<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-26298
HARBINGER CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
GEORGIA 58-1817306
<S> <C>
(State or other Jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
1277 LENOX PARK BOULEVARD 30319
ATLANTA, GEORGIA (Zip Code)
(Address of principal executive offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 467-3000
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 |_|
The number of shares of the issuer's class of capital stock outstanding as of
November 4, 1998, the latest practicable date, is as follows: 41,299,357 shares
of Common Stock, $.0001 par value.
<PAGE> 2
HARBINGER CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
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Page
Number
------
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - (unaudited) September 30, 1998
and December 31, 1997....................................................
Consolidated Statements of Operations (unaudited) - Three
Months and Nine Months Ended September 30, 1998 and 1997...................
Consolidated Statements of Comprehensive Loss (unaudited) -
Three Months and Nine Months Ended September 30, 1998 and 1997.............
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 1998 and 1997..............................
Notes to Consolidated Financial Statements (unaudited).........................
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................
PART II. OTHER INFORMATION
Item 6. Exhibits.........................................................................
SIGNATURES................................................................................
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
HARBINGER CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 52,156 $ 69,811
Short-term investments ................................................... 48,410 32,333
Accounts receivable, less allowances for returns and
doubtful accounts of $9,724 at September 30, 1998 and
$2,790 at December 31, 1997 ............................................ 35,763 40,381
Deferred income taxes .................................................... 1,903 1,892
Other current assets ..................................................... 5,494 3,431
--------- ---------
Total current assets ................................................. 143,726 147,848
--------- ---------
Property and equipment, less accumulated depreciation
and amortization ......................................................... 21,619 18,167
Intangible assets, less accumulated amortization ............................ 16,857 16,464
Deferred income taxes ....................................................... 909 909
Other non-current assets .................................................... 197 171
--------- ---------
$ 183,308 $ 183,559
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 4,554 $ 8,734
Accrued expenses ......................................................... 39,173 25,835
Deferred revenues ........................................................ 20,296 18,349
Current portion of long-term debt ........................................ -- 623
--------- ---------
Total current liabilities ............................................ 64,023 53,541
--------- ---------
Commitments and contingencies
Redeemable preferred stock:
Zero Coupon, $1.00 redemption value; 4,000,000 Shares issued and
outstanding at September 30, 1998 and December 31, 1997 ................ -- --
Shareholders' equity:
Common stock, $0.0001 par value; 100,000,000 shares Authorized,
42,245,457 shares and 40,827,856 shares issued
and outstanding at September 30, 1998 and December 31, 1997 ............ 4 4
Additional paid-in capital ............................................... 201,381 189,841
Accumulated deficit ...................................................... (81,767) (58,945)
Accumulated other comprehensive loss ..................................... (333) (882)
--------- ---------
Total shareholders' equity ........................................... 119,285 130,018
--------- ---------
$ 183,308 $ 183,559
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
HARBINGER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Services ................................................ $ 22,137 $ 16,242 $ 63,878 $ 46,087
Software ................................................ 13,283 12,911 34,772 35,803
-------- -------- -------- --------
Total revenues ........................................ 35,420 29,153 98,650 81,890
-------- -------- -------- --------
Direct costs:
Services ................................................ 9,262 5,712 24,799 15,754
Software ................................................ 1,312 1,758 3,210 5,763
-------- -------- -------- --------
Total direct costs .................................... 10,574 7,470 28,009 21,517
-------- -------- -------- --------
Gross margin ....................................... 24,846 21,683 70,641 60,374
-------- -------- -------- --------
Operating costs:
Selling and marketing ................................... 9,106 6,361 23,250 18,837
General and administrative .............................. 13,639 5,147 24,480 15,225
Depreciation and amortization ........................... 2,036 1,678 5,831 4,891
Product development ..................................... 2,843 3,736 7,765 11,568
Charge for purchased in-process product development,
write-off of software development costs, restructuring,
acquisition related and other one-time charges ........ 13,978 3,850 27,027 20,086
-------- -------- -------- --------
Total operating costs .............................. 41,602 20,772 88,353 70,607
-------- -------- -------- --------
Operating income (loss) ............................ (16,756) 911 (17,712) (10,233)
Interest income, net ........................................ (1,202) (1,207) (3,780) (2,632)
Equity in losses of joint ventures .......................... -- 125 -- 301
Minority interest income .................................... -- -- -- (2)
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes .......................................... (15,554) 1,993 (13,932) (7,900)
Income tax expense .......................................... 560 446 705 1,799
-------- -------- -------- --------
Income (loss) from continuing operations ................ (16,114) 1,547 (14,637) (9,699)
Discontinued operations:
Loss from operations of TrustedLink Procurement and
TrustedLink Banker .................................... (938) (10,517) (1,793) (10,482)
Loss on disposal of TrustedLink Procurement, including
provision of $2.9 million for operating losses during
phase-out period ...................................... (6,392) -- (6,392) --
-------- -------- -------- --------
Loss before extraordinary item ..................... (23,444) (8,970) (22,822) (20,181)
Extraordinary loss on debt extinguishment ................... -- -- -- (2,419)
-------- -------- -------- --------
Net loss applicable to common shareholders ......... $(23,444) $ (8,970) $(22,822) $(22,600)
======== ======== ======== ========
Basic and diluted loss per common share:
Income (loss) from continuing operations ................ $ (0.39) $ 0.04 $ (0.36) $ (0.27)
Loss from discontinued operations ....................... (0.02) (0.27) (0.04) (0.28)
Loss on disposal of discontinued operations ............. (0.15) -- (0.15) --
Extraordinary loss on debt extinguishment ............... -- -- -- (0.06)
-------- -------- -------- --------
Net loss per common share ............................. $ (0.56) $ (0.23) $ (0.55) $ (0.61)
======== ======== ======== ========
Weighted average number of common shares outstanding ........ 42,163 38,930 41,691 37,285
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
HARBINGER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(IN THOUSANDS)
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1998 1997 1998 1997
---- ---- ---- ----
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Net loss applicable to common shareholders ... $(23,444) $ (8,970) $(22,822) $(22,600)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments . 1,040 (95) 549 (293)
-------- -------- -------- --------
Comprehensive loss ..................... $(22,404) $ (9,065) $(22,273) $(22,893)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
HARBINGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows provided by operating activities ................................ $ 2,924 $ 4,788
-------- --------
Cash flows from investing activities:
Short-term investments ................................................. (15,965) (4,386)
Purchases of property and equipment .................................... (9,279) (6,830)
Additions to software development costs ................................ (2,837) (3,771)
Investment in acquisitions ............................................. (3,547) (13,924)
-------- --------
Net cash used in investing activities ................................ (31,628) (28,911)
-------- --------
Cash flows from financing activities:
Exercise of stock options and warrants and issuance of stock under
employee stock purchase plan ......................................... 11,540 3,486
Principal payments under notes payable, long-term debt and capital lease
obligations .......................................................... (623) (2,151)
Proceeds from issuance of common stock ................................. -- 60,026
Repayments under credit agreement ...................................... -- (1,847)
Purchase of subordinated debenture ..................................... -- (1,500)
-------- --------
Net cash provided by financing activities ............................ 10,917 58,014
-------- --------
Net increase (decrease) in cash and cash equivalents ....................... (17,787) 33,890
Cash and cash equivalents at beginning of period ........................... 69,811 35,697
Effect of exchange rates on cash held in foreign currencies ................ 80 (66)
Cash received from acquisitions ............................................ 52 3,322
-------- --------
Cash and cash equivalents at end of period ................................. $ 52,156 $ 72,843
======== ========
Supplemental disclosures:
Cash paid for interest ................................................. $ 50 $ 66
======== ========
Cash paid for income taxes ............................................. $ 530 $ --
======== ========
Supplemental disclosures of noncash investing and financing activities:
Purchase of subordinated debenture in exchange
for common stock ..................................................... $ -- $ 4,200
======== ========
Acquisition of minority interest in exchange for
issuance of options .................................................. $ -- $ 2,216
======== ========
Acquisition of businesses in exchange for assumption of
liabilities and issuance of common stock ............................. $ -- $ 454
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 7
HARBINGER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
information included herein is unaudited; however, the information reflects all
adjustments (consisting solely of normal recurring adjustments) that are, in the
opinion of management, necessary to a fair presentation of the financial
position, results of operations, and cash flows for the interim periods.
Operating results for the three months and nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in Harbinger Corporation's
("Harbinger" or the "Company") Form 10-K for the year ended December 31, 1997
and the Company's current reports on Form 8-K dated February 24, 1998 and May
26, 1998.
All share, per share and shareholders' equity amounts in the unaudited
consolidated financial statements have been retroactively restated to reflect a
three-for-two stock split in the form of a stock dividend paid on May 15, 1998
(see Note 5).
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Such estimates include charges for in-process product development,
write-off of software development costs, restructuring, acquisition related and
other one-time charges; loss on discontinued operations and allowance for
doubtful accounts. Actual results could differ from management estimates.
REVENUE RECOGNITION
On January 1, 1998, the Company adopted Statement of Position 97-2,
Software Revenue Recognition, issued by the Accounting Standards Executive
Committee in October 1997, effective for financial statements for fiscal years
beginning after December 15, 1997. The implementation of this statement did not
have a material impact on the Company's unaudited consolidated financial
statements for the three-month and nine-month periods ended September 30, 1998.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, issued by the
Financial Accounting Standards Board ("FASB") in June 1997, effective for fiscal
years beginning after December 15, 1997. Comprehensive income includes all
changes in equity during a period except those resulting in investments by
owners and distributions to owners.
OTHER
The Company continues to evaluate the requirements of Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, issued by the FASB in June 1997, effective
for fiscal years beginning after December 15, 1997. The provisions of this
standard do not apply to interim periods in the year of adoption. The Accounting
Standards Executive Committee has issued Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,
effective for fiscal years beginning after December 15, 1998. The Company
adopted this standard on January 1, 1998. The implementation of this statement
did not have a material impact on the Company's unaudited consolidated financial
statements for the three-month and nine-month periods ended September 30, 1998.
<PAGE> 8
HARBINGER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
2. ACQUISITION
Effective March 31, 1998, the Company acquired EDI Works! LLC ("EDI
Works!"), a Texas limited liability company, for 194,497 shares of the Company's
common stock in a transaction accounted for using the pooling-of-interests
method of accounting with a per-share value of $23.14. The EDI Works! business
combination is not material, and therefore has been accounted for as an
immaterial pooling, with EDI Works! retained earnings of $130,000 at December
31, 1997 being credited directly to the Company's accumulated deficit effective
January 1, 1998. The results of operations of EDI Works! are included in the
Company's consolidated statement of operations for the nine months ended
September 30, 1998. In connection with the EDI Works! acquisition, the Company
incurred a charge of $805,000 for acquisition-related expenses, asset write
downs and integration costs in the consolidated statement of operations for the
nine months ended September 30, 1998.
Effective July 9, 1998, the Company acquired substantially all of the
assets of the Materials Management Division of MACTEC, Inc., located in Tulsa,
Oklahoma, for approximately $3.5 million in cash, subject to certain
post-closing adjustments. The Company recorded the acquisition using the
purchase method of accounting, with approximately $3.5 million recorded to
goodwill to be amortized ratably over 10 years.
3. CHARGE FOR PURCHASED IN-PROCESS PRODUCT DEVELOPMENT, WRITE-OFF OF
SOFTWARE DEVELOPMENT COSTS, RESTRUCTURING, ACQUISITION RELATED AND
OTHER ONE-TIME CHARGES
In connection with the acquisitions made in 1998 and 1997 and a
restructuring of the Company effective September 30, 1998, the Company incurred
charges for purchased in-process product development, write-off of software
development costs, restructuring, acquisition related and other one-time charges
("one-time charges"). A summary of the components is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
In-process product development .... $ -- $ 138 $ -- $ 2,853
Integration costs and non recurring
one-time charges ............... 2,894 2,792 13,919 8,785
Lease termination and other ....... 4,490 -- 4,490 --
Transaction charges ............... -- -- 638 4,904
Intangible asset write downs ...... -- 107 -- 2,429
Asset write downs ................. 4,193 183 4,459 485
Other restructuring charges ....... 2,401 630 3,521 630
======= ======= ======= =======
$13,978 $ 3,850 $27,027 $20,086
======= ======= ======= =======
</TABLE>
Approximately $372,000 of the costs and expenses incurred in the three
months ended September 30, 1998 and $4.1 million for the nine months ended
September 30, 1998 in connection with these charges included certain internal
expense allocations which may recur in other expense categories in the future,
potentially resulting in an increase in such expense categories as a percentage
of total revenues.
<PAGE> 9
HARBINGER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
4. DISCONTINUED OPERATIONS
In the third quarter of 1998 the Board of Directors approved the
discontinuance of the Company's TrustedLink Procurement ("TLP") business
effective September 30, 1998. The Company is reviewing its alternatives and
expects to divest this business within 12 months. The results of operations for
the TLP business for all periods are reported in the accompanying statements of
operations under "Discontinued operations". For the three-month and nine-month
periods ended September 30, 1997, "Discontinued operations" also include
operating results of the TrustedLink Banker division ("Banker"), which was
discontinued in the fourth quarter of 1997. Banker's income for the three-month
and nine-month periods ended September 30, 1997 was $137,000 and $173,000,
respectively.
Revenues for the TLP business for the nine-month periods ended
September 30, 1998 and 1997 were $2.7 million and $1.1 million, respectively,
and for the three-month periods ended September 30, 1998 and 1997 were $596,000
and $1.1 million, respectively. Revenues for Banker for the nine-month and
three-month periods ended September 30, 1997 were $3.0 million and $1.1 million,
respectively.
In the third quarter of 1998 the Company provided for an estimated
anticipated loss of $6.4 million related to the disposal of the TLP business. No
income tax expense or benefit was recognized in 1998 or 1997 due to the
Company's net operating loss carryforwards. The remaining assets and liabilities
of the TLP business, excluding cash and certain liabilities, are included in the
Company's consolidated balance sheet at September 30, 1998 and are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
September 30,
1998
----
<S> <C> <C>
Accounts receivable, net .. $ 943
Other current assets ...... 78
Property and equipment, net 766
Intangible assets, net .... 2,454
Current liabilities ....... (822)
-------
Net assets ............ $ 3,419
=======
</TABLE>
5. SHAREHOLDERS' EQUITY
On March 31, 1998, the Company issued 194,497 shares of the Company's
common stock as consideration related to the Company's acquisition of EDI Works!
(See Note 2).
On May 15, 1998, the Company paid a stock split in the form of a stock
dividend on the Company's common stock to shareholders of record on May 1, 1998
as a result of a three-for-two stock split declared by the Board of Directors on
April 24, 1998. All share, per share and shareholders' equity amounts included
in the Company's consolidated financial statements have been restated to reflect
the split for all periods presented.
6. COMMITMENTS
During 1998 the Company entered into lease agreements for office space
committing the Company to approximately $29 million in total payments through
mid-year 2008, with an average annual commitment of $3.3 million over the next
five years.
<PAGE> 10
HARBINGER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
7. SUBSEQUENT EVENTS
On October 1, 1998, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to 10% of the Company's outstanding
common stock over the next 12 months.
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the accompanying consolidated financial statements and notes, the Company's
Form 10-K for the year ended December 31, 1997 and the Company's current reports
on Form 8-K dated February 24, 1998 and May 26, 1998 and the Company's Safe
Harbor Compliance Statement filed herewith as Exhibit 99.1.
OVERVIEW
Harbinger Corporation (the "Company") generates revenues from various
sources, including revenues for services and license fees for software. Revenues
for services principally include subscription fees for transactions on the
Company's Value Added Network ("VAN") and Internet Value Added Server ("IVAS"),
software maintenance and implementation charges and professional service fees
for consulting and training services. Subscription fees are based on a
combination of monthly access charges and transaction-based usage charges and
are recognized based on actual charges incurred each month. Software maintenance
and implementation revenues represent recurring charges to customers and are
deferred and recognized ratably over the service period. Revenues for
professional services are based on actual services rendered and are recognized
as services are performed. License fees for software are generally recognized
upon shipment, net of estimated returns. Software revenues also include royalty
revenues under distribution agreements with third parties which are recognized
either on shipment of software to a distributor or upon sales to end users by a
distributor depending on the terms of the distribution agreement. In 1998 the
Company adopted Statement of Position 97-2, Software Revenue Recognition, issued
by the Accounting Standards Executive Committee. The implementation of this
statement did not have a material impact on the Company's consolidated financial
statements for the period ended September 30, 1998.
During the nine months ended September 30, 1998, the Company incurred
acquisition and integration related and other one-time charges of $15.9 million
related to acquisitions made since September 30, 1997. These costs related to
business combinations include activities such as cross training, planning,
product integration and marketing ("Integration Activities"). Due to Integration
Activities in the nine months ended September 30, 1998 and 1997, certain
internal expense allocations ("Integration Activity Costs") included in the
"Charge for purchased in-process product development, write-off of software
development costs, restructuring, acquisition related and other one-time
charges" on the consolidated statement of operations may recur in other expense
categories in the future and may result in an increase in some expense
categories as a percentage of total revenues.
During the third quarter of 1998 the Company implemented a
restructuring plan that included the termination of approximately 10% of its
personnel, the announcement of the discontinuance of certain non-strategic
software products and realigning its internal organizational structure,
including certain senior management. In connection with this plan the Company
recorded a one-time restructuring charge of $11.1 million. The costs related to
restructuring include estimates for asset write downs, termination benefits to
former employees and lease termination costs.
Total restructuring, acquisition and integration and other one-time
charges ("one-time charges") for the nine months ended September 30, 1998 and
1997 were $27.0 million and $20.1 million, respectively. One-time charges
include management estimates. Actual costs could differ from such estimates.
During the third quarter of 1998, the Company also announced its
intention to divest its TrustedLink Procurement business (see Note 4 to the
accompanying unaudited consolidated financial statements) during the next 12
months. The results of operations for this business have been reclassified to
discontinued operations for all periods in the accompanying unaudited
consolidated financial statements.
<PAGE> 12
1998 ACQUISITIONS
Effective March 31, 1998, the Company acquired EDI Works! LLC ("EDI
Works!"), a Texas limited liability company, for 194,497 shares of the Company's
common stock in a transaction accounted for using the pooling-of-interests
method of accounting. The EDI Works! business combination is not material, and
therefore has been accounted for as an immaterial pooling. The results of
operations of EDI Works! are included in the Company's consolidated statement of
operations for the nine months ended September 30, 1998.
In connection with the EDI Works! acquisition, the Company incurred a
charge of $47,000 for acquisition related expenses, asset write downs and
integration costs in the consolidated statement of operations for the three
months ended September 30, 1998 and $805,000 for the nine months ended September
30, 1998.
Effective July 9, 1998, the Company acquired substantially all of the
assets of the Materials Management Division of MACTEC, Inc., located in Tulsa,
Oklahoma, for approximately $3.5 million in cash, subject to certain
post-closing adjustments. The Company recorded the acquisition using the
purchase method of accounting, with approximately $3.5 million recorded to
goodwill to be amortized ratably over ten years.
RESULTS OF OPERATIONS
REVENUES
Total revenues increased 20% from $81.9 million in the nine months
ended September 30, 1997 to $98.6 million in the same period in 1998. Revenues
for services increased 39% from $46.1 million in the nine months ended September
30, 1997 to $63.9 million in the same period in 1998. This increase is
attributable to growth in transaction fees, increased professional services,
increased maintenance revenues and revenues from companies acquired since
September 1997. Software revenue decreased 3% from $35.8 million in the nine
months ended September 30, 1997 to $34.8 million in the same period in 1998. The
overall decrease in software revenue for the nine months ended September 30,
1998 compared to the same period in 1997 reflects offsetting effects of modest
declines in the Company's PC and UNIX product lines, decreased royalty revenues
and increases in license fees from the NT product line.
Total revenues increased 21% from $29.2 million in the three months
ended September 30, 1997 to $35.4 million in the same period in 1998. Revenues
for services increased 36% from $16.2 million in the three months ended
September 30, 1997 to $22.1 million in the same period in 1998. This increase is
attributable to growth in transaction fees, increased professional services,
increased maintenance revenues and revenues from companies acquired since
September 1997. Software revenue increased 3% from $12.9 million in the three
months ended September 30, 1997 to $13.3 million in the same period in 1998. The
net increase is a result of decreases in software license fees from the
Company's UNIX product lines and decreases in royalty revenue offset by $1.1
million of software shipped and license fees recognized in the third quarter of
1998 for orders placed in the second quarter of 1998 that the Company did not
ship.
DIRECT COSTS
Direct costs for services increased from $15.8 million, or 34.3% of
services revenues, in the nine months ended September 30, 1997, to $24.8
million, or 38.8% of services revenues, in the nine months ended September 30,
1998. The increase in direct costs for services as a percentage of services
revenues is primarily attributable to growth in the Company's professional
services practice, which has lower margins than other components of the
Company's service revenues. The increase in direct costs was partially offset by
the impact of Integration Activity Costs. Direct costs for software decreased
from $5.8 million, or 16.1% of software revenues, in the nine months ended
September 30, 1997, to $3.2 million, or 9.2% of software revenues, in the nine
months ended September 30, 1998. The decrease in direct software costs as a
percentage of software revenues from the first nine months of 1997 compared to
the comparable period of 1998 primarily reflects the effects of a decrease in
software amortization in
<PAGE> 13
1998 as a result of writing off capitalized and purchased software development
in connection with certain business combinations in 1997.
Direct costs for services increased from $5.7 million, or 35.2% of
services revenue, in the three months ended September 30, 1997, to $9.3 million,
or 41.8% of services revenue, in the three months ended September 30, 1998. The
increase in direct costs for services as a percentage of services revenues is
primarily attributable to growth in the Company's professional services
practice, which has lower margins than other components of the Company's service
revenues. Direct costs for software decreased from $1.8 million, or 13.6% of
software revenues, in the three months ended September 30, 1997, to $1.3
million, or 9.9% of software revenues, in the three months ended September 30,
1998, primarily as a result of a decrease in software amortization in 1998 as a
result of writing off capitalized and purchased software development in
connection with certain business combinations in 1997.
SELLING AND MARKETING
Selling and marketing expenses increased 23% from $18.8 million, or
23.0% of revenues, in the nine months ended September 30, 1997 to $23.2 million,
or 23.6% of revenues, in the nine months ended September 30, 1998. For the third
quarters, selling and marketing expenses increased 43% from $6.4 million, or
21.8% of revenues, in the three months ended September 30, 1997, to $9.1
million, or 25.7% of revenues, in the three months ended September 30, 1998. For
both the nine-month and three-month period comparisons, the increase in expenses
is primarily due to increases in sales and marketing personnel and related
selling costs. For the quarters, selling and marketing expenses as a percentage
of revenues increased from the third quarter of 1997 compared to the third
quarter of 1998 due to increases in sales and marketing personnel and related
selling costs and a decrease in Integration Activity Costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 61% from $15.2 million in
the nine months ended September 30, 1997 to $24.5 million in the nine months
ended September 30, 1998. As a percentage of revenues, these expenses increased
from 18.6% of revenues in the nine months ended September 30, 1997 to 24.8% of
revenues in the nine months ended September 30, 1998. For the third quarters,
general and administrative expenses increased 165% from $5.1 million in the
three months ended September 30, 1997 to $13.6 million in the three months ended
September 30, 1998. As a percentage of revenues, these expenses increased from
17.7% of revenues in the three months ended September 30, 1997 to 38.5% of
revenues in the three months ended September 30, 1998. For both the nine-month
and three-month period comparisons, the increase in general and administrative
expenses is primarily due to a $6.5 million provision in the third quarter of
1998 in the Company's allowance for doubtful accounts. This increase relates
primarily to management's concern regarding the recent financial condition of a
reseller. Management intends to continue to pursue collections of these
accounts, but has reserved based on management's estimate of collectibility, for
these accounts. Actual results could differ from this estimate.
Adjusting for the impact of the specific charge to the allowance for
doubtful accounts, general and administrative expenses would have increased 18%
to $18.0 million, or 18.2% of revenues, for the nine months ended September 30,
1998 compared to the same period in 1997 and would have increased 39% to $7.1
million, or 20.1% of revenues, for the three months ended September 30, 1998
compared to the third quarter of 1997. The increase in expenses as a percentage
of revenues in the nine months ended September 30, 1998 is significantly
impacted by increases in expenses in the third quarter of 1998. The increase in
the third quarter of 1998 compared to the third quarter of 1997 is attributable
to an increase in personnel and associated costs in both the Company's domestic
and European operations, an increase in rent for expanded office space,
adjustments to compensation related accruals and the effect of Integration
Activity Costs between periods.
<PAGE> 14
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 19% from $4.9 million in the
nine months ended September 30, 1997 to $5.8 million in the nine months ended
September 30, 1998. As a percentage of revenues, these expenses were 6.0% and
5.9% of revenues for the nine-month periods ended September 30, 1997 and 1998,
respectively. For the third quarters, depreciation and amortization increased
21% from $1.7 million in the three months ended September 30, 1997 to $2.0
million in the three months ended September 30, 1998. As a percentage of
revenues, these expenses were 5.8% and 5.7% for the three months ended September
30, 1997 and September 30, 1998, respectively. The increase in depreciation and
amortization for the nine-month and three-month periods of 1998 compared to
1997, respectively, is a result of additions to fixed assets and equipment and
reflects certain investments in infrastructure.
PRODUCT DEVELOPMENT
Total expenditures for product development, including capitalized
software development costs, decreased 31% from $15.4 million in the nine months
ended September 30, 1997 to $10.6 million in the same period in 1998. The
Company capitalized product development costs of $3.8 million and $2.8 million
in the nine months ended September 30, 1997 and 1998, respectively, which
represented 24.7% and 26.7% of total expenditures for product development in
these respective periods. As a percentage of total revenues, product development
expenses decreased from $11.6 million, or 14.1% of revenues, in the nine months
ended September 30, 1997, to $7.8 million, or 7.8% of revenues, in the nine
months ended September 30, 1998. The decrease in total expenditures for product
development for the nine months ended September 30, 1998 compared to the same
period in 1997 is primarily attributable to efficiencies gained in consolidating
development resources of acquired companies in the last 12 months, offset by the
impact of Integration Activity Costs. Amortization of capitalized software
development costs is charged to direct costs of software revenues and totaled
$2.7 million and $1.1 million, in the nine months ended September 30, 1997 and
1998, respectively.
Total expenditures for product development, including capitalized
software development costs, decreased 28% from $5.1 million in the three months
ended September 30, 1997 to $3.6 million in the same period in 1998. The Company
capitalized software development costs of $1.3 million and $794,000 in the three
months ended September 30, 1997 and 1998, respectively, which represented 26.0%
and 21.8% of total expenditures for product development in these respective
periods. Product development expenses decreased from $3.8 million, or 12.8% of
revenues, in the three months ended September 30, 1997, to $2.8 million, or 8.0%
of revenues, in the three months ended September 30, 1998. The decrease in total
expenditures for product development for the third quarter of 1998 compared to
the third quarter of 1997 is primarily attributable to efficiencies gained in
consolidating development resources of acquired companies in the last 12 months,
offset by the impact of Integration Activity Costs. The decrease in the
percentage of capitalized product development costs as a component of total
expenditures for product development in the third quarter of 1998 compared to
the third quarter of 1997 is primarily attributable to a decrease in development
activities associated with products that have reached technological feasibility.
Amortization of capitalized software development costs is charged to direct cost
of software revenues and totaled $922,000 and $422,000 in the three months ended
September 30, 1997 and 1998, respectively.
CHARGE FOR PURCHASED IN-PROCESS PRODUCT DEVELOPMENT, WRITE-OFF OF SOFTWARE
DEVELOPMENT COSTS, RESTRUCTURING, ACQUISITION RELATED AND OTHER ONE-TIME CHARGES
Total one-time charges increased 35% from $20.1 million for the nine
months ended September 30, 1997 to $27.0 million for the comparable period in
1998. Certain charges in 1998 were incurred as a result of continued efforts to
integrate the following recent acquisitions: $13.7 million attributable to
Premenos Technology Corp. ("Premenos") acquired on December 19, 1997; $1.4
million attributable to Atlas Products International, Limited ("Atlas") acquired
on October 23, 1997; and $805,000 attributable to EDI Works! acquired on March
31, 1998. Additionally, the Company recorded $11.1 million in termination
benefits to former employees, lease termination costs, asset write downs and
other charges attributable to a restructuring effective September 30, 1998. For
the nine months ended September 30, 1997 the one-time charges of $20.1 million
were attributable to the following acquisitions:
<PAGE> 15
$11.9 million to Supply Tech, Inc.; $4.3 million to Harbinger NET Services LLC;
and $3.9 million to Acquion, Inc. ("Acquion). (See Note 3 to the accompanying
unaudited consolidated financial statements.)
Total one-time charges for the quarter ended September 30, 1997 were
$3.9 million compared to $14.0 million in the quarter ended September 30, 1998.
The charges for the three months ended September 30, 1998 were attributable as
follows: $2.7 million to Premenos; $200,000 to Atlas; $47,000 to EDI Works!; and
$11.1 million in termination benefits to former employees, lease termination
costs, asset write downs and other charges in connection with to a restructuring
effective September 30, 1998. The three-month charges for the comparable period
in 1997 were all attributable to the acquisition of Acquion.
Certain one-time charges were made based on management estimates.
Actual results could differ from such estimates.
INTEREST INCOME, NET
Interest income, net, increased 44% from $2.6 million for the nine
months ended September 30, 1997 to $3.8 million for the nine months ended
September 30, 1998. On a quarter-to-quarter comparison, interest income, net,
was $1.2 million in the third quarters of 1997 and 1998. The increase for the
nine months ended September 30, 1998 compared to the comparable period ended
September 30, 1997 is a result of higher average balances of cash and cash
equivalents and short-term investments in 1998 compared to 1997.
INCOME TAXES
Income tax expense decreased 61% from $1.8 million for the nine months
ended September 30, 1997 to $705,000 for the nine months ended September 30,
1998. For the quarters ended September 30, 1997 and 1998 income tax expense
increased from $446,000 to $560,000, respectively. All changes in income tax
expense are attributable to the nondeductibility of certain expenses for tax
purposes incurred in 1997, particularly acquisition and integration related
charges, and current tax liabilities incurred in certain foreign and state
jurisdictions.
DISCONTINUED OPERATIONS
On September 30, 1998, the Company discontinued its TrustedLink
Procurement ("TLP") business, which had been generating lower than desired
profitability and growth. The Company plans to divest the discontinued business
during the next twelve months. The results of operations for this business have
been reclassified to discontinued operations for all periods in the accompanying
unaudited consolidated financial statements. Reclassified losses for the TLP
business were $1.8 million and $10.7 million for the nine-month periods ended
September 30, 1998 and 1997, respectively, and were $938,000 and $10.7 million
for the three-month periods ended September 30, 1998 and 1997, respectively. In
the third quarter of 1998 the Company also provided for an estimated anticipated
loss on the disposal of the TLP business of $6.4 million. Actual costs could
differ from this estimate.
In the fourth quarter of 1997 the Company discontinued its TrustedLink
Banker division ("Banker") and the unaudited consolidated financial statements
also reflect the impact of reclassifying the Banker results of operations to
discontinued operations. Such reclassified income for the three-month and
nine-month periods ended September 30, 1997 were $137,000 and $173,000,
respectively.
NET LOSS AND EARNINGS (LOSS) PER SHARE
Net loss applicable to common shareholders increased from $22.6
million, or $0.61 per share, for the nine months ended September 30, 1997 to
$22.8 million, or $0.55 per share, for the nine months ended September 30, 1998.
Net income, adjusted to exclude one-time charges, a specific $6.5 million charge
to general and administrative expenses in the third quarter of 1998, a net loss
from discontinued operations and an extraordinary loss on debt extinguishment in
1997, net of the effect of income taxes, would have been $7.7 million, or $0.19
per share, for the nine months ended September 30, 1997, compared to $12.1
million, or $0.28 per share, for the nine
<PAGE> 16
months ended September 30, 1998, representing a 57% increase from 1997 to 1998.
Net income, excluding all aforementioned charges except the specific $6.5
million charge to general and administrative expenses in the third quarter of
1998, would have been $7.7 million, or $0.19 per share, for the nine months
ended September 30, 1997, compared to $8.2 million, or $0.19 per share, for the
nine months ended September 30, 1998, representing a 6% increase from 1997 to
1998.
Net loss applicable to common shareholders increased from $9.0 million,
or $0.23 per share, for the quarter ended September 30, 1997 to $23.4 million,
or $0.56 per share, for the quarter ended September 30, 1998. Net income,
adjusted to exclude one-time charges, a specific $6.5 million charge to general
and administrative expenses in the third quarter of 1998 and a net loss from
discontinued operations, net of the effect of income taxes, would have been $3.7
million, or $0.09 per share, for the quarter ended September 30, 1997, compared
to $3.0 million, or $0.07 per share, for the quarter ended September 30, 1998,
representing a 20% decrease from 1997 to 1998. Net income (loss), excluding all
aforementioned charges except the specific $6.5 million charge to general and
administrative expenses in the third quarter of 1998, would have been income of
$3.7 million, or $0.09 per share, for the three months ended September 30, 1997,
compared to a loss of $961,000, or $0.02 per share, for the three months ended
September 30, 1998, representing a 126% decrease from 1997 to 1998.
Earnings (loss) per share in future periods, for both basic and fully
diluted presentations, could be impacted by a potential change in the number of
shares of common stock outstanding as a result of the effects of the Company's
common stock repurchase program and the Company's repricing of certain
unexercised employee stock options held by employees other than certain senior
executive officers. Both programs were authorized by the Company's Board of
Directors in October 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $14.6 million from $94.3
million as of December 31, 1997 to $79.7 million as of September 30, 1998. Net
cash provided by operating activities decreased 40% from $4.8 million for the
nine months ended September 30, 1997 to $2.9 million for the comparable period
in 1998, primarily as a result of liquidation of liabilities incurred due to
one-time charges associated with acquisitions since September 30, 1997.
Net cash used in investing activities increased $2.7 million from $28.9
million for the nine months ended September 30, 1997 to $31.6 million for the
nine months ended September 30, 1998 due to an increase in short-term
investments over cash and cash equivalents between the periods offset by a
decrease in cash outlays for acquisitions of companies. Additionally, the
Company continues to acquire fixed assets and equipment in 1998.
Net cash provided by financing activities decreased $47.1 million from
$58.0 million for the nine months ended September 30, 1997 to $10.9 million for
the nine months ended September 30, 1998 primarily resulting from the Company
receiving $60.0 million from a secondary stock offering in July 1997.
Management expects that the Company will continue to be able to fund
its operations, investment needs and capital expenditures through cash flows
generated from operations, cash on hand, borrowings under the Company's $10
million credit facility and additional equity and debt capital. Management
believes that outside sources for debt and additional equity capital, if needed,
will be available to finance expansion projects and any potential future
acquisitions. The form of any financing will vary depending upon prevailing
market and other conditions and may include short or long term borrowings from
financial institutions, or the issuance of additional equity or debt securities.
However, there can be no assurances that funds will be available on terms
acceptable to the Company. Several factors could have an impact on the Company's
cash flows in the upcoming quarters, including the effects of the Company's
recent implementation of a common stock repurchase program (see Note 7 to the
accompanying unaudited consolidated financial statements), liquidation of
liabilities incurred due to a restructuring of the Company and a discontinued
operation effective September 30, 1998, and anticipated outlays for the
Company's on-going 1998 effort to enhance and consolidate its IT infrastructure.
The Company does not believe that inflation has had a material impact on its
business. However, there can be no assurance that Harbinger's business will not
be affected by inflation in the future.
<PAGE> 17
YEAR 2000 READINESS
Many currently installed computer systems and software products will
not properly process date information in the time period leading up to,
including and following the year 2000. These systems and products often store
and process the year field of date information as two digit numbers, and
misinterpret dates in the year 2000 and beyond as being dates in the year 1900
or subsequent years. This "Year 2000" issue impacts Harbinger both with respect
to its customers as a developer and vendor of computer software products and
services and internally for its information technology ("IT") and non-IT
systems.
The Company formed a Year 2000 Steering Committee in July 1998 to
formally address the Company's Year 2000 issues, which formalized the Company's
Year 2000 assessment program begun in March 1997. The Year 2000 Steering
Committee has overseen the Company's Year 2000 Readiness Assessment Program,
which includes establishing the Company's standard for Year 2000 Readiness,
designing test parameters for its products, IT and non-IT systems, overseeing
the Company's remediation program, including establishing priorities for
remediation and allocating available resources, overseeing the communication of
the status of the Company's efforts to its customers, and establishing
contingency plans in the event the Company experiences Year 2000 disruptions.
The Company describes its products and services as "Year 2000 Ready"
when they have been successfully tested using the procedure proscribed in its
Readiness Assessment Program. This procedure defines the criteria used to design
tests that seek to determine the Year 2000 readiness of a product. Under the
Company's criteria, a software product is Year 2000 Ready if it:
1. Correctly handles date information before, during, and after January 1,
2000, accepting date input, providing date output and performing
calculation on dates or portions of dates.
2. Functions accurately and without interruption before, during and after
January 1, 2000 without changes in operation associated with the advent
of the new century assuming correct configuration.
3. Where appropriate, responds to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined and
pre-determined manner.
4. Stores and provides output of date information in ways that are
unambiguous as to century.
5. Manages the leap year occurring in the year 2000, following the
quad-centennial rule.
As of September 30, 1998 Company management estimates that
approximately 90% of its product readiness testing has been completed. While
many of the Company's products are presently Year 2000 Ready, the Company
currently estimates that all of its continuing products will be available to
customers in a Year 2000 Ready version by the end of 1998. Certain of the
Company's customers are currently using legacy versions of the Company's
products for which a Year 2000 Ready version will not be developed. The Company
has developed migration plans to move such customers to functionally similar
Year 2000 Ready products. The Company is also in the process of implementing a
website on the Internet that will include a general overview of the Company's
Readiness Assessment Program, including a list of products and the applicable
Year 2000 Ready version numbers of such products.
The Company is presently engaged in a significant upgrade of
substantially all of its core IT systems, including those related to sales,
customer service, human resources, finance, accounting and other enterprise
resource planning functions, as a result of its growth in recent years. The
Company believes that the upgraded systems, which it expects to have
substantially implemented by mid-year 1999, are all Year 2000 Ready. The Company
is reviewing its remaining IT systems for Year 2000 Readiness, and expects to
modify, replace or discontinue the use of non-compliant systems before the end
of 1999. In addition, the Company is in the process of evaluating its Year 2000
readiness with respect to non-IT systems, including systems embedded in the
Company's communications and office facilities. In many cases these facilities
have been recently upgraded or are scheduled
<PAGE> 18
to be upgraded before year-end 1999 as a result of the Company's growth in
recent years. The Company is in the process of distributing surveys to its
principal IT and non-IT systems and services vendors soliciting information on
their Year 2000 Readiness as part of this review. The Company is also surveying
its vendors' websites for additional related information.
The majority of the work performed for the Company's Year 2000
Readiness Assessment Program has been completed by the Company's staff.
Additionally, the Company engaged outside advisors to evaluate the Readiness
Assessment Program and to participate in certain elements of product testing.
The total costs for completing the Year 2000 Readiness Assessment Program,
including modifications to the Company's software products, is estimated to be
between $1 million and $2 million, funded through the Company's internal
operating cash flows. This cost does not include the cost for new software, or
for modifications to existing software, for the Company's core IT and non-IT
systems, as these projects were not accelerated due to the Year 2000 issue.
Approximately $200,000 to $300,000 in cost remains to be incurred to complete
the Company's Readiness Assessment Program.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. Potential customers may also choose to defer purchasing Year
2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. In addition, Year 2000 issues could cause a
significant number of companies, including current Company customers, to
reevaluate their current software needs, and as a result switch to other systems
or suppliers. Any of the foregoing could result in a material adverse effect on
the Company's business, operating results and financial condition.
At present the Company has only preliminarily discussed contingency
plans in the event that Year 2000 non-compliance issues materialize. The Company
expects to formalize its contingency plans prior to year-end 1999. In the case
of certain of the Company's value-added network operations, it will be difficult
for the Company to seamlessly implement alternative service arrangements due to
the nature and complexity of the customer interface. While the Company believes
that its Readiness Assessment Program is addressing the risks specific to the
Company for the Year 2000 issue, including its operations in markets outside of
the United States, it cannot be assured that events will not occur that could
have a material adverse impact on its business, operating results and financial
condition. Such events include the risk of lawsuits from customers and the
inability to process data internally on its IT systems. Further, the Company is
aware of the risk that domestic and international third parties, including
vendors and customers of the Company, will not adequately address the Year 2000
problem and the resultant potential adverse impact on the Company. Regardless of
whether the Company's products are Year 2000 compliant, there can be no
assurance that customers will not assert Year 2000 related claims against the
Company.
EURO CONVERSION
Effective January 1, 1998, eleven of the 15 member countries of the
European Union are scheduled to adopt a single European currency, the euro, as
their common legal currency. Like many companies that operate in Europe, various
aspects of the Company's business will be affected by the conversion to the
euro. The Company is currently evaluating its products and systems. The failure
to adequately address the euro conversion issues could effect the Company's
ability to offer software and services in the effected countries, as well as its
ability to operate internal systems. While the company believes that it can
successfully remediate all related issues, there can be no assurance that it
will do so in a timely manner. The failure to do so could have an adverse effect
on the Company.
<PAGE> 19
FORWARD LOOKING STATEMENTS
Other than historical information contained herein, certain statements
included in this report may constitute "forward looking" statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934
related to the Company that involve risks and uncertainties including, but not
limited to, quarterly fluctuations in results, the management of growth, market
acceptance of certain products, impact of Year 2000 compliance and other risks.
For further information about these and other factors that could affect the
Company's future results, please see the Company's most recent Form 10-K
including the exhibits attached thereto or incorporated therein filed with the
Securities and Exchange Commission. Investors are cautioned that any forward
looking statements are not guarantees of future performance and involve risks
and uncertainties and that actual results may differ materially from those
contemplated by such forward looking statements. The Company undertakes no
obligation to update or revise forward looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998 the Company adopted Statement of Position 97-2, Software
Revenue Recognition, issued by the Accounting Standards Executive Committee, and
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, issued by the Financial Accounting Standards Board. The Company adopted
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, issued by the Accounting Standards
Executive Committee effective for fiscal years beginning after December 15,
1998, on January 1, 1998. The implementation of these statements did not have a
material impact on the Company's accompanying unaudited consolidated financial
statements for the three-month and nine-month periods ended September 30, 1998.
The Company continues to evaluate the requirements of Statement of
Financial Accounting Standard No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for the year ending
December 31, 1998 but does not apply to interim periods in the year of adoption.
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 10.1 Third Amendment to the Harbinger Corporation Amended
and Restated Stock Purchase Plan
Exhibit 27.1 Financial Data Schedule
Exhibit 27.2 Restated Financial Data Schedule
Exhibit 99.1 Safe Harbor Compliance Statement
<PAGE> 21
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARBINGER CORPORATION
Date: November 13, 1998 /s/ C. Tycho Howle
----------------- ---------------------------------------------
C. Tycho Howle
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 /s/ Joel G. Katz
----------------- ---------------------------------------------
Joel G. Katz
Chief Financial Officer
(Principal Financial Officer;
Principal Accounting Officer)
<PAGE> 1
EXHIBIT 10.1
THIRD AMENDMENT TO THE AMENDED AND RESTATED
HARBINGER CORPORATION EMPLOYEE STOCK PURCHASE PLAN
THIS THIRD AMENDMENT TO THE AMENDED AND RESTATED HARBINGER CORPORATION
EMPLOYEE STOCK PURCHASE PLAN (the "Amendment") is made effective as of September
30, 1998 (the "Effective Date"), by HARBINGER CORPORATION, a corporation
organized and doing business under the laws of the State of Georgia (the
"Company"). All capitalized terms in this Amendment have the meaning ascribed to
such term as in the Harbinger Corporation Employee Stock Purchase Plan (the
"Plan"), unless otherwise stated herein.
W I T N E S S E T H:
WHEREAS, the Plan has been amended on two prior occasions and the Board
of Directors desires to again amend the Plan pursuant to the authority set forth
in Plan Section 16;
NOW THEREFORE, in consideration of the premises and mutual promises
contained herein, the Plan is hereby amended as follows:
SECTION 2. "Definitions", is hereby amended by substituting the
following definition of "PURCHASE PERIOD":
"PURCHASE PERIOD means the period beginning 48 hours after the release
of operating results for the immediately prior quarter and ending 48 hours after
the release of operating results for the then current quarter."
IN WITNESS WHEREOF, the Company has caused this THIRD AMENDMENT TO THE
AMENDED AND RESTATED HARBINGER CORPORATION EMPLOYEE STOCK PURCHASE PLAN to be
executed and effective for the third quarter of the 1998 Plan year.
HARBINGER CORPORATION
By: /s/ C. Tycho Howle
--------------------------------------
C. Tycho Howle, Chairman & CEO
ATTEST:
By: /s/ Joel G. Katz
---------------------------
Joel G. Katz, Secretary
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED
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ENDED SEP-30-1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS. ALL AMOUNTS HAVE BEEN RETROACTIVELY RESTATED
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<PAGE> 1
EXHIBIT 99.1
Safe Harbor Compliance Statement
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. Harbinger Corporation ("Harbinger" or the
"Company") intends to qualify both its written and oral forward-looking
statements for protection under the Reform Act and any other similar safe harbor
provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Harbinger. The Company
undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements (the "Safe Harbor Statement") to
reflect future developments. In addition, Harbinger undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time. This Safe Harbor Statement supersedes that certain Safe Harbor Statement
filed as Exhibit 99.1 to the Company's Current Report on Form 10-K for the year
ended December 31, 1997.
Harbinger provides the following risk factor disclosure in connection
with its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include the disclosures contained in the Quarterly
Report on Form 10-Q to which this statement is appended as an exhibit and also
include the following:
Integration of Recent Acquisitions; Future Acquisitions. Harbinger has
completed a number of acquisitions since January 1, 1997, including the
acquisitions of the Materials Management Division of MACTEC, INC., EDIWorks!
L.L.C. , Premenos Technology Corp. ("Premenos"), Atlas Products International,
Limited and its affiliate ("Atlas"), Acquion, Inc. ("Acquion"), SupplyTech, Inc.
and its affiliated entities (collectively, "SupplyTech"), and the minority
interests of Harbinger NET Services, LLC ("HNS"). Premenos, Acquion, SupplyTech
and HNS have historically reported significant operating losses. Harbinger's
acquisitions present a number of risks and challenges, including the historical
operating losses of Premenos, Acquion, SupplyTech and HNS, the integration of
the software products of the acquired companies into Harbinger's current suite
of products, the integration of the sales forces of acquired companies into
Harbinger's existing sales operations, the coordination of customer support
services, the conversion of acquired companies to a uniform infrastructure, the
integration of international operations of acquired companies with Harbinger's
international affiliates, and the diversion of management's attention from other
business concerns. In connection with its prior acquisitions, Harbinger has
experienced the following effects during the periods subsequent to such
acquisitions: integration costs and expenses associated with such acquisition
transactions; refinement of the acquired companies business operations to
conform to Harbinger's mission and strategy, and the discontinuance of the
non-core business operations of the acquired company; and elimination of certain
revenue
<PAGE> 2
opportunities as a result of product overlap, channel conflict, or other
competitive overlap. Management of Harbinger currently anticipates that all or
certain of the foregoing factors may impact future operating results of
Harbinger as a result of the consummation of the acquisitions of Mactec MMD,
EDIWorks and Premenos including, but not limited to, growth in revenue and
operating income in future periods. Several of the newly acquired products
address the same markets as, and may therefore be competitive with, or redundant
with, existing Harbinger products. There can be no assurance that Harbinger can
successfully assimilate its operations and integrate its software products with
these recently acquired operations, software products and technologies, that
Harbinger will be successful in repositioning its products on a timely basis to
achieve market acceptance or that the integration efforts associated with recent
acquisitions will not have a material adverse effect upon Harbinger's business
or results of operations in future periods. Any delay in such integration
efforts or adverse developments associated therewith could have a material
adverse effect on Harbinger.
Harbinger's growth has been significantly enhanced through acquisitions
of other businesses, products and licenses. There can be no assurance that in
the future Harbinger will be able to identify suitable acquisition candidates
available for sale at reasonable prices, consummate any acquisition or
successfully integrate any acquired business into Harbinger's operations.
Operational and software integration problems may arise if Harbinger undertakes
future acquisitions of complementary products, technologies or businesses.
Future acquisitions may also result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, the write-off of in-process
product development and capitalized product costs, integration costs, and the
amortization of expenses related to goodwill and other intangible assets, all of
which could have a material adverse effect on Harbinger. Acquisitions involve
numerous additional risks, including difficulties in the assimilation of the
operations, products and personnel of the acquired company, differing company
cultures, the diversion of management's attention from other business concerns,
risks of entering markets in which Harbinger has little or no direct prior
experience, and the potential loss of key employees of the acquired company.
Customer satisfaction or performance problems at a single acquired firm could
have a material adverse impact on the reputation of Harbinger as a whole.
Although Harbinger has cash resources of approximately $100 million, to the
extent Harbinger desires to finance a future acquisition, there can be no
assurance that Harbinger will be able to secure financing for such a transaction
on reasonable terms or at all. See "Ability to Manage Growth."
Factors Affecting Operating Results; Potential Fluctuations in
Quarterly Results. Although Harbinger has been able to grow its revenue and
operating income (before special charges) in the past, there can be no assurance
that Harbinger will be able to continue to grow its revenue and operating income
at historical levels in the future or that fluctuations in revenue or operating
income growth will not occur in future periods. Factors currently known to
management that could impact rate of growth in revenue or operating income in
future periods include, but are not limited to, the management time and effort
currently anticipated in connection with the integration of recently acquired
businesses and the implementation of enterprise resource planning systems, the
discontinuance of historical or acquired lines of business or products and a
slow down in the rate of growth of AS/400 EDI sales. In addition, Harbinger's
quarterly operating results have in the past and may in the future vary or
decrease significantly depending on factors such as revenue from software sales,
the timing of new product and service announcements, changes in pricing policies
by Harbinger and its competitors, market acceptance of new and enhanced versions
of Harbinger's products, the size and timing of significant orders, changes in
operating expenses, changes in Harbinger's strategy, personnel changes,
government regulation, the introduction of alternative technologies, the effect
of acquisitions and general economic factors. Harbinger has limited or no
control over many of these factors. The Company is currently upgrading its
enterprise resource planning systems. Management believes that the successful
installation and
<PAGE> 3
implementation of these systems are prerequisites to the Company's success. Any
delay in the installation or failure in the implementation of one or more of
these systems could have a material adverse effect on the Company. Harbinger has
experienced losses in the past, and at September 30, 1998, Harbinger had an
accumulated deficit of approximately $81.8 million. Harbinger operates with
virtually no software product order backlog because its software products
typically are shipped shortly after orders are received. As a result, revenues
in any quarter are substantially dependent on the quantity of purchases of
services requested and product orders received in that quarter. Quarterly
revenues also are difficult to forecast because the market for electronic
commerce and EDI software products is rapidly evolving and Harbinger's revenues
in any period may be significantly affected by the announcements and product
offerings of Harbinger's competitors as well as alternative technologies.
Harbinger's IVAS and electronic catalog products are more complex and expensive
compared to Harbinger's other electronic commerce and Internet products
introduced to date, and will generally involve significant investment decisions
by prospective customers. Accordingly, Harbinger expects that in selling its
IVAS and electronic catalog products it will encounter risks typical of
companies that rely on large dollar purchase decisions, including the reluctance
of purchasers to commit to major investments in new products and protracted
sales cycles, both of which add to the difficulty of predicting future revenues
and may result in quarterly fluctuations. Harbinger's expense levels are based,
in part, on its expectations as to future revenues. If revenue levels are below
expectations, Harbinger may be unable or unwilling to reduce expenses
proportionately and operating results are likely to be adversely affected. As a
result, Harbinger believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Due to all of the foregoing factors, it is
likely that in some future quarter or quarters Harbinger's operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Harbinger Common Stock will likely be adversely affected
in a material manner.
Harbinger recognizes revenues for software license fees upon shipment,
net of estimated returns. Customers using Harbinger's PC products are permitted
to return products after delivery for a specified period, generally 30 days.
Harbinger generally has experienced returns of approximately 10% to 20% of the
PC product license fees, and Harbinger records revenues after a deduction for
estimated returns. Any material increase in Harbinger's return experience could
have an adverse effect on its operating results. See "Integration of Recent
Acquisitions; Future Acquisitions."
Acquisition-Related and Other Charges; Loss in Quarters Ended March 31,
1998 and September 30, 1998 and Loss Expected in Year Ended December 31, 1998.
In the first and third quarters of 1998, Harbinger reported approximately $13.0
million in integration related charges and $14.0 million in integration and
restructuring related charges, respectively. As a result of these charges,
Harbinger reported a net loss for each of the first and third quarters of 1998
and expects to report a net loss for the year ended December 31, 1998. Certain
of the costs and expenses incurred in connection with these integration
activities and reflected in such charges included internal expense allocations
which may recur in other expense categories in the future and may result in an
increase in some expense categories in Harbinger's results of operations in
future periods.
Ability to Manage Growth. Harbinger has recently experienced
significant growth in revenue, operations and personnel as it has made strategic
acquisitions, added subscribers to the Harbinger VAN and IVAS and increased the
number of licensees of its software products. This growth could continue to
place a significant strain on Harbinger's management and operations, including
its sales, marketing, customer support, research and development, finance and
administrative operations. Achieving and maintaining profitability during a
period of expansion will depend, among other things, on Harbinger's ability to
successfully expand its products, services and markets and to manage its
operations and
<PAGE> 4
acquisitions effectively. Difficulties in managing growth, including
difficulties in obtaining and retaining talented management and product
development personnel, especially following an acquisition, could have a
material adverse effect on Harbinger.
Ability to Respond to Rapid Change. Harbinger's future success will
depend significantly on its ability to enhance its current products and develop
or acquire and market new products which keep pace with technological
developments and evolving industry standards as well as respond to changes in
customer needs. The market for electronic commerce and EDI products and
services, VAN services and Internet software products and services is
characterized by rapidly changing technology, evolving industry standards and
customer demands, and frequent new product introductions and enhancements. There
can be no assurance that Harbinger will be successful in developing or acquiring
product enhancements or new products to address changing technologies and
customer requirements adequately, that it will introduce such products on a
timely basis, or that any such products or enhancements will be successful in
the marketplace. Harbinger's delay or failure to develop or acquire
technological improvements or to adapt its products to technological change
would have a material adverse effect on Harbinger's business, results of
operations and financial condition. The failure of Harbinger's management team
to respond effectively to and manage rapidly changing technological and business
conditions as well as the growth of its own business, should it occur, could
have a material adverse impact on Harbinger's business, results of operations
and prospects.
Intense Competition. The electronic commerce, EDI and network services
and products businesses are intensely competitive, and Harbinger has many
competitors with substantially greater financial, marketing, personnel and
technological resources than Harbinger. Other companies offer products and
services that may be considered by customers to be acceptable alternatives to
Harbinger's products and services. Certain companies also operate private
computer networks for transacting business with their trading partners, and
Harbinger expects other companies to offer products and services competitive
with the Templar, Express and IVAS products and services. It is expected that
other companies may develop and implement similar computer-to-computer networks,
some of which may be "public" networks such as Harbinger's and others may be
"private," providing services only to a specific group of trading partners,
thereby reducing Harbinger's ability to increase sales of its network services.
In addition, several companies offer PC-based, midrange NT and UNIX, and
mainframe and Internet computer software products which compete with Harbinger's
software products. Advanced operating systems and applications software from
Microsoft and other vendors also may offer electronic commerce functions that
limit Harbinger's ability to sell its software products. Harbinger believes that
the continuing acceptance of electronic commerce and EDI will attract new
competitors, including software applications, operating systems and systems
integration companies that may bundle electronic commerce solutions with their
offerings, and alternative technologies that may be more sophisticated and cost
effective than Harbinger's products and services. Competitive companies may
offer certain electronic commerce products or services, such as communications
software, network transactional services or consulting, at no charge or a deeply
discounted charge, in order to obtain the sale of other products or services.
Since Harbinger's agreements with its network subscribers generally are
terminable upon 30 days' notice, Harbinger does not have the contractual right
to prevent its customers from changing to a competing network. See "Dependence
on New Products; Industry Standards." Competitors that offer products and/or
services that compete with various of Harbinger's products and services include,
among others, IBM, Inc., AT&T, Computer Associates International, Inc., EDS,
General Electric Information Systems, QRS, Inc., Sterling Commerce, Inc., Aspect
Development, Inc., TSI International, Inc., Ariba Technologies, Inc. and a joint
venture between British Telecommunications Plc and MCI Communications
Corporation; as well as the internal programming staffs of various businesses
engaging in electronic commerce.
<PAGE> 5
Emergence of Electronic Commerce Over the Internet. The Internet
provides an alternative means of providing electronic commerce to business
trading partners. The market for Internet software and services is both emerging
and highly competitive, ranging from small companies with limited resources to
large companies with substantially greater financial, technical and marketing
resources than Harbinger. In addition to Harbinger's Internet related products
and services, several existing competitors of Harbinger have introduced their
own Internet electronic commerce products and services. Moreover, new
competitors, which may include telephone companies and media companies, are
likely to increase the provision of business-to-business data transmission
services using the Internet. There is no assurance that the Internet will become
an accepted method of electronic commerce. There is no assurance that
TrustedLink Guardian and Templar end user software and IVAS products, which
enable electronic commerce over the Internet, will be accepted in the Internet
market or can be competitive with other products based on evolving technologies.
If the Internet becomes an accepted method of electronic commerce, Harbinger
could lose network customers from its VAN which would reduce recurring revenue
from network services and have a material adverse effect on Harbinger. Even if
customers choose Harbinger's Internet solutions, the revenue gained from the
sale of these solutions may not offset the loss of revenue from the sale of
Harbinger's traditional EDI solutions.
The use of Harbinger's Internet electronic commerce products and
services will depend in large part upon the continued development of the
infrastructure for providing Internet access and services. Use of the Internet
for business-to-business electronic commerce services raises numerous issues
that greatly impact the development of this market. These issues include
reliability, data security and data integrity, timely transmission, and pricing
of products and services. Because global commerce and online exchange of
information on the Internet is new and evolving, it is difficult to predict with
any assurance whether the Internet will prove to be a viable commercial
marketplace. The Internet has experienced, and is expected to continue to
experience, substantial growth in the number of users and the amount of traffic.
There can be no assurance that the Internet will continue to be able to support
the demands placed on it by this continued growth. In addition, the Internet
could lose its viability due to delays in the adoption of new standards and
protocols to handle increased levels of Internet activity, or due to increased
governmental regulation or the imposition of fees or taxes for its use. There
can be no assurance that the infrastructure or complementary services necessary
to make the Internet a viable commercial marketplace will be developed, or, if
developed, that the Internet will become a viable commercial marketplace for
products and services such as those offered by Harbinger. If the necessary
infrastructure or complementary services or facilities are not developed, or if
the Internet does not become a viable commercial marketplace, Harbinger's
business, operating results or financial condition will be materially adversely
affected.
Dependence on New Products; Industry Standards. The electronic commerce
industry is characterized by rapid technological change, frequent new product
and service introductions and evolving industry standards. Harbinger's future
success will depend in significant part on its ability to anticipate industry
standards, to continue to apply advances in electronic commerce product and
service technologies, to enhance existing products and services, and to
introduce and acquire new products and services on a timely basis to keep pace
with technological developments. There can be no assurance that Harbinger will
be successful in developing, acquiring or marketing new or enhanced products or
services that respond to technological change or evolving industry standards,
that Harbinger will not experience difficulties that could delay or prevent the
successful development, acquisition or marketing of such products or services or
that its new or enhanced products and services will adequately meet the
requirements of the marketplace and achieve market acceptance. In the past,
Harbinger has experienced delays in the commencement of commercial shipments of
new products and enhancements, resulting in
<PAGE> 6
delays or losses of product revenues. Such delays or failure in the
introduction of new or enhanced products or services, or the failure of such
products or services to achieve market acceptance, could have a material adverse
effect on the business, results of operations and financial condition of
Harbinger.
Investment in International Subsidiaries; International Growth and
Operations. Harbinger believes that its continued growth and profitability will
require expansion of its international operations through its international
subsidiaries, in the United Kingdom, The Netherlands, Germany, Italy, France and
Mexico (collectively, the "International Subsidiaries"). This expansion will
require financial resources and significant management attention, particularly
by certain members of the management of Harbinger. Harbinger's ability to
successfully expand its business internationally will also depend upon its
ability to attract and retain both talented and qualified managerial, technical
and sales personnel and electronic commerce services customers outside the
United States and its ability to continue to effectively manage its domestic
operations while focusing on international expansion. Certain of the
International Subsidiaries have experienced operating losses in their recent
histories and some have experienced significant operating losses in their recent
histories. To the extent that the International Subsidiaries are unable to
penetrate international markets in a timely and profitable manner, Harbinger's
growth, if any, in international sales will be limited, and Harbinger could be
materially adversely affected.
During 1998, Harbinger's growth in revenue has been adversely affected
by management issues associated with its European operations, and general
softness in demand in the European markets. Moreover, Harbinger's ability to
successfully implement its international strategy may require installation and
operation of a value-added network and implementation of its IVAS software in
additional countries, as well as additional improvements to its infrastructure
and management information systems, including its international customer support
systems. In addition, there can be no assurance that Harbinger will be able to
maintain or increase international market demand for Harbinger's products or
services.
International operations are subject to certain inherent risks,
including unexpected changes in regulatory requirements and tariffs, longer
payment cycles, increased difficulties in collecting accounts receivable and
potentially adverse tax consequences. To the extent international sales are
denominated in foreign currencies, gains and losses on the conversion to U.S.
dollars of revenues, operating expenses, accounts receivable and accounts
payable arising from international operations may contribute to fluctuations in
Harbinger's results of operations. Harbinger has not entered into any hedging or
other arrangements for the purpose of guarding against the risk of currency
fluctuation. In addition, sales in Europe and certain other parts of the world
typically are adversely affected in the third calendar quarter of each year
because many customers reduce their business activities in the summer months.
Dependence on Key Management and Personnel; Ability to Attract and
Retain Qualified Personnel. Harbinger's success is largely dependent upon its
executive officers and key sales and technical personnel, the loss of one or
more of whom could have a material adverse effect on Harbinger. The future
success of Harbinger will depend in large part upon its ability to attract and
retain talented and qualified personnel. In particular, Harbinger believes that
it will be important for Harbinger to hire experienced product development and
sales personnel. Competition in the recruitment of highly-qualified personnel in
the computer software and electronic commerce industries is intense. The
inability of Harbinger to locate and retain such personnel may have a material
adverse effect on Harbinger. No assurance can be given that Harbinger can retain
its key employees or that it can attract qualified personnel in the future.
Harbinger currently carries key-person life insurance policies on the lives of
Messrs. Howle, Leach, Davis and Travers.
<PAGE> 7
Year 2000 Readiness; Euro Conversion. It is possible that the Company's
currently installed computer systems, software products or other business
systems, or those of the Company's customers, vendors or resellers, working
either alone or in conjunction with other software or systems, will not accept
input of, store, manipulate and output dates for the years 1999, 2000 or
thereafter without error or interruptions. The latest versions of the Company's
products released or to be released are believed to be Year 2000 ready, but the
Company is still in the process of confirming this. The Company is also in the
process of determining the extent to which its earlier software products as
implemented in the Company's installed customer base are Year 2000 ready, as
well as the impact of any non-readiness on the Company and its customers. The
Company currently anticipates that any problems resulting from non-ready
products will be addressed through a combination of product modifications as
part of planned product enhancements and migration of customers to functionally
similar products which are Year 2000 ready. Additional efforts are being made to
modify or replace other non-ready software, systems and equipment used by the
Company internally, including third party software, before the end of 1999.
Further, the Company is aware of the risk that third parties, including vendors
and customers of the Company, will not adequately address the Year 2000 problem
and the resultant potential adverse impact on the Company. However, there can be
no assurance that the Company will identify all such year 2000 problems in its
computer systems or those of its vendors in advance of their occurrence or that
the Company will be able to successfully remedy any problems that are
discovered. The Company believes that the majority of the compliance effort will
be absorbed with the product and internal systems enhancements planned for 1998
or 1999, and thus that the Year 2000 problem will not have a material adverse
impact on the Company's business, operating results and financial condition,
although there can be no assurance to that effect. Regardless of whether the
Company's products are Year 2000 ready, there can be no assurance that customers
will not assert Year 2000 related claims against the Company. The Company
believes that the purchasing patterns of customers and potential customers will
be affected by Year 2000 issues in a variety of ways. Many companies are
expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase software products such as those offered by the Company.
Potential customers may also choose to defer purchasing Year 2000 ready products
until they believe it is absolutely necessary, thus resulting in potentially
stalled market sales within the industry. Conversely, Year 2000 issues may cause
other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for software
products. Additionally, Year 2000 issues could cause a significant number of
companies, including current Company customers, to reevaluate their current
software needs, and as a result switch to other systems or suppliers. In
addition, failure of the Company to identify and remedy Year 2000 problems could
put the Company at a competitive disadvantage relative to companies that have
corrected such problems. Any of the foregoing, or combination thereof, could
result in a material adverse effect on the Company's business, operating results
and financial condition.
Effective January 1, 1998, eleven of the 15 member countries of the
European Union are scheduled to adopt a single European currency, the euro, as
their common legal currency. Like many companies that operate in Europe, various
aspects of the Company's business will be affected by the conversion to the
euro. The Company is currently evaluating its products and systems. The failure
to adequately address the euro conversion issues could affect the Company's
ability to offer software and services in the affected countries, as well as its
ability to operate internal systems. While the Company believes that it can
successfully remediate all related issues, there can be no assurance that it
will do so in a timely manner. The failure to do so could have a material
adverse effect on the Company.
<PAGE> 8
Dependence on Alliance Partners. Harbinger has various agreements with
alliance partners for the distribution and marketing of certain software
products of Harbinger. These alliance partners pay Harbinger royalties
representing a percentage of fees generated from the sale of software licensed
from Harbinger. For the years ended December 31, 1995 and 1996, revenues from
one of these alliance partners were approximately $1.4 million and $5.7 million,
respectively, which equaled the contractual minimum royalty during those years.
There is no minimum royalty obligation after 1996, and Harbinger has experienced
and believes that revenues from this alliance partner will decline in the
future. Further, based on amendments to the arrangement, Harbinger has
experienced and believes that the average collection period related to cash
flows derived from royalty revenues earned from this alliance partner will
lengthen substantially. In addition, in 1997 Premenos was dependent on a
distribution partner for approximately 6% of revenues, arising principally from
this partner's distribution efforts in Europe and other overseas locations.
There can be no assurance that this partner will continue to distribute Premenos
or Harbinger products in 1998, or that such distribution efforts, if continued,
will achieve the same degree of results.
Risks of Product Development. Software products as complex as those
offered by Harbinger may contain undetected errors or failures when first
introduced or when new versions are released. If software errors are discovered
after introduction, Harbinger could experience delays or lost revenues during
the period required to correct these errors. There can be no assurance that,
despite testing by Harbinger and by current and potential customers, errors will
not be found in new products or releases after commencement of commercial
shipments, resulting in loss of or delay in market acceptance, additional and
unexpected expenses to fund further product development or to add programming
personnel to complete a development project, and loss of revenue because of the
inability to sell the new product on a timely basis, any one or more of which
could have a material adverse effect on Harbinger.
Dependence on Data Centers. The network service operations of Harbinger
are dependent upon the ability to protect computer equipment and the information
stored in Harbinger's data centers against damage that may be caused by fire,
power loss, telecommunication or Internet failures, unauthorized intrusion,
computer viruses and disabling devices and other similar events. Notwithstanding
precautions Harbinger has taken, there can be no assurance that a fire or other
natural disaster, including national, regional or local telecommunications
outages, would not result in a prolonged outage of Harbinger's network services.
In the event of a disaster, and depending on the nature of the disaster, it may
take from several hours to several days before Harbinger's off-site computer
system can become operational for all of Harbinger's customers, and use of the
alternative off-site computer would result in substantial additional cost to
Harbinger. In the event that an outage of Harbinger's network extends for more
than several hours, Harbinger will experience a reduction in revenues by reason
of such outage. In the event that such outage extends for one or more days,
Harbinger could potentially lose many of its customers, which may have a
material adverse effect on Harbinger.
Dependence upon Certain Licenses. Harbinger relies on certain
technology that it licenses from third parties and other products that are
integrated with internally developed software and used in Harbinger's products
to perform key functions or to add important features. There can be no assurance
that Harbinger will be successful in negotiating third-party technology licenses
on suitable terms or that such licenses will not be terminated in the future.
Moreover, any delay or product problems experienced by such third party
suppliers could result in delays in introduction of Harbinger's products and
services until equivalent technology, if available, is identified, licensed and
integrated, which could have a material adverse effect on Harbinger's business,
operating results and financial condition.
<PAGE> 9
Limited Protection of Proprietary Technology; Risks of Infringement.
Harbinger relies primarily on a combination of copyright, patent and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. Harbinger seeks to protect its software,
documentation and other written materials principally under trade secret and
copyright laws, which afford only limited protection. Harbinger presently has
one patent for an electronic document interchange test facility and a patent
application pending for an EDI communication system. Despite Harbinger's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of Harbinger's products or to obtain and use information that Harbinger
regards as proprietary. There can be no assurance that Harbinger's means of
protecting its proprietary rights will be adequate or that Harbinger's
competitors will not independently develop similar technology. In distributing
many of its products, Harbinger relies primarily on "shrink wrap" licenses and
increasingly on "click wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, Harbinger has licensed it products to users and distributors in other
countries, and the laws of some foreign countries do not protect Harbinger's
proprietary rights to as great an extent as the laws of the United States.
Harbinger does not believe that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim infringement by Harbinger with respect to current or future
products, and Harbinger has agreed to indemnify many of its customers for the
full cost of such claims. Harbinger expects that software product developers
will increasingly be subject to infringement claims as the number of products
and competitors in electronic commerce grows and the functionality of products
in different industry segments overlaps. Any such claims, with or without merit
could be time-consuming, result in costly litigation, cause product shipment
delays or require Harbinger to enter into royalty or licensing agreements and
indemnify its customers against resulting liability, if any. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
Harbinger or at all, which could have a material adverse effect on Harbinger.
Government Regulatory and Industrial Policy Risks. Harbinger's network
services are transmitted to its customers over dedicated and public telephone
lines. These lines are governed by Federal and state regulations establishing
the rates, terms and conditions for their use. Changes in the legislative and
regulatory environment relating to on-line services, EDI or the Internet access
industry, including regulatory or legislative changes which directly or
indirectly affect telecommunication costs, restrict content or increase the
likelihood of competition from regional telephone companies or others, could
have a material adverse effect on Harbinger's business. The Telecommunications
Act of 1996 ("Act") amended the federal telecommunications laws by lifting
restrictions on regional telephone companies and others competing with Harbinger
and imposed certain restrictions regarding obscene and indecent content
communicated to minors over the Internet or through interactive computer
services. The Act set in motion certain events that will lead to the elimination
of restrictions on regional telephone companies providing transport between
defined geographic boundaries associated with the provision of their own
information services. This will enable regional telephone companies to more
readily compete with Harbinger by packaging information service offerings with
other services and providing them on a wider geographic scale. While provisions
of the Act prohibiting the use of a telecommunications device or interactive
computer service to send or display indecent material to minors have been held
by the U.S. Supreme Court to be unconstitutional, there can be no assurance that
future legislative or regulatory efforts to limit use of the Internet in a
manner harmful to Harbinger will not be successful. The Clinton administration
has announced an initiative to establish a framework for global electronic
commerce. Also, some countries such as Germany have adopted laws regulating
aspects of the Internet, and there are a number of bills currently being
considered in the United States at the federal and state levels involving
encryption and digital signatures, all of which may impact Harbinger. Harbinger
cannot predict the impact, if any, that the Act and future court opinions,
legislation, regulations or regulatory changes in the
<PAGE> 10
United States or other countries may have on its business. Management believes
that Harbinger is in compliance with all material applicable regulations.
Harbinger's TrustedLink Guardian product and the Templar product both
incorporate encryption technology which is subject to U.S. export control
regulations. Although both products are currently exportable under licenses
granted by the Commerce Department, government regulation in this area is
subject to frequent change and there can be no assurance that these products
will remain exportable.
Anti-Takeover Provisions. The Harbinger Board of Directors has
authority to issue up to 20,000,000 shares of preferred stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
the preferred stock without further vote or action by Harbinger shareholders.
The rights of the holders of Harbinger Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. While Harbinger has no present intention to issue
additional shares of preferred stock, such issuance, while providing desired
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of Harbinger. In addition,
the Harbinger Charter and the Harbinger Bylaws contain provisions that may
discourage proposals or bids to acquire Harbinger. This could limit the price
that certain investors might be willing to pay in the future for shares of
Harbinger Common Stock. The Harbinger Charter provides for a classified board of
directors with three-year, staggered terms for its members. The classification
of the Harbinger Board could have the effect of making it more difficult for a
third party to acquire control of Harbinger.
