldwide marketing
efforts.
RESEARCH AND DEVELOPMENT EXPENSES. The table below sets forth gross
research and development expenses, capitalized 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>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Gross research and development expenses. . . . . . . . $1,740 $2,697 $5,002 $8,572
Capitalized internal software development costs. . . . (66) (185) (428) (639)
------ ------ ------ ------
Net research and development expenses. . . . . . . . . $1,674 $2,512 $4,574 $7,933
------ ------ ------ ------
------ ------ ------ ------
As a percentage of net revenue
Gross research and development expenses. . . . . . 12% 20% 13% 20%
Net research and development expenses. . . . . . . 12% 18% 11% 18%
</TABLE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $1.8 million and $1.7 million for the quarters ended September
30, 1998 and 1997, respectively, and $5.3 million and $5.2 million for the
nine month period ended September 30, 1998 and 1997, respectively.
OTHER INCOME (EXPENSE), NET. Other income (expense), net is comprised
of interest income, interest expense, and gains or losses on foreign currency
transactions. For the quarter ended September 30, 1998 other income
(expense) remained relatively consistent at $0.1 Million, and is primarily
attributable to net gains on foreign currency transactions.
For the nine month period ended September 30, 1998 other income
(expense), net was $(1.3) million, compared to $(1.1) million for the nine
month period ended September 30, 1997. The increased expense was primarily
attributable to the imputed value of warrants of $1.0 million issued in
connection with the Company's conversion of debt during the first quarter of
1998, offset by a decrease in net interest expense of $0.4 million, and
$0.4 million less of foreign currency losses due to the purchase of foreign
currency forward contracts in the principal currencies in which the Company
conducts business.
PROVISION FOR INCOME TAXES. The provision for income taxes was $0.1
million for the quarter ended September 30, 1998 and was $0.2 million for the
first nine month period of 1998, and was insignificant for the corresponding
periods of 1997. The provision primarily relates to foreign withholding
taxes. Due to the availability of net operating loss carryforwards arising in
prior years, no provision for U.S. income taxes was made for the three and
nine month periods ended September 30, 1998 and 1997.
9
<PAGE>
YEAR 2000 ISSUE. Background. Some computers, software, and other
equipment include programming code in which calendar year data is abbreviated
to only two digits. As a result of this design decision, some of these
systems could fail to operate or fail to produce correct results if "00" is
interpreted to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches,
and are commonly referred to as the "Millenium Bug" or "Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly,
the Company is reviewing its internal computer programs and systems to ensure
that the programs and systems will be Year 2000 compliant. The Company
presently believes that its computer systems will be Year 2000 compliant in a
timely manner. However, while the estimated cost of these efforts are not
expected to be material to the Company's financial position or any year's
results of operations, there can be no assurance to this effect.
Software Sold to Consumers. All current products developed by CENTURA
are designed to record, store and process and present calendar dates
occurring on or after January 1, 2000 with the same degree of accuracy that
such products process dates occuring before such date.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be
modified, upgraded, or replaced to minimize the possibility of a material
disruption to its business. The Company has commenced the process of
modifying, upgrading, and replacing major systems that have been identified
as adversely affected, and expects to complete this process in a timely
manner.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities
equipment, such as fax machines, photocopiers, telephone switches, security
systems, and other common devices may be affected by the Year 2000 Problem.
The Company is currently assessing the potential effect of, and costs of
remediating, the Year 2000 Problem on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems
will not have a material adverse effect on the Company's business or results
of operations. This estimate is being monitored and will be revised as
additional information becomes available.
Suppliers. The Company has initiated communications with third party
suppliers of the major computers, software, and other equipment used,
operated, or maintained by the Company to identify and, to the extent
possible, to resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over the actions of these third party
suppliers. Thus, while the Company expects that it will be able to resolve
any significant Year 2000 Problems with these systems, there can be no
assurance that these suppliers will resolve any or all Year 2000 Problems
with these systems before the occurrence of a material disruption to the
business of the Company or any of its customers. Any failure of these third
parties to resolve Year 2000 problems with their systems in a timely manner
could have a material adverse effect on the Company's business, financial
condition, and results of operation.
Disclaimer. Management believes that it is not possible to determine
with complete certainty that all Year 2000 Problems affecting the Company
have been identified or corrected. The number of devices that could be
affected and the interactions among these devices are simply too numerous. In
addition, one cannot accurately predict how many Year 2000 Problem-related
failures will occur, or the severity, duration, or financial consequences of
these perhaps inevitable failures. The discussion of the Company's efforts,
and management's expectations, relating to Year 2000 compliance are
forward-looking statements. The Company's ability to achieve Year 2000
compliance and the level of incremental costs associated therewith, could be
adversely impacted by, among other things, the availability and cost of
programming and testing resources, vendors' ability to modify proprietary
software, and unanticipated problems identified in the ongoing compliance
review.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 1998, the Company had a working capital position of
$0.2 million, including a liability for deferred revenues of $12.8 million.
Excluding deferred revenues, working capital would have been $13 million.
This represents an increase in working capital of $18.5 million from December
31, 1997. Net cash provided by operating activities for the nine months
ended September 30, 1998 was $1.0 million, which resulted primarily from net
income, depreciation and amortization, increases in accounts receivable and
other assets, and reductions in deferred revenue and accounts payable and
accrued liabilities. Cash used in investing activities totaled $1.5 million,
which related primarily to the purchase of equipment and capitalization of
software development costs. Cash provided by financing activities totaled
$4.3 million, and related to an increase in short-term borrowings, and net
proceeds from the issuance of common stock.
At September 30, 1998 the Company had $5.8 million in unsecured foreign
currency contracts, denominated in various currencies, as part of a program
to hedge the financial exposure arising from foreign denominated monetary
assets and liabilities.
The deferred product and support revenues of $12.8 million at September
30, 1998 reflects a delay in recognition of revenue in accordance with
Generally Accepted Accounting Principles and requires minimal use of future
resources of the Company.
The Company believes that expected cash flows from operations and
existing cash balances, will be sufficient to meet the Company's currently
anticipated working capital and capital expenditure requirements for the next
12 months. The Company may, however, choose to raise cash for operational or
other needs sometime in the future. 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 shareholders.
The Company's capital requirements also may be affected by acquisitions
of businesses, products and technologies that are complementary to the
Company's business, which the Company may consider from time to time. The
Company regularly evaluates such opportunities. Any such transaction, if
consummated, may further reduce the Company's working capital or require the
issuance of equity.
FACTORS THAT MAY AFFECT FUTURE RESULTS:
CHANGES IN STRATEGIC DIRECTION: RESTRUCTURING. In efforts to stem
losses and maximize return on the Company's core assets and technologies, the
Company has restructured its operations and announced changes in strategic
direction several times in recent financial periods. The first of these
changes, which began in December 1995, encompassed a change in the Company's
name from Gupta Corporation to Centura Software Corporation and the
identification of a flagship product bearing the name CENTURA. In early
1997, the Company refocused its marketing and sales efforts away from RDBMS
and development tools products to a middleware connectivity product and a
related Merger Agreement with Infospinner, Inc. ("InfoSpinner"). In the
second half of 1997, however, the Company restructured and refocused
operations on its core
11
<PAGE>
competencies, products and technologies and severed its distribution
arrangement with InfoSpinner. There can be no assurance that the
restructuring efforts the Company has engaged in to date will be successful
or that the Company will be able to sustain profitability on a quarterly or
annual basis. In addition, there can be no assurance that the Company's
management will not deem it appropriate to undertake other major
restructuring efforts or changes in strategic direction in the future or to
what degree any of these efforts will result in improved operational
performance, if at all.
RECENT CHANGES IN SENIOR MANAGEMENT. In the fourth quarter of 1997, the
Company announced significant changes in senior management. Such changes
included the election and appointment of Scott R. Broomfield as Chief
Executive Officer, the appointment of John W. Bowman as Chief Financial
Officer, Kathy Lane as Senior Vice President of Marketing, and the election
of Messrs. Jack King, Philip Koen and Earl Stahl to the Company's Board of
Directors, and the retirement of Samuel M. Inman, III, Earl Stahl and Richard
Gelhaus from their positions as officers of the Company. In February 1998
the Company announced the election of Messrs. William D. Nicholas and Peter
Micciche to the Board of Directors and the appointment of Scott R. Broomfield
to the position of Chairman & CEO. There can be no assurance that the new
management team will be successful in the execution of its objectives or that
the successful execution of these objectives will result in improved
operating results or financial position of the Company.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance is
substantially dependent on the performance of its executive officers and key
product development, technical, sales, marketing and management personnel.
The Company does not have employment or non-competition agreements with any
of its employees. The loss of the services of any executive officer or other
key technical or management personnel of the Company for any reason could
have a material adverse effect on the business, operating results and
financial condition of the Company.
The future success of the Company also depends on its continuing ability
to identify, hire, train, motivate and retain other highly qualified
technical and managerial personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be able to
attract, assimilate or retain other highly qualified technical and managerial
personnel in the future. The inability to attract and retain the necessary
technical and managerial personnel could have a material and adverse effect
upon its business, operating results and financial condition.
RECENT COMPANY LOSSES; FLUCTUATIONS IN QUARTERLY RESULTS. The Company
has experienced in the past and may in the future continue to experience
significant fluctuations in quarterly operating results. The Company
reported a loss of $0.6 million for fiscal year 1997, a profit of $2.0
million for 1996, and a loss of $44.1 million for 1995. There can be no
assurance that the restructuring efforts the Company has engaged in to date
will be successful or that the Company will be able to sustain profitability
on a quarterly or annual basis. Many of the Company's product licensing
arrangements are subject to revenue recognition on a per-unit deployed basis
as the Company's deferred obligation to such customers is gradually
extinguished. Revenue recognition in such cases is therefore dependent upon
the business activities of the Company's customers and the timely and
accurate reporting of such activities to the Company, which makes
predictability of the related revenue extremely uncertain. In addition,
quarterly operating results of the Company will depend on a number of other
factors that are difficult to forecast, including, general market demand for
the Company's products; the size and timing of individual orders during a
quarter; the Company's ability to fulfill such orders; introduction,
localization or enhancement of products by the Company; delays in the
introduction and/or enhancement of products by the Company and its
competitors; market acceptance of new products; reviews in the industry press
concerning the products of the Company or its competitors; 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; 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 the Company's strategy; personnel
changes; foreign currency exchange rates; mix of products sold; inventory
obsolescence; product returns and rotations; and general economic conditions.
Sales of the Company's products also may be negatively affected by delays in
the introduction or availability of new hardware and software products from
third parties. The Company's financial results also may vary as a result of
seasonal factors including year and quarter end purchasing and the timing of
marketing activities, such as industry conventions and tradeshows.
DILUTIVE AND POTENTIAL DILUTIVE EFFECT TO SHAREHOLDERS. In February
1998, Computer Associates, Inc. ("CA"), and Newport Acquisition Company, LLP
("NAC") entered into a Note Purchase and Sale Agreement and the Company and
NAC entered into a Note Conversion Agreement (the "Agreements"). Under the
terms of the Agreements, a promissory note, plus accrued interest, in the
amount of $12,251,000, payable to CA (the "CA Note") was acquired by NAC, and
immediately converted into 11,415,094 shares of the Company's common stock
(the "Shares"). In February 1998, in connection with the Agreements, the
Company entered into a Warrant Purchase Agreement with CA wherein the Company
sold and issued to CA, at an issuance price of $.001 per share, a warrant to
purchase 500,000 shares of the Company's common stock. The warrant is
exercisable at $1.906 per share and expires on February 27, 2004. The
warrants were valued at $300,000 using a risk-free rate of 5.5% and a
volatility factor of 65% and the related charge is included in other income
(expense) in the first quarter of 1998.
Also, in consideration of services rendered in connection with the
Conversion of Notes Payable, the Company
12
<PAGE>
issued to Rochon Capital Group, Ltd. warrants to purchase 283,019 shares of
the Company's common stock at an exercise price of $2.12 (the "Rochon
Conversion Warrants"). The Rochon Conversion Warrants expire on February 27,
2003. The warrants were valued at $141,000.
Included with the Note Conversion Agreement is an Investor Rights
Agreement ("IRA") between the Company and NAC that carries certain
anti-dilution rights for two years. In June 1998, the Company and NAC
entered into an agreement to amend the IRA. The amendment included
modifications to the IRA that limit NAC's anti-dilution rights related to
certain transactions, including the grant of stock options to employees and
shares that may be issued as consideration in connection with certain
strategic transactions, such as, an acquisition, asset purchase, or license
agreement. In consideration for these modifications, the Company issued to
NAC warrants to purchase up to 893,320 shares of common stock at an exercise
price of $1.81 and up to 300,000 shares of common stock at an exercise price
of $2.09, both expiring on June 11, 2003. The warrants for the 893,320
shares were valued at $393,800 by an independent specialty investment banking
firm, using a modified Black Scholes method with a risk free rate of 5.51%
and a volatility factor of 62.77%. The warrants for the 300,000 shares were
valued at $155,300 by an independent specialty investment banking firm, using
a modified Black Scholes method with a risk-free rate of 5.48% and a
volatility factor of 62.77%. The related charges are included in other
income (expense) in the second quarter of 1998.
Also in February 1998, pursuant to the terms of Stock Purchase
Agreements, the Company completed a private placement of 2,330,191 shares of
the Company's common stock (the "Private Placement"), resulting in gross
proceeds to the Company of $2,470,000. In connection with the Private
Placement the Company issued warrants to purchase 582,548 shares of the
Company's common stock. The warrants are exercisable at $1.25 per share and
expire on February 28, 2003. Also, in consideration of services rendered in
connection with the Private Placement, the Company issued to Rochon Capital
Group, Ltd. warrants to purchase 71,698 shares of the Company's common stock
at an exercise price of $2.12 (the "Rochon Private Placement Warrants"). The
Rochon Private Placement Warrants expire on February 27, 2003. The Company
registered the foregoing shares and warrants under the Securities Act of
1933, as amended on a Form S-3 declared effective on May 18, 1998.
STOCK OPTION PLANS. From time to time, the Company issues shares of
common stock pursuant to its 1992 Employee Stock Purchase Plan and pursuant
to options granted under its 1995 Incentive Stock Option Plan, 1998 Employee
Stock Option Plan (for non-officer employees) and 1996 Directors' Stock
Option Plan. Additional options remain outstanding and are exercisable
pursuant to the Company's 1986 Incentive Stock Option Plan, which terminated
in July 1996. In addition, the Company has issued non-plan options to the
Company's Chief Executive Officer, Chief Financial Officer and Sr. Vice
President of Marketing, exercisable for a total of 1,500,000 shares.
NEW PRODUCT RISKS; RAPID TECHNOLOGICAL CHANGE. The markets for the
Company's software products and services are characterized by rapid
technological developments, evolving industry standards, swift changes in
customer requirements and computer operating environments, and frequent new
product introductions and enhancements. As a result, the success of the
Company depends substantially upon its ability to continue to enhance
existing products, develop and introduce in a timely manner, new products
incorporating technological advances and meet increasing customer
expectations, all on a timely and cost-effective basis. To the extent one or
more competitors introduce products that better address customer needs, the
Company's businesses could be adversely affected. The Company's success will
also depend on the ability of its primary products, SQLBASE, CENTURA TEAM
DEVELOPER, SQLWINDOWS, CENTURA NET.DB, and SQLHOST, to perform well with
existing and future leading, industry-standard application software products
intended to be used in connection with RDBMS. Any failure to deliver these
products as scheduled or their failure to achieve early market acceptance as
a result of competition, technological change, failure of the Company to
timely release new versions or upgrades, failure of such upgrades to achieve
market acceptance or otherwise, could have a material adverse effect on the
business, operating results and financial condition of the Company. In
addition, 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. If the Company is
unable to develop and introduce new products or enhancements to existing
products in a timely manner in response to changing market conditions or
customer requirements, its business, operating results and financial
condition could be materially and adversely affected.
The Company depends substantially upon internal efforts for the
development of new products and product enhancements. The Company has in the
past experienced delays in the development of new products and product
versions, which resulted in loss or delays of product revenues, and there can
be no assurance that the Company will not experience further delays in
connection with its current product development or future development
activities. Also, software products as complex as those offered by the
Company may contain undetected errors when first introduced or as new
versions are released. The Company has in the past discovered software errors
in certain of its new products and enhancements, respectively, after their
introduction. Although the Company has not experienced material adverse
effects resulting from any such errors to date, there can be no assurance
that errors will not be found in new products or releases after commencement
of commercial shipments, resulting in adverse product reviews and a loss of
or delay in market acceptance, which could have
13
<PAGE>
a material adverse effect upon the Company's business, operating results and
financial condition.
From time to time, the Company or its competitors may announce new
products, product versions, capabilities or technologies that have the
potential to replace or shorten the life cycles of the Company's existing
products. The Company has historically experienced increased returns of a
particular product version following the announcement of a planned release of
a new version of that product. The Company provides allowances for
anticipated returns, and believes its existing policies result in the
establishment of allowances that are adequate, and have been adequate in the
past, but there can be no assurance that product returns will not exceed such
allowances in the future. The announcement of currently planned or other new
products may cause customers to delay their purchasing decisions in
anticipation of such products, which could have a material adverse effect on
business, operating results and financial condition of the Company.
YEAR 2000 ISSUE. Background. Some computers, software, and other
equipment include programming code in which calendar year data is abbreviated
to only two digits. As a result of this design decision, some of these
systems could fail to operate or fail to produce correct results if "00" is
interpreted to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches,
and are commonly referred to as the "Millenium Bug" or "Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly,
the Company is reviewing its internal computer programs and systems to ensure
that the programs and systems will be Year 2000 compliant. The Company
presently believes that its computer systems will be Year 2000 compliant in a
timely manner. However, while the estimated cost of these efforts is not
expected to be material to the Company's financial position or any year's
results of operations, there can be no assurance to this effect.
Software Sold to Consumers. All current products developed by CENTURA
are designed to record, store and process and present calendar dates
occurring on or after January 1, 2000 with the same degree of accuracy that
such products process dates occuring before such date.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be
modified, upgraded, or replaced to minimize the possibility of a material
disruption to its business. The Company has commenced the process of
modifying, upgrading, and replacing major systems that have been identified
as adversely affected, and expects to complete this process in a timely
manner.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities
equipment, such as fax machines, photocopiers, telephone switches, security
systems, and other common devices may be affected by the Year 2000 Problem.
The Company is currently assessing the potential effect of, and costs of
remediating, the Year 2000 Problem on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems
will not have a material adverse effect on the Company's business or results
of operations. This estimate is being monitored and will be revised as
additional information becomes available.
Suppliers. The Company has initiated communications with third party
suppliers of the major computers, software, and other equipment used,
operated, or maintained by the Company to identify and, to the extent
possible, to resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over the actions of these third party
suppliers. Thus, while the Company expects that it will be able to resolve
any significant Year 2000 Problems with these systems, there can be no
assurance that these suppliers will resolve any or all Year 2000 Problems
with these systems before the occurrence of a material disruption to the
business of the Company or any of its customers. Any failure of these third
parties to resolve Year 2000 problems with their systems in a timely manner
could have a material adverse effect on the Company's business, financial
condition, and results of operation.
Disclaimer. Management believes that it is not possible to determine
with complete certainty that all Year 2000 Problems affecting the Company
have been identified or corrected. The number of devices that could be
affected and the interactions among these devices are simply too numerous. In
addition, one cannot accurately predict how many Year 2000 Problem-related
failures will occur, or the severity, duration, or financial consequences of
these perhaps inevitable failures. The discussion of the Company's efforts,
and management's expectations, relating to Year 2000 compliance are
forward-looking statements. The Company's ability to achieve Year 2000
compliance and the level of incremental costs associated therewith, could be
adversely impacted by, among other things, the availability and cost of
programming and testing resources, vendors' ability to modify proprietary
software, and unanticipated problems identified in the ongoing compliance
review.
While the Company has begun the implementation of Year 2000 related
upgrades appropriate for the Company's internal systems and equipment and
Year 2000 compliance issues in the systems of customers, vendors and other
related parties, there can be no assurance that problems will not arise as a
result of the Year 2000 issue.
EMBEDDABLE DATABASE MARKET. Since database capacity is often indicative
of differences in customer application, segments within the PC client/server
market in which the Company competes can generally be distinguished and
segregated by the target capacity of the database utilized. The Company
generally markets its database products in environments utilizing capacity
ranging from small, Smart Device environments to those of multiple Gigabytes.
Competitors of the Company, including Microsoft, Sybase, Pervasive and
Oracle, generally have product offerings which compete with the Company's
products in some or all of these capacity ranges. In addition, some of these
competitors are providers of sophisticated database software, originally
designed and marketed primarily for use with mainframes and minicomputers,
which, if successfully re-configured to provide similar functionality in PC
client/server, or smaller capacity environments, could materially and
adversely impact the Company's revenues, results of operations and financial
condition.
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 embeddable PC and
Web client/server software, and the Company's current and prospective
competitors offer a variety of solutions to address this market segment.
TOOLS AND CONNECTIVITY MARKETS. The Company faces competition from
providers of software specifically developed for the PC client/server market,
such as Oracle, Sybase, Microsoft, Inprise and Forte, and connectivity
software competitors, such as IBI Systems, Inc. and Sybase. The Company also
faces potential competition from vendors of applications development tools
based on 4GLs (generation languages) or CASE (Computer Aided Software
Engineers) technologies. With the emergence of the World Wide Web as an
important platform for application development and deployment and a variety
of newly created tools that export Java--TM-- program language connectivity,
additional competitors or potential competitors have emerged.
The principal competitive factors affecting the market for the Company's
products include, breadth of distribution and name recognition, product
architecture, performance, functionality, price, product quality, customer
support. The Company experienced increased competition during 1997, 1996,
and 1995, 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 "Competition."
INTERNET SOFTWARE MARKET. The market for Internet software in general,
and the segments of such market addressed by the Company's products in
particular, are relatively new. The future financial performance of the
Company will depend in part on the continued expansion of this market and
these market segments and the growth in the demand for other products
developed by the Company, as well as increased acceptance of the Company's
products by MIS professionals. There can be no assurance that the Internet
software market and the relevant segments of the market will continue to
grow, that the Company will be able to respond effectively to the evolving
requirements of the market and market segments, or that MIS professionals
will accept the Company's products. If the Company is not successful in
developing, marketing, localizing and selling applications that gain
commercial acceptance in these markets and market segments on a timely basis,
the Company's business, operating results and financial condition could be
materially and adversely affected. See "Industry Overview."
DEPENDENCE UPON DISTRIBUTION CHANNELS. The Company relies on
relationships with value-added resellers and independent third party
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, they can cease marketing the Company's products at any
time, and they may from time to time be granted stock exchange or rotation
rights. Moreover, the introduction of new and enhanced products may result in
higher product returns and exchanges from distributors and resellers. 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 strategic relationships with
a number of vertical software vendors and other technology companies for
marketing or resale of the Company's products. Any termination or
significant disruption of the Company's relationship with a major portion of
its resellers or distributors, or the failure by such parties to renew
agreements with the Company, could materially and adversely affect the
Company's business, operating results and financial condition. Since 1994
the Company has reduced its resources devoted to North American corporate
sales and also decreased its expenditures on corporate and product marketing.
Failure of the Company to successfully implement, support and manage its
sales strategies could have a material adverse effect on the Company.
The distribution channels through which client/server software products
are sold have been characterized by rapid change, including consolidations
and financial difficulties of distributors, resellers and other marketing
partners including certain of the Company's current distributors. The
bankruptcy, deterioration in financial condition or other business
difficulties of a distributor or retailer could render the Company's accounts
receivable from such entity uncollectible, and this could result in a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that distributors will
continue to purchase the Company's products or provide the Company's products
with adequate promotional support. Failure of distributors to do so could
have a material and adverse effect on the Company's business, operating
results and financial condition.
In a number of international markets 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 agreements 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 such 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.
DEPENDENCE ON THIRD PARTY ORGANIZATIONS. The Company is increasingly
dependent on the efforts of third party "partners", including consultants,
system houses and software developers 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.
INTERNATIONAL SALES AND OPERATIONS. International sales represented
58%, 60% and 61% of the Company's net revenues for the years ended December
31, 1997, 1996 and 1995, respectively. A key component of the Company's
strategy is continued expansion into international markets, and the Company
currently anticipates that international sales, particularly in new and
emerging markets, will continue to account for a significant percentage of
total revenues. The Company will need to retain effective distributors, and
hire, retain and motivate qualified personnel internationally to maintain
and/or expand its international presence. There can be no assurance that the
14
<PAGE>
Company will be able to successfully market, sell, localize and deliver its
products in these international markets. In addition to the uncertainty as
to the Company's ability to sustain or expand its international presence,
there are certain risks inherent in doing business on an international level,
such as unexpected changes in regulatory requirements and government
controls, problems and delays in collecting accounts receivable, tariffs,
export license requirements and other trade barriers, difficulties in
staffing and managing foreign operations, longer payment cycles, political
and economic instability, fluctuations in currency exchange rates, seasonal
reductions in business activity during summer months in Europe and certain
other parts of the world, restrictions on the export of critical technology,
and potentially adverse tax consequences, which could adversely impact the
success of international operations. Sales of the Company's products are
denominated both in local currencies of the respective geographic region and
in US dollars, depending upon the economic stability of that region and
locally accepted business practices. Accordingly, any increase in the value
of the US dollar relative to local currencies in these markets may negatively
impact revenues, results of operations and financial condition. An increase
in the relative value of the US dollar would serve to increase the relative
foreign currency cost to the customer of a US dollar denominated purchase,
which may negatively affect the Company's sales in foreign markets. In
addition, the US dollar value of a sale denominated in a region's local
currency decreases in proportion to relative increases in the value of the US
dollar. In addition, effective copyright and trade secret protection may be
limited or unavailable under the laws of certain foreign jurisdictions.
There can be no assurance that one or more of such factors will not have a
material adverse effect on the Company's international operations and,
consequently, on the Company's business, operating results and financial
condition.
PROPRIETARY RIGHTS. The success and ability of the Company to compete
is dependent in part upon the Company's proprietary technology. While the
Company relies on trademark, trade secret and copyright laws to protect its
technology, the Company believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and customer support are more essential to
establishing and maintaining a technology leadership position. The Company
has one patent with respect to its SQLWINDOWS and CENTURA TEAM DEVELOPER
products. The Company believes that the ownership of patents is not
necessarily a significant factor in its business and that its success does
not depend on the ownership of patents, but primarily on the innovative
skills, technical competence and marketing abilities of its personnel. Also,
there can be no assurance that others will not develop technologies that are
similar or superior to the Company's technology. The source code for the
Company's proprietary software is protected both as a trade secret and as a
copyrighted work. Despite these precautions, it may be possible for a third
party to copy or otherwise obtain and use their products or technology
without authorization, or to develop similar technology independently. In
addition, effective copyright and trade secret protection may be unavailable
or limited in certain foreign countries. The Company intends to apply for
new patents as appropriate opportunities and need becomes evident.
The Company generally enters into confidentiality or license agreements
with its employees, consultants and vendors, and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite efforts to protect proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain
and use information that is regarded as proprietary. Policing such
unauthorized use is difficult. There can be no assurance that the steps
taken by the Company will prevent misappropriation of the Company's
technology or that such agreements will be enforceable. In addition,
litigation may be necessary in the future to enforce intellectual property
rights, to protect trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
There can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products, and
the Company expects that it will increasingly be subject to such claims as
the number of products and competitors in the client/server and Internet
connectivity software market grows and the functionality of such products
overlaps with other industry segments. In the past, the Company has received
notices alleging that its products infringe trademarks of third parties. The
Company has historically dealt with and will in the future continue to deal
with such claims in the ordinary course of business, evaluating the merits of
each claim on an individual basis. There are currently no material pending
legal proceedings against the Company regarding trademark infringement. Any
such third party claims, whether or not they are meritorious, could result in
costly litigation or require the Company to enter into royalty or licensing
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to the Company, or at all. If the Company was
found to have infringed upon the proprietary rights of third parties, it
could be required to pay damages, cease sales of the infringing products and
redesign or discontinue such products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
LEGAL PROCEEDINGS. Other than as described in Item 1 of Part II hereof,
there are currently no material pending legal proceedings against the Company
or any of its subsidiaries, other than ordinary routine litigation incidental
to the business of the Company. The Company operates, however, in a complex
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
15
<PAGE>
Company's future success.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 17, 1997, Technology Venture (Software) Holdings Limited,
formerly known as Eagerquest Investments Limited ("Eagerquest") filed suit
against the Company in the United States District Court for the Central
District of California alleging that the Company acted improperly with
respect to its contract with Eagerquest for the distribution of the Company's
products in the territories of Hong Kong and China and that the Company's
actions illegally damaged Eagerquest. While the formal settlement document
has not yet been signed, the Company has reached an agreement in principle
with Eagerquest to resolve outstanding differences and to dismiss the
lawsuit. The Company does not believe this will have an adverse material
affect on the Company's financial situation or business prospects.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) SECURITIES SOLD. On February 28, 1998 the Company issued and sold to
purchasers in a Private Placement 2,330,191 shares of the Company's Common Stock
(the "PP Shares") and warrants exercisable for 1,082,548 shares of the Company's
Common Stock (the "PP Warrants"). The Company also issued and sold to Computer
Associates International, Inc. ("CA") a warrant exercisable for 500,000 shares
of the Company's Common Stock (the "CA Warrant"). The Company also converted a
convertible promissory note plus accrued interest (collectively, the "Note")
held by Newport Acquisition Company No. 2, LLC ("NAC") into 11,415,094 shares of
the Company's Common Stock. (the "NAC Shares"). The Company also issued to
Rochon Capital Group, Ltd. ("Rochon"), its financial advisor, warrants
exercisable for a total of 354,717 shares of the Company's Common Stock (the
"Rochon Warrants") in partial consideration for Rochon's services in connection
with the foregoing transactions. On March 17, 1998 and June 11, 1998, the
Company also issued and sold to NAC two warrants exercisable for 893,320 shares
and 300,000 shares of the Company's Common Stock respectively (collectively, the
"NAC Warrants").
(b) UNDERWRITERS AND OTHER PURCHASERS. There were no underwriters for
the foregoing transactions. The PP Shares and PP Warrants were offered only
to a group of accredited investors. The CA Warrant was offered only to CA,
an accredited investor. The NAC Shares and the NAC Warrants were offered
only to NAC, an accredited investor. The Rochon Warrants were offered only
to Rochon, an accredited investor.
(c) CONSIDERATION. The PP Shares and PP Warrants were sold for an
aggregate offering price of $2,470,502. The CA Warrant was sold for an
aggregate offering price of $500. The NAC Shares were sold in consideration
of NAC's cancellation of the Note in the aggregate principal amount of
$10,000,000 plus accrued interest through February 27, 1998 of $2,251,771,
and the NAC Warrants were issued and sold in partial consideration of a
negotiated amendment to the Investor Rights Agreement between the Company and
NAC dated February 27, 1998. The Rochon Warrants were issued to Rochon in
partial consideration for Rochon's services in connection with the Private
Placement and conversion of the note.
(d) EXEMPTION FROM REGISTRATION CLAIMED. The foregoing transactions
were exempt from registration under the Securities Act of 1933, as amended
(the "Act") pursuant to Rule 506 of Regulation D, which provides an exemption
for sales without regard to the dollar amount of the offering, provided that
there are no more than 35 purchasers, and the sale satisfies all terms and
conditions of Rules 501 and 502 under the Act. All shares of Common Stock
and Warrants exercisable for Common Stock issued and sold pursuant to the
foregoing transactions were subsequently registered on Registration
Statements on Form S-3 declared effective by the Securities Exchange
Commission as of May 18, 1998 and July 8, 1998, respectively.
(e) TERMS OF CONVERSION OR EXERCISE. The PP Warrants are exercisable
at a price of $1.25 per share and expire on February 28, 2003. The CA Warrant
is exercisable at a price of $1.906 per share and expires on February 27,
2004. The Rochon Warrants are exercisable at a price of $2.12 per share and
expire on February 27, 2003. The NAC Warrants are exercisable at prices of
$1.81 and $2.09 per share, respectively, and both expire on June 11, 2003.
16
<PAGE>
ITEM 3. DEFAULTS IN SENIOR SECURITIES--NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NOT APPLICABLE
ITEM 5. OTHER INFORMATION
(a) KEY PERSONNEL. Subsequent to the quarter ended September 30, 1998,
the Company hired Joseph Falcone as Senior Vice President and Chief
Technology Officer. Additionally, Kathy Lane is now Senior Vice President of
Strategic Alliances.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended
September 30, 1998.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTURA SOFTWARE CORPORATION
By: /s/ John W. Bowman
----------------------------
November 16, 1998 John W. Bowman
Senior Vice President Of Finance And
Operations, Chief Financial Officer
(Principal Financial and Accounting Officer)
18
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