===============================================================================
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 MARCH 31, 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)
CALIFORNIA 94-2874178
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
975 ISLAND DRIVE, REDWOOD SHORES, CALIFORNIA 94065
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 596-3400
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 1999, there were 29,598,932 shares of the Registrant's
Common Stock outstanding.
<PAGE>
CENTURA SOFTWARE CORPORATION
FORM 10-Q for the Quarter Ended March 31, 1999
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data
a) Condensed Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998
b) Condensed Consolidated Statements of
Operations for the Three Months
Ended March 31, 1999 and 1998
c) Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 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>
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,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $7,330 $6,414
Accounts receivable, less allowances of $1,078
and $1,321.................................... 11,776 12,988
Other current assets............................ 3,970 3,627
------------ ------------
Total current assets.......................... 23,076 23,029
Property and equipment, net........................ 3,941 2,888
Capitalized software, net.......................... 1,396 1,542
Other assets....................................... 1,408 1,913
------------ ------------
Total assets.................................. $29,821 $29,372
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations........ $405 $0
Accounts payable................................ $2,834 $2,798
Accrued compensation and related expenses....... 1,561 1,567
Short-term borrowings........................... 2,251 2,663
Other accrued liabilities....................... 1,454 1,744
Deferred revenue................................ 13,069 13,274
------------ ------------
Total current liabilities..................... 21,574 22,046
Other long-term liabilities........................ 790 53
------------ ------------
Stockholders' Equity:
Preferred stock, no par value; 2,000 shares
authorized; none issued an outstanding......... -- --
Common stock, par value $.01 per share; 60,000
authorized; 29,598 shares issued and
outstanding.................................. 85,690 85,690
Other comprehensive income...................... (346) (426)
Accumulated deficit............................. (77,887) (77,991)
------------ ------------
Total stockholders' equity ................... 7,457 7,273
------------ ------------
Total liabilities and stockholders' equity ... $29,821 $29,372
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
CENTURA SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Net revenues:
Product............................. $7,097 $8,584
Service............................. 5,272 4,188
--------- ---------
Net revenues...................... 12,369 12,772
--------- ---------
Cost of revenues:
Product............................. 837 1,282
Service............................. 956 1,096
--------- ---------
Cost of revenues.................. 1,793 2,378
--------- ---------
Gross profit...................... 10,576 10,394
--------- ---------
Operating expenses:
Sales and marketing................. 6,820 5,827
Engineering and product development. 1,731 1,544
General and administrative.......... 1,617 1,710
--------- ---------
Total operating expenses.......... 10,168 9,081
--------- ---------
Operating income................. 408 1,313
Other income (expense):
Interest income..................... 56 47
Interest expense.................... (68) (201)
Imputed value of warrants issued.... -- (441)
Foreign currency gain (loss)........ (287) (164)
--------- ---------
Income before income taxes............. 109 554
Provision for income taxes............. 5 8
--------- ---------
Net income............................. $104 $546
========= =========
Basic net income per share............. $0.00 $0.03
========= =========
Basic weighted average common shares... 29,598 20,566
========= =========
Diluted net income per share........... $0.00 $0.03
========= =========
Diluted weighted average common shares. 29,651 20,613
========= =========
</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>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $104 $546
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 783 991
Issuance of stock warrants............................ -- 441
Provision for doubtful accounts, sales returns
and allowances....................................... (210) 15
Changes in assets and liabilities:
Accounts receivable................................... 1,422 383
Other current assets.................................. 198 360
Other assets.......................................... (30) 74
Accounts payable and accrued liabilities.............. (260) (2,190)
Deferred revenue...................................... (205) (900)
---------- ----------
Net cash provided by (used in) operating activities. 1,802 (280)
---------- ----------
Cash flows from investing activities:
Purchases of investments................................ -- (33)
Acquisition of property and equipment................... (258) (26)
Capitalization of software costs........................ (175) (29)
Capitalization of other intangibles..................... (16) (13)
---------- ----------
Net cash used in investing activities............... (449) (101)
---------- ----------
Cash flows from financing activities:
Proceeds from (repayment of) short-term borrowings, net. (412) 1,375
Repayment of capital lease obligation................... (105) --
Proceeds from issuance of common stock, net............. -- 1,816
---------- ----------
Net cash provided by (used in)financing activities.. (517) 3,191
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents.............................................. 80 (60)
---------- ----------
Net increase in cash and cash equivalents................. 916 2,750
Cash and cash equivalents at beginning of period.......... 6,414 3,974
---------- ----------
Cash and cash equivalents at end of period................ $7,330 $6,724
========== ==========
Supplemental disclosure of non cash financing activities:
Conversion of operating lease to capital lease........ $1,300 $ --
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.
<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 March 31, 1999, the condensed consolidated statements of operations
for the three month periods ended March 31, 1999 and 1998, and cash flows
for the three month periods ended March 31, 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 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, 1998. The results of operations for the three
month period ended March 31, 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 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, 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
diluted EPS:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
(in thousands, except per share data)
<S> <C> <C>
Net income $104 $546
========= =========
Shares calculation:
Average basic shares outstanding 29,598 20,566
Effect of dilutive securities:
Options 53 47
Total shares used to compute --------- ---------
diluted earnings per share 29,651 20,613
========= =========
Earnings per basic share $0.00 $0.03
========= =========
Earnings per diluted share $0.00 $0.03
========= =========
</TABLE>
Antidilutive options and warrants to purchase 8,906,670 and
6,863,444 were outstanding at March 31, 1999 and March 31, 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 vender obligation exists. If an ongoing vendor
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 product, if
collection of the resulting receivable is probable and no ongoing vendor
obligation exists. If an ongoing vendor 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, are
recognized as 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."
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
March 31,
-------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Net income $104 $546
Other comprehensive gain (loss) 80 (68)
Total shares used to compute --------- ---------
Total comprehensive income 184 478
========= =========
</TABLE>
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on
capitalization of the costs incurred for computer software developed or
obtained for internal use. It also provides guidance for determining
whether computer software is internal-use software and on accounting for
the proceeds of computer software originally developed or obtained for
internal use and then subsequently sold to the public. The Company has
adopted the provisions of SOP 98-1.
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, 2000 and has not yet evaluated the
impact of adoption and its effects on the Company's results of
operations, financial position, capital resources or liquidity.
2. Legal Proceedings
As of March 31, 1999, to the best of the Company's knowledge there
were no pending actions, potential actions, claims or proceedings against
the Company that could reasonable 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.
3. Lease Change
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 $1,300,000 on a cost
basis, and are being depreciated on a straight-line basis over periods
ranging from three to five years.
4. Raima Merger
On March 15, 1999 the Company entered into a binding agreement (the
"Agreement") to acquire Raima? Corporation ("Raima"), a Seattle-based
vendor of cross-platform micro databases and data management tools for
real-time, Windows, and Unix-based applications. Except for a small cash
component under certain limited circumstances, the acquisition will be a
stock purchase, is expected to close on or before June 7, 1999, and is
anticipated to be accounted for using the purchase method of accounting.
Under the terms of the agreement, the former shareholders of Raima will
receive a gross amount of 5,800,000 shares (subject to certain
adjustments) of the Company's common stock. The Company subsequently
registered the 5,800,000 shares under the Securities Act effective May
13, 1999. It is a condition to the obligation of all parties to close the
transaction that the Average Centura Trading Price (defined as the
arithmetic mean of the closing sale price of the Company's common stock
on the NASDAQ SmallCap Market for each of the ten (10) trading days
ending on the day immediately preceding closing) be at least $1.00 per
share. Approximately 20% of the consideration payable to the former
Raima shareholders will be subject to escrow which will be available to
the Company to satisfy certain indemnification rights. Approximately
one-half of the consideration held in escrow not needed to satisfy
pending claims will be released to the former Raima shareholders six
months after closing, and the balance not needed to satisfy pending
claims will be released one year after closing.
If and when consummated, the merger will enable Centura to provide
customers with a comprehensive cross-platform family of embeddable
database solutions, including Windows NT, Windows 95/98 and Windows CE,
widely used versions of Unix (Solaris, AIX, HP-UX, Unix Ware, BSD/OS and
Linux) and Real Time Operating Systems. There can be no assurance that
the merger will become effective within the timeframe provided in the
Agreement or, if effective, whether Raima? Corporation can be
successfully integrated into the Company or that such integration efforts
or other issues surrounding the acquisition will not have a material and
adverse impact on the Company's business, operating results and financial
condition.
5. 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 ended March 31, 1999, certain
reclassifications have been made to the condensed consolidated balance
sheet and statement of cash flows for the three months ended March 31,
1998.
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, 1998.
Results of Operations:
Net Product Revenues. Net product revenues decreased 17% to $7.1
million for the three months ended March 31, 1999, from $8.6 million for
the three months ended March 31, 1998. The decrease in product revenues
is primarily due to decreases in the Centura Team Developer/SQLWindows
and SQLBase product lines. Centura Team Developer/SQLWindows revenues
decreased 32% to $1.5 million in the current quarter compared with $2.2
million for the quarter ended March 31, 1998. Although invoicing levels
for SQLBase increased 17% as compared with the first quarter of 1998,
SQLBase revenues decreased 14% to $5.3 million for the quarter ended
March 31, 1999, as compared with $6.1 million for the quarter ended March
31, 1998, primarily due to decreased amortization of deferred revenue.
The decrease in Centura Team Developer/SQLWindows revenue is primarily
attributable to decreased levels of invoicing compared with the quarter
ended March 31, 1998. International product revenues accounted for
$4.0 million or 56% and $4.7 million or 55% of net product revenues for
the three months ended March 31, 1999 and 1998, respectively. The
decrease in international product revenues are primarily due to decreased
sales in Latin America.
Net Service Revenues. Net service revenues increased 26% to $5.3
million for the quarter ended March 31, 1999, from $4.2 million for the
quarter ended March 31, 1998. The increase was primarily due to increased
amortization of license maintenance support. International sales
accounted for $2.8 million or 52% and $2.1 million or 50% of total net
service revenues for the quarters ended March 31, 1999 and 1998,
respectively.
Cost of Product Revenues. Cost of product revenues includes the
cost of production and the amortization of capitalized software. Cost of
product revenues decreased 35% to $0.8 million for the quarter ended
March 31, 1999, as compared with $1.3 million in the first quarter of
1998. The decrease in cost of product revenues was due primarily to a
decrease in royalty costs and amortization of capitalized software. The
decrease royalty costs was principally due to the write off of assets in
the quarter ended March 31, 1998, which were not anticipated to be
recoverable over future periods. The decrease in amortization of the
capitalized software costs from March 31, 1998 is due primarily to the
write-off of certain capitalized software costs which were not
anticipated to be recoverable in future periods. Cost of product revenues
as a percentage of product revenues decreased to 12% from 15% for the
quarters ended March 31, 1999 and 1998, respectively.
In accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", the Company capitalizes internal development costs
on a project when the technological feasibility of such project has been
determined. The Company ceases capitalizing such expenses when the
products derived from the project are released for sale. The capitalized
costs are then amortized ratably over the useful life of the products,
generally estimated to be two to three years. Amortization of capitalized
software costs, which include the software purchased from third parties,
were $321,000 and $506,000 for the three month period ended March 31,
1999 and 1998, respectively.
Cost of Service Revenues. Cost of service revenues consists
primarily of personnel costs related to technical support training and
product license maintenance. Cost of service revenues decreased to
$1.0 million from $1.1 million for the three month periods ended March
31, 1999 and 1998, respectively. Cost of service revenues as a percentage
of net service revenues were 18% and 26% for the quarters ended March 31,
1999 and 1998, respectively. The decrease was due principally to a
reduction of the Company's work force, outsourcing of front-end telephone
support, and the streamlining of operations.
Sales and Marketing Expenses. Sales and marketing expenses were
$6.8 million, or 55% of net revenues, for the quarter ended March 31,
1999, compared with $5.8 million, or 46% of net revenues, for the quarter
ended March 31, 1998. The increase in sales and marketing expense in the
aggregate and as a percentage of net revenues is due to planned increased
staffing in the Company's sales and marketing organization.
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 revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Gross engineering and product
development costs $1,906 $1,573
Capitalized software development
costs (175) (29)
--------- ---------
Net engineering and product
development expenses 1,731 1,544
========= =========
As a percentage of net revenues:
Gross engineering and product
development expenses 15.4% 12.3%
Net engineering and product
development expenses 14.0% 12.1%
</TABLE>
Engineering and product development expenses increased 12% to $1.7
million from $1.5 million for the quarters ended March 31, 1999 and 1998
respectively. The increase is due primarily to increases in personnel as
the Company expands its efforts to leverage core technologies into next
generation products. The Company believes that the development of new
products and the enhancement of existing products are 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 decreased 5% to $1.6 million from $1.7 million
for the quarters ended March 31, 1999 and 1998, respectively. The
decrease is due primarily to decreases in rent expense from the prior
year.
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
in connection with debt conversion. For the quarter ended March 31, 1999
other income (expense) decreased 61% to $(0.3) million from $(0.8) in the
same quarter of the prior year. The decrease is primarily attributable
to the imputed value of warrants issued and decreases in interest expense
in connection with the debt conversion which occurred in the first
quarter of 1998 - offset by increases in net losses on foreign currency
transactions.
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 period ended March 31,
1999 and 1998.
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 is reviewing its internal computer
programs and systems to ensure that the programs and systems will be
Year 2000 compliant. The Company presently believes that its computer
systems will be Year 2000 compliant in a timely manner. However, while
the estimated cost of these efforts is not expected to be material to
the Company's financial position or any year's results of operations,
there can be no assurance to this effect.
Software Sold to Consumers. All current products developed by
Centura are designed to 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 believes that it has
identified substantially all of the major computers, software
applications, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption to its business. The Company has
commenced the process of modifying, upgrading, and replacing major
systems that have been identified as adversely affected, and expects to
complete this process in a timely manner.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities
equipment, such as fax machines, photocopiers, telephone switches,
security systems, and other common devices may be affected by the Year
2000 Problem. The Company is currently assessing the potential effect
of, and costs of remediating, the Year 2000 Problem on its office and
facilities equipment.
The Company estimates the total cost to the Company of
completing any required modifications, upgrades, or replacements of
these internal systems will not have a material adverse effect on the
Company's business or results of operations. This estimate is being
monitored and will be revised as additional information becomes
available.
Suppliers. The Company has initiated communications with
third party suppliers of the major computers, software, and other
equipment used, operated, or maintained by the Company to identify and,
to the extent possible, to resolve issues involving the Year 2000
Problem. However, the Company has limited or no control over the
actions of these third party suppliers. Thus, while the Company expects
that it will be able to resolve any significant Year 2000 Problems with
these systems, there can be no assurance that these suppliers will
resolve any or all Year 2000 Problems with these systems before the
occurrence of a material disruption to the business of the Company or
any of its customers. Any failure of these third parties to resolve
Year 2000 problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition,
and results of operation.
Customers. The Company has initiated communications 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 Company has commenced 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.
Raima Merger:
On March 15, 1999 the Company entered into a binding agreement (the
"Agreement") to acquire Raima? Corporation ("Raima"), a Seattle-based
vendor of cross-platform micro databases and data management tools for
real-time, Windows, and Unix-based applications. Except for a small cash
component under certain limited circumstances, the acquisition will be a
stock purchase, is expected to close on or before June 7, 1999, and is
anticipated to be accounted for using the purchase method of accounting.
Under the terms of the agreement, the former shareholders of Raima will
receive a gross amount of 5,800,000 shares (subject to certain
adjustments) of the Company's common stock. The Company subsequently
registered the 5,800,000 shares under the Securities Act effective May
13, 1999. It is a condition to the obligation of all parties to close the
transaction that the Average Centura Trading Price (defined as the
arithmetic mean of the closing sale price of the Company's common stock
on the NASDAQ SmallCap Market for each of the ten (10) trading days
ending on the day immediately preceding closing) be at least $1.00 per
share. Approximately 20% of the consideration payable to the former
Raima shareholders will be subject to escrow which will be available to
the Company to satisfy certain indemnification rights. Approximately
one-half of the consideration held in escrow not needed to satisfy
pending claims will be released to the former Raima shareholders six
months after closing, and the balance not needed to satisfy pending
claims will be released one year after closing.
If and when consummated, the merger will enable Centura to provide
customers with a comprehensive cross-platform family of embeddable
database solutions, including Windows NT, Windows 95/98 and Windows CE,
widely used versions of Unix (Solaris, AIX, HP-UX, Unix Ware, BSD/OS and
Linux) and Real Time Operating Systems. There can be no assurance that
the merger will become effective within the timeframe provided in the
Agreement or, if effective, whether Raima? Corporation can be
successfully integrated into the Company or that such integration efforts
or other issues surrounding the acquisition will not have a material and
adverse impact on the Company's business, operating results and financial
condition.
Liquidity and Capital Resources:
At March 31, 1999, the Company had a positive working capital
position of $1.5 million, including a liability for deferred revenues of
$13.1 million. Excluding deferred revenues, working capital would have
been $14.6 million. This represents an increase in working capital
exclusive of deferred revenue of $0.3 million from December 31, 1998.
Net cash provided by operating activities for the three months ended
March 31, 1999 was $1.7 million, which resulted primarily from decreases
in accounts receivable. Cash used in investing activities totaled $0.4
million, which related primarily to the purchase of equipment and
capitalization of software development costs. Cash used in financing
activities totaled $0.5 million, and related to repayment of short-term
borrowings. In addition, 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
$1,300,000 on a cost basis, and are being depreciated on a straight-line
basis over periods ranging from three to five years.
At March 31, 1999 the Company had $4.8 million in unsecured
foreign currency forward contracts, denominated in various currencies,
as part of a program to hedge the financial exposure arising from
foreign denominated monetary assets and liabilities.
The deferred product and support revenues of $13.1 million at
March 31, 1999 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 has an asset based loan facility with Coast Business
Credit, (the "Facility"), which provides 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 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 March 31, 1999 there was $2,251,000 drawn
against the Facility, and having achieved certain financial covenants,
the Company realized an interest rate on funds drawn of 1.75% above the
Bank of America Reference Rate.
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.
Quantitative and Qualitative Disclosure about Market Risk
The Company enters into short-term forward contracts to reduce the
risks associated with foreign currency fluctuations. For the quarter
ended March 31, 1999, the Company recognized a loss of $349,000 related
to foreign currency fluctuations. At March 31, 1999, the Company had
$4,788,000 in forward contracts denominated in five currencies: German
Deutsche Marks, British Pound Sterling, Netherlands Guilders, Italian
Lira and Australian Dollars. The carrying value of the instruments
approximate their fair value as the Company records entries to
"mark-to-market" the respective contracts on a monthly basis. The
respective gains and losses from forward contracts are included in other
income (expense).
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
Financial 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, SQLBASE, SQLBASE SAFEGARDE, 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. 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 is reviewing its internal computer
programs and systems to ensure that the programs and systems will be
Year 2000 compliant. The Company presently believes that its computer
systems will be Year 2000 compliant in a timely manner. However, while
the estimated cost of these efforts is not expected to be material to
the Company's financial position or any year's results of operations,
there can be no assurance to this effect.
Software Sold to Consumers. All current products developed by
Centura are designed to 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 all of 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 believes that it has
identified substantially all of the major computers, software
applications, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption to its business. The Company has
commenced the process of modifying, upgrading, and replacing major
systems that have been identified as adversely affected, and expects to
complete this process in a timely manner.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities
equipment, such as fax machines, photocopiers, telephone switches,
security systems, and other common devices may be affected by the Year
2000 Problem. The Company is currently assessing the potential effect
of, and costs of remediating, the Year 2000 Problem on its office and
facilities equipment.
The Company estimates the total cost to the Company of
completing any required modifications, upgrades, or replacements of
these internal systems will not have a material adverse effect on the
Company's business or results of operations. This estimate is being
monitored and will be revised as additional information becomes
available.
Suppliers. The Company has initiated communications with
third party suppliers of the major computers, software, and other
equipment used, operated, or maintained by the Company to identify and,
to the extent possible, to resolve issues involving the Year 2000
Problem. However, the Company has limited or no control over the
actions of these third party suppliers. Thus, while the Company expects
that it will be able to resolve any significant Year 2000 Problems with
these systems, there can be no assurance that these suppliers will
resolve any or all Year 2000 Problems with these systems before the
occurrence of a material disruption to the business of the Company or
any of its customers. Any failure of these third parties to resolve
Year 2000 problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition,
and results of operation.
Customers. The Company has initiated communications 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 Company has begun the implementation of Year 2000
related upgrades appropriate for the Company's internal systems and
equipment and Year 2000 compliance issues in the systems of customers,
vendors and other related parties, there can be no assurance that
problems will not arise as a result of the Year 2000 issue.
Embeddable Database Market. Since database capacity is often
indicative of differences in customer application, segments within the
PC client/server market in which the Company competes can generally be
distinguished and segregated by the target capacity of the database
utilized. The Company generally markets its database products in
environments utilizing capacity ranging from small, Smart Device
environments to those of multiple Gigabytes. Competitors of the Company,
including Microsoft, Sybase, Pervasive and Oracle, generally have
product offerings which compete with the Company's products in some or
all of these capacity ranges. In addition, some of these competitors
are providers of sophisticated database software, originally designed
and marketed primarily for use with mainframes and minicomputers, which,
if successfully re-configured to provide similar functionality in PC
client/server, or smaller capacity environments, could materially and
adversely impact the Company's revenues, results of operations and
financial condition.
Competition. The market for client/server system software is
intensely competitive and rapidly changing. The Company's products are
specifically targeted at the emerging portion of this market relating to
embeddable PC and Web client/server software, and the Company's current
and prospective competitors offer a variety of solutions to address this
market segment.
Tools and Connectivity Markets. The Company faces competition
from providers of software specifically developed for the PC
client/server market, such as Oracle, Sybase, Microsoft, Inprise and
Forte, and connectivity software competitors, such as IBI Systems, Inc.
and Sybase. The Company also faces potential competition from vendors
of applications 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 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, customer support. The Company experienced increased
competition during 1997, 1996, and 1995, resulting in loss of market
share. The Company must continue to introduce enhancements to its
existing products and offer new products on a timely basis in order to
remain competitive. However, even if the Company introduces such
products in this manner, it may not be able to compete effectively
because of the significantly larger resources available to many of the
Company's competitors. There can be no assurance that the Company will
be able to compete successfully or that competition will not have a
material adverse effect on the Company's business, operating results and
financial condition. See " Competition."
Internet Software Market. The market for Internet software in
general, and the segments of such market addressed by the Company's
products in particular, are relatively new. The future financial
performance of the Company will depend in part on the continued
expansion of this market and these market segments and the growth in the
demand for other products developed by the Company, as well as increased
acceptance of the Company's products by MIS professionals. There can be
no assurance that the Internet software market and the relevant segments
of the market will continue to grow, that the Company will be able to
respond effectively to the evolving requirements of the market and
market segments, or that MIS professionals will accept the Company's
products. If the Company is not successful in developing, marketing,
localizing and selling applications that gain commercial acceptance in
these markets and market segments on a timely basis, the Company's
business, operating results and financial condition could be materially
and adversely affected. See "Industry Overview."
Dependence Upon Distribution Channels. The Company relies on
relationships with value-added resellers and independent third party
distributors for a substantial portion of its sales and revenues. Some
of the Company's resellers and distributors also offer competing
products. Most of the Company's resellers and distributors are not
subject to any minimum purchase requirements, they can cease marketing
the Company's products at any time, and they may from time to time be
granted stock exchange or rotation rights. Moreover, the introduction
of new and enhanced products may result in higher product returns and
exchanges from distributors and resellers. Any product returns or
exchanges in excess of recorded allowances could have a material adverse
effect on the Company's business, operating results and financial
condition. The Company also maintains strategic relationships with a
number of vertical software vendors and other technology companies for
marketing or resale of the Company's products. Any termination or
significant disruption of the Company's relationship with a major
portion of its resellers or distributors, or the failure by such parties
to renew agreements with the Company, could materially and adversely
affect the Company's business, operating results and financial
condition. Since 1994 the Company has reduced its resources devoted to
North American corporate sales and also decreased its expenditures on
corporate and product marketing. Failure of the Company to successfully
implement, support and manage its sales strategies could have a material
adverse effect on the Company.
The distribution channels through which client/server software
products are sold have been characterized by rapid change, including
consolidations and financial difficulties of distributors, resellers and
other marketing partners including certain of the Company's current
distributors. The bankruptcy, deterioration in financial condition or
other business difficulties of a distributor or retailer could render
the Company's accounts receivable from such entity uncollectible, and
this could result in a material adverse effect on the Company's
business, operating results and financial condition. There can be no
assurance that distributors will continue to purchase the Company's
products or provide the Company's products with adequate promotional
support. Failure of distributors to do so could have a material and
adverse effect on the Company's business, operating results and
financial condition.
In a number of international markets the Company has entered into
quasi-exclusive, multi-year agreements with independent companies that
have also licensed the use of the Company's name. These agreements are
in place to increase the Company's opportunities and penetration in such
markets where the rapid adoption of client/server technologies is
anticipated. While the Company believes that to date these agreements
have increased the Company's penetration in such markets, there can be
no certainty that this performance will continue nor that these
relationships will remain in place. The Company's future cost of
maintaining its business in these markets could increase substantially
if these agreements are not renewed.
Dependence On Third Party Organizations. The Company is
increasingly dependent on the efforts of third party "partners",
including consultants, system houses and software developers to
implement, service and support the Company's products. These third
parties increasingly have opportunities to select from a very broad
range of products from the Company's competitors, many of whom have
greater resources and market acceptance than the Company. In order to
succeed, the Company must actively recruit and sustain relationships
with these third parties. There can be no assurance that the Company
will be successful in recruiting new partners or in sustaining its
relationships with its existing partners.
International Sales And Operations. International sales
represented 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 is
preparing and filing 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
becomes evident.
The Company generally enters into confidentiality or license
agreements with its employees, consultants and vendors, and generally
controls access to and distribution of its software, documentation and
other proprietary information. Despite efforts to protect proprietary
rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that is regarded as
proprietary. Policing such unauthorized use is difficult. There can be
no assurance that the steps taken by the Company will prevent
misappropriation of the Company's technology or that such agreements
will be enforceable. In addition, litigation may be necessary in the
future to enforce intellectual property rights, to protect trade secrets
or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's
business, operating results and financial condition.
There can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products,
and the Company expects that it will increasingly be subject to such
claims as the number of products and competitors in the client/server
and Internet connectivity software market grows and the functionality of
such products overlaps with other industry segments. In the past, the
Company has received notices alleging that its products infringe
trademarks of third parties. The Company has historically dealt with
and will in the future continue to deal with such claims in the ordinary
course of business, evaluating the merits of each claim on an individual
basis. There are currently no material pending legal proceedings
against the Company regarding trademark infringement. Any such third
party claims, whether or not they are meritorious, could result in
costly litigation or require the Company to enter into royalty or
licensing agreements. Such royalty or license agreements, if required,
may not be available on terms acceptable to the Company, or at all. If
the Company was found to have infringed upon the proprietary rights of
third parties, it could be required to pay damages, cease sales of the
infringing products and redesign or discontinue such products, any of
which could have a material adverse effect on the Company's business,
operating results and financial condition.
Legal Proceedings. Other than as described in Item 1 of Part II
hereof, there are currently no material pending legal proceedings
against the Company or any of its subsidiaries, other than ordinary
routine litigation incidental to the business of the Company. The
Company operates, however, in a complex and volatile industry in which
disputes, litigation, regulatory proceedings and other actions are a
necessary risk of doing business. There can be no assurance that the
Company will not participate in such legal proceedings and that the
costs and charges will not have a material adverse impact on the
Company's future success.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 1998, to the best of the Company's knowledge
there were no pending actions, potential actions, claims or proceedings
against the Company that could reasonable 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
(a) Exhibits:
27.1 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter
ended March 31, 1999.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTURA SOFTWARE CORPORATION
By: /s/ John W. Bowman
----------------------------
May 14, 1999 John W. Bowman
Senior Vice President Of Finance And
Operations and Chief Financial Officer
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EXTRACTED FROM THE QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
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