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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD TO
COMMISSION FILE NUMBER: 0-21010
CENTURA SOFTWARE CORPORATION
(FORMERLY GUPTA CORPORATION)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 94-2874178
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
975 ISLAND DRIVE, REDWOOD SHORES, CALIFORNIA 94065
(Address of principal executive offices) (Zip Code)
</TABLE>
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $22,156,181 as of February 28, 1999, based upon the
closing sale price on the NASDAQ National Market reported for such date. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 28, 1999, there were 29,598,182 shares of the Registrant's
Common Stock outstanding.
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<PAGE>
PART I
Item 1. Business
Except for the historical information contained herein, the matters
discussed in this document are forward-looking statements that involve
certain risks and uncertainties, including the risks and uncertainties
under "Risk Factors".
Company Overview
Centura Software Corporation (the "Company" or "Centura") is a
leading provider of Secure, Embeddable, E-business and Micro database
solutions and the Connectivity products necessary to integrate these
solutions into business systems. The Company's products and services
provide a suite of development solutions for both corporate developers
and independent software vendors who require cross platform
Client/Server, Internet or Information Appliance (mobile and handheld)
business applications. (See Recent Developments)
The Company's principal product offerings include a family of
embedded databases that are most often built-in to applications that
require a very small footprint, low cost, zero database administration,
and security; such as ADP's desktop payroll system or UPS's tracking
system. Centura's SQLBase SafeGarde product is the only database on the
market that has a full "end-to-end" security solution. Centura has a
well known, component-based Client/Server and Web development environment
that enables rapid development and deployment of complex business
applications. Further, Centura has a comprehensive cross platform
Internet publishing and E-business solution that radically simplifies
bringing "back office" business systems to the Internet. The Company
also has products that enable connectivity to, and replication with not
only Centura's products, but other database environments as well, without
compromising performance, control, or security. The Company's current
product offerings are fully compliant with, and accommodate data
structures for years beginning after December 31, 1999.
The Company's Credo is to add value for customers by understanding
the complicated problems they face and how we help them solve these
problems with our products and consulting services. The Company also
recognizes that its customers face time-to-market, cost and investment
pressures. As such, Centura offers its customers a competitive advantage
with fast development and low cost deployment, which can result in a
significant return on investment for its customers.
Industry Overview
Industry experts believe that by the year 2010, information will be the
most important asset of the corporation. The Company agrees that
information is becoming more valuable, and the value of information is in
direct proportion to its accessibility and security. The immutable
Moore's law (microprocessor power) and Metcalf's laws (bandwidth and the
network) currently drive the entire software industry. These laws have
led to two relatively new phenomena: distributed or mobile computing and
the Internet. As these two laws continue to dominate, the result will be
computing for smart devices and appliances, such as Windows CE and Palm
Pilot, connected via the Internet. The term for this is ubiquitous or 5th
wave computing. Furthermore, without the right technology, distributed
information is less accessible and less secure. In conjunction with these
factors, companies are recognizing that meaningful, timely and secure
information is becoming a competitive advantage.
It was the proliferation of the microprocessor that ensured the
efficacy of Client/Server computing. Although inherently more
complicated than the Host Terminal computing environments of the 1970s,
Client/Server computing technologies also moved forward with powerful 4th
Generation Languages (4GL) and Relational Databases. Centura was the
first to market with both its award winning SQLWindows 4GL tool and its
powerful Database, SQLBase, for the PC. Early in the 1990's, additional
factors increased the deployment of Client/Server systems including the
continued decline in the costs of high-performance PCs and significant
improvements in operating systems, such as Microsoft Windows 3.11 and
Windows 95. In addition, connectivity software became available to enable
PC clients to access varied data sources, including existing mainframes
and minicomputers, thereby protecting an organization's investment in
these host-based systems. It was during these years that the packaged
application software industry exploded.
Today, the advent of mobile and Internet computing causes another
leap in the complexity of the computing environment. Many small to
medium size enterprises (SME) do not have the technical know how, budget
or interest to develop and deploy their own software business solutions.
Moreover, there are simply too many software companies claiming unique
solutions for these businesses to understand all that is necessary to
make informed decisions. Businesses are interested in maximizing their
return on investment, not in maximizing their understanding of
technology. New computing paradigms such as "thin client" or "n-tier"
are meaningless to most businesses in the SME segment. These people want
fast time to market, low cost of ownership, easy and safe software
solutions. Consequently, software technology providers, such as Centura,
work closely with independent software vendors (ISVs) to provide the
various solutions necessary for businesses in the SME segment of the
market. Forrester Research estimates that the SME segment is 97% of the
9 million businesses in the US. Moreover, Business Research Group
estimates that in 1998, only 22% of US companies with less than 1,000
employees had traditional Client/Server or Internet applications, where
larger organizations were over 90% penetrated. Finally, IDC estimates
that the SME market is growing much faster than the larger enterprise
market, over 33% per year.
The speed at which change is occurring is astonishing. IDC
estimates that the E-business market, a subset of the Internet market,
was $32 billion in 1998 and projects this market to grow to over $425
billion by 2002. In 1998, 66% of this market was business-to-business
commerce and IDC estimates this to increase to 79% by 2002. Furthermore,
IDC estimates that information appliances in 1997 was only 5% of a 33
million unit PC and appliance market and expects this to grow to over 68%
of a 87 million unit market by 2002. With the continued price/performance
curve of the microprocessor, the Company believes that these new
computing environments will continue to evolve and proliferate. Finally,
the Company believes that the new computing environments will require
robust, small footprint, secure embeddable database solutions that
connect to and access "shared" back office information systems and
business logic.
Centura's Solution and Strategies
The Company's goal is to become the market leader in Secure
Embeddable, E-business and Micro database solutions and to provide the
Connectivity products necessary to integrate these solutions into
business systems, thereby leveraging the market opportunities in the SME
markets as outlined above. The Company provides best-of-breed products
that meet the market requirements of fast time to market, low cost of
ownership, safety, performance and ease of use. These result in a total
solution that helps customers maximize their growth and return on
investment. As the Client/Server world continues to evolve with new types
of clients using the Internet to access applications and databases, the
Company will introduce new products to support these new client
environments. (See Recent Developments) At the same time, the Company
plans to continue to invest in its object oriented development solutions
to deploy applications in Client/Server, Internet, and distributed
COM/DCOM environments. Finally, the Company is the first and only vendor
to provide complete "end-to-end" security in an embeddable RDBMS
product. In summary, Centura's products and services solutions provide:
Secure Embedded Database, for Windows and Java programmers, that
scale from smart devices to the Internet
Component, COM/DCOM development solutions for both Client/Server
and Internet applications
Connectivity for Client/Server, Internet and Information
Appliances that integrate to back office business systems
Comprehensive consulting services
Very low cost of ownership, due to zero database administration
(ZDBA), for both ISVs and end users
Our Credo that places the customer first
Essential elements of Centura's strategies are highlighted below.
Embeddable Database Server. The Company believes several industry
trends will continue to drive demand for a secure, robust, low total cost
of ownership (TCO), ZDBA, small footprint embeddable database server.
Typically, an embeddable database integrates with business application
code and is invisible to the end user. An embeddable database features a
high degree of server programmability, allowing developers to control the
database server from the applications, reducing the need for a database
administrator through self tuning and self recovery functions. SQLBase,
SQLBase SafeGarde, and SQLBase SafeGarde Max all meet these criteria for
embeddable database products.
The SQLBase SafeGarde product family is the first and only database
product on the market with complete end-to-end security. For Centura,
"end-to-end" incorporates data integrity, authentication, (where data
comes from), access control and audit. Centura's end-to-end security
solution encompasses encryption in: local data storage, transfer of
information to and from the client, through the network, to the server
and its backup files and log files. With more attention on security by
all industry segments, the Company believes that SQLBase SafeGarde is a
unique and compelling solution for application database security. In
essence, not only is this feature unique to other database vendors, it
competes laterally with products in the traditional security market. The
Company has received an export license exception from the United States
Department of Commerce to permit the international sales of both 56 bit
DES and 128 bit Triple DES products for certain vertical markets,
facilitating this strategy. Furthermore, Centura's secure database
product is fast, with very little drop in performance. This makes
SQLBase SafeGarde one of the fastest embedded databases on the market,
and the only one that is secure.
Certain industry analysts expect that the next growth opportunity
for PCs is the implementation of enterprise automation applications in
the SME segment. Application vendors selling to large corporations, as
well as application vendors selling to SME businesses target this market.
Both classes of application vendors may find their existing choice of a
relational database is not appropriate for the mid size business market.
The SME applications market requires robust, secure, ZDBA, scalable,
embeddable databases that operate in either a LAN or Internet
environment, while minimizing TCO. The Company believes that this market
will continue to grow as SME businesses buy and implement enterprise
transaction-oriented applications requiring an embeddable database server
like SQLBase.
The growth of operating platforms is also important for the
Company. In particular, the growth of the Windows NT Server platform and
its increasing adoption for application and database services is opening
more opportunities for the Company, particularly for small and medium
size businesses. In addition, SQLBase is one of the only database
products remaining in the market which continues to support 16-bit PC
platforms installed in many corporate sites worldwide.
With the proliferation of the Web, there is a growing need for
secure, ZDBA relational databases for use with common application
development tools, such as Java and Visual Basic. Centura provides direct
support for Java applications and applets. With the JDBC type 4 driver
supplied with SQLBase, developers can create and run information-centric
applications that are portable and well-designed to be used in secure
environments such as that offered by SQLBase SafeGarde. The SQLBase API
makes it easy for application developers to connect SQLBase within their
application development process. SQLBase supports open connectivity to a
variety of development tools, including Visual Basic, Java and Visual
C++, using high performance ODBC Version 3 and JDBC Type 4.
The foregoing factors combine to create, what the Company believes,
is a compelling opportunity for the Company's embeddable database server
and connectivity products.
Application Development Environment. The Company believes there will be
a continued demand for building applications that run in an n-tier
environment, with access to common, reusable business logic; termed
component or object oriented computing. Centura Team Developer (CTD) is a
4GL, 32 bit, object-oriented development environment, designed to
maximize productivity developing business logic code. CTD applications
have native connectivity to SQLBase, as well as to Oracle, Sybase and
Microsoft SQLServer with the same set of APIs. The same CTD business
logic can be deployed as both a Windows and browser client (using Centura
Web Developer for browser deployment), with minimal reprogramming of
code, providing an easy redefinition of application packages to support
Internet-based applications.
With the continued trend toward enterprise wide applications,
Centura expects a continued interest in the use of application
development tools that access and create components and business logic
objects available on either the server or the clients. In this
environment, developers will be able to create new application solutions
throughout the enterprise by customizing and modifying existing
components. These components will provide a common linkage between
disparate applications. For example, sales automation systems can link to
accounting systems with minimal modifications using common logic created
with CTD. The Company expects that in the future, a component's location
on the network will become irrelevant to the developer. Developers will
expect to be able to compose, distribute, and debug applications from any
location. In 1998, the Company released enhancements for CTD designed to
make it easy to manage and distribute ActiveX components in a COM/DCOM
distributed architecture.
The Company expects large segments of the SME market to move away
from buying custom applications towards the building of new systems by
integrating and customizing existing components in packaged software
solutions. The competitive advantage will come from customizing
off-the-shelf applications. This "buy and customize" approach offers the
best of both worlds: rapid development and the ability to customize the
application to meet existing business processes requirements. The
object-oriented architecture provided by CTD is conducive to individual
customization of applications. This component based reusable
architecture provides an advantage to the Company's application
developers, especially in sales situations where evaluation criteria
might be the ease in which components can be customized.
Internet and E-Business Solutions: Centura net.db is a Web authoring and
E-business tool, enabling anyone to publish and update information from a
database to customers using ordinary Web browsers. Centura net.db is
browser-based for both design and deployment phases, requires no special
programming expertise, and uses no browser plug-ins and special server
software. Centura Net.db works well with all popular Web servers and is
extremely fast. The Centura net.db architecture is intelligent about its
use of resources, accessing only the business logic code necessary to
satisfy a user/program request, and enabling hundreds of simultaneous
accesses on a single NT server.
Centura also provides HTML extensions to its CTD development
environment thought its Centura Web Developer (CWD) solution. CWD
provides an easy method to evolve Client/Server applications without the
necessity of rewriting code in a new language. This provides huge
savings for the Company's customers who have written business application
in CTD and have a market requirement to move those applications to the
Web.
Distribution Channels, Partnerships and Strategic Alliances. The Company
distributes its products using a blended distribution model of inside
channel representatives, field sales representatives, and independent
business partners. Centura provides incentives for its direct sales force
to work closely with its business partners. The Company's Synergy Partner
Program is designed to meet the needs of businesses that include
resellers, commercial and corporate application developers, systems
integrators, consultants, ISVs, and complementary solution providers. A
number of companies have partnerships with Centura, whereby Centura
provides these partners the right to remanufacture the SQLBase product
and build it into a product they resell.
Worldwide Markets. The Company has designed its products and established
its marketing and sales channels to address the worldwide market
opportunities, including markets requiring double-byte enabled source
code, for embeddable databases and PC client/server systems. The Company
has established operations on six continents that have exclusive rights
through either wholly owned subsidiaries or third-party distribution
partners. CTD is shipped with Object Nationalizer, which facilitates
application development in multiple languages. The Company's software
products support international data conventions, and certain products
have been localized into French, German and Japanese language editions.
Services and Support Programs. The Company provides product support
services directly and through third-party vendors to enable easy customer
implementation of its client/server systems. The Company provides a
variety of support programs for customers ranging from small development
groups to those who require access to qualified Centura technical
engineers 24 hours a day, seven days a week. Traditional service
offerings are augmented with an informal support network through multiple
Internet news groups, Centura-endorsed User Groups, and a strong presence
on the Web. The Company-certified training partners offer courses each
year to assure customers of the right mix of classroom or on-site
training. Customers can also opt to study at their own pace with a
specially developed computer-based training course. In addition, teams of
professional consulting engineers are available to help companies develop
application systems using Centura products. These consultants offer
services such as Centura Team Migrate, the ability to migrate from other
embedded databases. Further, Centura Team2000, the only offering in the
market that analyzes CTD and SQLWindows applications to determine that
the application is year 2000 compliant. These are solutions that are
consistent with the Company's Credo of always adding value for the
Customer.
Products
The Company's embeddable database, development environments, family
of connectivity products, and Web-based development environments, enable
teams of developers to embed, build and deploy scaleable client/server
applications throughout distributed computing environments. The Company's
major products include:
SQLBase. The SQLBase family consists of embeddable and
small-footprint database products that enable application developers to
provide low TCO applications with complete and robust functionality and
help businesses deploy decentralized and web-based applications easily,
cost-effectively, and in a secure environment. These products: SQLBase -
Server and SQLBase Desktop - help organizations store data on machines
ranging from small mobile devices and single-user PCs to workgroup
servers and company-wide LAN and Web database servers. SQLBase SafeGarde
and SQLBase SafeGarde Max provide 56-bit DES and 128-bit Triple DES
encryption, respectively. These products were developed for use in
environments and market segments where the need for secure data is
mission critical. These segments include: banks, insurance companies and
other financial institutions; hospitals, medical labs, and other health
care institutions; mobile environments where sensitive data resides; and
databases supporting applications on corporate Web servers. The Company
has received permission from the United States Department of Commerce for
the export of SQLBase SafeGarde Max to certain defined vertical
industries, foreign countries, and foreign subsidiaries of US
corporations; a first in the database market.
SQLHost. SQLHost products allow organizations to integrate
mainframe DB2 or legacy data into a Client/Server environment without
compromising performance, control or security. SQLHost for Visual Basic
allows Visual Basic applications to access mainframe data. IBM supports
the latest version of SQLHost for use in DB2 environments and is, in
fact, a customer for the product.
SQLBase Exchange. SQLBase Exchange is the Company's server to
server database synchronization connectivity product. Given that SQLBase
and SQLBase SafeGarde are embedded databases, they must be able to talk
to large enterprise level databases. Centura's product is cross-platform
and enables remote or mobile applications to synchronize with back-end
business systems that run on a mainframe database.
Centura Team Developer (CTD) and SQLWindows. The CTD and SQLWindows
products enable customers to develop and deploy 32- and 16-bit, next
generation and Web-centric client/server object-oriented applications.
CTD and SQLWindows are created specifically to meet the needs of
application development teams seeking the power to move from workgroup
and enterprise pilot projects into large enterprise applications. These
products deliver client/server application scalability, ActiveX
compatibility, Internet integration, and drag-and-drop replication
functionality. The product family includes CTD and SQLWindows, Centura
Application Server, and the Centura Developers Kit, a set of
object-oriented interfaces that help developers create reusable objects
in the CTD 32-bit and SQLWindows 16-bit environments.
Centura Web Developer. Centura Web Developer, a subset of CTD,
enables the development of Web-based, thin-client applications that allow
the deployment of CTD business logic and transaction processing
applications on the Internet.
Centura net.db. Centura net.db is a browser-based Web authoring
tool that enables anyone to publish information from a database on to the
Internet. Centura net.db verifies the referential integrity of a SQL
database, and automatically generates an HTML page view of each table.
Using smart wizards, users can easily customize and design dynamic
queries and updates of live databases. The SQL queries can be deployed in
any browser and are therefore platform independent. No special browser
plug-ins or server software is needed.
Customers and Applications
No customer accounted for more than 10% of net revenues during the
fiscal years ended December 31, 1998, 1997, or 1996. The Company's
products are used by our customers to create and deploy applications in a
variety of ways. In some instances, developers create applications using
only Centura products, or in some instances, developers create the
application combining Centura products with other software development
tools. Companies use CTD to write the application business logic, and
deploy the software application with the data stored in SQLBase or
SQLBase SafeGarde. Some use CTD to create the application business logic
and deploy the application with the data stored in Oracle, Microsoft,
Sybase or other enterprise databases. Others write their business logic
using programming languages such as Java and C++, and store the data in
SQLBase (with JDBC Type 4 drivers) or SQLBase SafeGarde. Still other
software companies use SQLHost to connect PC systems with host legacy
systems. Furthermore, other companies have added intelligence to devices
by embedding SQLBase in new smart devices, such as copiers and routers.
Finally, companies use Centura's web products to web enable their legacy
systems, using the same business logic but with a new HTML user
interface.
The Company has established worldwide distribution channels that
provide broad market coverage for its products and address the specific
needs of its varied customer segments worldwide. Customers use the
products in at least 75 countries. Major Customers include, but are not
limited to, Automatic Data Processing ("ADP"), Baan (Aurum), BMW,
CamData, Citibank N.A., Clarus, Computer Associates, Daimler-Benz,
Deutsche Bank, Ford Motor Company, IFS, Infra Corporation (Help Desk
Systems), Norfolk Southern, Ontario Hydro, Lilly Software,
Siemens-Nixdorf Information System AG ("Siemens-Nixdorf"), Station,
Telia, The Southern Company, United Airlines, United Parcel Service
("UPS"), Xerox and the governments of Australia, France, Mexico, the
United Kingdom and the United States.
The Company's products have strong acceptance in several vertical
markets, including ERP, finance, government, health care, insurance,
retail and sales force automation (SFA).
Marketing, Distribution and Product Support
The Company's marketing and sales efforts are targeted to attract
worldwide developers of applications that operate on the web, are
embedded in smart appliances, or operate as PC client/server
applications. These developers include corporate developers, ISVs and
VARs who develop and install software application. The Company uses a
combination of direct sales, telesales, alliances and an indirect channel
to sell and support existing and new customers.
The Company has established a worldwide field sales organization,
which operates in the United States, Canada, Mexico, Brazil, France,
Germany, Italy, Switzerland, Austria, the Netherlands, Belgium, the
United Kingdom and Australia.
The Company also distributes its products through major independent
distributors that may sell such products to smaller VARs, resellers and
dealers. The Company presently has a distribution agreement with
DistribuPro, for distribution of the Company's products in North America.
The Company also has a network of international distributors, including
Computer 2000 AG GmbH, ADN, Nocom and Illion in Europe and Mitsubishi
Corporation in Japan. Although many of the Company's distributors carry
competing product lines, the Company provides various forms of sales and
marketing programs to incent the channel to sell Centura products. The
Company's distributors may from time to time be granted stock exchange or
rotation rights. Such returns or exchanges are generally offset by an
immediate replacement order of equal or greater value. Although the
Company believes that, to date, it has provided adequate allowances for
exchanges and returns, there can be no certainty that actual returns will
not exceed the Company's allowances, particularly concerning introduction
of new products or enhancements.
In a number of markets, the Company has entered into multi-year
master distribution agreements with unrelated 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.
While the Company believes that to date these agreements have increased
the Company's penetration in these markets, there can be no certainty
that this performance will continue or that these relationships will
remain in place.
The Company also sells its products through a worldwide network of
VARs and consultants that specialize in developing customized solutions
for smaller, departmental networks. These VARs bundle the Company's
products and products of other software vendors into systems that are
sold directly to end-users. The Company has certified over 1,000 VARs
marketing to industries such as financial services, telecommunications,
publishing, transportation and health care.
Marketing. To support its sales organizations, the Company conducts
comprehensive marketing programs and cooperative selling arrangements
with the Company's strategic partners. The Company's marketing programs
include direct mail, public relations, advertising, seminars, trade shows
and ongoing customer communication programs.
The marketing message focuses on the customer's benefits of using
Centura products, which offer a fast time to market, a low TCO and
security to both the developer and the end user, thereby maximizing their
Return on Investment ("ROI"). Our orientation is simple: the value of
information is directly proportional to the degree of accessibility and
security. The Company is building new marketing programs to attract
developers who are writing applications for new platforms and
architectures, including mobile, smart devices, and the Internet. Most
new customers will be attracted to the Company's new product offerings
that are available for the Web and smart devices. The Company's marketing
message intends to leverage its industry leadership in Client/Server into
new platforms for embedded devices and connectivity products.
New marketing programs are being put in place to support the ISVs
and VARs that sell and implement applications built with the Centura
environment.
The majority of the Company's revenues have been derived from the
licensing of software products for PC client/server systems, and such
products, and evolutions of such products and web based solutions, are
expected to continue to account for substantially all of the Company's
revenues for the foreseeable future. Accordingly, continued broad market
acceptance of PC Client/Server and web-based systems is critical to the
Company's future success.
Customer Support and Service. The Company is committed to providing
timely, high-quality technical support, which the Company believes is
critical to maintaining customer satisfaction. Customer requirements for
support and service vary depending on factors such as the number of
different hardware and software vendors involved in an installation, the
complexity of the application and the nature of the hardware
configuration. The Company offers flexible multi-tiered technical support
programs tailored to these specific customer needs. The Company offers a
licensed maintenance service to all its customers to provide bug fixes
and software enhancements. In addition, the Company provides technical
support through a telephone hotline service. For the large
enterprise-wide customer, the Company offers comprehensive premium
support programs. The Company broadens its support coverage through its
worldwide network of authorized support centers, certified business
partners and authorized consultants. The Company is building a Web self-
help database offering developers access to 24x7 on-line help.
Engineering and Product Development
Since inception, the Company has made substantial investments in
engineering and product development. During 1998, 1997, and 1996, the
Company's expenditures in engineering and product development, net of
capitalized software, were $7.9 million, $9.7 million, and $11.0 million,
representing 15%, 17%, and 17% of net revenues, respectively. The
Company's products have been developed by its internal product
development staff and, in certain instances, by strategic use of outside
consultants and third party developers. The Company believes that timely
development of new products and enhancements to existing products is
essential to maintain its competitive position.
The Company is committed to continued development of new
technologies for PC client/server and related evolutions of client server
and web-based computing, and the support of major 32-bit operating
systems, including Microsoft Windows 95 & 98, Microsoft Windows NT and
Novell NetWare. In addition, the Company plans to continue to offer
upgrades to its products. Delays or difficulties associated with new
products or product enhancements could have a material adverse effect on
the Company's business, operating results and financial condition.
Competition
The market for embeddable databases and application development
tools 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 database PC and Web client/server
software, and the Company's current and prospective competitors offer a
variety of solutions to address this market segment.
Embeddable Database Market. As 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 number of anticipated users and target capacity of the
database utilized. The Company generally markets its database products in
environments utilizing capacity ranging up to in excess of five
Gigabytes. The most recent release of SQLBase (version 7.5) increases
the capacity limit up to 512 Gigabytes. Competitors of the Company
include Microsoft, Oracle, Computer Associates, IBM, Sybase, Pervasive,
and Informix. These competitors generally have product offerings that
compete with the Company's products in some or all of these capacity
ranges. There are also a number of smaller companies that provide
databases in the RTOS (Real Time Operating System) and Java environments
that could grow to challenge the Company. (See Recent Developments) In
addition, competitors include 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.
Tools and Connectivity Markets. The Company faces competition from
providers of application development software, such as Sybase's Powersoft
Division, Microsoft, Inprise's Borland.com division, and connectivity
software competitors such as IBM. The Company also faces potential
competition from vendors of applications development tools based on 4GLs
or CASE (Computer Aided Software Engineers) technologies. With the
emergence of the Web as an important platform for application development
and deployment, additional competitors or potential competitors have
emerged.
Many of the Company's competitors have longer operating histories
and significantly greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger
installed base, than the Company. In addition, many competitors have
established relationships with customers of the Company. The Company's
competitors could in the future introduce products with more features and
lower prices than the Company's offerings. These companies could also
bundle existing or new products with more established products to compete
with the Company. Furthermore, as the PC and Web client/server market
expands, a number of companies, with significantly greater resources than
the Company, could attempt to increase their presence in this market by
acquiring or forming strategic alliances with competitors of the Company,
or by introducing products specifically designed for the PC and Web
client/server market.
The principal competitive factors affecting the market for the
Company's products include breadth of distribution and name recognition
(visibility), product architecture, performance, functionality, price,
product quality, and customer support. The Company experienced increased
competition during 1998, 1997, and 1996, 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.
Intellectual Property
The Company currently has one patent issued with respect to its
SQLWindows and CTD products and relies on a combination of trademark,
copyright and trade secret protection and nondisclosure agreements to
establish and protect its proprietary rights. Policing unauthorized use
of the Company's technology is expensive and difficult, and there can be
no assurance that these measures will be successful. While the Company's
competitive position may be affected by its ability to protect its
proprietary information, the Company believes that ultimately factors
such as the ability to effectively market the Company's products and
provide technical expertise and innovative skill of its personnel, its
name recognition, and ongoing product support and enhancements may be
more significant in maintaining the Company's competitive position.
The Company provides its software products to customers under
non-exclusive, non-transferable license agreements. As is customary in
the software industry to protect intellectual property rights, the
Company does not sell or transfer title to its software products to
customers. Under the Company's current standard form of end user license
agreement, licensed software may be used solely for the customer's
internal operations and, except for limited deployment rights provided in
certain of its SQLWindows packages, only on designated computers at
specified sites. The Company relies primarily on "shrink-wrap" licenses
for the protection of products intended for single, one-time use or
limited deployment. A shrink-wrap license agreement is a printed license
agreement included within packaged software that sets forth the terms and
conditions under which the purchaser can use the product, and binds the
purchaser by its acceptance and purchase of the software products to such
terms and conditions. Shrink-wrap licenses typically are not signed by
the licensee and therefore may be unenforceable under the laws of certain
jurisdictions.
The Company has entered into source code escrow agreements with a
number of resellers and end users that require release of source code to
such parties with a limited, nonexclusive right to use such code in the
event that there is a bankruptcy proceeding by or against the Company,
the Company ceases to do business or the Company breaches its contractual
obligations to the customer. The Company has, in certain cases, licensed
its source code to customers for specific uses.
There can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to
current or future products or that any such assertion may not result in
costly litigation or require the Company to obtain a license to
intellectual property rights of third parties. There can be no assurance
that such licenses will be available on reasonable terms, or at all. As
the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes
that software developers may become increasingly subject to infringement
claims. Any such claims, with or without merit, can be time consuming and
expensive to defend.
Employees
As of December 31, 1998, the Company had 204 full-time employees,
including 43 in research and development, 8 in operations and
manufacturing, 94 in sales and marketing, 24 in technical services and
support and 35 in MIS, finance and administration. The Company maintains
competitive compensation, benefits, equity participation and work
environment policies to assist in attracting and retaining qualified
personnel. None of the Company's employees are covered by collective
bargaining agreements. The Company believes its relationship with its
employees is good. The Company believes that the success of its business
will depend in large part on its ability to attract and retain qualified
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining
such personnel.
Risk Factors
This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Actual
results could differ materially from those projected in the
forward-looking statements as a result of certain of the risk factors set
forth below and elsewhere in this Annual Report on Form 10-K. In
evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information
presented in this report.
Changes in Strategic Direction: Restructuring. In efforts to stem
losses and maximize return on the Company's core assets and technologies,
the Company has restructured its operations and announced changes in
strategic direction several times during the past three years. The first
of these changes, which began in December 1995, encompassed a change in
the Company's name from Gupta Corporation to Centura Software Corporation
and the identification of a flagship product bearing the name Centura. In
early 1997, the Company refocused its marketing and sales efforts away
from databases and development tools products to a middleware
connectivity products, and entered into an agreement to merge with
InfoSpinner, Inc., ("InfoSpinner") the developer of the underlying
product (the "InfoSpinner Merger"). The InfoSpinner Merger was not
consummated, and the Company entered into a distribution agreement with
InfoSpinner. In the second half of 1997, however, the Company
restructured and refocused operations on its core competencies, products
and technologies and terminated its distribution arrangement with
InfoSpinner. The Company continued to pursue this strategic direction
throughout 1998. There can be no assurance that the restructuring efforts
the Company has engaged in to date will be successful or that the Company
will be able to sustain profitability on a quarterly or annual basis. In
addition, there can be no assurance that the Company's management will
not deem it appropriate to undertake other major restructuring efforts or
changes in strategic direction in the future or to what degree any of
these efforts will result in improved operational performance, if at all.
Recent Changes in Senior Management. In the fourth quarter of 1997, the
Company announced significant changes in senior management. Such changes
included the appointment of Scott R. Broomfield as Chief Executive
Officer, John W. Bowman as Chief Financial Officer, and Kathy Lane as
Senior Vice President of Alliances, and the election of Messrs. Jack
King, Phillip Koen, Jr., and Earl Stahl to the Company's Board of
Directors, and the departure of Samuel M. Inman, III, Earl Stahl and
Richard Gelhaus from their positions as officers of the Company. In
February 1998 the Company announced the election of Messrs. William D.
Nicholas and Peter Micciche to the Board of Directors and the appointment
of Scott R. Broomfield to the position of Chairman & CEO. Mr. Nicholas
subsequently resigned from the Board of Directors in December, 1998. The
key recent additions to the Senior Management team are Joe Falcone, who
joined Centura as Senior Vice President and Chief Technology Officer in
November, 1998, and Len Strickler, who joined Centura as Vice President,
Americas and Asia Pacific Sales and Marketing in January, 1999. There can
be no assurance that the new management team will be successful in
execution of its objectives or that the successful execution of these
objectives will result in improved operating results or financial
position of the Company.
Dependence on Key Personnel. The Company's future performance is
substantially dependent on the performance of its executive officers and
key product development, technical, sales, marketing and management
personnel. The Company does not have employment or non-competition
agreements with any of its employees. The loss of the services of any
executive officer or other key technical or management personnel of the
Company for any reason could have a material adverse effect on the
business, operating results and financial condition of the Company.
The future success of the Company also depends on its continuing
ability to identify, hire, train, motivate and retain other highly
qualified technical and managerial personnel. Competition for such
personnel is intense and the Company has experienced difficulty in
identifying and hiring qualified engineering and software development
personnel. 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 Fluctuations in Quarterly and Annual Results. The Company has
experienced in the past and may in the future to continue to experience
significant fluctuations in quarterly operating results. On an annual
basis, the Company reported a profit of $2.1 million in 1998, a loss of
$0.6 million for 1997, and a profit of $2.0 million for 1996. There can
be no assurance that the strategic direction 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.
Although the Company has operated historically with little or no
backlog of traditional boxed product shipments, it has experienced a
seasonal pattern of product revenue, contributing to variation in
quarterly worldwide product revenues and operating results. It has
generally realized lower European product revenues in the third quarter
as compared to the rest of the year. The Company has also experienced a
pattern of recording a substantial portion of its revenues in the third
month of a quarter. As a result, product revenues in any quarter are
dependent on orders booked in the last month. 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, including delays
that may be occasioned by failures of third party product fulfillment
firms to produce and ship products, or the actual loss of product orders
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. Due to the
foregoing factors, the Company's operating results may, during any fiscal
period, fall below the expectations of securities analysts and investors.
In such event, the trading price of the Company's common stock could be
materially adversely affected.
Volatility of the Company's Common Stock Price. The market for the
Company's common stock is highly volatile. The trading price of the
Company's common stock fluctuated significantly in 1998, 1997, and 1996,
and may continue to be subject to wide fluctuations in response to
quarterly variations in operating and financial results, announcements of
new products or customer contracts by the Company or its competitors,
litigation and other factors including sales of substantial blocks of the
Company's common stock. Any shortfall in revenue or earnings from levels
expected by securities analysts or others could have an immediate and
significant adverse effect on the trading price of the Company's common
stock in any given period. Additionally, the Company may not learn of, or
be able to confirm, revenue or earnings shortfalls until late in the
fiscal quarter or following the end of the quarter, which could result in
an even more immediate and adverse effect on the trading of the Company's
common stock. Finally, the Company participates in a highly dynamic
industry, which often results in significant volatility of its common
stock price, without necessarily any regard to whether the Company has
experienced changes in its business, operating results, or financial
condition.
Dilutive and Potential Dilutive Effect to Shareholders. The Company has
engaged in a number of transactions which have resulted in dilution to
the Company's shareholders. In February 1998, Computer Associates, Inc.
("CA"), and Newport Acquisition Company, LLP ("NAC") entered into a Note
Purchase and Sale Agreement (to which the Company consented) and the
Company and NAC entered into a Note Conversion Agreement (the
"Agreements"). Under the terms of the Agreements, a promissory note, plus
accrued interest, in the amount of $12,251,000, payable to CA (the
"CA Note") was acquired by NAC, and immediately converted into 11,415,094
shares of the Company's common stock (the "Shares"). Concurrently with
execution of the Agreements, the Company and NAC entered into an Investor
Rights Agreement (the "Rights Agreement") wherein the Company agreed to
register the Shares under the Securities Act of 1933, as amended (the
"Securities Act"). In March 1998 the Company issued to NAC an
additional warrant to purchase 893,320 shares of the Company's Common
Stock at an exercise price of $1.81 per share (the "NAC Warrant"),
pursuant to a Right of First Refusal provision contained in the Rights
Agreement. The NAC Warrant is subject to three-year vesting. The terms of
the Investor Rights Agreement were modified in favor of Centura in June,
1998, in exchange for an additional warrant to purchase 300,000 shares of
the Company's Common Stock at an exercise price of $2.09 per share and
early registration of the NAC shares with limited rights to sell common
stock through February 27, 1999, at which time selling restrictions would
cease. The Company registered the shares issued under the terms of the
agreement.
Also in February 1998, pursuant to the terms of a Common Stock and
Warrant Purchase Agreement, the Company completed a management-led
private placement of 2,330,191 shares of the Company's common stock (the
"Private Placement"), resulting in gross proceeds to the Company of
$2,470,000. Transaction costs associated with both the Agreements and the
Private Placement were $600,000. The Company subsequently registered the
Private Placement shares under the Securities Act effective May 18, 1998.
Also in February 1998, in connection with the Agreements, the
Company entered into a Warrant Purchase Agreement with CA wherein the
Company issued and sold to CA, a warrant to purchase 500,000 shares of
the Company's common stock (the "CA Warrant"). The CA Warrant is
exercisable at $1.906 per share and expires on February 27, 2004. The
Company registered the shares issuable upon exercise of the CA Warrant
under the Securities Act. Also in February 1998, in connection with the
Private Placement the Company issued warrants to purchase 582,548 shares
of the Company's common stock at an exercise price of $1.25 per share
(the "Private Placement Warrants"). The Private Placement Warrants expire
on February 27, 2003. Also, in consideration of services rendered in
connection with the Private Placement, the Company issued to Rochon
Capital Group, Ltd. warrants to purchase 354,717 shares of the Company's
common stock at an exercise price of $2.12 (the "Rochon Warrants"). The
Rochon Warrants expire on February 27, 2003. The Company registered the
shares issuable under the terms of the Private Placement Warrants and the
Rochon Warrants under the Securities Act. In June 1997, the Company
issued warrants to purchase 90,000 and 10,000 shares of its common stock
to Pacific Business Funding Corporation and its affiliate Sand Hill
Capital, LLC, respectively, at an exercise price of $2.094 per share. The
warrants expire on June 30, 2002.
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 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 purchase an aggregate of
1,500,000 shares of common stock to the Company's Chief Executive
Officer, Chief Financial Officer and Sr. Vice President of Alliances. In
March 1998, the Company's Board of Directors approved the 1998 Employee
Stock Option Plan, under which options to purchase 1,415,000 shares of
common stock are issuable to non-officer employees, of which 1,299,000
options net of cancellations, have been granted and are outstanding as of
December 31, 1998.
Future issuance of such shares of the Company's common stock
pursuant to any of the foregoing will dilute the beneficial ownership of
existing Company shareholders.
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 and Windows 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. 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 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, and widely
used versions of Unix (Solaris, AIX, HP-UX, Unix Ware, BSD/OS and Linux)
and RTOS. 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. (See
Recent Developments)
Need for Additional Equity Financing. The Company may be required to
seek additional equity financing to finance the acquisition of new
products and technologies, capital equipment and continuing operations.
If the Company needs further financing, there can be no assurance that it
will be available on reasonable terms or at all. Any additional equity
financing will result in dilution to the Company's shareholders.
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, 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 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. See "Business Research and Product Development"
and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations".
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 Y2K 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. The Company has multi-year insurance coverage
that does not have Y2K exclusions.
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. The Company has multi-year insurance coverage
that does not have Y2K exclusions.
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 very small environments of
less than five kilobytes to those in excess of five gigabytes.
Competitors of the Company, including Microsoft, Oracle, CA, IBM, Sybase,
borland.com (Inprise), Pervasive, and Informix, 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 Windows or
Browser clients, or smaller capacity environments, could materially and
adversely impact the Company's revenues, results of operations and
financial condition.
Competition. The market for embeddable databases and application
development tools 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.
The Company faces competition from providers of application development
software, such as Oracle, Sybase's Powersoft Division, Microsoft, and
borland.com (Inprise), and connectivity software competitors such as IBM.
The Company also faces potential competition from vendors of
applications development tools based on 4GLs 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 Java based development tools, additional
competitors or potential competitors have emerged.
Many of the Company's competitors have longer operating histories
and significantly greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger
installed base, than the Company. In addition, many competitors have
established relationships with customers of the Company. The Company's
competitors could in the future introduce products with more features and
lower prices than the Company's offerings. These companies could also
bundle existing or new products with more established products to compete
with the Company. Furthermore, as the PC and Web client/server market
expands, a number of companies, with significantly greater resources than
the Company, could attempt to increase their presence in this market by
acquiring or forming strategic alliances with competitors of the Company,
or by introducing products specifically designed for the PC and Web
client/server market.
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
1998, 1997, and 1996, 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.
Market Acceptance of PC Client/Server Systems. To date, substantially
all of the Company's revenues have been derived from the licensing of
software products for PC client/server systems and licensing of such
products is expected to continue to account for substantially all of the
Company's revenues for the foreseeable future. With the increasing focus
on enterprise-wide systems that embrace the World Wide Web, some
customers may opt for solutions that favor mainframe or mini-computer
solutions with associated Web connectivity. Accordingly, some companies
may substantially reduce or abandon the use of PC client/server systems,
which could have a material adverse effect on the Company's future
success.
Component Software Markets. The advent of component software may alter
the way in which customers buy software. In this structure, logical
statements or discreet "units of activity" can be distributed pursuant to
executable statements within a Windows or Browser client environment. As
specific software functionality can be bundled into smaller units or
objects rather than in broad, highly functional products such as the
Company's development tools, customers may be less willing to buy such
broad, highly functional products. If such a trend continues, the Company
may choose to introduce component-type products. The costs and efforts
necessary to package and distribute such components are largely unknown
and there can be no assurance that the Company will be able to repackage
and distribute its products in such a component-type software structure,
in an efficient manner, or at all.
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.
Dependence Upon Distribution Channels. The Company relies on
relationships with value-added resellers and independent third party
distributors for a substantial portion of its sales and revenues. Some of
the Company's resellers and distributors also offer competing products.
Most of the Company's resellers and distributors are not subject to any
minimum purchase requirements, they can cease marketing the Company's
products at any time, and they may from time to time be granted stock
exchange or rotation rights. Moreover, the introduction of new and
enhanced products may result in higher product returns and exchanges from
distributors and resellers. Any product returns or exchanges in excess of
recorded allowances could have a material adverse effect on the Company's
business, operating results and financial condition. The Company also
maintains strategic relationships with a number of vertical software
vendors and other technology companies for marketing or resale of the
Company's products. Any termination or significant disruption of the
Company's relationship with any of its resellers or distributors, or the
failure by such parties to renew agreements with the Company, could
materially and adversely affect the Company's business, operating results
and financial condition.
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 either in the local currency of the
respective geographic region or 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 those markets may negatively impact the
Company's competitive position and subsequently its revenues, results of
operations and financial condition. In addition, the US dollar value of
a sale denominated in a region's local currency decreases in proportion
to relative increases in the value of the US dollar. In addition,
effective copyright and trade secret protection may be limited or
unavailable under the laws of certain foreign jurisdictions. There can be
no assurance that one or more of such factors will not have a material
adverse effect on the Company's international operations and,
consequently, on the Company's business, operating results and financial
condition.
Proprietary Rights. The success and ability of the Company to compete is
dependent in part upon the Company's proprietary technology. While the
Company relies on trademark, trade secret and copyright laws to protect
its technology, the Company believes that factors such as the
technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and
customer support are more essential to establishing and maintaining a
technology leadership position. The Company has one patent with respect
to its SQLWindows and Centura Team Developer products. The Company
believes that its success does not depend on the ownership of patents,
but primarily on the innovative skills, technical competence and
marketing abilities of its personnel. Also, there can be no assurance
that others will not develop technologies that are similar or superior to
the Company's technology. The source code for the Company's proprietary
software is protected both as a trade secret and as a copyrighted work.
Despite these precautions, it may be possible for a third party to copy
or otherwise obtain and use their products or technology without
authorization, or to develop similar technology independently. In
addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries.
The Company generally enters into confidentiality or license
agreements with its employees, consultants and vendors, and generally
controls access to and distribution of its software, documentation and
other proprietary information. Despite efforts to protect proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that is regarded as
proprietary. Policing such unauthorized use is difficult. There can be no
assurance that the steps taken by the Company will prevent
misappropriation of the Company's technology or that such agreements will
be enforceable. In addition, litigation may be necessary in the future to
enforce intellectual property rights, to protect trade secrets or to
determine the validity and scope of the proprietary rights of others.
Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's
business, operating results and financial condition.
There can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products,
and the Company expects that it will increasingly be subject to such
claims as the number of products and competitors in the client/server and
Internet connectivity software market grows and the functionality of such
products overlaps with other industry segments. In the past, the Company
has received notices alleging that its products infringe trademarks of
third parties. The Company has historically dealt with and will in the
future continue to deal with such claims in the ordinary course of
business, evaluating the merits of each claim on an individual basis.
There are currently no material pending legal proceedings against the
Company regarding trademark infringement. Any such third party claims,
whether or not they are meritorious, could result in costly litigation or
require the Company to enter into royalty or licensing 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.
Management of Potential Growth. In recent years, the Company has
experienced both expansion and contraction of its operations each of
which has placed significant demands on the Company's administrative,
operational and financial resources. To manage future growth, if any,
the Company must continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand,
train and manage its work force. There can be no assurance that the
Company will be able to perform such actions successfully. The Company
intends to continue to invest in improving its financial systems and
controls in connection with higher levels of operations. Although the
Company believes that its systems and controls are adequate for the
current level of operations, the Company anticipates that it may need to
add additional personnel and expand and upgrade its financial systems to
manage any future growth. The Company's failure to do so could have a
material adverse effect upon the Company's business, operating results
and financial condition.
Legal Proceedings. There are currently no material pending legal
proceedings against the Company or any of its subsidiaries. The Company
operates in an environment, however, where litigation may occur in the
course of its normal business operations. In the complex and volatile
industry in which the Company operates, disputes, litigation, regulatory
proceedings and other actions are a necessary risk of doing business.
There can be no assurance that the Company will not participate in such
legal proceedings and that the costs and charges will not have a material
adverse impact on the Company's future success.
Directors and Executive Officers of Registrant
The following table sets forth information as of February 28, 1999,
regarding the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- - ------------------------- ------ ----------------------------------------
<S> <C> <C>
Scott R. Broomfield....... 42 President and Chief Executive Officer
(Principal Executive Officer),
Chairman of the Board of Directors
John W. Bowman............ 44 Executive Vice President, Finance and
Operations and Chief Financial
Officer (Principal Financial Officer)
Joe Falcone............... 40 Senior Vice President, Engineering and
Support, and Chief Technology
Officer
Kathy Lane................ 56 Senior Vice President, Alliances
Len Strickler............. 46 Vice President, Americas and Asia
Pacific Sales and Marketing
John Griffin.............. 51 Vice President, European Sales
and Marketing
Richard Lucien............ 41 Vice President, Finance and
Operations (Principal Accounting
Officer)
Samuel M. Inman, III(1)... 48 Director
Jack King(2).............. 65 Director
Phillip Koen, Jr.(2)(1)... 47 Director
Peter Micciche(2)......... 45 Director
Earl M. Stahl............. 44 Director
</TABLE>
- - ------------------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Mr. Broomfield has served as Chief Executive Officer and a director
of the Company since December 1997 and Chairman of the Board of Directors
and Chief Executive Officer since February 1998. Prior to joining the
Company, Mr. Broomfield was a principal with the firm of Hickey & Hill
Incorporated ("Hickey & Hill") from February 1993 to December 1997,
advising companies needing operational and financial restructuring. In
this capacity, Mr. Broomfield assisted companies with executive
management, strategy, operational and financial restructuring, business
planning and business development. Prior to joining Hickey & Hill,
Mr. Broomfield held senior management positions at Trilogy Systems, Inc.,
and Digital Equipment Corporation. Mr. Broomfield has a BS in psychology
from Azusa Pacific University and an MBA with an emphasis in finance,
from Santa Clara University.
Mr. Bowman has served as Chief Financial Officer of the Company
since December 1997. Prior to joining the Company Mr. Bowman also served
as a principal with the firm of Hickey & Hill from July 1997 to
December 1997 where he assisted companies with executive management,
strategy, operational and financial restructuring, business planning and
business development. Prior to joining Hickey & Hill, Mr. Bowman was
President of Country Club Foods, Inc. from November 1995 through
June 1997 and from February 1992 through November 1995 served as Vice
President of Finance for Spreckels Sugar Co., Inc. Prior to this, from
1978 through 1992, Mr. Bowman held various senior financial management
positions at Unisys Corporation. Mr. Bowman holds a BS in Business
Management from San Diego State University and an MBA in Finance from the
University of California, Berkeley.
Mr. Falcone joined the Company in November, 1998 as Senior Vice
President and CTO. Prior to joining the Company, Mr. Falcone was
Director of the Windows Products Group at Inprise Corporation. Prior to
joining Inprise, Mr. Falcone was Director of R&D for Tasking, Inc. From
1994 to 1997, he served in engineering management roles with Data General
Corporation, Kronos, Inc., and Brainstorm Technology, Inc. From 1983 to
1994, Mr. Falcone held positions in research and development at Digital
Equipment Corporation. From 1980 to 1983, Mr. Falcone was a Member of
Technical Staff at Hewlett-Packard Laboratories. Mr. Falcone holds an AB
degree in Computer Science from the University of California, Berkeley
and an MS degree in Electrical Engineering from Stanford University.
Ms. Lane has served as Senior Vice President of Alliances since
joining the Company in December 1997. Prior to this, Ms. Lane served as
Vice President, Marketing for Harman Interactive from June 1994 until
May 1997 when the company was sold to Intel. Prior to that, from
September 1993 through June 1994, Ms. Lane founded and served at NewMedia
Ware. From June 1991 through June 1993 Ms. Lane served as President,
Professional Division at Chipsoft, (which was later acquired by Intuit, a
leading provider of accounting and tax software for the desk-top). Prior
to this, Ms. Lane served as CEO of Softview from September 1988 through
June 1991 and in executive and senior marketing roles at several software
and related companies, including Dataquest, a market research firm, and
was elected to and chaired the Marketing Special Interest Group for the
Software Publishers Association for four years. Ms. Lane received a B.S.
in Business Administration from Fort Hays State College in Kansas.
Mr. Strickler joined the Company in January 1999 as Vice President,
Americas and Asia Pacific Sales and Marketing. Prior to joining the
Company, Mr. Strickler served in several senior sales management
positions at Sun Microsystems Inc.. While at Sun, Mr. Strickler was
responsible for overseeing service to Baan, growing Sun's revenue from
this worldwide account from $5 to $127 million in less than two year.
Prior to joining Sun, Mr. Strickler held management positions in sales,
marketing, and systems integration for both Digital Equipment Corporation
and Burroughs, where he was responsible for directing 200 salespeople as
well as pursuing, staffing and finalizing systems integration
opportunities. Mr. Strickler holds a B.A. in Marketing and Management
from the University of Alabama.
Mr. Griffin has served as Vice President of Sales and Marketing
for Europe at Centura Software Corporation since January 1, 1998.
Mr. Griffin joined the Company in January 1997 and served as Managing
Director, Northern Europe Region through December 1997. Prior to joining
the Company, Mr. Griffin was Managing Director at BMC Software Limited
from 1985 until 1995. He held various management positions at IBM UK
Limited from 1970 to 1985. Mr. Griffin holds a Bachelor of Arts in
Economics and Law from Keele University.
Mr. Lucien has served as Vice President, Finance and Operations
since December 1998, Vice President and Corporate Controller since
joining the Company in December 1997 and served as a consultant to the
Company from July 1997 through December 1997. Prior to joining the
Company, Mr. Lucien was Corporate Controller at Berkeley Systems, Inc., a
software games and entertainment company, from February 1996 through
June 1997 and was Director of Corporate Reporting at Spectrum HoloByte,
Inc., a software games and entertainment company, from July 1994 through
February 1996. Prior to this, Mr. Lucien served in the International
Consulting Practice of Tohmatsu & Co., the Japanese affiliate of
Delloitte, Touche, Tohmatsu, International, in Osaka, Japan, from
July 1991 through March 1994. Prior to this, Mr. Lucien served in various
financial management positions at Nellcor, Inc., a manufacturer of
non-invasive medical instruments from June 1987 through 1990. Mr. Lucien
began his professional career at Touche Ross & Co. in January 1985 and
holds a B.S. degree in business administration from California State
University, Hayward.
Mr. Inman served as Chairman of the Board of Directors from
September 1996 until February 1998 and as President and Chief Executive
Officer (Principal Executive Officer) from December 1995 until
December 1997, and President and Chief Operating Officer from April 1995
until November 1997. Mr. Inman is currently the Chief Executive Officer
of Viking Components. Prior to joining the Company, from March 1993 until
April 1995, Mr. Inman served as President and Chief Operating Officer of
Ingram Micro Inc., the largest microcomputer products distributor
worldwide, where he was responsible for overseeing and managing Ingram's
U.S. operations. Prior to joining Ingram, Mr. Inman, a 21-year veteran of
IBM, served as President of IBM's Personal Computer Company for the
Americas. He is a graduate of Purdue University, where he earned a B.S.
degree in mathematics.
Mr. King has served on the Company's Board of Directors since
December 1997. Mr. King has been President and CEO of Zitel Corporation,
a company specializing in Year 2000 software conversion consulting,
systems integration and "intelligence-based" technology solutions, since
November 1986. Prior to joining Zitel, Mr. King has held key executive
and senior management positions at Dynamic Disk, Data Electronics,
Memorex and Xerox Corporation. Mr. King holds a B.S. in Industrial
Management from San Diego State University.
Mr. Koen has served on the Company's Board of Directors since
December 1997. Mr. Koen has served as Chief Executive Officer of
PointCast Corporation since March of 1999. Prior to this Mr. Koen served
as Chief Financial Officer of Pointcast, and CFO Etec Systems from
December 1993 until June 1997. Prior to that he was the Vice President of
Finance, and then the Chief Financial Officer at Levelor Corporation from
April 1989 to December 1993. Mr. Koen holds a B.A. in Economics from
Claremont Mens College and an M.B.A in General Management from the
University of Virginia.
Mr. Micciche has served as a member of the Board of Directors since
February 1998. Mr. Micciche is currently Senior Vice President, Sales and
Services at ChannelPoint, Inc. Prior to this, Mr. Micciche served as
President and CEO of SceneWare Corporation from 1994 to 1998. Prior to
that he was Vice-President and General Manager, North America at The ASK
Group from December 1992 until May, 1993, and was President of Cognos
Corporation from December 1989 through December 1992. Mr. Micciche
graduated from Boston College with a Bachelor of Science in Accounting
and from Suffolk University with an MBA in Finance.
Mr. Stahl, served as Chief Technology Officer and Senior Vice
President for the products organization at Centura Software Corporation
from April, 1995 until December 1997. Mr. Stahl joined Centura in 1988
and has held various key positions within the company's development
organization, including spearheading the company's client/server tools
development effort. Mr. Stahl has more than 20 years of industry
experience, which includes product development and support on mainframe,
minicomputers, and PC systems. He holds a B.S. in computer science from
San Diego State University and has previously managed development
projects at Bell Northern Research, Dest Corporation, and VisiCorp.
Mr. Stahl is currently Vice President, Products and Strategy for
Rightpoint Corporation.
The Board of Directors elects the Company's officers and such
officers serve at the discretion of the Board of Directors of the
Company. There are no family relationships among the officers or
directors of the Company.
Item 2. Properties
The Company leases approximately 48,000 square feet of office,
development and warehousing space in facilities in Redwood Shores,
California, of which approximately 50% has been sublet for the term of
the lease as of September, 1998
As of December 31, 1998, the Company also has offices in the
metropolitan areas of Chicago, Dallas, New York, Washington, D.C.,
Berlin, Bruetten (Switzerland), Duesseldorf, Leuven (Belgium), London,
Sydney (Australia), Mexico City, Sao Paulo, Milan, Maarssen (The
Netherlands), Munich, Paris, and Vienna. The Company believes that its
facilities are adequate for its current needs and that suitable
additional space will be available as needed.
Item 3. Legal Proceedings
As of December 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 4. Submission of Matters to a Vote of Security Holders Not
Applicable
No matters were submitted to a vote of the Company's shareholders
during the fiscal quarter ended December 31, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The Company's common stock is quoted on The Nasdaq SmallCap Market
(the "SmallCap Market") under the trading symbol "CNTR". The following
table sets forth, for the periods indicated, the quarterly high and low
sale prices per share of the Company's common stock. The Company's common
stock began trading on The Nasdaq National Market ("Nasdaq") on
February 5, 1993 under the trading symbol "GPTA".
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
1998:
First quarter.................................... $2.125 $0.906
Second quarter................................... 2.875 1.563
Third quarter.................................... 1.813 1.000
Fourth quarter................................... 1.438 1.000
1997:
First quarter.................................... $5.125 $2.875
Second quarter................................... 3.625 1.313
Third quarter.................................... 3.125 1.438
Fourth quarter................................... 2.719 1.063
</TABLE>
The Company has not paid any cash dividends. The Company currently
does not anticipate paying any cash dividends in the foreseeable future.
As of February 28, 1999, there were approximately 943 shareholders
of record (not including beneficial holders of stock held in street name)
of the Company's common stock.
Item 6. Selected Financial Data
Selected Consolidated Statements of Operations Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Product...................... $33,453 $40,714 $45,452 $49,408 $46,134
Service...................... 20,044 17,232 17,781 16,306 10,398
--------- --------- --------- --------- ---------
Net Revenues................... 53,497 57,946 63,233 65,714 56,532
Cost of revenues............... 9,034 12,218 14,578 19,640 17,146
--------- --------- --------- --------- ---------
Gross Profit................... 44,463 45,728 48,655 46,074 39,386
Operating income (loss)........ 3,895 1,230 2,484 (42,993) (32,981)
--------- --------- --------- --------- ---------
Net income (loss).............. $2,115 ($649) $2,027 ($44,079) ($31,841)
--------- --------- --------- --------- ---------
Basic net income (loss) per
share(1)..................... $0.08 ($0.04) $0.15 ($3.62) ($2.66)
========= ========= ========= ========= =========
Basic weighted average
common shares(1)............. 27,390 15,439 13,231 12,175 11,957
--------- --------- --------- --------- ---------
Diluted net income (loss) per
share(1)..................... $0.08 ($0.04) $0.15 ($3.62) ($2.66)
========= ========= ========= ========= =========
Diluted weighted average
common shares(1)............. 27,776 15,439 13,380 12,175 11,957
========= ========= ========= ========= =========
</TABLE>
Selected Consolidated Balance Sheets Data
(in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit)(2)... $983 ($18,232) ($15,616) ($25,604) $599
Total Assets................... 29,372 28,200 36,705 48,104 58,161
Long-term Obligations.......... 53 856 12,188 11,744 1,939
Shareholders' Equity (Deficit). $7,273 ($9,954) ($16,923) ($24,057) $18,670
</TABLE>
- - -----------------------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net income (loss) per basic and diluted common
shares and equivalents.
(2) Working Capital (Deficit) includes deferred revenue of $13,274,000,
$14,618,000, $21,891,000, $28,800,000 and $21,879,000 at December 31, 1998,
1997, 1996, 1995 and 1994, respectively.
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of shares used in computing net income (loss) per basic
and diluted common shares and equivalents.
(2) Working Capital (Deficit) includes deferred revenue of $13,274,000,
$14,618,000, $21,891,000, $28,800,000 and $21,879,000 at
December 31, 1998, 1997, 1996, 1995, and 1994 respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis of the financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, as well as "Risk Factors"
included in this Annual Report on Form 10-K.
Overview
The Company commenced operations in 1984 and provides a suite of
products application developers use to build and deploy business
applications in a cost effective manner. Centura products include an
embeddable and secure databases that scale from micro database
environments to the Web, and object oriented and web-based application
development tools. The Company's product lines include a secure
embeddable database, (SQLBase), application and web-based development
tools, (Centura Team Developer, the 32-bit version of SQLWindows, and
Centura net.db) and PC to mainframe connectivity products (SQLHost).
These products are expected to constitute the majority of the Company's
net revenues for the foreseeable future ? see "Recent Developments"
below; also see Note 13 ? Subsequent Events, to the Consolidated
Financial Statements. Any failure to deliver products as scheduled, or
such products' failure to achieve early market acceptance, could have a
material adverse effect on the business, operating results and financial
condition of the Company. The Company distributes its products in the
United States and internationally through a corporate sales organization
consisting of the Company's internal sales force complimented by
marketing arrangements with vertical software partners, hardware original
equipment manufacturers and systems integrators, and a channel sales
organization consisting of value-added resellers and distributors. See
"Item 1. Business Risk Factors New Product Risks; Rapid Technological
Change," "Highly Competitive Markets", "Market Acceptance of PC
Client/Server Systems" and "Internet Software Market".
The Company reported a profit of $2.1 million for fiscal year 1998,
a loss of $0.6 million for 1997, and a profit of $2.0 million for 1996.
Beginning in the fourth quarter of 1997, the Company refocused and
restructured its operations to leverage its core technological
competencies into next generation products, which include embeddable
databases and web-based development tools. The Company continues to
embrace object oriented application development. With the addition of
Centura net.db, the Company's products now provide a comprehensive
architecture for the development and deployment of information systems
and applications from a host environment, through two-tier client/server
and SQL databases, to the multi-tier environment of the World Wide Web.
The Company has experienced in the past and may in the future continue to
experience significant fluctuations in quarterly operating results. 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 its 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. Although the Company has
operated historically with little or no backlog of traditional boxed
product shipments, it has experienced a seasonal pattern of product
revenue decline between the fourth quarter and the succeeding first
quarter, contributing to lower worldwide product revenues and operating
results during such quarters. It has generally realized lower European
product revenues in the third quarter as compared to the rest of the
year. The Company has also experienced a pattern of recording a
substantial portion of its revenues in the third month of a quarter. As a
result, product revenues in any quarter are dependent on orders booked in
the last month. 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. Due to the foregoing factors, it is likely that
the Company's operating results may, during any fiscal period, fall below
the expectations of securities analysts and investors. See "Part I,
Item 1. Business, Risk Factors Recent Company Losses; Fluctuations in
Quarterly Results."
Recent Developments
On March 15, 1999 the Company entered into an agreement (the
"Agreement") to acquire Raima? Corporation, a Seattle-based vendor of
cross-platform micro databases and data management tools for real-time
and Windows applications. The acquisition will be principally an
exchange of stock for stock and is expected to close on or before June 7,
1999. The Company is likely to account for the acquisition under the
purchase method of accounting. The merger will enable Centura to provide
customers with a comprehensive cross-platform family of secure embeddable
database solutions, including Windows NT, Windows 95/98 and Windows CE,
and widely used versions of Unix (Solaris, AIX, HP-UX, Unix Ware, BSD/OS
and Linux) and Real Time Operating Systems (RTOS). 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. See "Part I, Item I. Dilutive and Potential
Dilutive Effect to Shareholders".
Results of Operations
The following table sets forth consolidated statements of
operations data as a percentage of net revenues for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Net revenues:
Product............................... 63% 70% 72%
Service............................... 38% 30% 28%
---------- ---------- -----------
Net revenues........................ 100% 100% 100%
Cost of revenues:
Product............................... 9% 8% 8%
Service............................... 8% 13% 15%
---------- ---------- -----------
Cost of revenues.................... 17% 21% 23%
---------- ---------- -----------
Gross profit...................... 83% 79% 77%
Operating expenses:
Sales and marketing................... 48% 45% 46%
Engineering and product development... 15% 17% 17%
General and administrative............ 13% 12% 10%
Acquisition expense................... -- 1% 1%
Litigation expense.................... -- -- -1%
Restructuring expense................. -- 2% --
---------- ---------- -----------
Total operating expenses............ 76% 77% 73%
---------- ---------- -----------
Operating income (loss)........... 7% 2% 4%
Other income (expense), net............. -4% -3% --
Provision for income taxes.............. 1% -- 1%
---------- ---------- -----------
Net income (loss)....................... 4% -1% 3%
========== ========== ===========
Gross margin on product revenues...... 86% 88% 89%
Gross margin on service revenues...... 78% 57% 46%
</TABLE>
<PAGE>
Net Revenues. 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.
During 1998, the Company has 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." In December 1998, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position No. 98-9
("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition,
with Respect to Certain Transactions." The provisions of SOP 98-9 will
be adopted for transactions entered into during the fiscal year beginning
January 1, 1999.
Net Product Revenues. Net product revenues consist primarily of SQLBase,
Centura Team Developer, SQLWindows, and SQLNetwork product sales. Net
product revenues for 1998 decreased 18% to $33.5 million from $40.7
million in 1997 primarily due to decreased sales of Centura Team
Developer. Decreases in sales of the Company's development tools from
1997 to 1998 and from 1996 to 1997 were due primarily to increased
competition. Sales of the Company's SQLBase products decreased slightly
to $23.5 million or 70% of net product revenue in 1998 from $24.5 million
or 60% of net product revenue in 1997. The increase in SQLBase revenue as
a percentage of net product revenue was due primarily to relative
decreases in the Centura Team Developer product line. The Centura Team
Developer product line accounted for $7.0 million or 21% of net product
revenues for 1998 compared with $10.7 million or 26% of net product
revenues in 1997. Net product revenues for 1997 decreased to $40.7
million from $45.5 million in 1996 primarily due to decreased sales of
SQLWindows. Sales of SQLBase products increased to $24.5 million or 60%
of net product revenue in 1997, from $23.8 million or 52% of net product
revenues in 1996. Sales of other tools and connectivity software
accounted for $3.0 million or 9%, $5.5 million or 14%, and $13.1 million
or 29% net product revenues for 1998, 1997 and 1996, respectively.
International revenue accounted for 55%, 63% and 67% of total net product
revenues for 1998, 1997 and 1996, respectively. Distributor and OEM
royalties accounted for $12.7 million or 24%, and $34.4 million or 59% of
net revenues in 1998 and 1997, respectively.
Net Service Revenues. Net service revenues consist primarily of license
maintenance agreements and telephone support. Net service revenues
increased 16% to $20.0 million in 1998 from $17.2 million in 1997. The
increase in net service revenues reflects the Company's overall focus on
customer retention. License maintenance fees represent payments which
entitle customers the right to receive product revision upgrades and
updates as such are produced by the Company and become available. Net
service revenues decreased to $17.2 million in 1997, from $17.8 million
in 1996, due primarily to the decrease in net product revenues in 1997
and related support and service revenue that accompanies new product
sales. This was partially offset by renewals of customer support and
service agreements from prior years. License maintenance and telephone
support contracts are typically paid in advance, and revenue is
recognized ratably over the term of the contract. International service
revenues accounted for 52%, 46% and 41% of total net service revenues for
1998, 1997 and 1996, respectively.
Cost of Product Revenues. Cost of product as a percentage of product
revenues was 14%, 12% and 11% for 1998, 1997 and 1996, respectively. Cost
of product includes the cost of subcontracted production, royalties for
third party software, and the amortization of capitalized software. Cost
of product varies significantly by distribution channel. Channel sales
typically involve sales of packaged products and, as a result, generally
have higher costs of production than embeddable applications or large
scale deployment sales, which generally involve software reproduction
licenses. The increase in cost of product revenue as a percentage of
product revenue, in 1998 is due primarily to an increase in royalties,
and the write-off of development licenses for product which had been
released from development.
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 amortization software purchased from
third parties, decreased to $1.7 million in 1998 from $2.7 million in
1997, as compared with a $1.1 million increase from 1996 to 1997.
Cost of Service Revenues. Cost of service revenues, as a percentage of
service revenues was 22%, 43% and 54% in 1998, 1997 and1996 respectively,
primarily due to a decrease in headcount in each of the respective years.
Cost of service consists primarily of personnel costs related to
maintenance, training and technical support. The decrease in cost of
service revenues as a percentage of service revenue is primarily due to a
decrease in headcount in each of the respective years. In August 1997,
the Company completed operational restructurings which encompassed
outsourcing certain support functions. The outsourcing activities enabled
a lower infrastructural cost of service while maintaining adequate levels
of support. It is likely that the Company will increase the levels of
technical service in 1999, and devote additional resources to solutions
development for end-users and consultative sales. As such, the cost of
service as a percentage of service revenues is anticipated to increase.
To the extent that service and consulting revenues do not grow at the
same rate, such increases could have a material adverse effect on the
Company's business, results of operations and financial condition.
Sales and Marketing Expenses. Sales and marketing expenses consist
principally of salaries, sales commissions and costs of advertising and
marketing campaigns. Sales and marketing expenses decreased 2% to
$25.8 million in 1998 from $26.2 million in 1997. In 1997, sales and
marketing expenses decreased 10% from $29.1 million in 1996. Sales and
marketing expenses represented 48%, 45% and 46% of net revenues in 1998,
1997 and 1996, respectively. The decrease in sales and marketing expenses
in 1998 and 1997 was due to primarily to reductions in staffing,
including the elimination of portions of the field sales organization
which were focussed on the Foresite product which the Company
discontinued in the fourth quarter of 1997.
Engineering and Product Development. The table below sets forth gross
engineering and product development expenses, capitalized internal
software development costs, and net engineering and product development
expenses in dollar amounts and as a percentage of net revenues for the
periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
(in thousands)
Gross engineering and product
development expenses................. $8,602 $10,742 $12,897
Capitalized internal software
development costs.................... (664) (1,018) (1,865)
---------- ---------- -----------
Net engineering and product
development expenses................. $7,938 $9,724 $11,032
========== ========== ===========
As a percentage of net revenues:
Gross engineering and product
development expenses............... 16% 19% 20%
Net engineering and product
development expenses............... 15% 17% 17%
</TABLE>
Net engineering and product development expenses decreased 18% to
$7.9 million in 1998 from $9.7 million in 1997. In 1997, net engineering
and product development decreased 12% to $9.7 million from $11.0 million
in 1996. The decreases reflect a reduction in staffing and associated
continuing engineering costs as the Company reduced its emphasis on
engineering work related to software development tools. The Company has
begun efforts to re-align its engineering and product development
organization and anticipates that development costs will increase in 1999
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. To the extent that net
revenues do not grow at the same rate, such increases could have a
material adverse effect on the Company's business, results of operations
and financial condition.
General and Administrative Expenses. General and administrative
expenses consist primarily of staffing and related expenses, rent and
facilities expense, depreciation, and outside services. General and
administrative expenses decreased 2% to $6.9 million in 1998 from
$7.0 million in 1997. General and administrative expenses decreased in
1998 from 1997 due primarily to staffing reductions in the first half of
1998. In addition, during the third quarter of 1998, the Company began to
sublease a portion of its office space, which resulted in a reduction of
net rental expense in 1998. In 1997, general and administrative expenses
increased 5% from $6.7 million in 1996, due principally to operational
restructuring and expensed acquisition costs, and the abandonment of
certain MIS projects during the year. General and administrative expenses
were $6.7 million in 1996. These expenses represented 13%, 12% and 10% of
net revenues in 1998, 1997 and 1996, respectively.
Acquisition Expenses. On January 6, 1997, in an effort to expand its
product offerings in areas complimentary with the Company's core
products, technology and Internet applications, the Company entered into
a definitive agreement to acquire InfoSpinner, Inc. (InfoSpinner) of
Richardson, Texas (the "Merger Agreement"). The Company did not obtain
the majority vote of its shareholders required for the approval of the
proposed merger, and as such, InfoSpinner elected to exercise its right,
pursuant to the Merger Agreement, to terminate the transaction. In
connection with the Merger Agreement, the Company entered into a
non-exclusive distribution agreement with InfoSpinner. Beginning in the
second half of 1997, the distribution agreement with InfoSpinner was
terminated and the Company restructured its operations to leverage its
core technological competencies into next generation products, which
include embeddable databases and development tools that continue to
embrace object oriented development.
Restructuring expenses. Beginning in the second half of 1997, the
distribution agreement with Infospinner terminated and the Company
restructured its operations to leverage its core technological
competencies into next generation products, which include embeddable
databases and development tools that continue to embrace object oriented
development. In 1997 the Company incurred charges related to its
restructuring efforts in the amount of approximately $1.5 million, which
included the write-off of prepaid distribution royalties in connection
with the termination of the Infospinner distribution agreement and
severance costs, offset by the reversal of approximately $0.5 million in
existing restructuring reserves, originally recorded in 1995. The results
of operations for 1996 include the reversal of $0.2 million of
restructuring reserves due to a change in estimated employee reduction
costs. In addition, there can be no assurance that the Company's
management will not deem it appropriate to undertake other major
restructuring efforts in the future or to what degree any of these
efforts will result in improved operational performance, if at all.
Litigation Settlement?Class Action Lawsuit. The Company reached a binding
settlement agreement with plaintiffs' counsel in a lawsuit filed against
the Company and certain of its officers and directors by a holder of the
Company's common stock and gained court approval of the settlement
agreement on September 30, 1996. As part of the settlement, the Company
agreed to provide up to a maximum of 2,500,000 shares of its common stock
to a fund to be distributed among the members of the plaintiff class. As
of December 31, 1997, 2,500,000 shares have been issued and distributed
under the settlement agreement and no additional shares are required to
be issued. The 1996 results of operations includes the reversal of
$878,000 of litigation expenses attributed to the difference between the
original estimate of litigation expense and final settlement of the
lawsuit.
Other Income (Expense), Net. Other income (expense), net is comprised of
interest income, interest expense, valuation of warrants, and gains or
losses on foreign currency transactions. The Company's gains or losses
from foreign currency transactions have fluctuated from period to period,
primarily as a result of fluctuating values of the U.S. dollar and
instability in European and Latin American currency markets. The Company
recorded a foreign currency loss of approximately $0.4 million in 1998,
principally due to the decline in the value of certain European
currencies. The Company recorded a foreign currency loss of $1.0 million
in 1997 and a gain of $0.2 million in 1996. The costs of currency hedging
are reflected in the reported gains and losses of foreign currency
transactions. The Company anticipates that it will continue to hedge
foreign currency denominated assets and liabilities in 1999. Nonetheless,
a decrease in the value of foreign currencies relative to the value of
the U.S. dollar could result in losses from foreign currency
transactions. The Company's net interest expense was $0.2 million,
$0.8 million and $0.2 million in 1998, 1997 and 1996 respectively.
Included in other income and expense in 1998 are non-cash charges of
approximately $1.0 million associated with the issuance of warrants. The
warrants were valued using an independent appraiser, and a modified
Black Scholes model. See Note 9. of notes to the consolidated financial
statements.
Sales of the Company's products are denominated both in local
currencies of the respective geographic region and in U.S. dollars,
depending upon the economic stability of that region and locally accepted
business practices. Accordingly, any increase in the value of the U.S.
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 U.S. dollar would serve to increase
the relative foreign currency cost to the customer of a U.S. dollar
denominated purchase, which may negatively affect the Company's sales in
those markets. The U.S. dollar value of a sale denominated in a region's
local currency decreases in proportion to relative increases in the value
of the U.S. dollar.
Provision for Income Taxes. The provision for income taxes was
$0.3 million in 1998, $0.1 million in 1997 and $0.5 million in 1996. The
provision for income taxes related primarily to foreign withholding
taxes. As of December 31, 1998, the Company had net operating loss
carryforwards of approximately $72.7 million available to offset future
federal taxable income and $21.4 million available to offset future state
taxes, which expire through 2018. The availability and timing of these
loss carryforwards to offset future taxable income may be limited due to
the occurrence of certain events, including certain changes in ownership
interests. At December 31, 1998, 1997 and 1996, the Company fully
reserved its deferred tax assets due to the existence of uncertainty of
the Company's ability to realize the deferred tax assets.
Quantitative and Qualitative Disclosure About Market Risk. The Company's
international business is subject to risks customarily encountered in
foreign operations, including changes in specific country's or region's
political or economic conditions, trade protection measures, import or
export licensing requirements, unexpected changes in regulatory
requirements and natural disasters. The Company is also exposed to
foreign currency exchange rate risk inherent in its sales commitments,
anticipated sales and assets and liabilities denominated in currencies
other than the U.S. dollar, as well as the interest rate risk inherent in
the Company's foreign receivable portfolio. The Company's risk
management strategy utilizes derivative financial instruments (forward
contracts) to hedge certain foreign currency exposure. The Company
believes that the adverse movements in foreign exchange rates applied to
the hedging contracts and underlying exposures described above would not
have a material effect on the Company's consolidated financial position,
results of operations or cash flows. Annual gains and losses in the
future may differ materially from that analysis, however, based on the
changes in the timing and amount of foreign currency exchange rate
movements and the Company's actual exposures and hedges.
At December 31, 1998, the Company had $5,741,000 in 30 day forward
contracts denominated in four European currencies; German Deutsche Marks,
British Pounds Sterling, Netherland Guilders, and Italian Lire, as well
as the Australian Dollar. The carrying value of these financial
instruments approximate their respective fair values.
At December 31, 1998, the Company's investment portfolio
consisted of cash and cash equivalents, and is therefore, subject to no
interest rate risk.
In January 1998, the Company entered into a $5,000,000 asset based
loan facility with Coast Business Credit, the "Facility." The loan
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. The facility replaces an accounts receivable factoring
agreement entered into by the Company in June 1997. As of December 31,
1998 there was $2,663,000 drawn against the $5,000,000 loan facility,
and having achieved certain financial covenants, the Company was paying
an interest rate of 1.75% above the Bank of America Reference Rate.
Although the facility is subject to interest rate risk, the Company
believes that the adverse movements of interest rates would not have a
material effect on the Company's consolidated financial position, results
of operations or cash flows.
Year 2000 Issue. Background. Some computers, software, and other
equipment include programming code in which calendar year data is
abbreviated to only two digits. As a result of this design decision,
some of these systems could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as
the year 2000 approaches, and are commonly referred to as the
"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 the
Company are designed to record, store and process and present calendar
dates occurring on or after January 1, 2000 with the same degree of
accuracy that such products process dates occurring before such date.
Internal Infrastructure. The Company believes that it has
identified substantially all of the major computers, software
applications, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption to its business. The Company has
commenced the process of modifying, upgrading, and replacing major
systems that have been identified as adversely affected, and expects to
complete this process in a timely manner.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities
equipment, such as fax machines, photocopiers, telephone switches,
security systems, and other common devices may be affected by the Year
2000 Problem. The Company is currently assessing the potential effect
of, and costs of remediating, the Year 2000 Problem on its office and
facilities equipment.
The Company estimates the total cost to the Company of
completing any required modifications, upgrades, or replacements of
these internal systems will not have a material adverse effect on the
Company's business or results of operations. This estimate is being
monitored and will be revised as additional information becomes
available.
Suppliers. The Company has initiated communications with
third party suppliers of the major computers, software, and other
equipment used, operated, or maintained by the Company to identify and,
to the extent possible, to resolve issues involving the Year 2000
Problem. However, the Company has limited or no control over the
actions of these third party suppliers. Thus, while the Company expects
that it will be able to resolve any significant Year 2000 Problems with
these systems, there can be no assurance that these suppliers will
resolve any or all Year 2000 Problems with these systems before the
occurrence of a material disruption to the business of the Company or
any of its customers. Any failure of these third parties to resolve
Year 2000 problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial
condition, and results of operation.
Disclaimer. Management believes that it is not possible to
determine with complete certainty that all Year 2000 Problems affecting
the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are
simply too numerous. In addition, one cannot accurately predict how
many Year 2000 Problem-related failures will occur, or the severity,
duration, or financial consequences of these perhaps inevitable
failures. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking
statements. The Company's ability to achieve Year 2000 compliance and
the level of incremental costs associated therewith, could be adversely
impacted by, among other things, the availability and cost of
programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in the
ongoing compliance review.
While the Company has begun the implementation of Year 2000
related upgrades appropriate for the Company's internal systems and
equipment and Year 2000 compliance issues in the systems of customers,
vendors and other related parties, there can be no assurance that
problems will not arise as a result of the Year 2000 issue.
Inflation. The Company believes that inflation has not had a material
impact on the Company's operating results and does not expect inflation
to have a material impact on the Company's operating results in 1998.
Recent Accounting Pronouncements. In April 1998, the American Institute
of Certified Public Accountants issued Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on
capitalization of the costs incurred for computer software developed or
obtained for internal use. It also provides guidance for determining
whether computer software is internal-use software and on accounting for
the proceeds of computer software originally developed or obtained for
internal use and then subsequently sold to the public. The Company has
not yet determined the impact, if any, of adopting this statement. The
disclosures prescribed by SOP 98-1 will be effective for the Company's
consolidated financial statements for the fiscal year ending December
31, 1999.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement 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.
Liquidity and Capital Resources:
At December 31, 1998, the Company had a working capital position of
approximately $1.0 million and net shareholders equity of approximately
$7.3 million. Excluding the impact of deferred product and support
revenue of $13.3 million, the Company had a working capital position of
approximately $14.3 million at December 31, 1998.
At December 31, 1998 the Company had approximately $5.7 million in
unsecured foreign currency contracts, denominated primarily in various
European currencies, as part of a program to hedge the financial exposure
arising from foreign denominated monetary assets and liabilities.
The deferred product and support revenue of $13.3 million at
December 31, 1998 reflects a delay in recognition of revenue in
accordance with contractual agreements and requires minimal resources of
the Company.
Net cash provided by operating activities was $1.3 million in 1998,
compared to net cash used by operating activities of $3.3 million in
1997 and $7.7 million in 1996. The cash provided in 1998 was principally
due to net income, combined with depreciation and amortization, the
valuation of stock warrants issued, and a decrease in other assets,
offset by an increase in accounts receivable, and decreases in accounts
payable and deferred revenue. The use of cash in 1997 was due principally
to decreases in deferred revenue and accounts payable and accrued
liabilities, offset by depreciation and amortization and a decrease in
accounts receivable. In 1996, net income and an increase in depreciation
and amortization were offset by decreases in accounts payable and accrued
liabilities, litigation expense and deferred revenue.
Cash used in investing activities was $1.9 million in 1998 ,
principally due to the acquisition of equipment and the capitalization of
software costs. Cash used in investing activities was $1.6 million in
1997, principally due to the purchase of equipment related to the
Company's information systems architecture and capitalized software
costs, partially offset by maturities of investments. Cash provided by
investing activities was $4.6 million in 1996, principally due to
maturities of investments offset by acquisition of property and
equipment, and capitalization of software development costs.
Net cash provided by financing activities was $3.0 million in 1998,
and related to an increase in short-term borrowings and the issuance of
common stock. Net cash provided by financing activities in 1997 and 1996
totaled $2.2 million and $0.2 million, respectively, primarily as a
result of proceeds from short-term borrowings and issuance of common
stock offset by repayment of notes payable.
In February 1998, Computer Associates, Inc. ("CA"), and Newport
Acquisition Company, LLP ("NAC") entered into a Note Purchase and Sale
Agreement (to which the Company consented) and the Company and NAC
entered into a Note Conversion Agreement (the "Agreements"). Under the
terms of the Agreements, a promissory note, plus accrued interest, in the
amount of $12,251,000, payable to CA (the "CA Note") was acquired by NAC,
and immediately converted into 11,415,094 shares of the Company's common
stock (the "Shares"). Concurrently with execution of the Agreements, the
Company and NAC entered into an Investor Rights Agreement (the "Rights
Agreement") wherein the Company agreed to register the Shares under the
Securities Act. The shares were registered effective July 18, 1998.
The Company believes that expected cash flows from operations and
existing cash balances, will be sufficient to meet the Company's
currently anticipated working capital and capital expenditure
requirements for the next 12 months. The Company may, however, choose to
raise cash for operational or other needs sometime in the future. If the
Company needs further financing, there can be no assurance that it will
be available on reasonable terms or at all. Any additional equity
financing will result in dilution to the Company's shareholders.
The Company's capital requirements also may be affected by
acquisitions of businesses, products and technologies that are
complementary to the Company's business, which the Company considers 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 the Company's common stock.
In January 1998, the Company entered into a $5.0 million asset
based loan facility with Coast Business Credit. The loan provides for
borrowings of up to $5.0 million, secured by the Company's accounts
receivable, combined with a $0.5 million capital equipment facility. The
facility bears interest at a rate of 2.25% above the Bank of America
Reference Rate, and provides for the ability to reduce interest costs
based on the achievement of certain financial covenants. The facility
matures in January 2000 and provides for the ability to extend the
agreement for one year at the option of the Company. At December 31,
1998, the Company had drawn $2.7 million on the loan facility, and having
achieved certain financial covenants, the Company was paying an interest
rate of 1.75% above the Bank of America Reference Rate.
On March 15, 1999 the Company entered into an agreement (the
"Agreement") to acquire Raima? Corporation, a Seattle-based vendor of
cross-platform micro databases and data management tools for real-time
and Windows 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. The Company is
likely to account for the merger under the purchase method of accounting.
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, and widely used versions of Unix
(Solaris, AIX, HP-UX, Unix Ware, BSD/OS and Linux) and Real Time
Operating Systems (RTOS). 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. The
Company expects to incur transaction related expenses associated with the
merger. See "Part I, Item I. Dilutive and Potential Dilutive Effect to
Shareholders".
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.
In addition, quarterly operating results of the Company will depend
on a number of other factors that are difficult to forecast, including
factors listed in "Item 1. Business, - Risk Factors - Recent Company
Losses; Fluctuations in Quarterly Results".
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Centura Software Corporation:
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) present fairly, in all material
respects, the financial position of Centura Software Corporation and its
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 16 , 1999
<PAGE>
CENTURA SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $6,414 $3,974
Accounts receivable, less allowances of $1,321
and $1,621......................................... 12,988 11,744
Inventories.......................................... 44 259
Other current assets................................. 3,583 3,089
---------- ----------
Total current assets............................... 23,029 19,066
Property and equipment, net............................ 2,888 3,511
Capitalized software, net.............................. 1,542 2,573
Long-term investments.................................. 1,002 1,263
Other assets........................................... 911 1,787
---------- ----------
Total assets....................................... $29,372 $28,200
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term obligations............. $ -- $10,000
Accounts payable..................................... 2,798 4,244
Accrued compensation and related expenses............ 1,567 1,521
Short-term borrowings................................ 2,663 1,581
Other accrued liabilities............................ 1,744 5,334
Deferred revenue..................................... 13,274 14,618
---------- ----------
Total current liabilities.......................... 22,046 37,298
Other long-term liabilities............................ 53 856
---------- ----------
Commitments and contingencies (Note 7)
Shareholders' equity (deficit):
Preferred stock, no par value; 2,000 shares
authorized; none issued and outstanding............ -- --
Common stock, par value $.01 per share; 60,000 shares
authorized; 29,598 shares and 15,784 shares issued
and outstanding ................................... 85,690 70,636
Accumulated other comprehensive income............... (426) (484)
Accumulated deficit.................................. (77,991) (80,106)
---------- ----------
Total shareholders' equity (deficit)............... 7,273 (9,954)
---------- ----------
Total liabilities and shareholders' equity
(deficit)....................................... $29,372 $28,200
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CENTURA SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Net revenues:
Product............................... $33,453 $40,714 $45,452
Service............................... 20,044 17,232 17,781
---------- ---------- -----------
Net revenues........................ 53,497 57,946 63,233
Cost of revenues:
Product............................... 4,652 4,779 5,060
Service............................... 4,382 7,439 9,518
---------- ---------- -----------
Cost of revenues.................... 9,034 12,218 14,578
---------- ---------- -----------
Gross profit...................... 44,463 45,728 48,655
---------- ---------- -----------
Operating expenses:
Sales and marketing................... 25,776 26,224 29,106
Engineering and product development... 7,938 9,724 11,032
General and administrative............ 6,854 6,990 6,667
Acquisition expense................... -- 530 467
Litigation expense.................... -- -- (878)
Restructuring expense................. -- 1,030 (223)
---------- ---------- -----------
Total operating expenses............ 40,568 44,498 46,171
---------- ---------- -----------
Operating income (loss)........... 3,895 1,230 2,484
Other income (expense):
Interest income....................... 338 234 637
Interest expense...................... (505) (1,039) (831)
Imputed value of warrants issued...... (990) -- --
Foreign currency gain (loss).......... (350) (1,012) 215
---------- ---------- -----------
Income (loss) before income taxes....... 2,388 (587) 2,505
Provision for income taxes.............. 273 62 478
---------- ---------- -----------
Net income (loss)....................... $2,115 ($649) $2,027
========== ========== ===========
Basic net income (loss) per share....... $0.08 ($0.04) $0.15
========== ========== ===========
Basic weighted average common shares.... 27,390 15,439 13,231
========== ========== ===========
Diluted net income (loss) per share..... $0.08 ($0.04) $0.15
========== ========== ===========
Diluted weighted average common shares.. 27,776 15,439 13,380
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CENTURA SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $2,115 ($649) $2,027
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization................. 3,680 5,390 5,311
Loss on disposal of fixed assets.............. 236 -- --
Issuance of stock warrants.................... 990 103 165
Provision for doubtful accounts, sales
returns and allowances....................... (209) 187 586
Non-cash restructuring charges................ -- 166 (223)
Changes in assets and liabilities:
Accounts receivable......................... (1,035) 1,643 (1,986)
Inventories................................. 215 (43) 2
Other current assets........................ (494) (429) (301)
Other assets................................ 802 (12) (21)
Accounts payable and accrued liabilities.... (3,627) (2,416) (4,189)
Deferred revenue............................ (1,344) (7,273) (6,909)
Accrued litigation expense.................. -- 9 (2,877)
Other long-term liabilities................. -- -- 742
--------- --------- ---------
Net cash provided by (used in)
operating activities.................... 1,329 (3,324) (7,673)
--------- --------- ---------
Cash flows from investing activities:
Maturities of investments....................... 375 2,065 8,748
Purchases of investments........................ (114) -- (123)
Proceeds from sale of property and equipment.... -- -- 341
Acquisitions of property and equipment.......... (1,415) (2,253) (1,262)
Capitalization of software costs................ (664) (1,018) (2,890)
Capitalization of other intangibles............. (109) (360) (202)
--------- --------- ---------
Net cash provided by (used in)
investing activities..................... (1,927) (1,566) 4,612
--------- --------- ---------
Cash flows from financing activities:
Repayment of note payable....................... -- (368) (327)
Proceeds from short-term borrowings, net........ 1,082 1,581 --
Repayment of capital lease obligations.......... -- -- (32)
Proceeds from issuance of common stock, net..... 1,898 953 587
--------- --------- ---------
Net cash provided by financing activities. 2,980 2,166 228
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents..................................... 58 29 (363)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 2,440 (2,695) (3,196)
Cash and cash equivalents at beginning of period.. 3,974 6,669 9,865
--------- --------- ---------
Cash and cash equivalents at end of period........ $6,414 $3,974 $6,669
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes...................... $18 $60 $154
========= ========= =========
Cash paid for interest.......................... $344 $204 $62
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CENTURA SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumu-
lated
Other
Comprehen-
Common Stock sive (Accumu-
----------------- Income lated
Shares Amount (Loss) Deficit) Total
-------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995... 12,382 $57,577 ($150) ($81,484) ($24,057)
Issuance of common stock
under stock option plans.. 198 362 -- -- 362
Issuance of common stock
under Employee Stock
Purchase Plan............. 100 225 -- -- 225
Issuance of common stock
in relation to settlement
of class action
securities litigation..... 1,048 4,718 -- -- 4,718
Issuance of stock warrants
for 100,000 shares
related to merger with
InfoSpinner, Inc.......... -- 165 -- -- 165
Cumulative translation
adjustment................ -- -- (363) -- (363)
Net income.................. -- -- -- 2,027 2,027
-------- -------- ---------- ---------- ---------
Balances, December 31, 1996... 13,728 63,047 (513) (79,457) (16,923)
Issuance of common stock
under stock option plans.. 472 674 -- -- 674
Issuance of common stock
under Employee Stock
Purchase Plan............. 132 279 -- -- 279
Issuance of common stock
in relation to settlement
of class action
securities litigation..... 1,452 6,533 -- -- 6,533
Issuance of stock warrants
for 100,000 shares in
connection with
short-term borrowings..... -- 103 -- -- 103
Cumulative translation
adjustment................ -- -- 29 -- 29
Net loss.................... -- -- -- (649) (649)
-------- -------- ---------- ---------- ---------
Balances, December 31, 1997... 15,784 70,636 (484) (80,106) (9,954)
Issuance of common stock
under stock option plans.. 69 103 -- -- 103
Issuance of common stock
for conversion of note
payable, net.............. 11,415 12,063 -- -- 12,063
Issuance of common stock
for private placement,
net....................... 2,330 1,898 -- -- 1,898
Issuance of stock warrants.. -- 990 -- -- 990
Cumulative translation
adjustment................ -- -- 58 -- 58
Net income.................. -- -- -- 2,115 2,115
-------- -------- ---------- ---------- ---------
Balances, December 31, 1998... 29,598 $85,690 ($426) ($77,991) $7,273
======== ======== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CENTURA SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Risk Factors:
Centura Software Corporation (the "Company"), formerly Gupta
Corporation, develops, markets and supports an integrated set of software
solutions for the PC client/server system market.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reported period. Actual results could differ
materially from those estimates.
Note 2. Summary of Significant Accounting Policies:
Principles of Consolidation. The consolidated financial statements
include the financial statements of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
Financial Instruments. Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of cash,
investments, and accounts receivable. At December 31, 1998, the Company's
cash and cash equivalents consist of demand accounts and money market
accounts. Cost approximates market value of the securities at
December 31, 1998. The Company generally does not require collateral for
its receivables and maintains reserves for potential credit losses.
The Company accounts for investments under the Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", ("SFAS 115"). SFAS 115
establishes standards for financial accounting and reporting for
investments in equity securities that have readily determinable fair
values and for all investments in debt securities. Each investment is
classified into one of three categories: held-to-maturity,
available-for-sale or trading. Investments which the Company has the
intent and ability to hold until maturity are classified as
held-to-maturity and are recorded at amortized cost.
The Company enters into forward contracts to reduce the risks
associated with foreign currency fluctuations on net assets denominated
in foreign currencies. At December 31, 1998, the Company had $5,741,000
in forward contracts denominated in four European currencies; German
Deutsche Marks, British Pounds Sterling, Netherland Guilders, and Italian
Lire, as well as the Australian Dollar. The carrying value of all other
financial instruments approximate their respective fair values.
Inventories. Inventories are stated at the lower of cost (determined on
a first-in, first-out basis) or market, and consist principally of
finished goods.
Property and Equipment. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of three to five years. Leasehold improvements are
amortized over the life of the lease or the estimated useful life,
whichever is shorter.
Capitalized Software Development Costs. The Company capitalizes
internally generated software development costs and purchased software in
compliance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". Capitalization of internally generated software
development costs begins upon the establishment of technological
feasibility of the product. The Company makes an ongoing assessment of
the recoverability of these costs which requires considerable judgment by
management with respect to certain external factors, including but not
limited to, anticipated future gross product revenue, estimated economic
life and changes in software and hardware technology. Internally
generated software development costs capitalized were $664,000 and
$1,018,000 for the years ended December 31, 1998 and 1997, respectively.
Amortization of all capitalized software costs begins when a
product is available for general release to customers, and is computed
separately for each product as the greater of (a) current gross revenue
for a product to the total of current and anticipated gross revenue for
the product, or (b) the straight-line method over the remaining estimated
economic life of the product, up to three years. Amortization and
adjustments are included in cost of product revenues and amounted to
$1,695,000, $2,671,000 and $1,644,000, for the years ended December 31,
1998, 1997 and 1996, respectively.
Foreign Currency Transactions. The functional currency of each foreign
subsidiary is the local currency. For these operations, assets and
liabilities are translated into U.S. dollars at period-end exchange
rates, and income and expense accounts are translated at a rate that
approximates the average exchange rate prevailing during the period. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity (deficit). Gains and losses from foreign
currency-denominated transactions effected by the Company's U.S.
operations are included in other income (expense).
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.
During 1998, the Company has 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." In December 1998, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position No. 98-9
("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition,
with Respect to Certain Transactions." The provisions of SOP 98-9 will
be adopted for transactions entered into during the fiscal year beginning
January 1, 1999.
Net Income (Loss) per Share. Basic earnings per share is computed using
the weighted average number of shares of common stock. Diluted earnings
per share is computed using the weighted average number of shares of
common stock, common equivalent shares outstanding during the period.
Common equivalent shares consist of convertible preferred stock (using
the if converted method) and stock options and warrants (using the
treasury stock method). Common equivalent shares are excluded from the
computation if their effect is antidilutive.
The following is a reconciliation of the computation for basic and
diluted EPS:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- -----------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss)....................... $2,115 ($649) $2,027
========== ========== ===========
Shares calculation:
Average basic shares outstanding....... 27,390 15,439 13,231
Effect of dilutive securities options.. 386 -- 149
---------- ---------- -----------
Total shares used to compute diluted
earnings per share.................... 27,776 15,439 13,380
========== ========== ===========
Earnings (loss) per basic share......... $0.08 ($0.04) $0.15
========== ========== ===========
Earnings (loss) per diluted share....... $0.08 ($0.04) $0.15
========== ========== ===========
</TABLE>
Antidilutive options and warrants to purchase 8,416,000, 4,055,000,
and 2,935,000 shares of common stock were outstanding at December 31,
1998, 1997 and 1996, respectively. Antidilutive convertible debt to
convert to 3,774,000 shares of common stock was outstanding at
December 31, 1996. No such shares were outstanding at December 31, 1997,
as the Company lost the conversion option during 1997.
Stock-Based Compensation. During 1995, the FASB issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which requires companies to measure employee
stock compensation based on the fair value method of accounting or to
continue to apply the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
provide pro forma footnote disclosure under the fair value method
described in SFAS 123. The Company adopted SFAS 123 on January 1, 1996,
and will continue to apply the principles of APB 25, while providing the
pro forma footnote disclosure required by SFAS 123. See Note 9 "Capital
Stock," for the required pro-forma disclosure.
Comprehensive Income. Effective January 1, 1998 the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is
comprised of net income (loss) and other comprehensive earnings such as
foreign currency translation gain (loss).
Recent Accounting Pronouncements. In April 1998, the American Institute
of Certified Public Accountants issued Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on
capitalization of the costs incurred for computer software developed or
obtained for internal use. It also provides guidance for determining
whether computer software is internal-use software and on accounting for
the proceeds of computer software originally developed or obtained for
internal use and then subsequently sold to the public. The Company has
not yet determined the impact, if any, of adopting this statement. The
disclosures prescribed by SOP 98-1 will be effective for the Company's
consolidated financial statements for the fiscal year ending December
31, 1999.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement 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.
Note 3. Balance Sheet Detail:
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Computer equipment...................... $17,261 $16,418
Furniture and fixtures.................. 2,024 1,997
Leasehold improvements.................. 2,105 2,075
---------- ----------
21,390 20,490
Less: accumulated depreciation and
amortization.......................... (18,502) (16,979)
---------- ----------
$2,888 $3,511
========== ==========
</TABLE>
Capitalized software, net consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Internally developed software........... $7,806 $7,142
Purchased software...................... 3,852 3,852
---------- ----------
11,658 10,994
Less: accumulated amortization.......... (10,116) (8,421)
---------- ----------
$1,542 $2,573
========== ==========
</TABLE>
Deferred revenue consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Deferred product revenue................ $4,602 $7,152
Deferred support revenue................ 8,672 7,466
---------- ----------
$13,274 $14,618
========== ==========
</TABLE>
Allowance for doubtful accounts consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(in thousands)
<C> <C>
Balance at beginning of period........ $1,265 $1,140
Charged to costs and expenses......... -- 530
Deductions............................. (70) (405)
---------- ----------
$1,195 $1,265
========== ==========
</TABLE>
Reserves for sales returns and allowances consists of
the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(in thousands)
<C> <C>
Balance at beginning of period........ $356 $1,686
Charged to costs and expenses......... (209) (343)
Deductions............................. (21) (987)
---------- ----------
$126 $356
========== ==========
</TABLE>
Note 4. Short-Term Borrowings
In January 1998, the Company entered into a $5,000,000 asset based
loan facility with Coast Business Credit, the "Facility." The loan
provides 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. The
facility replaces an accounts receivable factoring agreement entered into
by the Company in June 1997. As of December 31, 1998 there was $2,663,000
drawn against the $5,000,000 loan facility, and having achieved certain
financial covenants, the Company was paying an interest rate of 1.75%
above the Bank of America Reference Rate.
Note 5. Restructuring Charges:
In November 1997, the Company incurred restructuring charges of
$1,504,000, which included a write-off of $640,000 in prepaid royalties,
$344,000 of severance benefits for certain executives and employees and a
$520,000 write-off of other assets, partially offset by the reversal of
$474,000 of reserves established in prior periods due to changes in
estimates. The decision to write-off the existing prepaid royalty and
other assets was associated with the Company's decision to discontinue
certain products. At December 31, 1997 $290,000 related to the
restructuring charge was included in other current liabilities. The
Company paid all remaining obligations related to these charges during
1998. The 1996 results of operations include the reversal of $223,000 of
restructuring reserves due to changes in estimates.
Note 6. Long-Term Debt:
In February, 1998, Computer Associates, Inc. ("CA"), and Newport
Acquisition Company, LLP ("NAC") entered into a Note Purchase and Sale
Agreement and the Company and NAC entered into a Note Conversion
Agreement (the "Agreements"). Under the terms of the Agreements, a
promissory note, plus accrued interest, in the amount of $12,251,000,
payable to CA (the "CA Note") was acquired by NAC, and immediately
converted into 11,415,094 shares of the Company's common stock (the
"Shares"). At December 31, 1997, the amount of the Note was $10.0
million plus accrued interest of $2.1 million.
Note 7. Commitments and Contingencies:
The Company has long-term noncancelable lease commitments for
office space and equipment. At December 31, 1998, future minimum rental
payments under noncancelable operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
1999.................................... $3,376
2000.................................... 3,133
2001.................................... 2,634
2002.................................... 1,481
2003.................................... 124
Thereafter.............................. --
----------
$10,748
==========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996,
amounted to $3,542,000, $3,057,000, and $3,235,000, respectively.
The Company leases approximately 48,000 square feet of office,
development and warehousing space in facilities in Redwood Shores,
California, of which 50% has been sublet for the term of the lease (the
"Sublease") as of September, 1998. Rental income related to the
Sublease is expected to be approximately $841,000 for the years ended
December 31, 1999, 2000, and 2001 respectively, and approximately
$561,000 for the year ended December 31, 2002.
On September 17, 1997, Technology Venture (Software) Holdings
Limited, formerly known as Eagerquest Investments Limited ("Eagerquest")
filed suit against the Company in the United States District Court for
the Central District of California alleging that the Company acted
improperly in terminating its contract with Eagerquest for the
distribution of the Company's products in the territories of Hong Kong
and China and that the Company's actions illegally damaged Eagerquest.
During the fourth quarter of 1998, the Company reached an agreement with
Eagerquest to resolve outstanding differences, and the lawsuit was
dismissed.
Note 8. Employee Benefit Plans
Incentive Stock Option Plans. Under the Company's 1986 Incentive
Stock Option Plan, as amended (the "86 ISOP"), 6,000,000 shares of common
stock have been reserved for issuance to eligible employees, directors
and consultants. Under the 86 ISOP, incentive stock options or
nonstatutory stock options may be granted at prices not less than fair
market value of the Company's common stock at the date of grant (85% of
fair market value for nonstatutory options). The options generally vest
over a four year period, beginning one year after the date of grant.
Unexercised options expire one to three months after termination of
employment with the Company. In July 1996 the 86 ISOP was terminated and
shares in the plan available for grant at that time have been canceled.
Under the Company's 1995 Incentive Stock Option Plan, as amended,
(the "95 ISOP"), 1,000,000 shares of common stock were initially reserved
for issuance to eligible employees, directors and consultants. In
September, 1996, and June 1998, an additional 1,000,000 shares were
reserved respectively, increasing the total to 3,000,0000 shares. Under
the 95 ISOP, incentive stock options or nonstatutory stock options may be
granted at prices not less than fair market value of the Company's common
stock at the date of grant (85% of fair market value for nonstatutory
options). The options generally vest over a three year period, beginning
one year after the date of grant. Unexercised options expire three months
after termination of employment with the Company.
During 1997 and 1996, holders of stock options were granted the
opportunity to exchange previously granted stock options for new stock
options exercisable at $1.50 and $5.94 per share, respectively, the fair
market value of common stock on the dates of exchange. The remaining
original terms of the stock options were not changed. Options to purchase
2,844,000, and 2,337,000, shares of common stock were exchanged in the
1997 and 1996 repricing, respectively.
Under the Company's 1998 Incentive Stock Option Plan, (the "98
ISOP"), 1,415,000 shares of common stock were initially reserved for
issuance to eligible employees, directors and consultants. Under the 98
ISOP, incentive stock options or nonstatutory stock options may be
granted at prices not less than fair market value of the Company's common
stock at the date of grant (85% of fair market value for nonstatutory
options). The options generally vest over a three year period, beginning
one year after the date the date of grant. Unexercised options expire
three months after termination of employment with the Company.
The following table summarizes the stock activity under the 86
ISOP, 95 ISOP and 98 ISOP:
<TABLE>
<CAPTION>
Option Price
Option Shares Per Share
------------------------ -------------------
Available Outstanding Low High
----------- ------------ --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Balances, December 31, 1995....... 239 3,533 $0.250 $27.250
Shares authorized................. 1,000 --
Shares discontinued............... (689) --
Options granted................... (2,886) 2,886 $4.250 $6.625
Options exercised................. -- (198) $3.375 $6.500
Options canceled.................. 3,536 (3,536) $1.250 $27.250
----------- ------------
Balances, December 31, 1996....... 1,200 2,685 $0.250 $12.062
Shares discontinued............... (545) --
Options granted................... (3,682) 3,682 $1.500 $5.000
Options exercised................. -- (472) $0.250 $1.625
Options canceled.................. 3,740 (3,740) $1.250 $10.750
----------- ------------
Balances, December 31, 1997....... 713 2,155 $0.500 $27.250
Shares authorized................. 2,415 --
Shares discontinued............... (275) --
Options granted................... (3,342) 3,342 $0.969 $2.031
Options exercised................. -- (69) $1.250 $1.500
Options canceled.................. 1,069 (1,069) $0.969 $27.250
----------- ------------
Balances, December 31, 1998....... 580 4,359 $0.500 $10.750
=========== ============
</TABLE>
Directors' Stock Option Plan. Under the 1996 Directors' Stock Option
Plan (the "96 DSOP"), 500,000 shares of common stock have been reserved
for issuance to non-employee directors of the Company. The 96 DSOP
provides that each outside Director will be automatically granted a
non-statutory stock option to purchase 50,000 shares of common stock on
the later of the following events occurring: (a) the effective date of
the plan, or (b) the date on which such person first becomes a
non-employee Director, provided that such Director agrees to cancel all
options granted to such Director from a prior Directors' stock option
plan, other than the initial 20,000 shares granted to the Director under
such plan. Options granted prior to June, 1998, become exercisable in
installments cumulatively as to 1/48 of the shares on each of the first
forty-eight monthly anniversaries of the grant date. Options granted
after June, 1998, become exercisable in installments cumulatively as to
1/36 of the shares on each of the first thirty-six monthly anniversaries
of the grant date. The options will remain exercisable for up to ninety
days following the optionee's termination of service as a director of the
Company unless such termination is a result of death, in which case the
options will remain exercisable for up to 6 month period. Options are
granted at a price equal to the fair market value of the Company's common
stock one year after the date of the grant. Options granted under the 96
DSOP have a term of ten years. In 1998, 450,000 options were granted and
46,000 options were canceled. In 1997, 200,000 options were granted and
50,000 options were canceled under the 96 DSOP. At December 31, 1998
600,000 options are outstanding and 400,000 options are available for
future grants under the 96 DSOP.
Other Stock Options. In November 1997, the Company granted 1,500,000
options to certain executive officers as an option grant external to the
86 ISOP, or the 95 ISOP. The options vest over a period of two years from
the date of grant and are exercisable at $1.91 per share. At December
31, 1998, 1,500,000 options are outstanding.
The following table summarizes information regarding all stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Oustanding Options Exercisable
------------------------------------ ----------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life (Years) Price 1998 Price
- - ------------------- ------------ ------------ ---------- ----------- ----------
(shares in thousands)
<S> <C> <C> <C> <C> <C>
$0.50 to $1.50 2,230 7.66 $1.32 1,061 $1.49
$1.63 to $1.91 3,305 8.75 $1.85 804 $1.89
$2.03 to $10.75 924 9.40 $2.08 83 $2.49
------------ -----------
6,459 8.47 $1.70 1,948 $1.70
============ ===========
</TABLE>
Pro Forma Stock Compensation Disclosure. The Company applies the
provisions of APB 25 and related interpretations in accounting for
compensation expense under the 95 ISOP, 96 DSOP, 98 ISOP, ESPP and other
stock option plans. Had compensation expense under these plans been
determined pursuant to SFAS 123, the Company's net income (loss) and net
income (loss) per share for the years ended December 31, 1998, 1997 and
1996 would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
(in thousands, except per share
data)
<S> <C> <C> <C>
Net income (loss):
As reported.................... $2,115 ($649) $2,027
Pro-forma...................... ($2,349) ($5,512) ($3,594)
Basic and diluted net income
(loss) per share:
As reported.................... $0.08 ($0.04) $0.15
Pro-forma...................... ($0.07) ($0.36) ($0.27)
</TABLE>
The fair value of each stock option granted under the 86 ISOP, 95
ISOP, 96 DSOP, 98 ISOP and other stock option plans, was estimated using
the Black-Scholes model with the following assumptions: zero dividend
yield; an expected life of 48 months; an expected volatility of 62.77% in
1998, and a weighted average expected volatility of 65% and 63.54% in
1997 and in 1996; and a risk free interest rate of 5.48% in 1998, and a
weighted average risk-free interest rate of 6.20% and 5.57%, in 1997 and
1996 respectively. The weighted average fair value of the stock options
granted under the 86 ISOP, 95 ISOP, 96 DSOP, 98 ISOP and other stock
option plans was $0.93, $0.91, and $3.06, for the years ended December
31, 1998, 1997 and 1996, respectively.
The fair value of the shares granted under the ESPP is considered
to have an immaterial impact on this calculation.
The above pro forma amounts include compensation expense based on the
fair value of stock options granted and vesting during the years ended
December 31, 1998, 1997 and 1996. Accordingly, the above pro forma net
income and net income per share are not representative of the effects of
computing stock compensation expense using the fair value method for
future periods.
Employee Stock Purchase Plan. Under the 1992 Employee Stock Purchase
Plan (the "ESPP"), 300,000 shares of common stock were initially reserved
for issuance to eligible employees. In 1996 and 1998 respectively,
100,000 and 1,000,000 additional shares of common stock were reserved for
issuance to eligible employees increasing the total to 1,400,000. The
ESPP permits employees to purchase common stock through payroll
deductions, which may not exceed 10% of an employee's compensation, at a
price equal to the lower of 85% of the fair market value of the Company's
common stock at a predetermined point during the offering period. The
ESPP became effective upon the Company's initial public offering and 0,
132,000 and 100,000 purchase rights were issued in 1998, 1997 and 1996,
respectively. At December 31, 1998 there were 1,000,000 ESPP shares
available for employee purchases. As of December 31, 1998, the ESPP was
inactive.
401K Plan. The Company has a Savings Plan (the "Plan") as allowed under
Section 401(k) of the Internal Revenue Code. The Plan provides employees
with tax deferred salary deductions, Company matching contributions up to
limited amounts and a number of investment options. The Plan allows for
contributions by the Company as determined annually by the Board of
Directors. The Company has not contributed to the Plan since its
inception.
Note 9. Capital Stock
As of December 31, 1998, there were 60,000,000 shares of common
stock, par value $.01, authorized.
Private Placement. In February 1998, pursuant to the terms of Stock
Purchase Agreements, the Company completed a private placement of
2,330,191 shares of the Company's common stock (the "Private
Placement"), resulting in gross proceeds to the Company of approximately
$2,470,000.
Warrants. In June 1997, the Company issued warrants to purchase 90,000
and 10,000 shares of common stock to Pacific Business Funding Corporation
and its affiliate Sand Hill Capital, LLC, at an exercise price of $2.09
per share. The warrants were valued at $103,000 using a risk-free rate of
6.33% and a volatility factor of 55%, and the related charge is included
in general and administrative expenses in 1997. The warrants expire on
June 30, 2002.
In February 1998, Computer Associates, Inc. ("CA"), and Newport
Acquisition Company, LLP ("NAC") entered into a Note Purchase and Sale
Agreement (with the Company's consent) and the Company and NAC entered
into a Note Conversion Agreement (the "Agreements"). In connection with
the Agreements, the Company entered into a Warrant Purchase Agreement
with CA wherein the Company sold and issued to CA, at an issuance price
of $.001 per share, a warrant to purchase 500,000 shares of the
Company's common stock. The warrant is exercisable at $1.906 per share
and expires on February 27, 2004. The warrants were valued at $300,000.
Also, in consideration of services rendered in connection with the
Agreements, the Company issued to Rochon Capital Group, Ltd. warrants to
purchase 283,019 shares of the Company's common stock at an exercise
price of $2.12 (the "Rochon Conversion Warrants"). The Rochon Conversion
Warrants expire on February 27, 2003. The warrants were valued at
$141,000. Each of the warrants were valued using a risk-free rate of
5.5% and a volatility factor of 65% and the related charge is included
in other income (expense) in 1998.
In connection with the Private Placement the Company issued
warrants to purchase 582,548 shares of the Company's common stock. The
warrants are exercisable at $1.25 per share and expire on February 28,
2003. Also, in consideration of services rendered in connection with
the management led Private Placement, the Company issued to Rochon
Capital Group, Ltd. warrants to purchase 71,698 shares of the Company's
common stock at an exercise price of $2.12 (the "Rochon Private
Placement Warrants"). The Rochon Private Placement Warrants expire on
February 27, 2003.
In connection with certain modifications to the NAC shareholder
rights plan discussed below, the Company issued to NAC warrants to
purchase up to 893,320 shares of common stock at an exercise price of
$1.81 and up to 300,000 shares of common stock at an exercise price of
$2.09, both expiring on June 11, 2003. The warrants for the 893,320
shares were valued at $393,800 by an independent specialty investment
banking firm, using a modified Black Scholes method with a risk free
rate of 5.51% and a volatility factor of 62.77%. The warrants for the
300,000 shares were valued at $155,300 by an independent specialty
investment banking firm, using a modified Black Scholes method with a
risk-free rate of 5.48% and a volatility factor of 62.77%. The related
charges are included in other income (expense) in 1998.
Shares Reserved for Future Issuance. The following table summarizes
shares of common stock reserved for future issuance as of December 31,
1998:
<TABLE>
At
December 31,
1998
(in thousands)
---------
<S> <C>
Incentive stock option plans............... 6,459
Employee stock purchase plan............... 1000
Wqrrants.................................... 2,731
---------
10,190
=========
</TABLE>
Shareholder Rights Plan. In August 1994, the Company adopted a
Shareholder Rights Plan pursuant to which one Preferred Share Purchase
"Right" was distributed for each outstanding share of common stock. Each
Right entitles shareholders to purchase a fraction of a share of
Preferred Stock at an exercise price of $60.00 upon certain events. The
Rights expire on August 3, 2004, unless earlier redeemed by the Company.
The Rights become exercisable if a person acquires 15% or more of
the Company's common stock or announces a tender offer that would result
in such person owning 15% or more of the Company's common stock. If the
Rights become exercisable, the holder of each Right (other than the
person whose acquisition triggered the exercisability of the Rights) will
be entitled to purchase, at the Right's then current exercise price, a
number of shares of the Company's common stock having a market value of
twice the exercise price. In addition, if the Company were to be acquired
in a merger or the Company sells more than 50% of its assets or earning
power, each Right will entitle its holder to purchase, at the Right's
then current exercise price, common stock of the acquiring company having
a market value of twice the exercise price. The Rights are redeemable by
the Company at a price of $.01 per Right at any time within ten days
after a person has acquired 15% or more of the Company's common stock.
NAC Shareholder Rights Plan. Included with the Note Conversion
Agreement between the Company and NAC is an Investor Rights Agreement
("IRA") that carries certain anti-dilution rights for two years. In
June 1998, the Company and NAC entered into an agreement to amend the
IRA. The amendment included modifications to the IRA that limit NAC's
anti-dilution rights related to certain transactions, including the
grant of stock options to employees and shares that may be issued as
consideration in connection with certain strategic transactions, such
as, an acquisition, asset purchase, or license agreement.
Note 10. Income Taxes:
Income (loss) before income taxes are attributable to the
following jurisdictions:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
in thousands)
<S> <C> <C> <C>
Domestic......................... $3,981 $360 $2,903
Foreign.......................... (1,593) (947) (398)
--------- --------- ---------
$2,388 ($587) $2,505
========= ========= =========
</TABLE>
The provision for income taxes on income (loss) before income taxes
primarily consists of foreign withholding taxes.
The difference between income taxes at the statutory federal income
tax rate and income taxes reported in the income statement are primarily
the result of foreign withholding taxes.
Deferred income taxes result from temporary differences in the
recognition of certain expenses for financial and income tax reporting
purposes. The net deferred tax asset consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating losses................. $25,961 $26,437
Nondeductible reserves............... 983 1,333
Credit carryforwards................. 1,974 4,521
Deferred revenue..................... 949 5,146
Depreciation......................... 469 482
--------- ---------
Gross deferred tax asset........... 30,336 37,919
Less: valuation allowance............ (30,336) (37,133)
--------- ---------
Net deferred tax asset............. -- 786
Deferred tax liabilities:
Software capitalization.............. -- (786)
--------- ---------
Total net deferred tax assets
(liabilities)......................... $ -- $ --
========= =========
</TABLE>
At December 31, 1998, the Company had net operating loss
carryforwards of approximately $72.7 million available to offset future
federal taxable income and $21.4 million available to offset future state
taxes, which expire through 2018. The availability and timing of these
carryforwards to offset future taxable income may be limited due to the
occurrence of certain events, including certain changes in ownership
interests. At December 31, 1998 and 1997, the Company fully reserved its
deferred tax assets due to the existence of sufficient uncertainty with
respect to its the ability to realize the deferred tax assets.
Note 11. Segment Information:
The Company participates in one industry segment: the development
and marketing of computer software and related services. No one customer
has accounted for more than 10% of consolidated annual revenues.
The following table presents a summary of operations by geographic
region:
<TABLE>
<CAPTION>
North Rest of
America Europe World Total
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Total revenues.................. $24,534 $24,146 $4,817 $53,497
Long lived assets at year end... 5,590 676 77 6,343
Year ended December 31, 1997:
Total revenues.................. $24,473 $27,650 $5,823 $57,946
Long lived assets at year end... 8,203 809 122 9,134
Year ended December 31, 1996:
Total revenues.................. $25,332 $27,551 $10,350 $63,233
Long lived assets at year end... 9,575 1,116 190 10,881
</TABLE>
Revenues have been allocated to geographic regions based primarily
upon destination of product shipment.
Note 12. Related Party Transactions:
The Company recognized revenue of $750,000 and $664,000 for the
years ended December 31, 1997 and 1996 respectively, from Computer
Associates International, Inc., which held a floating rate subordinated
convertible debenture. In February 1998, Computer Associates, Inc.
("CA"), and Newport Acquisition Company, LLP ("NAC") entered into a Note
Purchase and Sale Agreement (with the Company's consent) and the Company
and NAC entered into a Note Conversion Agreement (the "Agreements").
Under the terms of the Agreements, a promissory note, plus accrued
interest, in the amount of $12,251,000, payable to CA (the "CA Note")
was acquired by NAC, and immediately converted into 11,415,094 shares of
the Company's common stock (the "Shares").
The Company has the option to acquire 100% of the outstanding stock
of one of its independent foreign distributors, using a purchase price
formula based on net profits and revenues. The Company recognized revenue
of $328,000, $489,000 and $1,783,000 for the years ended December 31,
1998, 1997, and 1996, from this distributor.
Note 13. Subsequent Event (Unaudited):
On March 15, 1999 the Company entered into an agreement (the
"Agreement") to acquire Raima? Corporation ("Raima"), a Seattle-based
vendor of cross-platform micro databases and data management tools for
real-time and Windows 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. 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
the closing) be at least $1.00 per share. Approximately 20% of the
consideration payable to the former Raima shareholders will be subject to
an 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.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the executive officers and directors of the
Company required by this item is contained in "Part I, Item 1. Directors
and Executive Officers of Registrant".
Additional information required by this item is incorporated by
reference from the Company's Proxy Statement for the 1999 Annual Meeting
of Shareholders to be held June 17, 1999, a copy of which will be filed
with the Securities and Exchange Commission no later than 120 days from
the end of the Company's last fiscal year.
Item 11. Executive Compensation
Incorporated by reference from the Proxy Statement for the 1999
Annual Meeting of Shareholders to be held June 17, 1999, a copy of which
will be filed with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Proxy Statement for the 1999
Annual Meeting of Shareholders to be held June 17, 1999, a copy of which
will be filed with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the Proxy Statement for the 1999
Annual Meeting of Shareholders to be held June 17, 1999, a copy of which
will be filed with the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements. The following financial statements of the Company
are contained in Item 8 of this Annual Report on Form 10-K:
1. Report of Price Waterhouse LLP, Independent Accountants.
2. Consolidated Balance Sheets at December 31, 1998 and 1997.
3. Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1998.
4. Consolidated Statements of Shareholders' Equity (Deficit) at December
31, 1998, 1997 and 1996.
5. Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1998.
6. Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules. The following financial statement
schedules of the Company for the year ended December 31, 1998, 1997 and
1996 is contained in Item 8 of this Annual Report on Form 10-K:
1. II--Valuation and Qualifying Accounts
2. Report of Price Waterhouse LLP, Independent Accountants. Refer to
Item 14(a)(1)1 above.
Schedules not listed above have been omitted because they are either
inapplicable or the required information has been given in
Management's Discussion and Analysis of Financial Condition and
Results of Operations or in the financial statements or the notes
thereto.
3. Exhibits. Refer to Item 14(c) below.
(b) Reports on Form 8-K.
Not applicable..
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- - ------------- --------------------------------------------------------
<C> <S>
2.1(1) Agreement and Plan of Reorganization dated January 6, 1997 by
and among the Registrant, IS Acquisition Corporation and
InfoSpinner, Inc.
2.2(1) Form of Certificate of Merger among the Registrant, IS
Acquisition Corporation and InfoSpinner, Inc.
3(i)(2) Articles of Incorporation of Registrant, as amended on
September 24, 1996.
3(iii) Bylaws of Registrant, as amended effective February 27, 1998.
4.1(13) Preferred Shares Rights Agreement, dated as of August 3, 1994,
between the Registrant and Chemical Trust Company of
California, including the Certificate of Determination of
Rights, Preferences and Privileges of Series A Participating
Preferred Stock, the form of Rights Certificate and the
Summary of Rights, attached thereto as Exhibits A, B and C,
respectively.
4.2 Amendment to Preferred Shares Rights Agreement effective
February 27, 1998.
10.1(3) Form of Directors' and Officers' Indemnification Agreement.
10.2(4)(5) 1986 Incentive Stock Option Plan, as amended, and forms of
agreements thereunder.
10.3(3) 1991 United Kingdom Sub Plan and forms of agreement thereunder.
10.4(2) 1992 Employee Stock Purchase Plan and forms of agreements
thereunder, as amended on September 24, 1996.
10.5(3)* 1992 Directors' Stock Option Plan and forms of agreements
thereunder.
10.8(3) Lease Agreement dated February 4, 1992 between Registrant and
Bohannon Associates.
10.9(6) 1996 Executive Officers' Compensation Plan.
10.12(3) Forms of License Agreements.
10.14(2) 1995 Stock Option Plan and forms of agreement thereunder, as
amended on September 24, 1996.
10.16(7) Note Purchase Agreement dated March 31, 1996 between the
Company and Computer Associates International, Inc.
10.17(8)* Executive Employment Agreement dated April 10, 1996 between
the Company and Sam M. Inman III.
10.18(9)* Loan Agreement Secured by Property and Securities dated August
31, 1996 between the Company and Earl and Ann Stahl.
10.19(2)* 1996 Directors' Stock Option Plan and forms of agreement
thereunder.
10.20(2) Stipulation of Settlement dated July 19, 1996, in regards to
the Registrant's securities litigation between plaintiff's
settlement counsel and the Registrant's counsel, including
exhibits thereto, and related Final Judgment and Order of
Dismissal dated September 30, 1996.
10.21(14) Distributorship Agreement dated January 6, 1997, between the
Registrant and InfoSpinner, Inc.
10.22* Intentionally omitted.
10.23(15) Factoring Agreement dated June 26, 1997, between Centura
Software Corporation and Pacific Business Funding Corporation.
10.24(15) Warrant to Purchase Common Stock issued June 30, 1997 by
Centura Software Corporation to Sand Hill Capital.
10.25(15)* 1997 Executive Retention Program.
10.26(16) Lease Agreement, dated October 14, 1996, between Westport
Investments and the Registrant.
10.27* Letter Agreement dated November 5, 1997 between the Registrant
and Hickey & Hill Incorporated, and form of Nonstatutory Stock
Options issued to new Executives.
10.28* Settlement Agreements and Mutual Releases between the
Registrant and Sam M. Inman, III and between the Registrant
and Earl Stahl.
10.29 Loan and Security Agreement dated January 19, 1998 between the
Registrant and Coast Business Credit, a division of Southern
Pacific Bank.
10.30 Common Stock and Warrant Purchase Agreement dated February 27,
1998 between the Registrant and certain Purchasers of the
Registrant's Common Stock.
10.31 Note Conversion Agreement dated February 27, 1998 between the
Registrant and Newport Acquisition Company No. 2, LLC.
10.32 Warrant Purchase Agreement dated February 27, 1998 between the
Registrant and Computer Associates International, Inc.
10.33 Investor Rights Agreement dated February 27, 1998 between the
Registrant and Newport Acquisition Company No. 2, LLC.
10.34 Common Stock Purchase Warrants issued to Rochon Capital Group,
Ltd. on February 27, 1998.
10.35* 1998 Employee Stock Option Plan and form of Nonstatutory
Option Agreements thereunder.
11.1(14) Statement regarding Computation of per share earnings.
16(10)(11)(12) Letter regarding change in Certifying Accountant.
21(1) Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney. See Page 65.
27.1 Financial Data Schedules at December 31, 1998 and for the year
ended December 31, 1998.
</TABLE>
- - ------------------------
* Management Compensatory Plan or Arrangement.
(1) Incorporated by reference from the Company's Registration
Statement on Form S-4 (No. 333-20491) filed with the Commission
on January 27, 1997.
(2) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(3) Incorporated by reference from the Company's Registration
Statement on Form S-1 (No. 33-55566), declared effective by
the Commission on February 4, 1993.
(4) Incorporated by reference from the Company's Registration
Statement on Form S-8 (No. 33-62194) filed with the Commission
on May 5, 1993.
(5) Incorporated by reference from the Company's Registration
Statement on Form S-8 (No. 33-83850) filed with the Commission
on September 9, 1994.
(6) Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995.
(8) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995.
(9) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995.
(10) Incorporated by reference from the Company's Current Report on
Form 8-K dated July 2, 1993.
(11) Incorporated by reference from the Company's Current Report on
Form 8-K dated October 11, 1995 as amended by Amendment No. 1
dated October 25, 1995 (Form 8-K/A).
(12) Incorporated by reference from the Company's Current Report on
Form 8-K dated January 8, 1996.
(13) Incorporated by reference from the Company's Registration
Statement on Form 8-A filed with the Commission on August 10,
1994.
(14) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-4 filed with the
Commission on March 10, 1997.
(15) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
(16) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q/A for the quarter ended June 30, 1997.
(17) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998.
(18) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
(19) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.
(20) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
(21) Incorporated by reference from the Company's Registration
Statement on Form S-8 (No. 333-65565) filed with the
Commission on October 13, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTURA SOFTWARE CORPORATION
By: /s/ SCOTT R. BROOMFIELD Date: March 30, 1999
- - ------------------------------
Scott R. Broomfield,
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE
BOARD OF DIRECTORS (PRINCIPAL
EXECUTIVE OFFICER)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Scott R. Broomfield or John W. Bowman, or either
of them, with the power to substitution, his attorney-in-fact and agents, to
sign any and all amendments to this Annual Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorney-in-fact, or substitute or substitutes may do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ SCOTT R. BROOMFIELD
-------------------------------------------
Scott R. Broomfield, PRESIDENT, CHIEF EXECUTIVE Date: March 30, 1999
OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS
(PRINCIPAL EXECUTIVE OFFICER)
/s/ JOHN W. BOWMAN
-------------------------------------------
John W. Bowman, EXECUITIVE VICE PRESIDENT, Date: March 30, 1999
FINANCE AND OPERATIONS AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL OFFICER)
By: /s/ RICHARD LUCIEN
-------------------------------------------
Richard Lucien, VICE PRESIDENT, FINANCE Date: March 30, 1999
AND OPERATIONS (PRINCIPAL ACCOUNTING OFFICER)
By: /s/ PETER MICCICHE
------------------------------------------- Date: March 30, 1999
Peter Micciche, DIRECTOR
By: /s/ WILLIAM D. NICHOLAS
------------------------------------------- Date: March 30, 1999
William D. Nicholas, DIRECTOR
By: /s/ EARL M. STAHL
------------------------------------------- Date: March 30, 1999
Earl M. Stahl, DIRECTOR
By: /s/ SAMUEL M. INMAN, III
------------------------------------------- Date: March 30, 1999
Samuel M. Inman, III, DIRECTOR
By: /s/ PHILIP KOEN, JR.
------------------------------------------- Date: March 30, 1999
Philip Koen, Jr., DIRECTOR
By: /s/ JACK KING
------------------------------------------- Date: March 30, 1999
Jack King, DIRECTOR
<PAGE>
CENTURA SOFTWARE CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- - ------------- --------------------------------------------------------
<C> <S>
2.1(1) Agreement and Plan of Reorganization dated January 6, 1997 by
and among the Registrant, IS Acquisition Corporation and
InfoSpinner, Inc.
2.2(1) Form of Certificate of Merger among the Registrant, IS
Acquisition Corporation and InfoSpinner, Inc.
3(i)(2) Articles of Incorporation of Registrant, as amended on
September 24, 1996.
3(iii) Bylaws of Registrant, as amended effective February 27, 1998.
4.1(13) Preferred Shares Rights Agreement, dated as of August 3, 1994,
between the Registrant and Chemical Trust Company of
California, including the Certificate of Determination of
Rights, Preferences and Privileges of Series A Participating
Preferred Stock, the form of Rights Certificate and the
Summary of Rights, attached thereto as Exhibits A, B and C,
respectively.
4.2 Amendment to Preferred Shares Rights Agreement effective
February 27, 1998.
10.1(3) Form of Directors' and Officers' Indemnification Agreement.
10.2(4)(5) 1986 Incentive Stock Option Plan, as amended, and forms of
agreements thereunder.
10.3(3) 1991 United Kingdom Sub Plan and forms of agreement thereunder.
10.4(2) 1992 Employee Stock Purchase Plan and forms of agreements
thereunder, as amended on September 24, 1996.
10.5(3)* 1992 Directors' Stock Option Plan and forms of agreements
thereunder.
10.8(3) Lease Agreement dated February 4, 1992 between Registrant and
Bohannon Associates.
10.9(6) 1996 Executive Officers' Compensation Plan.
10.12(3) Forms of License Agreements.
10.14(2) 1995 Stock Option Plan and forms of agreement thereunder, as
amended on September 24, 1996.
10.16(7) Note Purchase Agreement dated March 31, 1996 between the
Company and Computer Associates International, Inc.
10.17(8)* Executive Employment Agreement dated April 10, 1996 between
the Company and Sam M. Inman III.
10.18(9)* Loan Agreement Secured by Property and Securities dated August
31, 1996 between the Company and Earl and Ann Stahl.
10.19(2)* 1996 Directors' Stock Option Plan and forms of agreement
thereunder.
10.20(2) Stipulation of Settlement dated July 19, 1996, in regards to
the Registrant's securities litigation between plaintiff's
settlement counsel and the Registrant's counsel, including
exhibits thereto, and related Final Judgment and Order of
Dismissal dated September 30, 1996.
10.21(14) Distributorship Agreement dated January 6, 1997, between the
Registrant and InfoSpinner, Inc.
10.22* Intentionally omitted.
10.23(15) Factoring Agreement dated June 26, 1997, between Centura
Software Corporation and Pacific Business Funding Corporation.
10.24(15) Warrant to Purchase Common Stock issued June 30, 1997 by
Centura Software Corporation to Sand Hill Capital.
10.25(15)* 1997 Executive Retention Program.
10.26(16) Lease Agreement, dated October 14, 1996, between Westport
Investments and the Registrant.
10.27* Letter Agreement dated November 5, 1997 between the Registrant
and Hickey & Hill Incorporated, and form of Nonstatutory Stock
Options issued to new Executives.
10.28* Settlement Agreements and Mutual Releases between the
Registrant and Sam M. Inman, III and between the Registrant
and Earl Stahl.
10.29 Loan and Security Agreement dated January 19, 1998 between the
Registrant and Coast Business Credit, a division of Southern
Pacific Bank.
10.30 Common Stock and Warrant Purchase Agreement dated February 27,
1998 between the Registrant and certain Purchasers of the
Registrant's Common Stock.
10.31 Note Conversion Agreement dated February 27, 1998 between the
Registrant and Newport Acquisition Company No. 2, LLC.
10.32 Warrant Purchase Agreement dated February 27, 1998 between the
Registrant and Computer Associates International, Inc.
10.33 Investor Rights Agreement dated February 27, 1998 between the
Registrant and Newport Acquisition Company No. 2, LLC.
10.34 Common Stock Purchase Warrants issued to Rochon Capital Group,
Ltd. on February 27, 1998.
10.35* 1998 Employee Stock Option Plan and form of Nonstatutory
Option Agreements thereunder.
11.1(14) Statement regarding Computation of per share earnings.
16(10)(11)(12) Letter regarding change in Certifying Accountant.
21(1) Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney. See Page 65.
27.1 Financial Data Schedules at December 31, 1998 and for the year
ended December 31, 1998.
</TABLE>
- - ------------------------
* Management Compensatory Plan or Arrangement.
(1) Incorporated by reference from the Company's Registration
Statement on Form S-4 (No. 333-20491) filed with the Commission
on January 27, 1997.
(2) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(3) Incorporated by reference from the Company's Registration
Statement on Form S-1 (No. 33-55566), declared effective by
the Commission on February 4, 1993.
(4) Incorporated by reference from the Company's Registration
Statement on Form S-8 (No. 33-62194) filed with the Commission
on May 5, 1993.
(5) Incorporated by reference from the Company's Registration
Statement on Form S-8 (No. 33-83850) filed with the Commission
on September 9, 1994.
(6) Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995.
(8) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995.
(9) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995.
(10) Incorporated by reference from the Company's Current Report on
Form 8-K dated July 2, 1993.
(11) Incorporated by reference from the Company's Current Report on
Form 8-K dated October 11, 1995 as amended by Amendment No. 1
dated October 25, 1995 (Form 8-K/A).
(12) Incorporated by reference from the Company's Current Report on
Form 8-K dated January 8, 1996.
(13) Incorporated by reference from the Company's Registration
Statement on Form 8-A filed with the Commission on August 10,
1994.
(14) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-4 filed with the
Commission on March 10, 1997.
(15) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
(16) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q/A for the quarter ended June 30, 1997.
(17) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998.
(18) Incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
(19) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.
(20) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
(21) Incorporated by reference from the Company's Registration
Statement on Form S-8 (No. 333-65565) filed with the
Commission on October 13, 1998.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (No. 33-83850, No. 33-61294, No. 333-
09477, No. 333-17087 and No. 333-65565,) of Centura Software Corporation
of our report dated February 16, 1999, appearing on page 36 of this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in the
Company's Form 10-K for the year ended December 31, 1998 and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER>1000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 6,414
<SECURITIES> 0
<RECEIVABLES> 14,309
<ALLOWANCES> 1,321
<INVENTORY> 44
<CURRENT-ASSETS> 23,029
<PP&E> 21,390
<DEPRECIATION> 18,502
<TOTAL-ASSETS> 29,372
<CURRENT-LIABILITIES> 22,046
<BONDS> 0
0
0
<COMMON> 85,690
<OTHER-SE> (78,417)
<TOTAL-LIABILITY-AND-EQUITY> 29,372
<SALES> 33,453
<TOTAL-REVENUES> 53,497
<CGS> 4,652
<TOTAL-COSTS> 9,034
<OTHER-EXPENSES> 40,568
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 505
<INCOME-PRETAX> 2,388
<INCOME-TAX> 273
<INCOME-CONTINUING> 2,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,115
<EPS-PRIMARY> $0.08
<EPS-DILUTED> $0.08
</TABLE>
