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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 31, 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: 0-21010
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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 No.)
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 X No
--- ---
As of April 30, 1998, there were 29,543,558 shares of the Registrant's
Common Stock outstanding.
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CENTURA SOFTWARE CORPORATION
FORM 10-Q for the Quarter Ended March 31, 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 March 31,
1998 and December 31, 1997........................ 1
b) Condensed consolidated statements of operations
for the three months ended March 31, 1998 and
1997.............................................. 2
c) Condensed consolidated statements of cash flows
for the three months ended March 31, 1998 and
1997.............................................. 3
d) Notes to condensed consolidated financial
statements........................................ 4-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 7-16
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................ 17
Item 2. Changes in Securities.................................... 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 ........................ 17
</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>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 6,724 $ 3,974
Accounts receivable, less allowances of $1,636
and $1,621.......................................... 11,346 11,744
Inventories......................................... 158 259
Other current assets................................ 2,830 3,089
--------- ------------
Total current assets........................... 21,058 19,066
Property and equipment, net ............................. 3,111 3,511
Capitalized software, net ............................... 2,096 2,573
Long-term investments.................................... 1,296 1,263
Other assets............................................. 1,667 1,787
--------- ------------
Total assets................................... $29,228 $28,200
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Subordinated Notes Payable.......................... $ -- $10,000
Accounts payable.................................... 3,691 4,244
Accrued compensation and related expenses........... 1,407 1,521
Short-term borrowings............................... 2,956 1,581
Other accrued liabilities........................... 1,560 5,334
Deferred revenue.................................... 13,718 14,618
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Total current liabilities...................... 23,332 37,298
Other liabilities........................................ 856 856
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Total liabilities.............................. 24,188 38,154
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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; 29,533 shares and
15,784 shares issued and outstanding........... 85,144 70,636
Cumulative translation adjustment................... (544) (484)
Accumulated deficit................................. (79,560) (80,106)
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Total shareholders' equity (deficit)........... 5,040 (9,954)
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Total liabilities and shareholders'
equity (deficit)............................ $29,228 $ 28,200
--------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
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CENTURA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Net revenues:
Product............................................ $8,584 $9,514
Service............................................ 4,188 4,086
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Net revenues.................................. 12,772 13,600
------ ------
Cost of revenues:
Product............................................ 1,282 1,366
Service............................................ 1,096 2,119
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Cost of revenues.............................. 2,378 3,485
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Gross profit............................. 10,394 10,115
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Operating expenses:
Sales and marketing................................ 5,827 6,623
Research and development........................... 1,544 2,703
General and administrative......................... 1,710 1,693
Acquisition expense................................ -- 261
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Total operating expenses...................... 9,081 11,280
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Operating income (loss).................. 1,313 (1,165)
Other income (expense):
Interest income.................................... 47 55
Interest expense................................... (201) (214)
Imputed value of warrants issued in connection
with debt conversion............................. (441) --
Foreign currency loss.............................. (164) (731)
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Income (loss) before income taxes....................... 554 (2,055)
Provision for income taxes.............................. 8 10
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Net income (loss)....................................... $546 $(2,065)
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Basic net income (loss) per share....................... $.03 $(.14)
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Basic weighted average common shares.................... 20,566 15,224
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Diluted net income (loss) per share..................... $.03 $(.14)
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Diluted weighted average common shares.................. 20,613 15,224
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
2
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CENTURA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $546 $(2,065)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 991 1,383
Issuance of stock warrants (Imputed Value).............. 441 --
Provision for doubtful accounts, sales returns and
allowances............................................ 15 106
Changes in assets and liabilities:
Accounts receivable.............................. 383 3,944
Inventories...................................... 101 135
Other current assets............................. 259 (108)
Other assets..................................... 74 2
Accounts payable and accrued liabilities......... (2,190) (2,958)
Deferred revenue................................. (900) (2,830)
Other liabilities................................ -- 192
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Net cash used in operating activities....... (280) (2,199)
------- -------
Cash flows from investing activities:
Maturities of investments.................................. -- 652
Purchases of investments................................... (33) (1)
Proceeds from sale of property and equipment............... -- 69
Acquisitions of property and equipment..................... (26) (511)
Capitalization of software costs........................... (29) (466)
Capitalization of other intangibles........................ (13) (37)
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Net cash used in investing activities....... (101) (294)
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Cash flows from financing activities:
Repayment of note payable.................................. -- (89)
Proceeds from short-term borrowings, net................... 1,375 --
Proceeds from issuance of common stock, net................ 1,816 91
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Net cash provided by financing activities... 3,191 2
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Effect of exchange rate changes on cash and cash equivalents.... (60) 85
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Net increase (decrease) in cash and cash equivalents............ 2,750 (2,406)
Cash and cash equivalents at beginning of period................ 3,974 6,669
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Cash and cash equivalents at end of period...................... $ 6,724 $ 4,263
------- -------
Supplemental disclosure of non cash financing activities:
Conversion of convertible debt and accrued interest for
common stock.............................................. $12,251 $ --
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
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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
March 31, 1998 and the condensed consolidated statements of operations and cash
flows for the three months ended March 31, 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 month period ended March 31, 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 10-K.
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 March 31, 1998, the
Company recognized a loss of $164,000 related to foreign currency
fluctuations. At March 31, 1998, the Company had $5,741,000 in forward
contracts denominated in four European currencies; German Deutsche Marks,
British Pound Sterling, Netherland Guilders, and Italian Lira. 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). Due to the short-term nature of the forward contracts, the
deferred gain/(loss) recorded on the balance sheet is not material for
disclosure. The net change in the deferred gain/(loss) at the end of each
period reported is included in other comprehensive income/(loss) reported by
the Company.
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 convertible preferred stock (using the if
converted method) and stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation if their
effect is antidilutive.
Antidilutive options and warrants to purchase 6,863,444 and 3,048,285
were outstanding at March 31, 1998 and March 31, 1997, respectively.
Antidilutive convertible debt to convert 2,768,216 shares of common stock
were outstanding at March 31, 1997. No such debt was outstanding as of March 31,
1998.
The following is a reconciliation of the computation for basic and diluted EPS:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
(in thousands, except per share data)
<S> <C> <C>
Net income (loss) $546 $(2,065)
------------ --------------
Shares calculation
Average basic shares outstanding 20,566 15,224
Effect of dilutive securities
Options 47 --
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Total shares used to compute
diluted earnings per share 20,613 15,244
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Earnings (loss) per basic share $.03 $(0.14)
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Earnings (loss) per diluted share $.03 $(0.14)
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</TABLE>
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
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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. Adoption of the remaining provisions of SOP 97-2 did not have a
material impact on revenue recognition during the first quarter of 1998.
COMPREHENSIVE INCOME (LOSS). The Company has adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
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. This Statement also requires that an entity classify
items of other comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings may include foreign
currency translation adjustments and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. The Company's
total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
(in thousands)
<S> <C> <C>
Net income(loss) $546 $(2,065)
Other comprehensive loss(gain) 68 (85)
------------------ ------------------
Total comprehensive income(loss) $478 $(1,980)
------------------ ------------------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENT. 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.
RECLASSIFICATIONS. In order to conform to the condensed consolidated
balance sheet and statement of cash flows for the three months ended March
31, 1998, certain reclassifications have been made to the condensed
consolidated balance sheet and statement of cash flows for the three months
ended March 31, 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 in terminating 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. The Company believes that its actions were within its
rights under its contract with Eagerquest and that the allegations are without
merit. The Company intends to defend itself vigorously in this action and
believes that the outcome will not have a material adverse 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
5
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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 2.25% above the Bank of America Reference Rate, and provides for
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 March 31, 1997 there was $2,956,000 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 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 using a risk-free rate of 5.5% and volatility factor of 65% and the
related charge is included in other income (expense) in the first quarter of
1998.
Included with the Note Conversion Agreement is an Investor Rights
Agreement between the Company and NAC that carries certain anti-dilution
rights for two years. Interpretation of specific sections of the Investor
Rights Agreement are currently in question. While the parties have been in
active discussion to resolve the question of interpretation, there can be
no assurance that final resolution of the interpretation of the Investor
Rights agreement will not entail litigation activity.
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. The Company has agreed to register the
shares under the Securities Act of 1933, as amended. 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.
Transaction costs associated with both the Agreements and the Private
Placement were $612,000.
6
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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 decreased 10% to $8.6 million
for the quarter ended March 31, 1998, from $9.5 million for the quarter ended
March 31, 1997. The decrease in net product revenues is primarily
attributable to $0.7 million in Q1 1997 revenues for the initial launch of
Foresite products, which are no longer distributed by the Company.
International sales accounted for $4.7 million or 55% and $6.1 million or 63%
of net product revenues for the quarters ended March 31, 1998 and 1997,
respectively. The decrease in international sales of $1.4 million is
primarily due to decreased sales in Central Europe. Revenue from expired
contracts amounted to $0.7 million and $0.5 million in the first quarter of
1998 and 1997, respectively.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 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. Adoption of the remaining provisions of SOP 97-2 did not have a
material impact on revenue recognition during the first quarter of 1998.
NET SERVICE REVENUES. Net service revenues primarily consists of
maintenance, support and professional services. Net service revenues
increased 2% to $4.2 million for the quarter ended March 31, 1998, from $4.1
million for the quarter ended March 31, 1997. International sales accounted
for 50% and 38% of total net service revenues for the quarters ended March
31, 1998 and 1997, respectively.
COST OF PRODUCT REVENUES. Cost of product revenues includes the cost of
subcontracted production and the amortization of capitalized software. Cost
of product revenues decreased 6% to $1.3 million for the quarter ended March
31, 1998, from $1.4 million for the quarter ended March 31, 1997, primarily
due to an associated decrease in product revenues. Cost of product revenue
as a percentage of product revenues was 15% and 14% for the quarters ended
March 31, 1998 and 1997.
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, decreased to
$506,000 for the three months ended March 31, 1998 from $594,000 for the
three months ended March 31, 1997.
COST OF SERVICE REVENUES. Cost of service revenues consists primarily
of personnel costs related to maintenance, training and technical support.
Cost of service revenues decreased to $1.1 million from $2.1 million for the
quarters ended March 31, 1998 and 1997, respectively. Cost of service
revenues as a percentage of net service revenues was 26% and 52% for the
quarters ended March 31, 1998 and 1997, respectively. The decrease in
percentage is due principally to a reduction of
7
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the Company's work force and the streamlining of operations which took effect
in the third quarter of 1997.
SALES AND MARKETING EXPENSES. For the quarter ended March 31, 1998,
expenses in sales and marketing activities decreased to $5.8 million, or 46% of
net revenues, from $6.6 million, or 49% of net revenues, for the quarter ended
March 31, 1997. The reduction in sales and marketing expense reflects the
Company's commitment to control spending, while continuing its 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 ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Gross research and development expenses.................... $1,573 $3,019
Capitalized internal software development costs............ (29) (316)
------ ------
Net research and development expenses...................... $1,544 $2,703
------ ------
As a Percentage of Net Revenues:
Gross research and development expenses .............. 12% 22%
Net research and development expenses ................ 12% 20%
</TABLE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and Administrative
expenses consists of Finance, Legal, Systems and other administrative
expenses. General and administrative expenses remained constant at $1.7
million for the first quarter of 1998 and $1.7 million for the first quarter
of 1997.
OTHER INCOME (EXPENSE), NET. Other income (expense), net is comprised of
interest income, interest expense, imputed value of warrants issued in
connection with equity financing and gains or losses on foreign currency
transactions. For the quarter ended March 31, 1998 other income (expense), net
was $(0.8) million, compared to $(0.9) million for the quarter ended March 31,
1997. The net decrease in expense is primarily attributable to more stability in
the principal currencies in which the Company does business, when compared to
the first quarter of 1997, offset by the imputed value of warrants of $0.4
million issued in connection with the Company's conversion of debt during the
first quarter of 1998.
YEAR 2000 ISSUE. The Company has commenced, for all of its information
systems, a year 2000 date conversion project to address all necessary code
changes, testing and implementation of mission critical applications. The
"Year 2000 Issue" arises because most computer systems and programs were
designed to handle only a two-digit year, as opposed to a four digit year.
When the year 2000 begins these computers may interpret "00" as the year 1900
and could either stop processing date-related computations or could process
them incorrectly. The Year 2000 Issue creates risk for the Company from
unforeseen problems in its internal computer systems and from third parties
with which the Company interacts. Such failures of the Company's and/or third
parties' computer systems could have a material impact on the Company's
ability to conduct its business, and to process and account for the transfer
of funds electronically. Management has not completed its assessment of all
of the potential Year 2000 compliance expenses and the related potential
effect on the Company's earnings.
PROVISION FOR INCOME TAXES. The provision for income taxes was
insignificant for the first quarter of 1998 and the first quarter of 1997.
The provision primarily relates to foreign withholding taxes. Due to the
Company's existing net operating loss position with regard to prior years, no
tax provision was made for income in this quarter.
LIQUIDITY AND CAPITAL RESOURCES:
8
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In the first quarter of 1998 the Company completed a note payable
conversion and private placement of common stock, as described in Notes 4 and
5 of the Notes to the Consolidated Financial Statements. Together with the
net income for the period, this resulted in a net increase in shareholder's
equity of $15.0 million.
At March 31, 1998, the Company had a deficit working capital position,
including a liability for deferred revenues of $13.7 million, of $2.3
million, representing an increase of $16.0 million from December 31, 1997.
Net cash used in operating activities for the quarter ended March 31, 1998
was $.3 million, which resulted primarily from decreases in accounts payable
and accrued liabilities (principally comprised of interest on the CA Note),
and deferred revenue, partially offset by depreciation and amortization, net
income, issuance of stock warrants and the decrease in accounts receivable.
Cash used in investing activities totaled $0.1 million which related
primarily to the capitalization of software development costs, the purchases
of property and equipment, and the purchase of investments. Cash from
financing activities totaled $3.2 million of which $1.8 million is from the
private placement and $1.4 million is proceeds from short-term borrowings.
At March 31, 1998 the Company had $5.7 million in unsecured foreign
currency contracts, denominated in various European currencies, as part of a
program to hedge the financial exposure arising from foreign denominated
monetary assets and liabilities.
The deferred product and support revenue of $13.7 million at March 31,
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 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, Phillip Keon, Jr, 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. In addition, the Company is in the
process of recruiting a Chief Technology Officer. The Company considers this
position critical to the success of its ongoing competitive position in
defined markets and operations. There can be no assurance that an appropriate
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individual will be located to fill this position on a timely basis on terms
reasonable to the Company, or at all.
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.
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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 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 using a risk-free rate of 5.5% and volatility factor of 65% and the
related charge is included in other income (expense) in the first quarter of
1998.
Included with the Note Conversion Agreement is an Investor Rights
Agreement between the Company and NAC that carries certain anti-dilution
rights for two years. Interpretation of specific sections of the Investor
Rights Agreement are currently in question. While the parties have been in
active discussion to resolve the question of interpretation, there can be no
assurance that final resolution of the interpretation of the Investor Rights
Agreement will not entail litigation activity.
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. The Company has agreed to register
the shares under the Securities Act of 1933, as amended. 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.
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
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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 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: The "Year 2000 Issue" arises because most computer
systems and programs were designed to handle only a two-digit year, as opposed
to a four digit year. When the year 2000 begins these computers may interpret
"00" as the year 1900 and could either stop processing date-related computations
or could process them incorrectly. As customers and potential customers of
the Company begin to devote incremental resources to this issue, resources
previously allocated to other information systems requirements may be redirected
to address the Year 2000 issue. To the extent that the Company's products are
not selected as part of a customer's overall Year 2000 solution, redirection of
these customer resources could have a material adverse effect on the Company's
results of operations and financial condition. In addition, the Year 2000
Issue creates risk for the Company from unforeseen problems in its internal
computer systems and from third parties with which the Company interacts. Such
failures of the Company's and/or third parties' computer systems could have
material impact on the Company's ability to conduct its business, and to process
and account for the transfer of funds electronically.
While the Company has undertaken a study 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, Oracle, CA, IBM, Sybase,
Inprise, Pervasive, and Informix, generally
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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 Developer 2000, Sybase's Powersoft Division, Microsoft,
Inprise 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 (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".
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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 any 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
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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
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
presently 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 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
15
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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
Company's future success.
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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 in
terminating 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. The Company believes that
its actions were within its rights under its contract with Eagerquest and
that the allegations are without merit. The Company intends to defend itself
vigorously in this action and believes that the outcome will not have a
material adverse 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.
ITEM 2. CHANGES IN SECURITIES _ NOT APPLICABLE
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 _ NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) The Company filed the following reports on Form 8-K and 8-K/A
during the quarter ended March 31, 1998:
Report Date: January 14, 1998 (filed January 30, 1998)
Item 5: Other Events
The Company announced that its listing had been moved from the
Nasdaq National Market to The Nasdaq SmallCap Market effective
January 15, 1998, and that it had recently completed a loan
facility transaction with Coast Business Credit enabling it to
borrow up to $5 million against accounts receivable.
- -----------------------
Report Date: February 18, 1998 (filed February 27, 1998)
Item 5: Other Events
The Company announced the structure of a proposed
recapitalization of its balance sheet in connection with
conversion of its promissory note to Computer Associates
International, Inc. to equity and completion of a private
placement of 2,330,191 shares of its common stock and the
subsequent completion of the foregoing transactions on February
27, 1998.
- ----------------------
Report Date: February 18, 1998 (filed March 2, 1998)
Item 5: Other Events
The Company amended its pro forma balance sheet for January 31,
1998, previously included with its Report on Form 8-K filed on
February 27, 1998.
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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:
-------------------------------------------
May 15, 1998 John W. Bowman
SENIOR VICE PRESIDENT OF FINANCE AND
OPERATIONS, CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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<TABLE> <S> <C>
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<ARTICLE> 5
<MULTIPLIER> 1,000
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