===============================================================================
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, 1999 OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period From _____ to _____
Commission file number: 0-21010
Centura Software Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 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 X No
----- -----
As of October 31, 1999, there were 35,420,609 shares of the Registrant's
Common Stock outstanding.
<PAGE>
CENTURA SOFTWARE CORPORATION
FORM 10-Q for the Quarter Ended September 30, 1999
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data
a) Condensed consolidated balance sheets at
September 30, 1999 and December 31, 1998
b) Condensed consolidated statements of
operations for the three and nine months
ended September 30, 1999 and 1998
c) Condensed consolidated statements of cash
flows for the three and nine months ended
September 30, 1999 and 1998
d) Notes to condensed consolidated financial
statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Changes in securities and use of proceeds
Item 3. Defaults in senior securities
Item 4. Submission of matters to a vote of security
holders
Item 5. Other information
Item 6. Exhibits and reports on Form 8-K
<PAGE>
CENTURA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE> September 30, December 31
<CAPTION> 1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $4,182 $6,414
Accounts receivable, less allowances of
$1, 623 and $1,321....................... 14,179 12,988
Other current assets....................... 3,924 3,627
------------ ------------
Total current assets..................... 22,285 23,029
Property and equipment, net................... 3,876 2,888
Capitalized software, net..................... 1,007 1,542
Goodwill, net................................. 2,563 0
Other intangible assets, net.................. 3,880 770
Other assets.................................. 1,419 1,143
------------ ------------
Total assets............................. $35,030 $29,372
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations... $875 $0
Accounts payable........................... 3,131 2,798
Accrued compensation and related expenses.. 1,254 1,567
Short-term borrowings...................... 2,406 2,663
Other accrued liabilities.................. 2,803 1,744
Deferred revenue........................... 13,285 13,274
------------ ------------
Total current liabilities................ 23,754 22,046
Long-term liabilities......................... 620 53
Stockholders' Equity:
Preferred stock, no par value; 2,000 shares
authorized; none issued and outstanding... -- --
Common stock, par value $.01 per share;
60,000 shares authorized; 35,421 and 29,598
shares issued and outstanding............ 91,695 85,690
Accumulated other comprehensive income..... (453) (426)
Accumulated deficit........................ (80,586) (77,991)
------------ ------------
Total stockholders' equity ............... 10,656 7,273
------------ ------------
Total liabilities and stockholders' equity $35,030 $29,372
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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,
------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Product............................. 7,823 $8,811 20,447 $25,377
Service............................. 5,949 5,310 16,605 14,563
--------- --------- --------- ----------
Net revenues...................... 13,772 14,121 37,052 39,940
--------- --------- --------- ----------
Cost of revenues:
Product............................. 673 1,370 2,634 3,556
Service............................. 1,022 1,079 2,922 3,241
Amortization of acquired products... 134 0 179 0
--------- --------- --------- ----------
Cost of revenues.................. 1,829 2,449 5,735 6,797
--------- --------- --------- ----------
Gross profit...................... 11,943 11,672 31,317 33,143
--------- --------- --------- ----------
Operating expenses:
Sales and marketing................. 7,223 6,759 20,402 18,930
Engineering and product development. 2,327 2,093 6,682 5,589
General and administrative.......... 1,808 1,786 6,104 5,294
Amortization of goodwill............ 199 0 260 0
--------- --------- --------- ----------
Total operating expenses.......... 11,557 10,638 33,448 29,813
--------- --------- --------- ----------
Operating income (loss).......... 386 1,034 (2,131) 3,330
Other income (expense):
Interest income..................... 33 110 142 249
Interest expense.................... (80) (113) (234) (428)
Imputed value of warrants issued.... 0 0 0 (990)
Foreign currency gain (loss)........ 154 163 (302) (118)
--------- --------- --------- ----------
Income before income taxes............. 493 1,194 (2,525) 2,043
Provision for income taxes............. 31 90 70 204
--------- --------- --------- ----------
Net income............................. 462 $1,104 (2,595) $1,839
========= ========= ========= ==========
Basic net income per share............. $0.01 $0.04 $(0.08) $0.07
========= ========= ========= ==========
Basic weighted average common shares... 35,413 29,599 32,045 26,696
========= ========= ========= ==========
Diluted net income per share........... $0.01 $0.04 $(0.08) $0.07
========= ========= ========= ==========
Diluted weighted average common shares. 35,413 29,714 32,045 27,191
</TABLE> ========= ========= ========= ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
CENTURA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN THOUSANDS)
<TABLE> Nine Months Ended
<CAPTION> September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... ($2,595) $1,839
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 2,817 2,666
Loss on disposal of fixed assets...................... 0 327
Provision for doubtful accounts, sales returns
and allowances....................................... (211) (109)
Issuance of stock warrants............................ 0 990
Changes in assets and liabilities:
Accounts receivable................................... 808 (1,253)
Other current assets.................................. 633 (218)
Other assets.......................................... 181 146
Accounts payable and accrued liabilities.............. (777) (1,549)
Deferred revenue...................................... (1,498) (1,802)
---------- ----------
Net cash provided by (used in) operating activities. (642) 1,037
---------- ----------
Cash flows from investing activities:
Net cash acquired on acquisition........................ 23 0
Maturaties (Purchases) of investments................... 60 (114)
Acquisition of property and equipment................... (726) (908)
Capitalization of software costs........................ (308) (428)
Capitalization of other intangibles..................... (52) (78)
---------- ----------
Net cash used in investing activities............... (1,003) (1,528)
---------- ----------
Cash flows from financing activities:
Proceeds from (repayment of) short-term borrowings, net. (257) 2,415
Repayment of capital lease obligation................... (303) 0
Proceeds from issuance of common stock, net............. 0 1,898
---------- ----------
Net cash provided by (used in)financing activities.. (560) 4,313
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents.............................................. (27) (36)
---------- ----------
Net increase (decrease)in cash and cash equivalents....... (2,232) 3,754
Cash and cash equivalents at beginning of period.......... 6,414 3,974
---------- ----------
Cash and cash equivalents at end of period................ 4,182 7,728
========== ==========
Supplemental disclosure of non cash financing activities:
Conversion of convertible debt and accrued interest
for common stock.................................... $ 0 $12,251
========== ==========
Conversion of operating lease to capital lease........ $1,300 $ 0
========== ==========
Acquired net assets associated with the Raima
acquisition includes:
Fair value of tangible assets......................... 4,734
Fair value of acquired products....................... 2,670
Fair value of acquired workforce...................... 670
Goodwill.............................................. 2,752
Fair value of liabilities assumed..................... (3,227)
----------
7,599
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
<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, 1999, the condensed consolidated statements of
operations for the three month and nine month periods ended September 30,
1999 and 1998, and cash flows for the nine month periods ended September
30, 1999 and 1998 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 of cash flows have been made for all periods presented.
As discussed in Note 2, the Company completed its acquisition of Raima
Corporation ("Raima") on June 7, 1999. The acquisition was accounted
for using the purchase method of accounting and accordingly, the net
assets and results of operations of Raima have been included in the
Company's condensed consolidated financial statements since the
acquisition date. 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,
1998. The results of operations for the three month and nine month
periods ended September 30, 1999 are not necessarily indicative of the
operating results to be expected for the full year.
The December 31, 1998 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.
Net Income (Loss) Per Share. Basic net income (loss) per share
is computed using the weighted-average number of shares of common stock
outstanding during each respective period. Diluted net income (loss) per
share is computed using the weighted-average number of shares of common
stock and 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.
The following is a reconciliation of the computation for basic and
diluted net income (loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands, except per shar
<S> <C> <C> <C> <C>
Net income (loss) $462 $1,104 ($2,595) $1,839
========= ========= ========= =========
Shares calculation:
Average basic shares outstanding. 35,413 29,599 32,045 26,696
Effect of dilutive securities -- 115 -- 495
Total shares used to compute --------- --------- --------- ---------
diluted net income (loss)
per share 35,413 29,714 32,045 27,191
========= ========= ========= =========
Basic net income (loss) per share $0.01 $0.04 ($0.08) $0.07
========= ========= ========= =========
Diluted net income (loss) per share $0.01 $0.04 ($0.08) $0.07
========= ========= ========= =========
</TABLE>
Antidilutive options and warrants to purchase 10,904,307 and
8,256,628 shares of common stock were outstanding at September 30, 1999
and September 30, 1998, respectively.
Revenue Recognition. The Company receives licensing fees from certain
resellers (including original equipment manufacturers) under product
licensing arrangements. Revenue from these resellers is recognized upon
shipment of product, if collection of the resulting receivable is
probable and no ongoing obligation exists. If an ongoing obligation
exists, such fees are recorded as revenue as product is sold and reported
to the Company by the reseller. For licensing agreements with end-users,
fees are recognized upon shipment of the product, if collection of the
resulting receivable is probable and no ongoing obligation exists. If an
ongoing obligation exists, revenue is deferred based on vendor-specific
objective evidence of the undelivered element. If vendor-specific
objective evidence does not exist for all undelivered elements, all
revenue is deferred until sufficient evidence exists or all elements have
been delivered. Service revenues from customer maintenance fees for
ongoing customer support and product updates, including maintenance
bundled with software licenses, is recognized ratably over the period of
the contract. When licensing agreements terminate, the Company records
any licensing fees previously not recognized. Revenue from other
services, including training, is recognized as the service is performed.
The Company also enters into agreements with certain of its distributors
involving boxed product. Revenues from these distributors are generally
recognized when the product is shipped and are reduced by management's
estimate of anticipated stock exchanges based on historical experience.
Commencing January 1, 1999, the Company has recognized revenues in
accordance with Statement of Position No. 98-9 ("SOP 98-9"),
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions." During 1998, the Company recognized revenues in
accordance with Statement of Position No. 97-2 ("SOP 97-2"), "Software
Revenue Recognition." Prior to 1998, the Company recognized revenues in
accordance with Statement of Position No. 91-1, "Software Revenue
Recognition."
Long-Lived Assets. The Company evaluates the recoverability of
its long-lived assets in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be disposed of" ("SFAS
121"). SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
Comprehensive Income (Loss). The Company reports components of
comprehensive income (loss) in its annual consolidated statement of
shareholders' equity. Other comprehensive income (loss) consists of net
income and foreign currency translation adjustments. The Company's total
comprehensive earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $462 $1,104 ($2,595) $1,839
Other comprehensive gain (loss) (194) 32 (27) 68
--------- --------- --------- ---------
Total comprehensive income (loss) 268 1,136 (2,622) 1,907
========= ========= ========= =========
</TABLE>
Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain 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, 2001 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.
2. Acquisitions
On June 7, 1999 the Company acquired all the outstanding shares of
Raima Corporation ("Raima"), a Seattle-based vendor of cross-platform
micro databases and data management tools for real-time, Windows, and
Unix-based applications. Under the terms of the agreement, the former
shareholders of Raima received a gross amount of 5,800,000 shares
(subject to certain adjustments) of the Company's common stock valued at
$1.031 per share. The Company also incurred approximately $1.6 million in
acquisition related expenses.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Raima and the
fair market value of the acquired assets and liabilities have been
included in the financial statements of the Company as of June 7, 1999.
The total purchase price of $7.6 million was allocated to assets
acquired, including tangible and intangible assets and liabilities
assumed, based on their respective estimated fair values at the
acquisition date. The estimate of fair value of the net assets acquired
is based on an independent appraisal, and management estimates. The
purchase consideration included 5.8 million shares of Centura common
stock valued at approximately $6.0 million, and other consideration of
$1.6 million.
The total purchase price was allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of tangible assets....... $4,734
Fair value of acquired products..... 2,670
Fair value of acquired workforce.... 670
Goodwill............................ 2,752
Fair value of liabilities assumed... (3,227)
---------
Goodwill............................ $7,599
=========
</TABLE>
The identified intangible assets are being amortized over the
periods of benefit, ranging from thirty-six to sixty months.
The following table represents pro forma information as if Centura
and Raima had been combined as of the beginning of the periods
presented. The pro forma data are presented for illustrative purposes
only and are not necessarily indicative of the combined financial
position or results of operations of future periods or the results that
actually would have resulted had Centura and Raima been a combined
company during the specified periods. The pro forma results include the
effects of the purchase price allocation from amortization of the
acquisition related intangible assets.
Pro Forma Unaudited
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1999 1998
--------- ---------
<S> <C> <C>
Net revenue........................... $43,386 $46,778
Net income (loss)..................... (1,202) 2,898
Basic income (loss) per share......... ($0.03) $0.09
Basic weighted average common shares.. 35,421 32,518
Diluted net income (loss) per share... ($0.03) $0.09
Diluted weighted average common shares 35,421 33,015
</TABLE>
4. Reclassifications
In order to conform with the condensed consolidated balance sheet
at December 31, 1998, and the condensed consolidated statement of cash
flows for the three months and nine months ended September 30, 1999,
certain reclassifications have been made to the condensed consolidated
balance sheet and statement of cash flows for the nine months ended
September 30, 1999.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Centura provides secure embedded database, connectivity and
development solutions for the Internet Appliance, intelligent device,
and the e-business marketplace. The Company's product offerings address
the growing demand for complete and secure systems for always,
occasionally, and connected on-demand mobile enterprise, Internet
Appliance, intelligent devices and scalable e-business
solutions.
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, 1998.
Results of Operations:
Net Product Revenue. Net product revenue decreased 11% to $7.8
million for the three months ended September 30, 1999, from $8.8 million
for the three months ended September 30, 1998. The decrease in net
product revenue is primarily due to decreases in net sales of the
development tools product line. Development tools revenue decreased 40%
to $2.0 million for the quarter ended September 30, 1999, as compared
with $3.3 million for the quarter ended September 30, 1998. From time to
time the Company has recognized increases in the quarterly revenue during
quarters in which a new version of a major product is released. In the
quarter ended September 30, 1998, the Company released version 1.5 of its
flagship development tool, Centura Team Developer. A principal reason
for the decline in development tools revenue for the three-months ended
September 30, 1999 is that the Company released no new versions of
comparable products during this quarter. International product revenue
accounted for $3.9 million or 50% and $4.6 million or 52% of net product
revenue for the three-months ended September 30, 1999 and 1998,
respectively.
Net product revenue decreased 19% to $20.4 million for the nine
months ended September 30, 1999, from $25.4 million for the nine months
ended September 30, 1998, primarily due to the same factors which caused
the quarter over quarter decrease. Development tools revenue decreased
30% to $5.3 million for the nine-month period ended September 30, 1999,
as compared with $7.6 million for the nine-month period ended September
30, 1998. International net product revenue accounted for $11.9 million
or 58% and $13.0 million or 51% of net product revenue for the nine-month
period ending September 30, 1999 and September 30, 1998 respectively.
Net Service Revenue. Net service revenue increased 12% to $5.9
million for the quarter ended September 30, 1999, from $5.3 million for
the quarter ended September 30, 1998. International sales accounted for
$2.8 million or 46% and $2.7 million or 51% of total net service revenue
for the quarters ended September 30, 1999 and 1998, respectively. Net
service revenue increased 14% to $16.6 million for the nine-month period
ended September 30, 1999, from $14.6 million for the nine-month period
ended September 30, 1998. International sales accounted for $8.4 million
or 51% and $7.5 million or 52% for the nine-month period ending September
30, 1999 and September 30, 1998 respectively.
Cost of Product Revenue. Cost of product revenue includes the
cost of production, royalties to third parties and the amortization of
capitalized software. Cost of product revenue decreased 51% to $0.7
million for the quarter ended September 30, 1999, as compared with $1.4
million in the quarter ended September 30, 1998. Cost of product revenue
as a percentage of product revenue decreased to 9% from 16% for the
quarters ended September 30, 1999 and 1998, respectively. The decrease
in cost of product revenue as a percentage of product revenue for the
quarter ended September 30, 1999 compared to the quarter ended September
30, 1998 is primarily related to higher royalty costs in 1998.
Cost of product revenue decreased 26% to $2.6 million for the nine-
month period ended September 30, 1999, as compared with $3.6 million for
the nine-month period ended September 30, 1998. The decrease in cost of
product revenue was due primarily to a decrease in royalty costs and
amortization of capitalized software. The decrease in royalty costs was
principally due to the write-off of assets during the first nine months
of 1998, which were greater than the write-off of assets during the same
period in the current year. The decrease in amortization of the
capitalized software costs for the nine-month period ended September 30,
1999 as compared with the nine-month period ended September 30, 1998 is
due primarily to the write-off of certain capitalized software costs
during 1998, which were not anticipated to be recoverable in future
periods.
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 includes software purchased from third parties, was
$223,000 and $843,000 for the three and nine month periods ended
September 30, 1999 compared with $373,000 and $1,177,000 for the same
periods in 1998.
Cost of Service Revenue. Cost of service revenue consists
primarily of personnel costs related to technical support, training and
product license maintenance. Cost of service revenue decreased marginally
to $1.0 million from $1.1 million for the three-month periods ended
September 30, 1999 and 1998, respectively. For the nine months ended
September 30, 1999 and 1998, cost of service revenue were $2.9 million
and $3.2 million, respectively. Cost of service revenue as a percentage
of net service revenue were 17% and 20% for the quarters ended September
30, 1999 and 1998, respectively, and 18% and 22% for the nine-month
period ended September 30, 1999 and 1998 respectively.
During fiscal year 1999, the Company amortized $179,000 of
capitalized costs for acquired products.
Sales and Marketing Expenses. Sales and marketing expenses are
primarily comprised of personnel related expenses, advertising and
promotional expenses. Sales and marketing expenses were $7.2 million and
$20.4 million for the three and nine-month periods ended September 30,
1999, compared with $6.8 million and $18.9 million for the same periods
in 1998. Sales and marketing expense increased for the quarter ended
September 30, 1999 compared to the quarter ended September 30, 1998
primarily due to increased staffing in the Company's sales and marketing
organization following the Raima acquisition, in addition to one-time
severance costs following a reorganization of the European sales
and marketing organization. The increase in sales and marketing expenses
for the nine-month period ended September 30, 1999 is principally due to
the same factors which caused the quarter over quarter increase.
Engineering and Product Development Expenses. The table below sets
forth gross engineering and product development expenses, capitalized
software development costs, and net research and development expenses in
dollar amounts and as a percentage of net revenue for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gross engineering and product
development costs................. $2,380 $2,159 $6,991 $6,017
Capitalized software development cos (53) (66) (309) (428)
--------- --------- --------- ---------
Net engineering and product
development costs................. $2,327 $2,093 $6,682 $5,589
========= ========= ========= =========
As a percentage of net revenues:
Gross engineering and product
development costs................. 17% 15% 19% 15%
Net engineering and product
development costs................. 17% 15% 18% 14%
</TABLE>
Gross engineering and product development expenses increased 10% to
$2.4 million from $2.2 million for the quarters ended September 30, 1999
and 1998 respectively, and increased 16% to $7.0 million from $6.0 million
for the nine months ended September 30, 1999 and September 30, 1998,
respectively. The increases are due primarily to increases in personnel as
the Company expands its efforts to leverage core technologies into next
generation products, combined with increased personnel related costs as a
a result of the Raima acquisition. The Company believes that the
development of new products and the enhancement of existing products
is essential to its continued success, and the Company intends to continue
to devote substantial resources to new product development.
General and Administrative Expenses. General and administrative
expenses are comprised primarily of staffing and related expenses, rent
and facilities expense, depreciation, and outside services. General and
administrative expenses remained relatively consistent for the quarter
ended September 30, 1999 compared to the quarter ended September 30, 1998
primarily due to increased personnel related costs as a result of the
Raima acquisition offset by decreases in consulting and legal expenses.
General and administrative expenses increased 15% to 6.1 million for the
nine-month period ended September 30, 1999 from $5.3 million for the
nine-month period ended September 30, 1998, primarily due to increased
bad debt expense and increased personnel costs.
During fiscal year 1999, the Company recognized $260,000 of
amortization for goodwill.
Other Income (Expense), Net. Other income (expense), net is
comprised of interest income, interest expense, gains or losses on
foreign currency transactions, and the imputed value of warrants issued
during the respective periods. For the quarter ended September 30, 1999
other income (expense) decreased to $0.1 million from $0.2 in the same
quarter of the prior year. Other income (expense), net decreased to
$(0.4) million for the nine month period ended September 30, 1999, from
$(1.3) million for the same period in the prior year, primarily due to
the imputed value of warrants issued in the first two quarters of 1998.
Provision for Income Taxes. The provision for income taxes
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-month periods ended
September 30, 1999 and 1998.
Liquidity and Capital Resources:
At September 30, 1999, the Company had a negative working capital
position of $1.5 million, including a liability for deferred revenue of
$13.3 million. Deferred revenue generally represents obligations to
deliver software or services in future periods. Excluding deferred
revenue, working capital would have been $11.8 million. Net cash used in
operating activities for the nine months ended September 30, 1999 was
$0.6 million, which resulted primarily from decreases in accounts
receivable and other current assets, offset by decreases in accounts
payable, accrued liabilities and deferred revenue. Cash used in
investing activities totaled $1.0 million, which principally reflects
acquisition costs, the purchase of equipment and capitalization of
software development costs, offset by cash acquired on acquisition, and
maturaties of investments. Cash used in financing activities totaled
$0.6 million and related to repayment of short-term borrowings and
repayment of a capital lease obligation.
Effective January 1, 1999, the Company entered into a three-year,
non-cancelable capital lease. The lease bears interest at an annual
rate of 7.95%. Leased assets were approximately $1.3 million on a cost
basis, and are being depreciated on a straight-line basis over three
years.
At September 30, 1999 the Company had $8.6 million in unsecured
foreign currency forward contracts, denominated in various currencies,
as part of a program to reduce the financial exposure arising from
foreign denominated monetary assets and liabilities.
The deferred product and support revenue of $13.3 million at
September 30, 1999 reflect a delay in recognition of revenue in
accordance with Generally Accepted Accounting Principles and require
minimal use of future resources of the Company.
The Company has an asset based loan facility with Coast Business
Credit (the "Facility"), which provides borrowings of up to $5.0
million secured by the Company's accounts receivables, combined with a
$0.5 million capital equipment facility. The Facility bears interest at
2.25% 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 also requires that the Company maintain
a minimum net worth of negative $8.0 million. The Facility matures in
January 2000 and provides for the ability to extend the agreement for one
year at the option of the Company. As of September 30, 1999 there was
$2.4 million drawn against the Facility.
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 stockholders.
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.
Year 2000 Issue.
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 "Millennium 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 reviewed its internal computer
programs and systems to ensure that the programs and systems are Year
2000 compliant. The Company presently believes that its major internal
computer systems are Year 2000 compliant. The cost of these efforts has
not been material to the Company's financial position or results of
operations to date, however there can be no assurance that Year 2000
Problems will not arise which could result in the need for significant
future expenditures.
Software Sold to Consumers. All current products developed by
Centura are designed to allow developers 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 occurring
before such date. However, customers that may not be compliant may
experience cash flow difficulties and could negatively affect the
Company's accounts receivables Days Sales Outstanding (DSO) or bad debt
reserves. The Company has requested compliance letters from its large
customers. Moreover, the Company has created Centura Team2000, which is
a service that determines whether any application built in CTD or
SQLWindows is Year 2000 compliant. The Company charges for this
service, but does not, however, mandate that the service be purchased.
This is a proactive step to mitigate possible damage that may result
from customer non-compliance.
Internal Infrastructure. The Company has identified substantially
all of the major computers, software applications, and related equipment
used in connection with its internal operations that required
modification, upgrades, or replacement to minimize the possibility of a
material disruption to its business. The Company has substantially
completed the process of modifying, upgrading, and replacing major
systems that have been identified as adversely affected.
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 has taken action to ensure that its internal
systems are Year 2000 Compliant. The total cost to the Company of
completing any required modifications, upgrades, or replacements of
these internal systems has not been material to the Company's business
or results of operations.
Suppliers. Centura has communicated 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.
Customers. The Company communicated with its customers 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 its customers. Thus, while the Company expects that it
will be able to resolve any significant Year 2000 Problems with its
internal systems and products, there can be no assurance that its
customers will resolve any or all Year 2000 Problems with their systems
before the occurrence of a material disruption to the business of the
Company. 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 Centura has substantially completed 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.
Quantitative and Qualitative Disclosure about Market Risk
The Company enters into short-term forward contracts to reduce the
risks associated with foreign currency fluctuations. The Company
recognized gains of $0.2 million for each of the three-month periods
ended September 30, 1999 and September 30, 1998, and losses of $0.3
million and $0.1 million for the nine month periods ended September 30,
1999 and September 30, 1998, respectively, all of which were related to
foreign currency fluctuations. At September 30, 1999, the Company had
$8.6 million 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).
Factors That May Affect Future Results:
The Company has experienced in the past and expects in the future
to continue to experience significant fluctuations in quarterly operating
results. The Company has at times recognized a substantial portion of its
net revenues in the last month or last few weeks of a quarter. The
Company generally ships products as orders are received and, therefore,
has little or no backlog. As a result, quarterly sales and operating
results generally depend on a number of factors that are difficult to
forecast, including, among others, the volume and timing of and ability
to fulfill orders received within the quarter. Operating results also may
fluctuate due to factors such as demand for the Company's products,
introduction, localization 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,
changes or anticipated changes in pricing by the Company or its
competitors, mix of distribution channels through which products are
sold, mix of products sold, returns from the Company's distributors and
general economic conditions. As a result, the Company believes that
period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as any indication of
future performance.
In addition, because the Company's staffing and other operating
expenses are based in part on anticipated net revenues, a substantial
portion of which may not be generated until the end of each quarter,
delays in the receipt or shipment of orders and ability to achieve
anticipated revenue levels can cause significant variations in operating
results from quarter to quarter. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in sales of the
Company's products in relation to the Company's expectations could have
an immediate adverse impact on the Company's business, operating results
and financial condition. In addition, the Company currently intends to
increase its operating expenses to fund greater levels of sales and
marketing operations and expand distribution channels. To the extent that
such expenses proceed or are not subsequently followed by increased net
revenues, the Company's business, operating results and financial
condition could be materially and adversely affected.
In the future, the Company may make acquisitions of complementary
companies, products or technologies. Managing acquired businesses entails
numerous operational and financial risks, including difficulties in
assimilating acquired operations, diversion of management's attention to
other business concerns, amortization of acquired intangible assets and
potential loss of key employees or customers of acquired operations.
There can be no assurance that the Company will be able to effectively
complete or integrate acquisitions, and failure to do so could have a
material adverse effect on the Company's operating results. As of the
date hereof, the Company has no understanding or agreement with any other
entity regarding any potential acquisition or combination, the
consummation of which is probable.
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 profit of $2.1 million for fiscal year ended December
31, 1998, a loss of $0.6 million for fiscal year 1997, and a profit of
$2.0 million for 1996. 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.
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
Operating Officer and Sr. Vice President of Alliances, 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, eSNAPP, SQLBASE, SQLBASE SAFEGARDE,
CENTURA TEAM DEVELOPER, SQLWINDOWS, CENTURA NET.DB, SQLHOST, VELOCIS,
and RDM 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. 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 "Millennium 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 reviewed its internal computer
programs and systems to ensure that the programs and systems are Year
2000 compliant. The Company presently believes that its major internal
computer systems are Year 2000 compliant. The cost of these efforts has
not been material to the Company's financial position or results of
operations to date, however there can be no assurance that Year 2000
Problems will not arise which could result in the need for significant
future expenditures.
Software Sold to Consumers. All current products developed by
Centura are designed to allow developers 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 occurring
before such date. However, customers that may not be compliant may
experience cash flow difficulties and could negatively affect the
Company's accounts receivables Days Sales Outstanding (DSO) or bad debt
reserves. The Company has requested compliance letters from its large
customers. Moreover, the Company has created Centura Team2000, which is
a service that determines whether any application built in CTD or
SQLWindows is Year 2000 compliant. The Company charges for this
service, but does not, however, mandate that the service be purchased.
This is a proactive step to mitigate possible damage that may result
from customer non-compliance.
Internal Infrastructure. The Company has identified substantially
all of the major computers, software applications, and related equipment
used in connection with its internal operations that required
modification, upgrades, or replacement to minimize the possibility of a
material disruption to its business. The Company has substantially
completed the process of modifying, upgrading, and replacing major
systems that have been identified as adversely affected.
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 has taken action to ensure that its internal
systems are Year 2000 Compliant. The total cost to the Company of
completing any required modifications, upgrades, or replacements of
these internal systems has not been material to the Company's business
or results of operations.
Suppliers. Centura has communicated 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.
Customers. The Company communicated with its customers 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 its customers. Thus, while the Company expects that it
will be able to resolve any significant Year 2000 Problems with its
internal systems and products, there can be no assurance that its
customers will resolve any or all Year 2000 Problems with their systems
before the occurrence of a material disruption to the business of the
Company. 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 Centura has substantially completed 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.
ongoing compliance review.
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.
Development 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 Centura Team Developer/SQLWindows 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 development tools that export JavaTM- 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, and customer support. The Company experienced increased
competition during 1998, 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 54%, 58% and 60% of the Company's net revenues for the years
ended December 31, 1998, 1997 and 1996, 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 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 patent rights with
respect to its SQLWINDOWS, and CENTURA TEAM DEVELOPER products, and as
filed patent applications related to its SQLBASE SAFEGARDE 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 become 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 grow 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
Company's future success.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 1999, to the best of the Company's
knowledge there were no pending actions, potential actions, claims or
proceedings against the Company that could reasonably be expected to
result in material damages to the Company which would have a material
adverse effect on its business, results of operations or financial
condition. As noted in the "Legal Proceedings" section under "Risk
Factors" above, the Company exists in a volatile legal and regulatory
environment and it is not possible to anticipate or estimate the
potential adverse impact of unknown claims or liabilities against the
Company, its officers and directors, and as such no estimate is made in
the Company's financial statements for such unknown claims or
liabilities.
Item 2. Changes in Securities and Use of Proceeds-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-Not Applicable
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/ Richard Lucien
___________________________________
November 15, 1999 Richard Lucien
Vice President of Finance and
Chief Financial Officer
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