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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] 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 Specified in Its Charter)
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GEORGIA 58-1817306
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1277 LENOX PARK BOULEVARD 30319
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Office)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 467-3000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Title of Each Class Name of Exchange on Which Registered
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Common Stock, par value $.0001 per share The Nasdaq National Market
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the average of the closing bid and ask quotations
for the Common Stock on March 17, 1999 as reported by The Nasdaq Stock Market,
was approximately $217,023,517. The shares of Common Stock held by each officer
and director and by each person known to the Registrant who owns 5% or more of
the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of March 17, 1999,
Registrant had outstanding approximately 40,371,410 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1998 are incorporated by reference in Parts II
and IV of this Form 10-K to the extent stated herein. The Registrant's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
April 30, 1999 is incorporated by reference in Part III of this Form 10-K to the
extent stated herein.
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EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, CERTAIN MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF HARBINGER CORPORATION AND MEMBERS OF ITS MANAGEMENT AS
WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH 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. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS INCLUDE "OUR OPERATING RESULTS COULD FLUCTUATE, CAUSING OUR STOCK
PRICE TO FALL", "IF WE CANNOT INTEGRATE ACQUIRED COMPANIES IN OUR BUSINESS, OUR
PROFITABILITY MAY BE ADVERSELY EFFECTED", AND "WE MAY NOT BE ABLE TO COMPETE
SUCCESSFULLY AGAINST OTHER COMPANIES." THESE AND ADDITIONAL IMPORTANT FACTORS TO
BE CONSIDERED ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS REPORT, THE TERMS OF
WHICH ARE INCORPORATED BY REFERENCE HEREIN. 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.
PART I
ITEM 1. BUSINESS
Harbinger Corporation ("Harbinger" or the "Company") is a leading
worldwide provider of business-to-business electronic commerce ("E-Commerce")
products and services and offers comprehensive, customizable standards-based
electronic commerce solutions. The Company develops, markets and supports
software products and provides communication and consulting services that help
businesses automate the cycle of transactions for the exchange of goods and
services. The Company's core competency is building and managing trading
communities for its customers who electronically communicate with each other.
The Company believes that development of trading communities requires the
assistance of an intermediary. Intermediaries help businesses identify their
trading partners, determine a common means for exchanging electronic
transactions, and over time maintain that relationship and the changes in
electronic transaction formats.
The Company develops and supports standards-based E-Commerce software
products that enable trading communities to engage in E-Commerce with one
another. This software is designed and compatible for use with the most commonly
used computer platforms and operating systems, and provides secure and reliable
transmission of E-Commerce data between businesses. Harbinger provides
E-Commerce professional services for the implementation of its software,
including the integration of the software (and resulting E-Commerce data) with
the customer's business systems. Professional services also include E-Commerce
outsourcing services for customers that require E-Commerce operations to be
performed by a third party either on-site or remotely, on the Company's or their
network and business systems. Harbinger additionally offers E-Commerce network
communications with a complement of value-added information services to support
the transmission of E-Commerce data between businesses. Network communications
can be made using Internet Protocol ("IP"), the underpinning the Internet,
Intranets, Extranets, Web sites and e-mail, or over standard telephone lines and
non-IP protocols, such as X.400, X.25 and Bisync. The Company's E-Commerce
products and services are deployed in many combinations to suit the
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individual needs of its customers, resulting in a comprehensive E-Commerce
solution for each customer, thus maximizing the number and value of their
E-Commerce trading relationships with other businesses. As of March 31, 1999,
the Company's customers included leading U.S. and multi-national corporations
and government agencies, including the following:
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3M Companies Eli Lilly Sears
Abbott Labs Environmental Protection Agency Shell
Allied Signal Exxon Southern Company
Ameritech Federal Express Southwestern Bell
Amoco Ford Sports Authority
AT&T General Motors Sprint
Baxter Healthcare Georgia Power Swisscom
Bell Atlantic Hewlett-Packard Telstra
Bell Canada Honda Tennessee Valley Authority
Bellcore IBM Texaco
BellSouth Internal Revenue Service Texas Instruments
Caterpillar John Deere The Limited
Chevron Johnson & Johnson Timberland
Chrysler Johnson Controls Toys R Us
Compaq Computer Kmart TRW
Dell Computer Lucent Technologies United Parcel Service
Detroit Edison MCI United Technologies
Digital Equipment Corp. Mobil Upjohn
Duke Power Northern Telecom US Dept, of Transportation
DuPont Northrop Grumman US Dept. of Defense
Dutch PTT Post Pacific Gas & Electric US Postal Service
Eastman Chemical Reebok International Wal-Mart
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In February 1999, the Company announced three strategic initiatives in
connection with an acceleration of its goal to have more customers conducting
IP-based business-to-business E-Commerce than any other company in the industry.
The first initiative is harbinger.net, which the Company believes is the world's
first IP-based transaction portal for application-to-application E-Commerce, and
includes transaction, customer care and E-Commerce content services open to all
industry professionals. The second initiative, Harbinger Labs, creates a
strategic products and services incubator for the Company and is focused on
maintaining a leadership position in the next generation of mission-critical,
business-to-business E-Commerce technologies. Finally, the Company is actively
working with its customer community to migrate them from legacy systems to IP
connectivity and the harbinger.net portal.
E-COMMERCE
Business-to-business E-Commerce involves the automation of business
processes and transactions through the use of computers and telecommunications
to exchange and electronically process commercial information and transactions
between businesses. In the 1980s, the predominant technology for
business-to-business E-Commerce was electronic data interchange ("EDI"), which
facilitated the computer-to-computer exchange of standards-based business
documents between trading partners. The documents, typically purchase orders,
confirmations, shipping notices and invoices, were communicated between
businesses over private service networks, known as value-added networks
("VANs"), which provided security, auditability and delivery for transactions.
In the 1990s, IP has become more prominent in the business-to-business
E-Commerce market and has greatly expanded the opportunity for software
functionality, types of electronic transactions and the data communications of
such transactions between businesses. As a result, EDI is now a subset of the
more pervasive E-Commerce market, an industry that has grown to include
electronic catalogs, web storefronts, information portals, and the like.
The advantages of E-Commerce typically include one-time data entry,
reduced clerical workload and the elimination of paper records, rapid, accurate
and secure exchange of business data, and reduced operating and inventory
carrying costs. EDI, for example, facilitates uniform communications with
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different trading partners in different industries, including customers,
suppliers, common carriers, banks or other financial institutions. EDI is a
cornerstone of E-Commerce and has historically been the source of the majority
of the Company's revenue. The Company expects IP-based revenue to increase as a
percentage of its total revenue. Nevertheless, many business-to-business
E-Commerce transactions, including those generated by new IP-based applications,
follow a common transaction flow originally established using EDI.
Transaction Flow. In a typical E-Commerce transaction, a trading
partner (the "sending partner") first creates with its computer, either manually
or electronically, the business data used for the completion of a particular set
of transactions (EDI standards would refer to these as a transaction set).
Transaction sets include requests for quotes, purchase orders, invoices,
shipping notices, and other related documents and messages. Second, a
translation software program on the sending partner's computer converts the
document or transaction set into an acceptable data format. The most frequently
used data formats remain those associated with EDI, ANSI X12 in the United
States and UN/EDIFACT in the rest of the world. Third, this information is
electronically transmitted through telecommunications links from the sending
partner's computer to the central server of the trusted third party that serves
as the intermediary for many trading partners. Telecommunications could be
point-to-point between trading partners, but the predominant model remains
through intermediaries for reasons of security, auditing and ease of delivery.
Intermediaries receive documents for subsequent delivery to the intended trading
partner (the "receiving partner").
Trading Communities. Groups of companies that regularly trade with each
other generate significant repetitive business transactions. These existing
trading communities are prospects for implementation of E-Commerce. The early
market expansion of EDI has been possible through the establishment of
repetitive transactions using ANSI X12 and UN/EDIFACT formats. Additionally,
there are now subsets of these standards used in specific industries such as
automotive, banking, chemical, financial, grocery, healthcare, petroleum, retail
and utilities. The adoption of these standard formats as an accepted means of
transmitting business documents and data has occurred, in part, because many
trade organizations or groups and many large companies within a trading
community increasingly recommend or require their member organizations or
trading partners to adopt such formats as the primary method of communicating
business documents. Current E-Commerce transactions include these standard and
subset formats. The market is also seeing new, standard formats such as
extensible markup language ("XML") and open buying over the internet ("OBI"),
which like EDI in the 1980s must first achieve market acceptance.
Hubs and Spokes. Large companies within a trading community often are
described as "hubs" and their trading partners as "spokes." A hub company and
its trading partners communicate through electronic networks. These can be
Internet or Extranet, third party networks and, for a few larger businesses,
private networks owned and operated by the hub company. Hub companies often
initially justify E-Commerce programs with direct cost savings from reduced
administrative handling costs and elimination of data entry errors in the
documents that they send and receive from trading partners. Advanced E-Commerce
implementations by a hub company may be more strategic in nature, being utilized
as enabling technologies for business processes such as supply chain management
and just-in-time manufacturing, and efficient consumer response and vendor
managed inventory in retailing. For these reasons, a hub company often adopts as
a stated business objective that all of its trading partners use E-Commerce as
the principal means of communicating business documents. Spoke companies, in
turn, often expand the trading community by also requesting or requiring their
other trading partners to communicate through E-Commerce. This expansion results
in the establishment of distinct trading communities comprising potential
software customers and network subscribers for E-Commerce services.
According to Forrester Research, business-to-business Internet
E-Commerce transactions will grow more than 30-fold over the next five years,
reaching $1.3 trillion by 2003 in the United States. Furthermore, management
estimates that of the 3 million U.S. companies with five or more employees,
approximately 150,000-170,000 have elected to date to make use of E-Commerce.
Although many of these businesses are members of existing trading communities,
the Company believes that the majority of the members of these trading
communities use E-Commerce solutions to communicate with only a small
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percentage of their trading partners. Acceptance of E-Commerce and expansion
within trading communities will depend on various factors, such as the extent of
automation in the industry, the degree to which hub companies require electronic
trading from their trading partners, the level of computer sophistication of
businesses in the trading community, the frequency of transactions among trading
partners in the community and the economic benefits derived from the trading
community by implementing electronic trading, which historically have accrued
principally to the larger members of the community. To date, E-Commerce, and in
particular EDI, has achieved only limited penetration in small companies because
current E-Commerce solutions have not provided significant added value to
justify the associated cost.
THE INTERNET AND INTERNET PROTOCOL
The Internet is a collection of interconnected public and private
networks that allows any computer on the network to communicate with any other
computer on the network through IP. IP is the common denominator for the
Internet as well as for corporate Intranets, Extranets, Web sites and e-mail.
Although the Internet affords a lower cost, more robust and widely available
medium for E-Commerce telecommunications, there are significant actual and
perceived concerns relating to the use of the Internet for commercial
transactions. These concerns include the absence of security, inability to
confirm message integrity, vulnerability of messages to interception and
fabrication, lack of user support, service or centralized "help desk" support,
and difficulties in obtaining reliable assurance of receipt of messages sent or
the authenticity of messages received. These difficulties inherent in the
Internet are magnified if the Internet is used to execute commercial,
mission-critical transactions.
To solve the current problems with using the Internet and other IP
networks for conducting business-to-business electronic transactions and
communications, the Company offers a series of products and services. Harbinger
Express is an E-Commerce Extranet product using a Web browser and industry
standard security, secure sockets layer ("SSL"), for the secure transmission of
transactions. Harbinger Templar is an E-Commerce e-mail product using patented
and industry standard encryption technologies for the transmission of
transactions. The Company also offers harbinger.net, an E-Commerce Portal,
providing IP and non-IP telecommunications and value-added information services
between trading partners, as well as an E-Commerce information service
accessible to all businesses.
THE HARBINGER SOLUTION
The Harbinger solution to address E-Commerce is based on the following
six components that are designed to build and maintain trading partner
relationships and generate recurring revenue. The Company believes these
components differentiate it from competitors in the market.
- - Network. The Company offers harbinger.net, an E-Commerce portal,
providing IP and non-IP telecommunications and value-added
information services between trading partners, as well as an
E-Commerce information service accessible to all businesses. The
portal hosts E-Commerce services and traffic for customers and
others who visit the site. Trading services include on-line
customer care, subscription-based vertical market trading
communities, electronic storefronts, an EC resource center, a
commerce directory, and various interconnections to numerous
private networks and VANs.
- - Software. The Company offers a fully-scalable range of E-Commerce
software solutions for trading communities, including IP and
non-IP communications software, EDI translation and mapping
software, content and data management software, and Web site
creation and management software.
- - Professional Services. The Company offers a full complement of
E-Commerce professional services for the implementation and
integration of its software. Professional services also include
complete outsourcing programs for the on-site or remote management
of a customer's E-Commerce operations and systems. The Company
also provides Internet applications development for hubs seeking a
customized E-Commerce solution.
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- - Mass Deployment Services. The Company provides mass deployment
services to trading community leaders to permit them to plan,
manage and deploy E-Commerce solutions to their trading partners
through the use of trading partner conferences and direct
marketing services.
- - Trading Relationship Management Services. The Company provides a
range of trading relationship management services, including
installation assistance, trading partner certification and rules,
and services such as customization, training and consulting to
facilitate the customer experience.
- - Vertical Market Expertise. The Company has developed vertical
market expertise in selected industries such as aerospace,
automotive, electronics, financial services, food and beverage,
government, healthcare, heavy manufacturing, petroleum/chemicals,
retail and utilities.
STRATEGY
The Company's objective is to be a leading worldwide provider of
IP-based, business-to-business E-Commerce solutions to businesses of all sizes.
To accomplish this objective, the Company offers a full spectrum of products and
services, which enable customers to transact business over IP networks. The
Company's focus is on building and managing the trading partner communities and
relationships for its customers on a worldwide basis. The Company strives to
generate recurring revenue by extending the solution it offers to its current
customers while adding new customers, thus increasing market awareness and
acceptance for the Company and revenue-related traffic to harbinger.net.
Provide a Comprehensive Range of Integrated Products and Services. The
products and services offered by the Company include IP-enabled, E-Commerce
software for use on the full range of commonly used computers and operating
systems, along with industry-standard applications (e.g., Web browsers) where
required. Harbinger designs its products and services to include significant
ease-of-use features while providing a high degree of maintainability and
supportability across the customer and product lifecycles. The software supports
standard formats and transactions for E-Commerce, including EDI, and is designed
to be adaptable to newly emerging formats such as XML and OBI. While certain
software is designed for installation by the customer, more sophisticated
E-Commerce applications often require implementation assistance provided by
Harbinger's professional services group. Such instances typically include
specific customer requirements for data mapping and translation, as well as
integration of the resulting data with the customer's business systems,
including popular enterprise resource planning ("ERP") systems. Finally, the
software is compatible with the Company's E-Commerce portal, harbinger.net, and
seeks to drive recurring revenue through E-Commerce transaction volume.
Focus on Building and Managing Trading Communities. Harbinger seeks to
establish new and larger trading communities by (i) developing marketing and
technical competence within specific industries by understanding the needs of
major trade organizations or hub companies in the industry, and the trading
customs and practices of their trading partners, (ii) working closely with
trading partners to define software and information processing requirements,
(iii) developing trading community solutions that meet the needs of trading
partners in these markets, and (iv) providing a wide array of value-added,
high-quality services to facilitate the adoption and implementation of
E-Commerce solutions across these industries.
Penetrate International Markets. The Company intends to aggressively
pursue international E-Commerce opportunities in Europe, the Middle East and
Africa. The Company has a direct presence in the United Kingdom, Germany,
France, Italy and The Netherlands. Indirect channels through distributors in
countries where Harbinger does not have a direct presence complement the
Company's direct sales, marketing and support for this region. The Company
maintains a direct presence in Mexico, and through a network of resellers, the
Company sells into other worldwide markets, pursuing indirect channels of
distribution and support for its products and services in the region.
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Achieve and Maintain Operational Excellence. Harbinger's
value-proposition is based on a business model of operational excellence. This
business model enables the Company to pursue sustainable competitive advantage
in its ability to deliver products and services to its customers at the lowest
possible cost, with the highest degree of quality and efficiency, backed by
expert customer care.
Pursue Strategic Acquisitions and Alliances. The Company intends to
enter new vertical markets, penetrate additional geographic markets and expand
its E-Commerce product and service offerings. The Company will continue to seek
to acquire complementary technologies and businesses opportunistically, when
appropriate and supportable. The Company has in the past completed acquisitions
to address other E-Commerce opportunities on the Internet, enter new vertical
markets, acquire complementary technologies and further penetrate international
markets. The Company also actively seeks strategic alliances with leading
professional services companies, software application developers and computer
system suppliers to resell, distribute and co-market the Company's E-Commerce
software products and services.
PRODUCTS AND SERVICES
The Company offers a comprehensive range of E-Commerce products and
services for entire trading communities. The Company's offerings are divided
into three categories: E-Commerce software, telecommunications and services. The
following chart summarizes these categories and provides the functions and
computer operating systems (where applicable) for the offerings.
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NAME DESCRIPTION
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E-COMMERCE NETWORK SERVICES
harbinger.net E-Commerce Portal for IP and non-IP transactions, IP connectivity and hosting,
and access to E-Commerce industry content and information
Harbinger INP Software and Web hosting service permitting rapid development of an
E-Commerce Web site with capabilities for promoting and selling products and
services via the Internet
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COMPUTER
OPERATING
NAME FUNCTION SYSTEMS
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E-COMMERCE SOFTWARE
Harbinger Knowbility Software and services to manage electronic Windows NT
catalog content and enterprise data
Harbinger Express Software allowing users to send and receive Windows 95, Windows
Windows 95, Windows 98, E-Commerce 98, Windows NT
transactions using only a Web browser
Windows NT or an optional thick client
desktop application
Harbinger Templar Data encryption and communications software Windows 95, Windows 98,
for transmitting E-Commerce documents over Windows NT, UNIX
the IP networks
Harbinger IVAS Advanced IP gateway technology for managing Windows NT, UNIX
and operating an IP service network
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COMPUTER
OPERATING
NAME FUNCTION SYSTEMS
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Harbinger TrustedLink E-Commerce and EDI translation, mapping, Windows 95, Windows 98,
communications and document management Windows NT, UNIX, AS/400,
MVS
Harbinger Prime Factors Encryption for multiple platforms and
applications, including ANSI X12.58 and
X12.42 standards, generalized file security,
ANSI X9.9 and ATM sharing credit and debit
networks
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NAME DESCRIPTION
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E-COMMERCE SERVICES
Trading Partner Complete marketing programs to build and manage trading partner communities
Implementation Program including information seminars, support materials, telemarketing, creation and
distribution of standard formats.
Trading Partner Certification Installation, testing and confirmation of E-Commerce software and communications
with trading partners.
Professional Services Application integration, project management, installation services,
onsite education and training for Harbinger E-Commerce software products.
Outsourcing Onsite or remote operation, administration and support of customer E-Commerce
systems and resources.
Customer Support Telephone hotline, support documentation, network transmission support,
electronic software updates.
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E-COMMERCE NETWORK SERVICES
harbinger.net. harbinger(R)net is an IP-based portal for
application-to-application E-Commerce. harbinger.net will serve as a
clearinghouse for E-Commerce information and as a gateway for
E-Commerce transactions, noting that these transactions will
increasingly flow through real-time, universal and persistently
connected networks. Harbinger believes that its network is one of the
largest business-to-business E-Commerce networks in the United States
as measured by the number of billable subscribers. To manage and
facilitate these types of connections, harbinger.net provides a set of
features and functions that cover a broad range of services. The
harbinger.net portal supports real-time transactions, open network and
application interfaces, self-serve customer care facilities and
E-Commerce content for industry professionals. harbinger.net is a
single-address portal that provides a means for E-Commerce
professionals to obtain information, find links to relevant
destinations, and conduct Web catalog transactions. harbinger.net also
serves as an access point for application to application transactions.
The features, services and capabilities of harbinger.net fall into
three general categories: Transaction Services; Customer Services, and
Content Services.
Portal Transaction Services
- Transport Services - harbinger.net provides several
mechanisms enabling businesses, trading communities,
ISPs, system integrators, hosting services and others
to transmit and receive E-Commerce transactions.
- Connectivity - harbinger.net provides connectivity,
data communications protocols and transport
applications to move transactions through the portal
and on to their destination. The primary protocol
suite is oriented around IP technologies, including
HTTP, SMTP, and FTP. Although
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many services of harbinger.net require IP
technologies, other protocols and transports are
available, including: Async, Bisync, SNA, X.400 and
OFTP.
- Mailboxing Services - for trading partners who are
not immediately accessible (i.e., do not have
persistent connection to the network or the
connection is down). Unconnected trading partners can
access their mailboxes at a later time to pickup
their transactions.
- Interconnections - interconnections to other networks
to ensure that transactions are able to flow through
the portal and reach their final destination, such as
public VANs (Harbinger, Sterling, GEIS, IBM, etc.),
Private VANs, and X.400 Networks.
- Security - several security and encryption mechanisms
are supported for harbinger.net transactions,
including SSL and S/MIME.
- Web E-Commerce (Harbinger Express) - harbinger.net
provides a Web transaction portal supporting all
levels of browser-side applications.
- Translation and Mapping Service - This service allows
businesses to send transactions through the portal in
any format and rely on harbinger.net to ensure that
the transactions are transformed into the appropriate
data format required by trading partners.
- Archiving and Restoral - a standard feature of
harbinger.net is the storage and archiving of
transactions.
- Value-Added Processing - transactions traversing
harbinger.net can be momentarily diverted for
value-added processing. Some examples of value-added
processing are: translation from one E-Commerce
standard to another; reformatting; standards
compliance checking; event triggers based on various
criteria; carbon copy to duplicate and forward
transactions to additional mailboxes; and redirection
of transactions.
- Catalog Content Management - harbinger.net will
enable the aggregation and rationalization of catalog
content for business-to-business E-Commerce. Tools
and services will be provided to allow businesses to
submit, review and modify catalog content and then
control the release of that content to the in-house
catalogs of the user's customers. These services are
facilitated via harbinger.net through the use of
browser utilities and FTP technologies.
- Marketplaces and Storefronts - businesses may provide
and host their product catalog content for a
storefront or general marketplace using
harbinger.net.
- Communities of Interest ("COINs") - harbinger.net
hosts and serves as an intermediary for E-Commerce
COINs. It also serves as a navigation portal (link)
for COINs that have E-Commerce functionality.
Portal Customer Services
- Internet Customer Support System - browser
submission, review and modification of trouble
tickets, and a direct link into the harbinger.net
call support system.
- Network Inspector - harbinger.net's document tracking
system which includes a flexible, powerful browser
interface to enable tracing of every transaction or
document, with exact times and checkpoints for each
stage of processing and transport.
- Harbinger.net also provides the following customer
services: Customer Alarm/Alert Notification,
Transaction Recovery, Restoral, Retransmission, Error
Viewing and Correction, Billing Review, Registration,
and Electronic Software Distribution.
Portal Content Services
- E-Commerce Content - harbinger.net also serves as a
portal for information and resources associated with
E-Commerce. E-Commerce at harbinger.net includes:
E-Commerce standards (ANSI X,12, UN/EDIFACT, XML,
OBI, eCo, ANX, EDI-INT, e.g.), news and events
associated with e-business, links to associations,
organizations, standards bodies, consortiums,
vendors, system integrators, consultants, forums and
discussion groups, case studies, and an E-Commerce
glossary.
- Commerce Directory Services - the commerce directory
component of harbinger.net is an open directory of
businesses trading electronically.
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- my.harbinger - E-Commerce managers and specialists
can personalize their access and use of harbinger.net
to ensure that the content and transactions that are
most relevant to their business needs are immediately
available to them.
- Trading Rules Repository - harbinger.net serves as a
leading repository of trading rules associated with
individual businesses and E-Commerce data standards,
including emerging data standards such as XML.
Harbinger INP. Harbinger INP allows a user to establish an instant
presence on the Internet through the creation of a web site for the business
user. Users create their web site by entering information in an interview
format. The user can then preview their site using the embedded Microsoft
Internet Explorer software and publish the site on the harbinger.net web hosting
service. Harbinger INP includes an electronic catalog and purchase order system
for conducting commerce over the Internet.
E-COMMERCE SOFTWARE
Harbinger Knowbility. Harbinger Knowbility is an MRO procurement
catalog content management service offering that aggregates supplier data
specific to a purchaser company so that only appropriate suppliers are presented
to the company. This technology is also used to rationalize an enterprise
company's material master information for their ERP systems. Electronic catalog
technology has been applied in both supply chain management initiatives for
production goods and services, and maintenance, repair and operating supplies
for non-production goods and services. Harbinger provides its solution in the
form of an easy-to-use, web-based application that allows users to search and
source data from electronic vendor catalogs and from their own internal
inventory.
Harbinger Express. Harbinger Express enables the large hub companies to
trade easily with small spoke trading partners who have been reluctant to
implement full-scale EDI. Harbinger Express is typically marketed to larger
companies who seek the benefits of traditional EDI, but often have hundreds or
thousands of smaller trading partners who are unable or unwilling to invest in
the infrastructure required to support EDI. Harbinger Express allows small and
mid-size businesses to perform E-Commerce using a Web browser or optionally a
Windows client application. Harbinger Express is available as a service hosted
by Harbinger on harbinger.net, or as a software license. When purchased as a
software license, the Harbinger Express server software resides on a server at
the hub location and the Windows client software is installed at a spoke trading
partner. For less complex business requirements, the spoke trading partner can
use a Web browser. Custom forms are created analogous to the forms promulgated
by the various EDI standards bodies to meet the needs of the hub when trading
with the spokes in its trading community. Harbinger Express translates EDI
documents into a hypertext markup language ("HTML") form that can be accessed by
the trading partner via the Internet. Harbinger Express users can also initiate
EDI documents simply by filling out a browser-based HTML form at the Harbinger
Express Web site. For more complex business requirements, the spoke trading
partner can use the Windows client application, which supports offline document
processing and application integration.
Harbinger Templar. Harbinger Templar is an open, standards-based
solution for enabling secure transmission of digitally designed electronic
documents, including EDI documents, over the Internet and other IP networks.
Harbinger Templar supplies security for message transmissions by utilizing
public key cryptography techniques licensed from RSA Data Security, Inc. and by
implementing security and confidentiality features at the software application
level. Templar generates a digital signature for each outbound message that
verifies the identity of the sender and automatically detects any alteration of
the message upon receipt. Templar automatically tracks message traffic and
message integrity and authenticity and provides user-configurable management
reports. Templar also maintains transmission records for audit trails. The
Company also markets an exportable version of Templar in order to allow export
of Templar in compliance with current U.S. export control laws and regulations
applicable to encryption technology. Harbinger Templar is available for both
UNIX and Windows systems and integrates with the Company's EDI translators.
Harbinger Internet Value-Added Server ("IVAS"). Harbinger IVAS enables
a network services provider to offer a robust, reliable, manageable and
sophisticated EC/EDI service network. Harbinger
<PAGE> 11
IVAS consists of modules that allow subscribers to conduct electronic business
with their trading partners. Harbinger IVAS provides intermediation, archiving,
standards compliance monitoring and third-party services using IP. Harbinger
IVAS permits participants in a trading community to select the desired
communications transport mechanism for individual documents of a typical EDI
transaction.
Harbinger TrustedLink. The Harbinger TrustedLink family permits fast
receipt and transmission of EDI documents and supports a comprehensive range of
EDI standards across all major computing platforms, including MVS mainframe,
OS/400, UNIX, Windows NT Server, Windows NT Workstation, Windows 98 and Windows
95. The product family facilitates the creation and control of business
documents, such as order forms and invoices, and provides data linking and
messaging functions that act as a gateway to update a trading partner's
accounting system. Additional functionality includes mapping, translation,
communication and trading partner management tools and the utilization of
standard EDI formats.
The OS/400 version of Harbinger TrustedLink is the leading EDI software
product for the mid-range computer market, operating on the IBM AS/400 computer.
The AS/400 is the leading mid-range platform installed worldwide for use as
either the main computer for a small or mid-size business or as a departmental
or dedicated processor in a larger business.
The Windows NT Workstation, Windows 98 and Windows 95 versions of
Harbinger TrustedLink are designed for small to mid-sized companies. The
products perform the critical tasks to create, format and electronically
transmit and receive business documents and data between trading partners. The
products convert a customer's documents and data into EDI format, translate the
document to a standard form for use with the designated trading partner,
transmit the information to harbinger.net, the Internet, or other third party
networks and convert EDI documents and data received from their trading partners
into a format that can be interpreted by the user's personal computer. Other
products for the Windows NT Workstation, Windows 98 and Windows 95 platforms
include STFORMS, which enables the user to customize the format of EDI
documents, and STBAR, which allows the entry of data via bar code scanning.
Additionally, STMAP mapping integration software allows users to download EDI
data seamlessly from an integrated application and to move data electronically
between business programs and EDI applications. Harbinger develops custom
software templates, known as forms overlays, to conform to guidelines and
parameters identified by the hubs and spokes within trading communities. For
example, Harbinger can customize its software to utilize only a specified subset
of the ANSI X.12 or EDIFACT standard that the hub companies have defined for the
trading relationship. In this way, each trading partner is assured that only the
expected data elements are sent and received. The Company distributes these
customized forms overlays to help hub companies expand the acceptance of EDI
among trading partners. Harbinger maintains an extensive library of forms
overlays.
Harbinger Prime Factors. Harbinger Prime Factors enables banks and
other businesses to secure financial and other information transmitted over
internal and external networks. Customers include money center banks, large
corporations and government agencies interested in securing data transmitted
internally and externally. Prime Factors products include Descrypt +,
Descrypt/EDI +, Psypher/EDI +, Fdesmac +, PIN Management System and can operate
on computer platforms ranging from PCs to UNIX and AS/400, DEC and Tandem
machines to MVS mainframes.
E-COMMERCE SERVICES
Mass Deployment, Trading Partner Implementation and Certification.
Harbinger offers mass deployment services to trade organizations or hub
companies within selected industries to establish and promote the growth of
trading communities. Initially, the Company develops marketing and technical
competence within an industry by learning the trading customs and practices of
their trading partners. The Company then defines the software and computer
system requirements for the promotion of electronic commerce in the trading
community. These definitions are used to develop standard and customized
software products to meet the needs of trading partners within their own
markets. These products are complemented by an array of services to facilitate
the adoption and implementation of EDI and other electronic commerce services
throughout that industry. Harbinger offers several programs to assist its hub
<PAGE> 12
customers in maximizing the use of EDI and electronic commerce among its trading
partners. These programs communicate the advantages of EDI and electronic
commerce to potential trading partners of a major hub, regardless of size, and
include information seminars, support materials and the trading partner
certification program. This program assists trading partners in installing,
testing and confirming EDI capabilities with hub companies using the Harbinger
networks.
Professional Services. Harbinger technical consultants work with
trading communities to create the functional specifications to develop computer
programs necessary to integrate EDI with other software applications. This
process, known as "mapping," requires the identification of internal data file
and record formats along with the creation of functional specifications to
integrate EDI with trading partner applications. Harbinger also provides
software-programming services to trading communities to create the application
interface programs necessary to translate data into and out of EDI standards. In
addition, Harbinger offers training classes for various stages of EDI
implementation by trading partners. These classes provide instruction on the use
of the Company software products operating either alone or together with other
application software. The classes explain the basics of EDI and its integration
with other application software and provide basic information for creating
application interface programs to connect trading partners.
Outsourcing. Harbinger provides a full complement of E-Commerce
outsourcing services to trading communities. Harbinger can provide complete
outsourcing of E-Commerce or EDI operations for the hub company of a trading
community complete with onsite personnel. The Company also offers remote
management of a customer's EDI translator where complete outsourcing is not
desired, and Internet applications development for trading hubs desiring
customized EC solutions. To ease implementation of EC by businesses reluctant to
implement full scale EDI; Harbinger also provides service bureau-type
translation and mapping of raw trading information to standard EDI formats and
distribution to trading partners.
Customer Services. Harbinger provides extensive customer service and
support to trading partners on the use and operation of its software products
and the business processes associated with electronic commerce. The Company's
support of EDI communication standards enables its customer support personnel to
perform file transfers to analyze problems on a customer's computer system and
to transmit software or EDI standard updates to a customer where necessary.
The Company's principal marketing strategy focuses on establishing
electronic trading communities and expanding the number of trading partners
using Harbinger software and the harbinger.net portal. The Company targets
trading communities composed of trading partners in common industries or markets
conducting recurring business transactions. To achieve this objective, the
Company has developed a sales and distribution function that includes direct and
indirect channels to promote the implementation of E-Commerce within these
trading communities through hub and spoke programs, particularly within selected
vertical markets. Within its direct selling operations, the Company utilizes a
three-tiered marketing program.
SALES AND MARKETING
Direct. The Company has direct selling operations based in North
America, Europe and Mexico. The Company's direct sales organization seeks to
license software and sell network and professional services to businesses of all
sizes that address the needs and requirements of those businesses E-Commerce
objectives. In addition to utilizing Harbinger software and services for their
E-Commerce transactions, hub companies also seek to increase the number of
trading partners conducting E-Commerce. Harbinger's direct sales organization
executes a three-step marketing program to develop and promote the hub companies
E-Commerce initiative with their existing or prospective trading partners,
referred to as "spokes". First, the Company identifies hub companies that either
seek to formulate or expand an E-Commerce program. The Company representatives
meet with the hub company and discuss the procedure for enabling the hub company
and/or establishing E-Commerce relationships with trading partners. Second, the
Company contacts the hub company's trading partners through seminars and by
telemarketing, informing these parties of the hub company's E-Commerce
requirements and implementation procedures.
<PAGE> 13
The Company schedules and conducts half-day information seminars with potential
trading partners of a hub company highlighting the benefits of E-Commerce,
explaining the hub company's E-Commerce initiative, and demonstrating the
Company's products and services. Hub company representatives generally attend
these seminars to present their E-Commerce recommendations and requirements.
Third, Harbinger uses telemarketing, direct mail and advertising activities that
are targeted at potential trading partners of the hub company. As of March 1,
1999, the Company employed approximately 300 sales and marketing personnel. The
Company's compensation strategies are designed to reward sales personnel based
upon sales to new customers and the sale of additional products and services to
existing customers.
Indirect. Harbinger seeks to complement its direct selling operations
through referral partners and distributors, and relies on distributors in the
South American and Asia-Pacific theaters. Through various alliance programs, the
Company has established relationships with referral partners, distributors,
application software developers, systems integrators and value-added resellers
of computer products. The Company's objective is to integrate Harbinger's
products with those of its business partners and to promote distribution of
Harbinger software along with products and services sold by its Marketing
Partners. The Company fosters relationships with software vendors that bundle or
imbed the Company's products with their own products, or which resell the
Company's products in particular trading communities. Distributors typically
sublicense the Company's software to end-user customers and pay the Company a
royalty, while co-marketers typically forward leads to the Company in exchange
for a percentage referral fee if the sale is completed. The Company has
relationships with partners such as AT&T, Ariba, Baan, Booz-Allen & Hamilton,
Checkfree, Computer Associates, Concur, Control Data Systems,
PriceWaterhouseCoopers, CyberCash, Daly & Wolcott, Data General, Deloitte &
Touche, Digital, Entrust Technologies, Ernst & Young, Hewlett-Packard, IBM,
Intentia, JBA, JD Edwards, MAPICS, Maxware, Microsoft, Netscape/AOL, Oracle,
Peachtree Software, PeopleSoft, SAP, Sprint, Sun, Sybase, Unisys and UUNET
Technologies for distribution of its products worldwide.
PRODUCT DEVELOPMENT
The Company continues to assess the needs of trading partners in
various trading communities and to develop software programs and network
services, which facilitate electronic commerce transactions over the
harbinger.net portal, or directly over standard telephone lines. The Company's
product development efforts currently are focused on providing a full range of
electronic commerce solutions to Harbinger customers. In addition, the Company
has incorporated into its products certain software licensed to it by other
software developers, where appropriate, to reduce product development time.
The Company is in various stages of development for other software
applications, including electronic messaging, bar code integration to facilitate
the shipping and receiving of goods, an enhanced mapping product to allow users
to customize their E-Commerce data to existing software applications,
catalog-based solutions, and foreign translations of the Company's software
products for distribution in international markets.
COMPETITION
The E-Commerce services and computer software markets are highly
competitive. Numerous companies supply electronic commerce network services, and
several competitors target specific vertical markets such as the pharmaceutical,
agri-business, retail and transportation industries. Additional competitors
provide software designed to facilitate electronic commerce and EDI
communications. Several of the Company's most significant competitors provide
network services and related software products and services. Other competitors
provide PC-based computer programs and network services specifically targeted to
facilitate electronic banking transactions. These competitors include banks and
financial institutions that operate privately owned computer networks that link
directly to their commercial customers. The Company believes that many of its
competitors have significantly greater financial and personnel resources than
the Company.
The market for Internet software and services is emerging and highly
competitive, ranging from small companies with limited resources to large
companies with substantially greater financial, technical
<PAGE> 14
and marketing resources than the Company. The Company believes that existing
competitors are likely to expand the range of their electronic commerce services
to include Internet access, and that new competitors, which may include
telephone companies and media companies, are likely to increasingly offer
services which utilize the Internet to provide business-to-business data
transmission services. Additionally, several competitive network service
providers allow their subscribers access to the Internet, and several major
software and telecommunications companies have Internet access services. If the
Internet becomes an accepted method of electronic commerce, the Company could
lose network customers that would reduce recurring revenue from network services
and have a material adverse effect on the Company.
Competitors that offer products and/or services that compete with
various of the Company's products and services include, among others, IBM; AT&T;
Computer Associates International, Inc.; EDS; General Electric Information
Systems; QuickResponse Services, 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. The Company believes that the principal
competitive factors in the commercial electronic commerce industry include
responsiveness to customer needs, efficiency in the delivery of solutions, ease
of product use, quality of service, price and value. The Company believes it
competes favorably with regard to these factors.
INTELLECTUAL PROPERTY RIGHTS
In accordance with industry practice, the Company relies primarily on a
combination of copyright, patent and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials principally under trade secret and copyright laws, which
afford only limited protection. The Company presently has one U.S. patent for an
electronic document interchange test facility, one U.S. patent for technology
utilized in the Company's EDI/Open product and U.S. patent applications pending
for an EDI communication system and for technology utilized in the Company's
Templar product. In addition, the Company has applied for foreign patents
relating to technology utilized in the Company's EDI/Open product and foreign
patents relating to technology utilized in the Company's Templar product. The
Company owns a number of registered and unregistered trademarks. In addition,
the Company uses the trademark EDI/400 in connection with its principal EDI
product pursuant to a license agreement with IBM that IBM may terminate on 60
days' prior written notice. The Company has not received any indication from IBM
that it intends to terminate the agreement. The Company routinely enters into
non-disclosure and confidentiality agreements with employees, vendors,
contractors, consultants and customers. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. There can be no assurance that the Company's means of protecting
its proprietary rights will be adequate or that competitors will not
independently develop similar technology. The laws of certain foreign countries
in which the Company's products are or may be developed, manufactured, licensed
or distributed may not protect the Company's products or intellectual property
rights to the same extent as do the laws of the United States and thus make the
possibility of piracy of the Company's technology and products more likely. The
Company believes that, due to the rapid pace of innovation within the electronic
commerce, EDI and related software industries, factors such as the technological
and creative skills of its personnel are more important in establishing and
maintaining a leadership position within the industry than are the various legal
protections of its technology. The Company 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 the
Company with respect to current or future products. From time to time, the
Company has received notices which allege, directly or indirectly, that the
Company's products or other intellectual property rights infringe the rights of
others. The Company generally has been able to address these allegations without
material cost to the Company. The Company 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 the Company to enter into royalty or
licensing agreements. Such royalty or licensing
<PAGE> 15
agreements, if required, may not be available on terms acceptable to the Company
or at all, which could have a material adverse effect on the Company.
In its distribution agreements and certain of its customer or other
agreements, the Company agrees to indemnify certain parties, which may include
customers of parties with which the Company has contracted, for any expenses or
liabilities resulting from claimed infringements of patents, trademarks or
copyrights or certain other intellectual property rights of third parties. In
the event of litigation to determine the validity of any third-party claims,
such litigation, whether or not determined in favor of the Company, could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks. In the event of an
adverse ruling in such litigation, the Company might be required to pay money
damages, to discontinue the use and sale of infringing products, to expend
significant resources to develop non-infringing technology or obtain licenses
from third parties. There can be no assurance that licenses from third parties
would be available on reasonable commercial terms, if at all. In the event of a
successful claim against the Company and the failure of the Company to develop
or license a substitute technology, the Company's business and operations
results would be materially adversely affected.
Third Party Technology. The Company incorporates in its products
certain software licensed to it by other software developers. These include the
public key cryptography software licensed by RSA Data Security, Inc. to Premenos
which is used in connection with Templar as well as certain database software
used in the Templar and EDI/Open products and certain graphical interface
software used in EDI products and Templar.
Premenos licensed the public key encryption technology pursuant to a
license agreement with RSA (the "RSA License"), which was transferred to
Harbinger in connection with the acquisition of Premenos. The RSA License grants
to the Company the non-exclusive, non-transferable, non-assignable limited
license to incorporate certain functionality within RSA's public key encryption
technology into a Premenos product solely to create a Bundled Product, as
defined in the RSA License, to reproduce and sublicense the Bundled Product, and
to use or authorize end-users to use the Bundled Product in conjunction
<PAGE> 16
with a service bureau or internal network or to provide electronic
communications, messaging and similar services to third parties. A Bundled
Product is defined as a Company product which represents a significant
functional and value enhancement to the RSA technology designed to facilitate
the secure exchange of electronic information such as EDI documents over open
networks. The RSA License contains a number of restrictions regarding
sublicensing of the Bundled Product to act as a certification authority, as well
as other restrictions regarding end-user use, territory and distribution
channels. The Company is prohibited from selling the Bundled Product or any
product with comparable functionality which does not incorporate the RSA
encryption technology, except in certain circumstances, in which event the
Company is required to pay the otherwise applicable royalty fee to RSA.
The Company also incorporates database software licensed from Sybase,
Inc. into its Templar and certain versions of its EDI/Open products, and
incorporates graphical software licensed from third parties into the EDI
products and Templar. Although the Company seeks and generally receives
assurances from third-party software vendors as to such third party's
intellectual property rights and the non-infringement by such software of other
parties' rights, Harbinger's right to use such software could be impaired by
third party claims. In addition, certain agreements pursuant to which the
Company uses such software may be terminated in accordance with their terms in
certain circumstances.
If the Company were deprived of the right to use software incorporated
in its products for any reason, there could be serious disruption to its
business.
YEAR 2000 COMPLIANCE
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.
<PAGE> 17
5. Manages the leap year occurring in the year 2000, following the
quad-centennial rule.
As of December 31, 1998 Company management estimates that approximately
95% of its product readiness testing has been completed. While most 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 the first quarter of 1999. 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 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 $100,000 to $200,000 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
<PAGE> 18
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.
<PAGE> 19
EMPLOYEES
As of March 9, 1999, the Company had approximately 975 full-time
employees. Approximately 195 are technical personnel engaged in maintaining or
developing the Company's products or performing related services, approximately
351 are marketing and sales personnel, approximately 330 are customer support
and operations personnel, and approximately 99 are involved in administration
and finance.
EXECUTIVE OFFICERS
The current executive officers of the Company and their ages as of
March 9, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------- -------------- --------------------------------------------------
<S> <C> <C>
C. Tycho Howle 49 Chairman of the Board of Directors and Chief
Executive Officer
James M. Travers 47 President and Chief Operating Officer
Joel G. Katz 34 Chief Financial Officer and Secretary
Dave Bursiek 61 Executive Vice President and General Manager,
Customer Solutions and Enhancements Division
Daniel L. Manack 40 Senior Vice President and General Manager, EC
Solutions Division
Willem van Nieuwenhuyzen 51 General Manager, Europe, Middle East and Africa
</TABLE>
Mr. Howle, age 49, has been Chairman of the Board of Directors of the
Company and its predecessors since 1983, and served as Chief Executive Officer
since September 1998 and from 1983 until March 1997.
Mr. Travers, age 47, currently serves as a Class I director. He has
served as President and Chief Operating Officer of the Company since October
1998. He served as President and General Manager of the Company's Software
Division from June 1997 until October 1998, and from January 1994 until June
1997, he served as President of Harbinger Enterprise Solutions Division. In this
latter capacity, Mr. Travers managed the business operations acquired from Texas
Instruments, Inc. ("TI"). From 1978 through 1994, Mr. Travers served in various
managerial positions with TI, including Vice President for North American Field
Operations and most recently as Director of Business Development for TI's
Worldwide Applications Software Business and General Manager of TI's EDI
business unit from June 1992 through December 1994.
Mr. Katz has served as Chief Financial Officer and Secretary of the
Company since January 1997. He served as Vice President, Finance and Secretary
from January 1995 to January 1997 and Senior Director, Finance of the Company
from February 1994 to January 1995. He joined Harbinger in 1990 as Controller
and became Director of Finance in December 1991.
Mr. Bursiek, age 61, has served as Executive Vice President and General
Manager of the Customer Solutions and Enhancements Division since February 1999.
From January 1997 through February 1999, he served as Senior Vice President of
Sales, with responsibility for mass deployment sales. From December 1996 until
January 1997, he served as the Executive Vice President of Sales of Supply Tech,
Inc., which was acquired by the Company in January 1997. From 1995 until
December 1996, he was a management consultant with Optimum Associates, a
consulting firm. In 1994, he served as Chief Executive Officer of Sapiens
International, a software and consulting firm.
<PAGE> 20
Mr. Manack, age 41, has served as Senior Vice President and General
Manager, EC Solutions Division since February 1999. From February 1998 to
February 1999, he served as Vice President and General Manager - Professional
Services & Outsourcing Practice and from January 1997 to February 1998 he served
as Vice President of Professional Services and Outsourcing. From September 1994
until December 1996, he was a principal with the Information Services unit of
Unisys Corporation and from June 1980 until August 1994, he was a Business
Manager with Texas Instruments.
Mr. van Nieuwenhuyzen, age 51, has served as General Manager, Europe,
Middle East and Africa since October 1997 and was appointed an officer of
Harbinger in November 1997. From September 1995 to October 1997 he served as
Manager of Global Accounts, Europe, Middle East and Africa, of Hewlett-Packard
EMEA SA, and from May 1991 to September 1995, as Director of Computer Systems
Organization of Hewlett-Packard Netherlands BV.
GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS
Government Regulatory and Industrial Policy Risks. The Company's
network services are transmitted to its customers over dedicated and public
telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. Changes in the legislative
and regulatory environment relating to online services, EDI or the Internet
access industry, including regulatory or legislative changes that directly or
indirectly affect telecommunication costs or increase the likelihood of
competition from regional telephone companies or others, could have an adverse
effect on the Company's business. The Telecommunications Act of 1996 (the "Act")
amended the federal telecommunications laws by relaxing restrictions on regional
telephone companies and others competing with the Company. 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 its own information services. This will enable
regional telephone companies to more readily compete with the Company by
packaging information service offerings with other services and providing them
on a wider geographic scale. While some provisions of the Act 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 the Company 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 the Company. The
Company cannot predict the impact, if any, that the Act and future court
opinions, legislation, regulations or regulatory changes in the United States or
other countries may have on its business. Management believes that the Company
is in compliance with all material applicable regulations. The Harbinger IVAS
product and the Harbinger 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.
ITEM 2. PROPERTIES.
The Company occupies approximately 145,476 square feet of office space
in Atlanta, Georgia under a lease expiring in 2008, plus options to extend the
lease term. This location serves as the Company's headquarters and data center.
The Company also has offices in Michigan, Texas, California, South Carolina,
Oregon, Pennsylvania, Canada and Oklahoma, occupying approximately 39,800;
24,000; 73,615; 21,789; 2,100; 215; 4,182 and 3,491 square feet, respectively.
In addition, the Company also has offices in The Netherlands, Germany, the
United Kingdom, France, Italy and Mexico occupying approximately 17,108; 14,546;
7,600; 2,390; 2,228 and 1,529 square feet, respectively. The Company's offices
are generally located in suburban office park environments.
ITEM 3. LEGAL PROCEEDINGS.
<PAGE> 21
The Company is not a party to any material legal proceedings. From time
to time, the Company is involved in various routine legal proceedings incidental
to the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the last quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Harbinger's Common Stock is traded on the Nasdaq National Market under
the symbol "HRBC". The price per share reflected in the table below represents
the range of low and high closing sale prices for the Company's Common Stock as
reported by The Nasdaq Stock Market for the quarters indicated:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH PRICE LOW PRICE
------------------------------ -------------------- ---------------------
<S> <C> <C>
March 31, 1997 $27 1/8 $14 1/8
June 30, 1997 $21 5/8 $12 1/8
September 30, 1997 $26 1/8 $17 3/8
December 31, 1997 $28 5/16 $13
March 31, 1998 $25 3/16 $16 1/2
June 30, 1998 $27 $21
September 30, 1998 $22 13/16 $6 1/8
December 31, 1998 $ 9 5/16 $4 1/16
</TABLE>
The closing sale price of the Company's Common Stock as reported by The
Nasdaq Stock Market on March 17, 1999 was $7.13.
The number of shareholders of record of the Company's Common Stock as
of March 17, 1999, was approximately 260.
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain any earnings for use in the business and
does not anticipate paying any cash dividends in the foreseeable future. The
Company declared a 3-for-2 stock split in the form of a stock dividend which was
paid on May 15, 1998 to shareholders of record as of May 1, 1998.
On March 31, 1998, the Company issued 194,497 shares of Common Stock to
the interest holders of EDI Works! LLC ("EDI Works!") in exchange for all of the
outstanding interest in EDI Works! (the "EDI Works! Acquisition"). The shares of
common stock issued in the EDI Works! Acquisition were issued pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended, in reliance, in part, upon the representations and warranties set forth
in the EDI Works! Acquisition agreement.
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the section entitled "Selected
Financial Data" on page 1 of the Company's 1998 Annual Report to Shareholders is
incorporated herein by reference and filed herewith as part of Exhibit 13.1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The information set forth under the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's 1998 Annual Report to Shareholders is incorporated herein by reference
and filed herewith as a part of Exhibit 13.1.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The quarterly results of operations set forth in the Company's 1998
Annual Report to Shareholders and the following financial statements, related
notes thereto and report of independent auditors set forth in the Company's 1998
Annual Report to Shareholders are incorporated herein by reference and filed
herewith as a part of Exhibit 13.1.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information required by this item is incorporated by reference
from the information contained in the Company's Proxy Statement for the Annual
Meeting of Shareholders expected to be filed with the Commission on March 31,
1999 under the captions "Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the information contained in the Company's Proxy Statement for the Annual
Meeting of Shareholders expected to be filed with the Commission on March 31,
1999 under the caption "Executive Compensation."
<PAGE> 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is incorporated by reference from
the information contained in the Company's Proxy Statement for the Annual
Meeting of Shareholders expected to be filed with the Commission on March 31,
1999 under the caption "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the information contained in the Company's Proxy Statement for the Annual
Meeting of Shareholders expected to be filed with the Commission on March 31,
1999 under the caption "Certain Transactions."
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements of Harbinger Corporation and report
of independent auditors as set forth under Item 8 of this report on Form 10-K
are incorporated herein by reference.
2. Financial Statement Schedules
(i) The following Financial Statement Schedule of Harbinger
Corporation for the Years Ended December 31, 1996, 1997 and 1998 is filed as a
part of this Report on Form 10-K and should be read in conjunction with the
Consolidated Financial Statements, and related notes thereto, of Harbinger
Corporation.
HARBINGER CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Amount
Balance at Charged to Recorded Charged to Balance at
Beginning of Costs and Due to Other End of
Description Period Expenses Acquisitions Accounts Deductions Period
- ----------------------------------------- ------------ ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for returns and doubtful
Accounts (in thousands):
1996 ........................... $ 941 640 325 2,392 (B) (1,873) (A) $ 2,425
1997 ........................... $ 2,425 1,561 -- 3,148 (B) (4,344) (A) $ 2,790
1998 ........................... $ 2,790 6,428 -- 3,588 (B) (3,728) (A) $ 9,078
Allowance for net deferred tax assets (in
Thousands):
1996 ........................... $ -- 1,494 3,304 -- -- $ 4,798
1997 ........................... $ 4,798 13,509 4,364 -- -- $22,671
1998 ........................... $22,671 5,171 -- -- -- $27,842
</TABLE>
- --------------
(A) Deductions represent write-offs of doubtful accounts and sales returns
charged against the allowance.
(B) Deductions from revenues for sales returns and allowances.
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Harbinger Corporation:
Under date of February 5, 1999, we reported on the consolidated
balance sheets of Harbinger Corporation and subsidiaries as of
December 31, 1998 and 1997 and the related consolidated
statements of operations, comprehensive loss, shareholders'
equity, and cash flows for each of the years in the three-year
period ended December 31, 1998 as contained in the Harbinger
Corporation 1998 Annual Report to shareholders. We did not audit
the 1996 financial statements of Premenos Technology Corp. and
subsidiaries, which statements reflect total revenues
constituting 38% of the related consolidated totals. Those
statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the
amounts included for Premenos Technology Corp. and subsidiaries
for 1996 is based solely on the report of the other auditors. In
connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial
statement schedule for each of the years in the three-year period
ended December 31, 1998 listed in Item 14(a)(2). This financial
statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, based on our audits and the report of the other
auditors with respect to 1996, such financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
---------------------------
KPMG LLP
Atlanta, Georgia
February 5, 1999
Schedules not listed above have been omitted because they are not
applicable or the information required to be set forth herein is included in the
Financial Statements or notes thereto.
<PAGE> 26
(ii) The following Reports of Independent Public
Accountants with respect to the Company's statements of operations,
shareholders' equity and cash flows for the year ended December 31, 1996 is
filed as a part of this Report on Form 10-K and should be read in conjunction
with the Financial Statements, and related notes thereto, of Harbinger
Corporation.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Premenos Technology Corp.:
We have audited the consolidated balance sheet of Premenos
Technology Corp. and subsidiaries (the Company) as of December
31, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the two years in
the period then ended. We have also audited the Company's
financial statement schedule of Valuation and Qualifying Accounts
included in the Company's 1996 Form 10-K. These consolidated
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements
and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Premenos Technology Corp. and subsidiaries
as of December 31, 1996, and the consolidated results of their
operations and their cash flows for each of the two years in the
period then ended in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial
statement schedule, referred to above, when considered in
relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information
required to be included therein.
/s/ Coopers & Lybrand L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.
San Francisco, California
January 31, 1997, except for Paragraph 3 of Note 16
as to which the date is March 16, 1997
<PAGE> 27
(b) Reports on Form 8-K. The Company filed the following reports
on Form 8-K during the quarter ended December 31, 1998.
(i) Report on Form 8-K filed October 1, 1998 with respect
to the Company's announcement of its refined
strategy, organizational re-structuring and
preliminary third quarter results pursuant to Item 5
of Form 8-K and a certain exhibit relating to the
same pursuant to Item 7(c) of Form 8-K.
(ii) Report on Form 8-K filed October 2, 1998 with respect
to the Company's announcement of a stock repurchase
program pursuant to Item 5 of Form 8-K and a certain
exhibit relating to the same pursuant to Item 7(c) of
Form 8-K.
(c) Exhibits. The following exhibits are filed as part of, or are
incorporated by reference into, this report on Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------- -----------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form S-1
(File 33-93804) declared effective on August 22,
1995).
3.2 Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
4.1 Provisions of the Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws of the
Company defining rights of the holders of the Common
Stock (incorporated by reference to Exhibits 3.1
through 3.4 to the Company's Registration Statement
on Form S-1 (File No. 33-93804) declared effective on
August 22, 1995).
4.2 Specimen Stock Certificate (incorporated by reference
to Exhibit 4.3 to the Company's Registration
Statement on Form S-1 (File 33-93804)).
4.3 Form of Registration Rights Agreement effective March
29, 1996 between each of the Harbinger N.V.
Shareholders and the Company (incorporated by
reference to Exhibit 2(a) to the Company's Current
Report on Form 8-K dated May 3, 1996).
4.4 Form of Warrant issued to former Harbinger N.V.
Shareholders on July 18, 1996 (incorporated by
reference to Exhibit 4.5 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
4.5 Form of Warrant issued to former INOVIS Shareholders
on April 19, 1996 (incorporated by reference to
Exhibit 2(a) to the Company's Current Report on Form
8-K dated July 1, 1996).
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
4.6 Registration Rights Agreement between the Company,
Carol G. Croom, Charles E. Webber, Nine-Min Cheng,
Judy A. Bailey and Krish R. Sampat, dated as of March
31, 1998 (incorporated by reference to Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
10.1 Employment Agreement between the Company and Mr.
James M. Travers effective as of February 1, 1995
with Letter from the Company to Mr Travers dated
December 27, 1994 (incorporated by reference to
Exhibit 10.14 to the Company's Registration Statement
on Form S-1 (File 33-93804) declared effective on
August 22, 1995).
10.2 Employment Agreement between the Company and Mr. C.
Tycho Howle effective as of July 1, 1997
(incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-3 (File
No. 33-31191).
10.3 Employment Agreement between the Company and Mr. Joel
G. Katz effective as of March 7, 1994 (incorporated
by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1 (File No.
33-93804) declared effective August 22, 1995).
10.4 Employment Agreement between the Company and Mr.
David T. Leach effective as of July 1, 1997
(incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-3 (File
No. 33-31191).
10.5 Employment Agreement between the Company and Mr.
Willem van Nieuwenhuyzen effective August 1, 1997
(incorporated by reference to Exhibit 99A to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
10.6 Amended and Restated 1993 Stock Option Plan for
Nonemployee Directors effective as of August 11, 1993
(incorporated by reference to Exhibit 10.33 to the
Company's Registration Statement on Form S-1 (File
33-93804) declared effective on August 22,1995).
10.7 First Amendment to Harbinger Corporation Amended and
Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.50 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
10.8 Third Amendment to Amended and Restated 1993 Stock
Option Plan for Nonemployee Directors (incorporated
by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
10.9 Lease between the Company and 1277 Lenox Park
Boulevard, LLC for office located at 1277 Lenox Park
Boulevard, Atlanta, Georgia dated October 10, 1997
(incorporated by reference to Exhibit 99c to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
10.10 Amended and Restated 1989 Stock Option Plan effective
as of April 15, 1992 (incorporated by reference to
Exhibit 10.39 to the Company's Registration Statement
on Form S-1 (File 33-93804) declared effective on
August 22, 1995).
</TABLE>
<PAGE> 29
<TABLE>
<S> <C>
10.11 Form of Indemnification Agreement between the Company
and Directors (incorporated by reference to Exhibit
10.43 to the Company's Registration Statement on Form
S-1 (File 33-93804) declared effective on August 22,
1995).
10.12 Harbinger Corporation 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.48 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.13 First Amendment to the 1996 Harbinger Corporation
Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Company's Form S-8 Registration
Statement (File 333-30219) filed June 27, 1997).
10.14 Second Amendment to the 1996 Harbinger Corporation
Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Company's Form S-8 Registration
Statement (File 333-42959) filed December 22, 1997).
10.15 Amended and Restated Harbinger Corporation Employee
Stock Purchase Plan (incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.16 First Amendment to Harbinger Corporation Employee
Stock Purchase Plan (incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.17 Form of Amendment to Employment Agreement of James
Travers and Joel Katz (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
10.18 Form of Indemnification Agreement for certain of the
Company's Directors and Officers (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998).
10.19 Third Amendment to the Harbinger Corporation 1996
Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
10.20 Second Amendment to the Amended and Restated
Harbinger Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 99.2 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
10.21 Fourth Amendment to the Harbinger Corporation Amended
and Restated 1993 Stock Option Plan for Nonemployee
Directors (incorporated by reference to Exhibit 99.3
to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
10.22 Third Amendment to the Amended and Restated Harbinger
Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.23 Employment Agreement between the Company and Dave
Bursiek effective December 1, 1996
</TABLE>
<PAGE> 30
<TABLE>
<S> <C>
10.24 Form of Employment Agreement between the Company and
Dan Manack effective December 4, 1996.
10.25 Amendment No. 1 to Lease between the Company and
1277 Lenox Park Blvd., LLC dated June 5, 1998.
13.1 The following financial information included within
the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1998:
(i) Selected Financial Data;
(ii) Quarterly Results of Operations;
(iii) Management's Discussion and Analysis of
Financial Condition and Results of Operations;
(iv) Consolidated Financial Statements, Notes to
Consolidated Financial Statements, and
Independent Auditors' Report.
21.1 List of Subsidiaries of Company.
23.1 Consent of KPMG LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for the Year Ended December 31,
1998.
27.2 Restated Financial Data Schedule for the Year Ended
December 31, 1997.
27.3 Restated Financial Data Schedule for the Year Ended
December 31, 1996.
99.1 Safe Harbor Compliance Statement.
</TABLE>
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
March, 1999.
HARBINGER CORPORATION
By: /s/ C. Tycho Howle
-----------------------------------
C. Tycho Howle
Chairman and Chief Executive
Officer
<PAGE> 32
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ C. Tycho Howle Chief Executive Officer; March 30, 1999
--------------------- Chairman of the Board of
C. Tycho Howle Directors
(Principal Executive Officer)
/s/ David T. Leach Vice Chairman - International; March 30, 1999
--------------------- Director
David T. Leach
/s/ James M. Travers President; Chief Operating March 30, 1999
--------------------- Officer; Director
James M. Travers
/s/ Joel G. Katz Chief Financial Officer; March 30, 1999
--------------------- Secretary; (Principal Financial
Joel G. Katz Officer; Principal Accounting
Officer)
/s/ William D. Savoy Director March 30, 1999
---------------------
William D. Savoy
/s/ William B. King Director March 30, 1999
---------------------
William B. King
/s/ Stuart L. Bell Director March 30, 1999
---------------------
Stuart L. Bell
/s/ Benn R. Konsynski Director March 30, 1999
---------------------
Benn R. Konsynski
/s/ Ad Nederlof Director March 30, 1999
---------------------
Ad Nederlof
/s/ Klaus Neugebauer Director March 30, 1999
---------------------
Klaus Neugebauer
/s/ David Hildes Director March 30, 1999
---------------------
David Hildes
/s/ John Lowenberg Director March 30, 1999
---------------------
John Lowenberg
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------------- -----------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form S-1
(File 33-93804) declared effective on August 22,
1995).
3.2 Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
4.1 Provisions of the Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws of the
Company defining rights of the holders of the Common
Stock (incorporated by reference to Exhibits 3.1
through 3.4 to the Company's Registration Statement
on Form S-1 (File No. 33-93804) declared effective on
August 22, 1995).
4.2 Specimen Stock Certificate (incorporated by reference
to Exhibit 4.3 to the Company's Registration
Statement on Form S-1 (File 33-93804)).
4.3 Form of Registration Rights Agreement effective March
29, 1996 between each of the Harbinger N.V.
Shareholders and the Company (incorporated by
reference to Exhibit 2(a) to the Company's Current
Report on Form 8-K dated May 3, 1996).
4.4 Form of Warrant issued to former Harbinger N.V.
Shareholders on July 18, 1996 (incorporated by
reference to Exhibit 4.5 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
4.5 Form of Warrant issued to former INOVIS Shareholders
on April 19, 1996 (incorporated by reference to
Exhibit 2(a) to the Company's Current Report on Form
8-K dated July 1, 1996).
4.6 Registration Rights Agreement between the Company,
Carol G. Croom, Charles E. Webber, Nine-Min Cheng,
Judy A. Bailey and Krish R. Sampat, dated as of March
31, 1998 (incorporated by reference to Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
10.1 Employment Agreement between the Company and Mr.
James M. Travers effective as of February 1, 1995
with Letter from the Company to Mr Travers dated
December 27, 1994 (incorporated by reference to
Exhibit 10.14 to the Company's Registration Statement
on Form S-1 (File 33-93804) declared effective on
August 22, 1995).
10.2 Employment Agreement between the Company and Mr. C.
Tycho Howle effective as of July 1, 1997
(incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-3 (File
No. 33-31191).
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
10.3 Employment Agreement between the Company and Mr. Joel
G. Katz effective as of March 7, 1994 (incorporated
by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1 (File No.
33-93804) declared effective August 22, 1995).
10.4 Employment Agreement between the Company and Mr.
David T. Leach effective as of July 1, 1997
(incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-3 (File
No. 33-31191).
10.5 Employment Agreement between the Company and Mr.
Willem van Nieuwenhuyzen effective August 1, 1997
(incorporated by reference to Exhibit 99A to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
10.6 Amended and Restated 1993 Stock Option Plan for
Nonemployee Directors effective as of August 11, 1993
(incorporated by reference to Exhibit 10.33 to the
Company's Registration Statement on Form S-1 (File
33-93804) declared effective on August 22,1995).
10.7 First Amendment to Harbinger Corporation Amended and
Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.50 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
10.8 Third Amendment to Amended and Restated 1993 Stock
Option Plan for Nonemployee Directors (incorporated
by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
10.9 Lease between the Company and 1277 Lenox Park
Boulevard, LLC for office located at 1277 Lenox Park
Boulevard, Atlanta, Georgia dated October 10, 1997
(incorporated by reference to Exhibit 99c to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
10.10 Amended and Restated 1989 Stock Option Plan effective
as of April 15, 1992 (incorporated by reference to
Exhibit 10.39 to the Company's Registration Statement
on Form S-1 (File 33-93804) declared effective on
August 22, 1995).
10.11 Form of Indemnification Agreement between the Company
and Directors (incorporated by reference to Exhibit
10.43 to the Company's Registration Statement on Form
S-1 (File 33-93804) declared effective on August 22,
1995).
10.12 Harbinger Corporation 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.48 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.13 First Amendment to the 1996 Harbinger Corporation
Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Company's Form S-8 Registration
Statement (File 333-30219) filed June 27, 1997).
10.14 Second Amendment to the 1996 Harbinger Corporation
Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Company's Form S-8 Registration
Statement (File 333-42959) filed December 22, 1997).
</TABLE>
<PAGE> 35
<TABLE>
<S> <C>
10.15 Amended and Restated Harbinger Corporation Employee
Stock Purchase Plan (incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.16 First Amendment to Harbinger Corporation Employee
Stock Purchase Plan (incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.17 Form of Amendment to Employment Agreement of James
Travers and Joel Katz (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
10.18 Form of Indemnification Agreement for certain of the
Company's Directors and Officers (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998).
10.19 Third Amendment to the Harbinger Corporation 1996
Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
10.20 Second Amendment to the Amended and Restated
Harbinger Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 99.2 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
10.21 Fourth Amendment to the Harbinger Corporation Amended
and Restated 1993 Stock Option Plan for Nonemployee
Directors (incorporated by reference to Exhibit 99.3
to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
10.22 Third Amendment to the Amended and Restated Harbinger
Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.23 Employment Agreement between the Company and Dave
Bursiek effective December 1, 1996.
10.24 Form of Employment Agreement between the Company and
Dan Manack effective December 4, 1996.
10.25 Amendment No. 1 to Lease between the Company and 1277
Lenox Park Blvd., LLC dated June 5, 1998.
13.1 The following financial information included within
the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1998:
(i) Selected Financial Data;
(ii) Quarterly Results of Operations;
(iii) Management's Discussion and Analysis of
Financial Condition and Results of
Operations;
(iv) Consolidated Financial Statements, Notes to
Consolidated Financial Statements, and
Independent Auditors' Report.
21.1 List of Subsidiaries of Company.
</TABLE>
<PAGE> 36
<TABLE>
<S> <C>
23.1 Consent of KPMG LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for the Year Ended December 31, 1998.
27.2 Restated Financial Data Schedule for the Year Ended December 31, 1997.
27.3 Restated Financial Data Schedule for the Year Ended December 31, 1996.
99.1 Safe Harbor Compliance Statement.
</TABLE>
<PAGE> 1
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
1. PARTIES; EFFECTIVE DATE. This Employment Agreement ("Agreement") is
between Supply Tech, Inc., a Michigan corporation with offices at 1000
Campus Drive, Ann Arbor, Michigan 48104 (the "Company") and R. David
Bursiek of 10215 Governors Drive, Chapel Hill, North Carolina 27514
("Employee" or "you"). This Agreement is effective as of December 1,
1996 ("Effective Date").
2. NATURE OF AGREEMENT; "AT-WILL" EMPLOYMENT.
(a) The Company is the developer, owner and distributor of certain
Electronic Data Interchange computer software and bar coding
software, and provides various related products and
technological and professional services related to such
software (the "Company's Business"). The Company wishes to
hire you as an employee. Your job responsibilities are
generally described in Exhibit A of this Agreement. Your
responsibilities could change as the Company obtains new
projects and reassigns responsibilities. These changes may be
communicated orally, or in writing.
(b) This is not a contract for a specific period of time, and is
not a promise of continued employment. You are an employee "at
will," which means that the Company can terminate your
employment for any reason, with or without "cause," and with
or without notice. You, too, have the right to terminate your
employment with the Company at any time, with or without
cause, and with or without notice to the Company.
(c) You agree to devote your full business time and best efforts
to the Company while employed by the Company. You shall not be
employed by (or retained as a consultant for) any other
company providing products or services similar to the
Company's Business. While employed by the Company, you shall
not engage in any activity that will have an adverse effect
upon your ability to perform the obligations under this
Agreement.
3. COMPENSATION; COMPANY POLICIES.
(a) The Company shall compensate you, and shall provide you the
employment benefits, set forth in Exhibit A, which may be
amended from time to time by the Company. Upon the termination
of your employment with the Company, you shall be paid
severance pay (if applicable) in accordance with the terms and
conditions of Section 8 of this Agreement.
(b) The Company may develop additional personnel policies,
including policies relating to benefits, terms and conditions
of employment, and any terms relating to or affecting the
operation of the Company, including rules, procedures and
regulations required by U.S. or state governments or their
agencies. You agree that compliance with those policies, terms
and conditions is a condition of continued employment with the
Company.
4. THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS.
(a) In the course of your employment with the Company, you may
have access to information or materials that are considered
trade secret, confidential and/or proprietary by the Company
("Information"). Information permits the development and
commercialization of competitive and unique products and
services, and is protected by the Company from unauthorized
use and disclosure. Information includes, but is not limited
to, technical know-how, procedures, technical specifications,
designs, software (both object code and source code), results
of testing, programmer documentation, protocols, processes,
compilations of data, strategic plans, sales and marketing
plans, customer information, supplier information, financial
information and proposed agreements. Information also includes
all written materials identified in writing as "Confidential"
or "Proprietary" or such similar proprietary legend, and oral
information
Company___ 1 Employee___
<PAGE> 2
disclosed in connection with the Information. Information also
includes "Proprietary Materials" identified in Section 4(c)
below.
(b) The Company understands that its current employees may have
had access to the trade secrets and proprietary information of
third parties (that is, persons or companies other than the
Company) during their previous employment. These other trade
secrets may be owned by the former employers or by clients
with whom those former employers did business. The Company
does not permit its employees to disclose, use or incorporate
into the Company's products or services, the unlicensed trade
secrets or proprietary information of third parties. You
acknowledge the foregoing, and represent and warrant that you
will not disclose to the Company, or incorporate into the
Company Information, any trade secrets or proprietary
information of third parties.
(c) Information created by you within the scope of your employment
belongs to the Company and is not owned by you individually.
This Information includes copyrightable works of original
authorship (including but not limited to computer programs,
compilations of information, generation of data, graphic
works, audio-visual materials, technical reports and the
like), ideas, inventions (whether patentable or not) know-how,
processes, trademarks and other intellectual property, whether
proprietary or nonproprietary. You agree that all works of
original authorship created during your employment are "works
for hire" as that term is used in connection with the U.S.
Copyright Act. You agree to disclose promptly to the Company
all ideas, inventions, improvements, works of original
authorship, know-how, trade secrets, processes and the like,
developed or discovered by you in the course of your
employment relating to the business of the Company, or to the
prospective business of the Company, or which utilizes the
Company Information or staff services ("Proprietary
Materials"). To the extent that, by operation of law, you
retain any intellectual property rights in such Proprietary
Materials, you hereby assign to the Company all right, title
and interest in all such Proprietary Materials, including
copyrights, patents, trade secrets, trademarks and know-how.
As used in this Agreement, "Information" includes "Proprietary
Materials."
(d) You agree to cooperate with the Company, at the Company's
expense, in the protection of the Company Information and the
securing of the Company's proprietary rights, including
signing any documents necessary to secure such rights, whether
during or after your employment with the Company.
(e) You agree (i) to not use Information for your own benefit,
(ii) to not disclose Information to any other company or
person without the written permission from a Company officer;
(iii) and to return to the Company all Information and Company
materials upon termination of your employment. You have no
obligation to maintain as confidential any Information that is
entirely in the public domain, or is known to you prior to
disclosure by the Company as evidenced by written, dated
records in your possession, or is received lawfully by you
without the breach of any obligation of confidentiality owed
to the Company.
(f) You may also have access to information that is considered
confidential by third parties with whom the Company does
business, such as customers, suppliers, OEMs and consultants
("Clients"). Such client information shall be maintained as
confidential in accordance with the procedures identified
above.
5. NONSOLICITATION AND NONCOMPETE.
(a) As used in this Section 5, the term "Restricted Period" means:
(1) the number of months for which severance pay is paid to
you in accordance with Section 8 of this Agreement in the
event that you are terminated by the Company for a reason
other than gross negligence or fraud; or (2) in all other
cases, 12 months. As used in this Section 5, the
Company___ 2 Employee___
<PAGE> 3
term "Indirectly" means as an employee, agent, consultant,
advisor, principal, proprietor, owner, partner or shareholder
(other than by holding shares listed on a stock exchange that
does not exceed 5% of the outstanding shares listed).
(b) During the term of your employment and during the Restricted
Period thereafter, you agree not to directly or indirectly
hire, or solicit for hire, any then-current Company employees,
or to contact them for the purpose of inducing them to leave
the Company.
(c) During the term of your employment and during the Restricted
Period thereafter, you agree not to directly or indirectly:
(i) contact any then-current Company customers for the purpose
of inducing them to leave the Company or to discourage them
from doing business with the Company; or (ii) within the
geographic area to which you were assigned to work by the
Company during the immediately preceding year, compete with
the Company or engage in an business which is competitive with
the Company's Business, without the express prior written
approval of the Company.
6. ENFORCEMENT OF AGREEMENT; INJUNCTIVE RELIEF; ATTORNEYS' FEES AND
EXPENSES.
You acknowledge that violation of this Agreement will cause irreparable
damage to the Company, entitling it to injunctive relief and possible
money damages. If you violate this Agreement, in addition to all other
remedies available to the Company at law, in equity, and under
contract, you agree that you are obligated to pay all the Company's
costs of enforcement of this Agreement, including attorneys' fees and
expenses. The parties agree that any litigation over this Agreement
shall be in a court of competent jurisdiction in Washtenaw County,
Michigan, or the Eastern District of Michigan, Southern Division, and
the parties hereby consent to personal jurisdiction and venue in such
courts.
7. DRUG/ALCOHOL POLICY. While on company time or in the representation of
the Company, it is understood that there will be no use of illegal
mind-altering drugs or chemicals. It is also understood that upon
arrival to work that there will be no traces of mind-altering drugs or
chemicals in the employee's body. This includes amount of blood alcohol
that is beyond legal driving limits. As alcohol is not considerate an
illegal drug, it is understood that its mind-altering effects can
reduce employees judgment and is not to be consumed during normal
business hours. It is understood that if alcohol is being served at an
event in which the Company has not been hired to provide services for,
an employee may consume alcohol, but must not exceed the legal blood
level for driving. Failure to comply with the above may result in
termination of employment.
8. SEVERANCE PAY.
(a) As used in this Section 8, the term "Base Salary" means only
the base salary paid to you and does not include bonus,
benefits, expenses, or options, if any.
(b) Upon the termination by the Company of your employment with
the Company for any reason other than for gross negligence or
fraud, you shall be paid severance pay in accordance with the
following terms and conditions.
(i) If your employment with the Company is terminated
during the first year of your employment, you shall
be paid a severance pay equal to 6 months of your
Base Salary as of the date of termination;
(ii) If your employment with the Company is terminated
during the second year of your employment, you shall
be paid a severance pay equal to 9 months of your
Base Salary as of the date of termination; or
Company___ 3 Employee___
<PAGE> 4
(iii) If your employment with the Company is terminated at
any time after the second year of your employment,
you shall be paid a severance pay equal to 12 months
of your Base Salary as of the date of termination.
9. GENERAL.
(a) This Agreement shall be construed in accordance with the laws
of the state of Michigan, and shall inure to the benefit and
be binding upon the parties and their heirs, representatives,
successors and assigns.
(b) The terms of this Agreement are deemed to be severable, with
the effect that if any of the provisions of this Agreement
shall be held to be invalid or enforceable by any court of
competent jurisdiction, such provision shall be deemed revised
so as to reflect the intent of the parties expressed therein
and such revisions or determinations of invalidity or
unenforceability shall not affect any other provision of this
Agreement.
(c) This Agreement contains the entire understanding of you and
the Company with respect to the subject matter of employment;
and the status of employment at will cannot be amended except
by a written agreement between the parties. You represent that
you have not been given any oral or written promises relating
to employment that are not contained in this Agreement,
including in any of the Exhibits, which are made a part of
this Agreement.
THE PARTIES HAVE READ THE FOREGOING AGREEMENT,
UNDERSTAND ITS TERMS AND AGREE TO BE BOUND BY THEM.
SUPPLY TECH, INC. EMPLOYEE
By:
------------------------------------ ------------------------------
Ted C. Annis R. David Bursiek
Its: Chief Executive Officer
Company___ 4 Employee___
<PAGE> 1
EXHIBIT 10.24
EMPLOYMENT AND CONFIDENTIALITY AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as of the 4th
day of December, 1996, by and between HARBINGER CORPORATION ("HC"), including
its wholly owned affiliates and Daniel L. Manack ("Employee"), an individual.
For and in consideration of the mutual covenants described below, the parties
hereto agree as follows:
1. EMPLOYMENT. HC agrees to employ or continue to employ Employee,
and Employee agrees to accept and continue such employment, upon the following
terms and conditions.
2. DUTIES. (a) Employee shall assume the responsibilities and perform the
Duties specified in EXHIBIT A ("Duties"). Such Duties may be revised from time
to time at the sole discretion of HC. Employee agrees to devote his or her full
time and energy to the furtherance of the business of HC and shall not during
the term hereof work or perform services in any advisory or other capacity for
any individual, firm, company, or corporation other than for HC without HC's
prior written consent. This Agreement may be supplemented from time to time by
rules and regulations of employment issued by HC, including, without limitation,
such rules and regulations described in the HC employee handbook, and Employee
agrees to adhere to these rules and regulations.
(b) If Employee desires to perform any services during the term hereof
for anyone other than HC, whether or not Employee is compensated, then Employee
agrees to contact an officer of HC to discuss this matter. HC will review the
request and advise Employee of HC's approval or disapproval of the proposed
outside work, in HC's sole discretion. In making its decision, HC may consider
such factors as whether the outside work may be harmful to the business of HC or
interfere with Employee's ability to satisfactorily discharge his or her Duties,
whether the outside work is based directly or indirectly on a business practice
of HC or idea that was conceived by Employee while on HC's payroll, or whether
such outside work could result in a violation of any covenants of Employee in
this Agreement. In this case, HC will notify Employee of HC's approval or
disapproval of such request to perform outside work within a reasonable period
of time after HC is notified by Employee of the request to perform such
services. Unless HC grants such approval in writing, Employee agrees to refrain
from such outside work.
3. COMPENSATION. HC shall pay as compensation for all the services to
be rendered the salary and additional compensation, if any, described in EXHIBIT
B (the "Employee Compensation") and as the Employee Compensation may be
determined by HC in its sole discretion from time to time. HC's obligation to
pay Employee any Employee Compensation shall cease upon termination of
Employee's employment with HC. Employee's annual salary shall be prorated on a
daily basis for the years in which Employee commences and terminates his or her
employment relationship with HC.
4. TERM AND TERMINATION. This Agreement shall be effective upon
execution by the parties and shall remain in full force and effect for an
indefinite period of time. The parties agree that Employee's term of employment
may be terminated at any time, for any reason or for no reason, for cause or not
for cause, with or without notice, by HC or Employee. Upon termination of
employment for any reason, Employee shall return immediately to HC all
documents, property, and other records of HC, and all copies thereof, within
Employee's possession, custody or control, including but not limited to any
materials containing any Trade Secrets or Confidential Information (as defined
below) or any portion thereof.
5. OWNERSHIP.
(a) For purposes of this Agreement, "Work Product" shall mean the
data, materials, documentation, computer programs, inventions (whether or not
patentable), and all works of authorship, including all worldwide rights therein
under patent, copyright, trade secret, confidential information, or other
property right, created or developed in whole or in part by Employee, whether
prior to the date of this Agreement or in the future, either (i) while retained
by HC and that have been or will be paid for by HC, or (ii) while employed by HC
(whether developed during work hours or not). All Work Product shall be
considered work made for hire by the Employee and owned by HC. If any of the
Work Product may not, by operation of law, be considered work made for hire by
Employee for HC, or if ownership of all right, title, and interest of the
intellectual property rights therein shall not otherwise vest exclusively in HC,
Employee hereby assigns to HC, and upon the future creation thereof
automatically assigns to HC, without further consideration, the ownership of all
Work Product. HC shall have the right to obtain and hold in its own name
copyrights, patents, registrations, and any other protection available in the
Work Product. Employee agrees to perform, during or after Employee's employment,
such further acts as may be necessary or desirable to transfer, perfect, and
defend HC's ownership of the Work Product that are reasonably requested by HC.
(b) Employee agrees that during the term of employment, any money
or other remuneration received by Employee for services
rendered to a customer or potential customer of HC shall be
the property of HC.
<PAGE> 2
6. TRADE SECRETS AND CONFIDENTIAL INFORMATION.
(a) HC may disclose to Employee certain Trade Secrets and
Confidential Information (defined below). Employee acknowledges and agrees that
the Trade Secrets and Confidential Information are the sole and exclusive
property of HC (or a third party providing such information to HC) and that HC
or such third party owns all worldwide rights therein under patent, copyright,
trade secret, confidential information, or other property right. Employee
acknowledges and agrees that the disclosure of the Trade Secrets and
Confidential Information to Employee does not confer upon Employee any license,
interest or rights of any kind in or to the Trade Secrets or Confidential
Information. Employee may use the Trade Secrets and Confidential Information
solely for the benefit of HC while Employee is employed or retained by HC.
Except in the performance of services for HC, Employee will hold in confidence
and not reproduce, distribute, transmit, reverse engineer, decompile,
disassemble, or transfer, directly or indirectly, in any form, by any means, or
for any purpose, the Trade Secrets or the Confidential Information or any
portion thereof. Employee agrees to return to HC, upon request by HC, the Trade
Secrets and Confidential Information and all materials relating thereto.
(b) Employee's obligations under this Agreement with regard to the
Trade Secrets shall remain in effect for as long as such information shall
remain a trade secret under applicable law. Employee acknowledges that its
obligations with regard to the Confidential Information shall remain in effect
while Employee is employed or retained by HC and for three (3) years thereafter.
As used herein, "Trade Secrets" means information of HC, its licensors,
suppliers, customers, or prospective licensors or customers, including, but not
limited to, technical or nontechnical data, formulas, patterns, compilations,
programs, devices, methods, techniques, drawings, processes, financial data,
financial plans, product plans, or a list of actual or potential customers or
suppliers, which (a) derives economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure or use; and (b)
is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy. As used herein, "Confidential Information" means
information, other than Trade Secrets, that is of value to its owner and is
treated as confidential, including, but not limited to, future business plans,
licensing strategies, advertising campaigns, information regarding executives
and employees, and the terms and conditions of this Agreement.
7. CUSTOMER NON-SOLICITATION. Employee agrees that for a period
of eighteen (18) months immediately following termination of Employee's
employment with HC for any reason, including, without limitation, voluntary
resignation from employment by Employee ("Non-Solicitation Period"), Employee
shall not, on Employee's own behalf or on behalf of any person, firm,
partnership, association, corporation or business organization, entity or
enterprise, solicit, contact, call upon, communicate with or attempt to
communicate with any customer or prospect of HC, or any representative of any
customer or prospect of HC, with a view to sale or providing of any deliverable
or service competitive or potentially competitive with any deliverable or
service sold or provided or under development by HC during the time of two (2)
years immediately preceding cessation of Employee's employment with HC, provided
that the restrictions set forth in this paragraph shall apply only to customers
or prospects of HC, or representatives of customers or prospects of HC, with
which Employee had contact during such two (2) year period. The actions
prohibited by this paragraph shall not be engaged in by Employee directly or
indirectly, whether as manager, salesperson, agent, technical support, sales, or
service representative, or otherwise.
8. EMPLOYEE NON-SOLICITATION. Employee agrees that Employee shall
not call upon, solicit, recruit, or assist others in calling upon, recruiting or
soliciting any person who is or was an employee of HC within the
Non-Solicitation Period, for the purpose of having such person work in any other
corporation, association, entity, or business engaged in providing any of the
following: (i) development and operation of computer networks (the "Hosts") to
facilitate electronic data interchange and electronic commerce ("EDI")
transactions and cash management services; (ii) development, marketing,
distribution, and licensing of personal computer, workstation and networking
software to facilitate EDI and transaction processing and other communications
with the Hosts; (iii) development, marketing, distribution, and licensing of
software products for operation on personal computers and workstations relating
to the performance of cash management services, including balance and
transaction reporting, transfers, stop payments, account reconciliation, check
writing, financial record keeping, messaging, and information services; and (iv)
consulting, training, and implementation of the products and services described
in (i), (ii) and (iii) above (collectively the "Company Business").
9. NONCOMPETITION. Employee agrees that, without the prior written
consent of HC, Employee shall not, so long as Employee is employed hereunder and
for a period of one (1) year thereafter within the area described in EXHIBIT C
(the "Territory"), directly or indirectly perform the Duties on behalf of any
person, firm, corporation, or other entity in the Company Business, if the
Company is also then still engaged in the Company Business.
10. WARRANTIES OF EMPLOYEE.
(a) Employee warrants to HC that (i) Employee is not presently
under any contract or agreement with any party that will prevent Employee from
performing
<PAGE> 3
the Duties assigned by HC, and (ii) Employee is not in breach of any
agreement with respect to any trade secrets or confidential information owned by
any other party.
(b) Employee agrees to indemnify and hold harmless HC, any
affiliated corporation, and their respective shareholders, directors, officers,
agents, and employees, from and against any and all liability, including payment
of attorneys' fees, arising directly or indirectly from a violation of Section
10(a).
11. EQUITABLE RELIEF. The parties to this Agreement acknowledge
that a breach by Employee of any of the terms or conditions of this Agreement
will result in irrevocable harm to HC and that the remedies at law for such
breach may not adequately compensate HC for damages suffered. Accordingly,
Employee agrees that in the event of such breach, HC shall be entitled to
injunctive relief or such other equitable remedy as a court of competent
jurisdiction may provide. Nothing contained herein will be construed to limit
HC's right to any remedies at law, including the recovery of damages for breach
of this Agreement.
12. SEVERABILITY. If any provision or part of any provision of this
Agreement is held invalid or unenforceable by a court of competent jurisdiction,
such holding shall not affect the enforceability of any other provisions or
parts thereof, and all other provisions and parts thereof shall continue in full
force and effect.
13. MISCELLANEOUS. This Agreement shall not be amended or modified
except by a writing executed by both parties. This Agreement shall be binding
upon and inure to the benefit of HC and its successors and assigns. Due to the
personal nature of this Agreement, Employee shall not have the right to assign
Employee's rights or obligations under this Agreement without the prior written
consent of HC. This Agreement shall be governed by the laws of the States of
Georgia, Michigan, Texas, and California without regard to its rules governing
conflicts of law. This Agreement and the attached Exhibits represent the entire
understanding of the parties concerning the subject matter hereof and supersede
all prior communications, agreements and understandings, whether oral or
written, relating to the subject matter hereof. All communications required or
otherwise provided under this Agreement shall be in writing and shall be deemed
given when delivered to the address provided below such party's signature (as
may be amended by notice from time to time), by hand, by courier or express
mail, or by registered or certified United States mail, return receipt
requested, postage prepaid. The exhibits attached hereto are incorporated herein
by this reference.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
affixed their hands and seals effective as of the date first above written.
HARBINGER CORPORATION
By:
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Title: Michael Lieb, Director of Human Resources
Date:
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1055 Lenox Park Boulevard
Atlanta, Georgia 30319
EMPLOYEE: Daniel L. Manack
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Signature
Date:
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Address:
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<PAGE> 1
EXHIBIT 10.25
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (herein called this "First Amendment"),
made and entered into this 5th day of June, 1998, by and between 1277 LENOX PARK
BOULEVARD, LLC, a Georgia limited liability company (herein called "Lessor"),
having an office at c/o Lenox Park Associates, Suite 100, 1055 Lenox Park
Boulevard, Atlanta, Georgia 30319, and HARBINGER CORPORATION, a Georgia
corporation (herein called "Lessee") having an office at Suite 340, 1055 Lenox
Park Boulevard, Atlanta, Georgia 30319;
W I TN E S S E T H: That,
WHEREAS, by virtue of that certain Lease dated October 10, 1997 by and
between Lessor and Lessee (herein called the "Lease"), Lessor leased to Lessee
certain space in the Building (as defined in the Lease);
WHEREAS, the Lease contained an option to expand the Premises (as
defined in the Lease) to include the fourth (4th) floor of the Building;
WHEREAS, Lessor and Lessee desire to further amend the Lease, among
other things, to exercise the expansion option and include the fourth (4th)
floor of the Building in the Premises, all as hereinafter provided;
NOW, THEREFORE, for and in consideration of the premises, TEN DOLLARS,
($10.00) paid by Lessee to Lessor and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
have agreed, and do hereby agree, as follows:
1. Definitions. All capitalized terms shall have the meaning
given to them in the Lease, unless otherwise defined in this First Amendment.
2. Amendments. The Lease has been and hereby is amended as
follows:
2.1 Option to Expand. Section 43.1 has been and is hereby
amended to delete Section 43.1 in its entirety and place in lieu
thereof the following new Section 43.1:
43.1 Lessee has the option to lease and expand the
"Premises" under this Lease (the "Expansion Option") to include
within its definition up to all of the fourth (4th) floor (as may be
leased by Lessee, called the "Expansion Space"), and all of the terms
and conditions of this Lease shall apply with full force and effect
to the expanded Premises after such expansion except as provided for
in this Section 43. To exercise the Expansion Option, Lessee shall
deliver written notice to Lessor on or before the Commencement Date
which notice shall specify the space to be a part of the expansion.
After such exercise and no later
<PAGE> 2
than ninety (90) days after the Commencement Date, Lessee shall
deliver to Lessor approved plans for the construction of improvements
to the Expansion Space (the "Expansion Space Plans"), which Expansion
Space Plans shall be of the same or better quality and detail as the
Premises Plans. The Lessor's approval of the Expansion Plans shall
not be unreasonably withheld, conditioned or delayed. The
commencement date for the Expansion Space (the "Expansion Space
Commencement Date") shall be the later of (i) the date that is six
(6) months after the Commencement Date, or (ii) if Lessee has timely
delivered the approved Expansion Space Plans, ten (10) days after
substantial completion of the tenant improvements in the Expansion
Space, with Lessee's obligation to pay Annual Base Rental, Base Rent,
Annual Step Rental, Amounts Due, and Proportionate Share of Common
Operating Expenses for such Expansion Space beginning on such
Expansion Space Commencement Date, with Annual Base Rental, Base
Rent, Annual Step Rental, Amounts Due, and Proportionate Share of
Common Operating Expenses paid to Lessor at the rates provided for in
the Lease. For the avoidance of doubt, if Lessee fails to deliver
timely the approved Expansion Space Plans, the Expansion Space
Commencement Date will occur no later than the date that is six (6)
months after the Commencement Date, even if the Expansion Space is
not ready for occupancy on that date. If Lessee elects to lease less
than the entire fourth (4th) floor, then Lessor shall have the right
to approve the location of the space that Lessee shall lease pursuant
to this Section 43 on the fourth (4th) floor. Lessor's approval right
shall not be unreasonably withheld, conditioned or delayed. Should
Lessee request any changes to the approved Expansion Space Plans and
such requested change increases the cost of construction or causes a
delay the completion of the Expansion Space Construction, then Lessee
shall be responsible to pay such increased costs and will be
responsible for the rent as of the date that the Expansion Space
Commencement Date would have occurred but for the delay, as the case
may be, even if Lessee is not yet occupying the Expansion Space.
Lessor shall cause the Expansion Space Improvements
(hereinafter defined) to be constructed and completed substantially
in accordance with the approved Expansion Space Plans. Lessor shall
cause the Expansion Space Improvements to be completed within the
later of 90 days after delivery of Expansion Space Plans or six (6)
months after the Commencement Date.
For purposes of this paragraph 43.1, the term "substantial
completion" shall have the same definition as such term has in
paragraph 10.1.
Upon the substantial completion of the Expansion Space
Improvements, Lessor shall notify Lessee of such completion, and the
parties hereto within three (3) days after such notice shall perform
a walk-through inspection of the Expansion Space Improvements. During
such inspection the parties shall prepare
-2-
<PAGE> 3
a punch-list of defective or incomplete items, if any, which items
Lessor shall correct within thirty (30) days after the date of such
inspection.
All references contained in Section 43.1 shall refer to the references as
redefined by this First Amendment.
2.2 Exercise of Option to Expand. In accordance with the
new Section 43.1 above, by its execution of this First Amendment
Lessee has exercised and hereby exercises its Expansion Option for
the entire fourth (4th) floor of the Building, being approximately
22,958 rentable square feet. Lessor and Lessee acknowledge and agree
that upon the Expansion Space Commencement Date the fourth (4th)
floor shall be included as a part of the "Premises", and the
Expansion Space Improvements shall be included as a part of the
"Premises Improvements."
2.3 Security. By their execution of this First Amendment
Lessor and Lessee acknowledge that Lessee has substituted and/or
replaced the Letter of Credit with a replacement letter of credit in
the face amount of $3,473,000.00 in accordance with Section 43. The
Lease has been and is hereby amended by deleting Exhibit "F" of the
Lease in its entirety and by substituting in lieu thereof Exhibit "F"
to this First Amendment.
2.4 General Contractor. The general contractor (the
"General Contractor") for the build out of the Expansion Space in
accordance with the Expansion Space Plans shall be selected in the
following manner:
2.4.1 After such exercise and no later than sixty
(60) days after the Commencement Date, Lessee shall deliver to
Lessor two (2) names of qualified general contractors and
Lessor shall deliver to Lessee one (1) name of a qualified
general contractor.
2.4.2 After Lessor's receipt of the Expansion
Space Plans, as approved by Lessor, the Lessor shall solicit
bids from each contractor, which bids shall set forth the
price, terms, conditions and time schedule that such
contractor would require if chosen to construct the Expansion
Space in accordance with the Expansion Space Plans. Such bids
must be received within fourteen (14) days after the date
hereof to be considered.
2.4.3 Lessor and Lessee shall, within ten (10)
business days after the receipt of such bids, mutually agree
on a General Contractor. All other factors being equal, Lessor
and Lessee will choose the contractor that submits the lowest
bid. If a discrepancy between Lessor and Lessee remains in the
selection of a contractor, then Lessee's selection of a
contractor shall prevail.
-3-
<PAGE> 4
2.4.4 Notwithstanding the foregoing of this
Section 2.4 to the extent that this Section 2.4 conflicts with
any provision in the Lease for the selection of a General
Contractor, then this Section 2.4 shall control.
3. Ratification. Both Lessor and Lessee acknowledge and confirm
that the Lease, as amended hereby, is in full force and effect. This Lease, as
amended hereby, inures to the benefit of and is binding upon the parties hereto
and their respective successors and assigns. This First Amendment shall be
governed by and construed under the laws of the State of Georgia.
4. Brokerage. Lessor and Lessee covenant, warrant and represent
to each other that no broker except TPA Realty Services, Inc. (herein called
"TPA"), which represents Lessor, and Davidson Associates, Inc. (herein called
"Broker"), which represents Lessee, was instrumental in consummating this First
Amendment and that Lessor and Lessee have had no conversations or negotiations
with any brokers except for TPA and Broker concerning Lessee's leasing of the
Expansion Space. Lessor and Lessee agree to indemnify and hold harmless the
other against and from any claims for any brokerage commissions and all costs,
expenses, and liabilities, including, without limitation, attorneys' fees and
expenses, arising out of any conversations or negotiations had by the
indemnifying party with any broker other than TPA and Broker. Lessee shall be
solely responsible for paying all commissions and other compensation due Broker
in connection with this Lease and Lessor shall be solely responsible for paying
all commissions and other compensation due TPA in connection with this First
Amendment.
5. Counterparts. This First Amendment may be executed in any
number of counterparts, each of which shall be deemed to be an original, and all
of such counterparts shall constitute one agreement. To facilitate execution and
delivery of this First Amendment, the parties may execute and exchange
counterparts of the signature pages by telefax. The signature of any party to
any counterpart may be appended to any other counterpart.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals the day and year first above written.
LESSOR:
1277 LENOX PARK BOULEVARD, LLC, a
Georgia limited liability company
BY: Techpole, Inc., a Georgia corporation,
its manager
By: /s/ Richard R. O'Brien
--------------------------------------
Richard R. O'Brien
President
[SEAL]
LESSEE:
HARBINGER CORPORATION, a Georgia
corporation
By: /s/ James Davis
--------------------------------------
Name:
Title:
[CORPORATE SEAL]
<PAGE> 6
EXHIBIT "F"
(LETTER OF CREDIT SCHEDULE)
<TABLE>
<S> <C>
INITIAL BALANCE: $3,473,000.00
---------------
<CAPTION>
REDUCTION DATE: BALANCE:
-------------- -------
<S> <C>
August 1, 1998 $2,944,460.00
November 1, 1998 $2,415,920.00
February 1, 1999 $1,749,632.00
May 1, 1999 $1,083,344.00
August 1, 1999 $ 442,521.00
</TABLE>
<PAGE> 1
EXHIBIT 13.1
SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(In thousands, except per share data) Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues....................................... $135,151 $ 118,221 $ 89,245 $ 60,077 $ 45,454
Direct costs................................... 39,436 30,510 23,112 14,994 10,558
-------- --------- -------- -------- --------
Gross margin................................... $ 95,715 $ 87,711 $ 66,133 $ 45,083 $ 34,896
======== ========= ======== ======== ========
Operating income (loss)........................ $(12,652) $ (22,705) $(10,667) $ 1,314 $ 505
======== ========= ======== ======== ========
Net loss applicable to common
shareholders........................... $(14,712) $ (39,047) $(16,091) $ (444) $ (273)
======== ========= ======== ======== ========
Diluted net loss per share of
common stock........................... $ (0.35) $ (1.02) $ (0.46) $ (0.02) $ (0.01)
======== ========= ======== ======== ========
Weighted average number of
common shares outstanding.............. 41,557 38,162 35,080 28,573 24,112
======== ========= ======== ======== ========
- -----------------------------------------------
Pooled Basis of Accounting for Acquisitions....
Operating income (excluding special charges)*.. $ 20,138 $ 17,850 $ 2,808 $ 2,474 $ 4,822
======== ========= ======== ======== ========
Net income applicable to common
shareholders**......................... $ 15,396 $ 13,435 $ 3,366 $ 1,608 $ 2,524
======== ========= ======== ======== ========
Diluted net income per common share**.......... $ 0.36 $ 0.33 $ 0.09 $ 0.05 $ 0.10
======== ========= ======== ======== ========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
(In thousands) At December 31,
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital............................... $ 79,303 $ 94,307 $ 60,392 $ 73,167 $ 4,550
======== ========= ======== ======== ========
Total assets.................................. $178,369 $ 183,559 $131,199 $125,867 $ 34,751
======== ========= ======== ======== ========
Long-term obligations, redeemable preferred
stock and puttable common stock....... -- $ 1,608 $ 7,116 $ 803
======== ========= ======== ======== ========
Shareholders' equity.......................... $120,019 $ 130,018 $ 94,118 $ 93,196 $ 10,052
======== ========= ======== ======== ========
</TABLE>
* Excludes $27.0 million, $40.6 million, $13.5 million, $1.2 million and
$4.3 million charges for 1998, 1997, 1996, 1995 and 1994, respectively,
for purchased in-process product development, write-off of software
development costs, restructuring, acquisition related and other one-time
charges. Excludes $5.8 million in net general and administrative charges
for 1998, principally related to a provision for doubtful accounts.
** Excludes all charges per note * above. In addition, excludes $313,000,
$7.2 million, and $954,000 equity in losses of joint ventures for 1997,
1996, and 1995 respectively. Excludes operating losses of all discontinued
operations and net losses on disposals of discontinued operations totaling
$6.2 million and $14.4 million in 1998 and 1997, respectively. Also
excludes extraordinary loss on debt extinguishment of $2.4 million in
1997. The resulting adjusted net income applicable to common shareholders
is tax effected at 39%.
<PAGE> 2
SELECTED FINANCIAL DATA (CONTINUED)
Supplemental Information
STATEMENT OF OPERATIONS DATA AS ORIGINALLY REPORTED (EXCLUDING ACQUISITIONS
ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING):
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
- ------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues............................... $135,151 $90,415 $38,236 $19,846 $11,208
======== ======= ======= ======= =======
Operating income*...................... $ 20,138 $18,791 $ 7,619 $ 2,807 $ 1,919
======== ======= ======= ======= =======
Net income applicable to common
shareholders**................. $ 15,396 $12,647 $ 4,672 $ 1,363 $ 809
======== ======= ======= ======= =======
Diluted net income per common share**.. $ 0.36 $ 0.31 $ 0.18 $ 0.07 $ 0.05
======== ======= ======= ======= =======
</TABLE>
* The results of operations of Premenos, a pooling-of-interests, are
excluded from all periods prior to the merger in 4Q97. The results of
operations of STI, a pooling-of-interests, are excluded from all periods
prior to the merger in 1Q97. Excludes $27.0 million, $40.6 million, $8.8
million and $4.3 million of pre-tax charges for 1998, 1997, 1996 and 1994,
respectively, for purchased in-process product development, write-off of
software development costs, restructuring, acquisition related and other
one-time charges. Excludes $5.8 million in net general and administrative
charges for 1998, principally related to a provision for doubtful
accounts.
** Excludes all charges per note * above. The results of operations of
Premenos, a pooling-of-interests, are excluded from all periods prior to
the merger in 4Q97. The results of operations of STI, a pooling-of-
interests, are excluded from all periods prior to the merger in 1Q97.
In addition, excludes $7.0 million and $954,000 for 1996 and 1995,
respectively, of equity in loss of HNS. Also excludes $2.4 million loss
on extinguishment of debt in 1997. Excludes operating losses of all
discontinued operations and net losses on disposals of discontinued
operations totaling $6.2 million and $14.4 million in 1998 and 1997. The
resulting net income applicable to common shareholders is tax effected
at 39%.
<PAGE> 3
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data) THREE MONTHS ENDED
- --------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues.................................................. $30,052 $33,178 $ 35,420 $36,501
======= ======= ======== =======
Gross margin.............................................. $21,910 $23,885 $ 24,846 $25,074
======= ======= ======== =======
Operating income (loss)................................... $(2,296) $ 1,339 $(16,755) $ 5,060
======= ======= ======== =======
Net income (loss) applicable to common shareholders....... $(1,338) $ 1,960 $(23,444) $ 8,110
======= ======= ======== =======
Net income (loss) per share of common stock............... $ (0.03) $ 0.04 $ (0.56) $ 0.19
======= ======= ======== =======
Weighted average number of common
shares outstanding................................ 41,046 44,480 42,163 41,772
======= ======= ======== =======
Net income applicable to common shareholders (excluding
charges listed separately below)*................. $ 4,418 $ 4,696 $ 2,980 $ 3,302
======= ======= ======== =======
Net income per common share (excluding charges listed
separately below)*................................ $ 0.10 $ 0.11 $ 0.07 $ 0.08
======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
(In thousands, except per share data) THREE MONTHS ENDED
- -----------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues.................................................. $ 24,320 $28,418 $ 29,153 $ 36,330
========= ======= ======== ========
Gross margin.............................................. $ 17,638 $21,052 $ 21,683 $ 27,338
========= ======= ======== ========
Operating income (loss)................................... $ (14,911) $ 3,767 $ 912 $(12,473)
========= ======= ======== ========
Net income (loss) applicable to common shareholders....... $ (16,353) $ 2,724 $ (8,970) $(16,448)
========= ======= ======== ========
Net income (loss) per share of common stock............... $ (0.45) $ 0.07 $ (0.23) $ (0.40)
========= ======= ======== ========
Weighted average number of common
shares outstanding................................ 36,250 38,987 38,930 40,749
========= ======= ======== ========
--------
Net income applicable to common shareholders (excluding
charges listed separately below)**................ $ 1,254 $ 2,745 $ 3,706 $ 5,730
========= ======= ======== ========
Net income per common share (excluding charges listed
separately below)**............................... $ 0.03 $ 0.07 $ 0.09 $ 0.13
========= ======= ======== ========
</TABLE>
* Excludes pre-tax charge of $8.0 million for the quarter ended March 31,
1998, $5.0 million for the quarter ended June 30, 1998 and $14.0 million
for the quarter ended September 30, 1998 for purchased in-process product
development, write-off of software development costs, restructuring,
acquisition related and other charges. Also excludes $6.5 million in
general and administrative charges and $700,000 in recovery related to
allowance for doubtful accounts for the quarters ended September 30 and
December 31, 1998, respectively. Also excludes losses on discontinued
operations of TrustedLink Procurement ("TLP") of $217,000 for the quarter
ended March 31, 1998, $637,000 for the quarter ended June 30, 1998 and
$938,000 for the quarter ended September 30, 1998. Also excludes a $6.4
million loss on the disposal of TLP in the quarter ended September 30,
1998 and income of $2.0 million on the disposal of TrustedLink Banker
"(Banker") division for the quarter ended December 31, 1998. The resulting
adjusted net income applicable to common shareholders is tax affected at
39%.
** Excludes pre-tax charge of $16.2 million for quarter ended March 31,
1997, $3.8 million for the quarter ended September 30, 1997 and $20.5
million for at the quarter ended December 31, 1997 for purchased
in-process product development, write-off of software development costs,
restructuring, acquisition related and other charges. Also excludes a $2.4
million charge for quarter ended March 31, 1997 for extraordinary loss on
debt extinguishment and a $4.0 million charge for quarter ended December
31, 1997 for loss on disposal of Banker, including provision for operating
losses during phase-out period. Also excludes results of discontinued
operations of Banker and TLP of $47,000 income for the quarter ended March
31, 1997, $12,000 loss for the quarter ended June 30, 1997, $10.5 million
loss for the quarter ended September 30, 1997 and $49,000 income for the
quarter ended December 31, 1997. The resulting adjusted net income
applicable to common shareholders is tax affected at 39%.
<PAGE> 4
OVERVIEW
ABOUT THE COMPANY
Harbinger Corporation (the "Company") generates revenues from various
sources, including for services and license fees and royalties 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.
As a result of acquisitions in the last three years, the Company
incurred acquisition and integration related, restructuring and other charges
("Charges") during 1996, 1997 and 1998 of $13.4 million, $40.6 million and $27.0
million, respectively. The costs related to acquisitions and integration include
activities such as cross training, planning, product integration and marketing
("Integration Activities"). Due to Integration Activities in the years ended
December 31, 1998 and 1997, certain internal expense allocations ("Integration
Activity Costs") included within the Charges in the consolidated statements 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. On
September 30, 1998 the Company implemented a restructuring plan that included
the termination of approximately 10% of its personnel, the announcement of the
phase-out of certain non-strategic software products and the realignment of its
internal organizational structure, including the roles of certain senior
management. The costs related to restructuring include asset and intangible
asset write-downs, termination benefits to former employees and estimates for
lease termination costs and liabilities associated with phased-out products. A
portion of Charges includes management estimates. Actual costs could differ from
such estimates.
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 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.
On September 30, 1998 the Company announced its intention to divest its
TrustedLink Procurement business (see Note 12 to the accompanying audited
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 audited consolidated statements of
operations.
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. As of December 31, 1998 the Company had
repurchased 1,562,000 shares of common stock at an aggregate cost of $7.4
million.
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 year ended December
<PAGE> 5
31, 1998. In connection with the EDI Works! acquisition, the Company incurred
Charges of $805,000 in the consolidated statement of operations for the year
ended December 31, 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.
PRIOR ACQUISITIONS
The company completed 13 acquisitions in 1997 and 1996, through a
combination of cash outlays totaling $23.9 million, the issuance of 13,186,000
shares of the Company's common stock and the issuance of 606,000 stock options
and warrants. One acquisition was accounted for by the Company prior to the
January 1, 1997 acquisition date using the equity method of accounting, which
reflected losses in the Company's 1996 statements of operations. Two of the 1997
acquisitions were accounted for using the pooling-of-interests method of
accounting and the Company's financial position and results of operations were
retroactively restated for all periods prior to the respective acquisition
dates. The acquisitions completed during 1997 and 1996 are fully described in
Note 2 to the Company's accompanying consolidated financial statements.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship of consolidated statements of operations data items to total
revenues.
<TABLE>
<CAPTION>
Percentage of Total Revenues
---------------------------------
Years Ended December 31,
---------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
Services ..................................................................... 65.2% 53.6% 51.8%
Software ..................................................................... 34.8 46.4 48.2
----- ----- -----
Total revenues .......................................................... 100.0 100.0 100.0
----- ----- -----
Direct costs:
Services ..................................................................... 26.1 19.2 18.3
Software ..................................................................... 3.1 6.6 7.6
----- ----- -----
Total direct costs ...................................................... 29.2 25.8 25.9
----- ----- -----
Gross margin ............................................................ 70.8 74.2 74.1
----- ----- -----
Operating costs:
Selling and marketing ........................................................ 23.3 22.6 28.0
General and administrative ................................................... 22.9 17.6 19.4
Depreciation and amortization ................................................ 6.0 6.0 5.3
Product development .......................................................... 8.0 12.9 18.3
Charge for purchased in-process product development,
write-off of software development costs, restructuring,
acquisition related and other charges ................................... 20.0 34.3 15.1
----- ----- -----
Total operating costs ............................................ 80.2 93.4 86.1
----- ----- -----
Operating loss ............................................. (9.4) (19.2) (12.0)
----- ----- -----
Interest income, net ............................................................. (3.6) (3.3) (3.2)
Equity in losses of joint ventures ............................................... -- 0.3 8.1
----- ----- -----
Loss from continuing operations
before income taxes ..................................... (5.8) (16.2) (16.9)
Income tax expense ............................................................... 0.5 2.6 1.1
----- ----- -----
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Loss from continuing operations ................................................. (6.3) (18.8) (18.0)
----- ----- -----
Loss from operations of TrustedLink Procurement business
and TrustedLink Banker division .................................................................. (1.3) (8.8) --
Loss on disposal of TrustedLink Procurement business and
TrustedLink Banker division, including provisions for operating losses during phase-out periods (3.3) (3.4) --
----- ----- -----
Loss before extraordinary item .................................................. (10.9) (31.0) (18.0)
Extraordinary loss on debt extinguishment ........................................................... -- (2.0) --
Preferred stock dividends ........................................................................... -- -- --
----- ----- -----
Net loss applicable to common
shareholders ................................................................. (10.9)% (33.0)% (18.0)%
===== ===== =====
</TABLE>
Revenues. Total revenues increased from $89.2 million in 1996 to $118.2
million in 1997 and to $135.2 million in 1998. Revenues for services increased
from $46.2 million in 1996 to $63.4 million in 1997 and to $88.1 million in
1998. These increases, partly attributable to acquisitions made in the last
three years, reflect growth in subscription fees, professional services and
maintenance. Subscription fees increased each year as a result of increased
subscribers to the Company's VAN and IVAS plus increases in the average
transaction volume per customer each year. Software revenues increased from
$43.0 million in 1996 to $54.8 million in 1997 and to $47.1 million in 1998. The
decrease in 1998 compared to 1997 was primarily attributable to decreased
royalty revenues from resellers. The increase in 1997 as compared to 1996 was
primarily the result of increases in domestic PC and enterprise software sales,
sales from the Company's European subsidiaries, software sales from 1997
acquisitions and increases in revenues derived through the Company's network of
international distributors.
Direct Costs. Direct costs for services increased from $16.3 million in
1996 to $22.7 million in 1997 and to $35.2 million in 1998. As a percentage of
services revenues these costs were 35.4% in 1996, 35.8% in 1997 and 40.0% in
1998. The increase in direct costs as a percentage of services revenues in 1998
compared to 1997 is primarily attributable to the mix of services revenue, which
in 1998 included a larger percentage of professional services. The Company
increased its emphasis on professional services in response to the market need
for more integrated solutions. The increase in direct costs in 1998 was
partially offset by the impact of Integration Activity Costs. The increase as a
percentage of services revenues in 1997 compared to 1996 primarily reflects the
higher mix of lower-margin professional services revenues at the Company's
European subsidiaries, which were acquired in March 1996. Direct software costs
increased from $6.8 million in 1996 to $7.8 million in 1997 and decreased to
$4.2 million in 1998. Direct software costs as a percentage of software revenues
were 15.7% in 1996, 14.2% in 1997 and 8.9% in 1998. The decrease in direct
software costs as a percentage of software revenues in 1998 compared to 1997
reflects the effects of a decrease in software amortization as a result of
writing off capitalized and purchased software development in connection with
certain business combinations in 1997 and a decrease in royalty and other fees
paid by the Company to third parties. The decrease in direct software costs as a
percentage of software revenues in 1997 compared to 1996 primarily reflects the
effect of higher-margin royalty revenues from certain distributors, licensing of
higher-margin software products and decreases in software amortization as a
result of write-offs of software development in connection with a business
combination.
Selling and Marketing. Selling and marketing expenses increased from
$25.0 million in 1996 to $26.7 million in 1997 and to $31.5 million in 1998. As
a percentage of revenues these expenses were 28.0% in 1996, 22.6% in 1997 and
23.3% in 1998. The slight increase in selling and marketing expenses as a
percentage of revenues in 1998 compared to 1997 reflects an increase in sales
and marketing personnel and related selling costs and a decrease in Integration
Activity Costs. The decrease in selling and marketing expenses as a percentage
of revenues in 1997 compared to 1996 principally reflects the effect of
increased services revenues, efficiencies associated with other costs to support
increased sales activity and the effect of Integration Activity Costs.
General and Administrative. General and administrative expenses
increased from $17.3 million in 1996 to $20.8 million in 1997 and to $30.9
million in 1998. As a percentage of revenues these expenses
<PAGE> 7
were 19.4% in 1996, 17.6% in 1997 and 22.9% in 1998. The increase in general and
administrative expenses in 1998 compared to 1997 is primarily due to an increase
of $6.3 million to the Company's allowance for doubtful accounts in 1998. Of
this increase, approximately $5.8 million relates primarily to management's
concern regarding the financial condition of a reseller and certain other
customer accounts. Management intends to continue to pursue collections of these
accounts, but has established the reserve based on management's estimate of
collectibility for these accounts. Actual results could differ from this
estimate. Excluding the impact of this increase to the allowance for doubtful
accounts, general and administrative expenses would have increased to $25.1
million or 18.6% of revenues for 1998. The increase in adjusted general and
administrative expenses as a percentage of revenues in 1998 compared to 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 a decrease in
Integration Activity Costs between periods. The decrease in general and
administrative expenses as a percentage of revenues in 1997 as compared to 1996
reflects efficiencies associated with expanding the Company's operations, the
effect of increases in software and services revenues and the effect of
Integration Activity Costs.
Depreciation and Amortization. Depreciation and amortization increased
from $4.7 million in 1996 to $7.1 million in 1997 and to $8.1 million in 1998.
As a percentage of revenues these expenses increased from 5.3% in 1996 to 6.0%
in 1997 and 1998. The increase in depreciation and amortization expense in both
years is a result of additions to fixed assets and increased intangible assets
acquired through business combinations during the last three years.
Product Development. Total expenditures for product development,
including capitalized software development costs, decreased from $21.1 million
in 1996 to $20.3 million in 1997 and to $14.4 million in 1998. Total expenses
for product development decreased from $16.3 million in 1996 to $15.3 million in
1997 to $10.8 million in 1998. As a percentage of revenues total product
development expenses decreased from 18.3% in 1996 to 12.9% in 1997 and to 8.0%
in 1998. The decrease in product development expenses in 1998 compared to 1997
is primarily attributable to efficiencies gained in consolidating development
resources of acquired companies, offset by the impact of Integration Activity
Costs. The decrease in 1997 compared to 1996 is due to increased synergies
realized from an early 1997 acquisition and the effect of Integration Activity
Costs. The Company capitalized software development costs of $4.8 million, $5.0
million and $3.6 million in 1996, 1997 and 1998, respectively, which represented
22.7%, 24.7% and 24.8% of total expenditures for product development in these
respective periods. The decrease in the amounts capitalized in 1998 compared to
1997 reflects a decrease in development activities associated with products that
have reached technological feasibility. The increase in the amounts capitalized
in 1997 compared to 1996 reflects the Company incurring greater product
development costs in 1997 on products that had reached technological
feasibility. Amortization of capitalized software development costs included in
direct costs of software totaled $3.4 million, $3.7 million and $1.6 million in
1996, 1997 and 1998, respectively.
Charge for Purchased In-Process Product Development, Write-Off of
Software Development Costs, Restructuring, Acquisition Related and Other
Charges. The Company incurred Charges of $13.5 million in 1996, $40.6 million in
1997 and $27.0 million in 1998 as a result of 15 acquisitions and two
restructurings in the last three years. For 1998 and 1997, approximately $4.1
million and $7.8 million, respectively, in Charges were Integration Activity
Costs which 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.
(See Note 11 to the accompanying audited consolidated financial statements.)
Equity in Losses of Joint Ventures. Of the Company's $7.2 million
equity in losses of joint ventures recognized in 1996, $7.0 million was
attributable to Harbinger NET Services, LLC, ("HNS") which was subsequently
acquired by the Company on January 1, 1997. (See Note 2 to the accompanying
audited consolidated financial statements.)
Income Taxes. The Company recorded income tax expense of $996,000, $3.1
million and $705,000 in 1996, 1997 and 1998. Taxable income of $7.4 million will
be required in future years to realize the Company's net deferred income tax
assets at December 31, 1998 of $2.8 million, net of a
<PAGE> 8
valuation allowance of $27.8 million. Future decreases of $3.3 million in the
total valuation allowance of $27.8 million at December 31, 1998 relate to
foreign net operating loss carryforwards and will reduce the intangibles
associated with those acquisitions as those net operating loss carryforwards are
realized.
Discontinued Operations. The Company discontinued its TrustedLink
Procurement business ("TLP") on September 30, 1998 and its TrustedLink Banker
division ("Banker") on December 31, 1997, both of which had been generating
lower than desired profitability and growth and which management deemed to be no
longer strategic to the Company. The results of TLP and Banker for all years
presented are reported in the accompanying reclassified audited consolidated
statements of operations under "Loss from operations of TrustedLink Procurement
business and TrustedLink Banker division." Reclassified losses for the TLP
business were $10.3 million and $1.8 million for 1997 and 1998, respectively.
Reclassified losses for Banker were $30,000 and $121,000 for 1996 and 1997,
respectively. For Banker the Company provided for an estimated anticipated loss
of $4.0 million related to the discontinuance of the division, including an
estimated $2.3 million for operating losses during the phase-out period. As of
December 31, 1998 the disposal of Banker was substantially complete and $2.0
million in anticipated losses not incurred was recorded as a reduction to "Loss
on disposal of TrustedLink Banker" on the statements of operations in 1998.
For TLP the Company provided for an estimated anticipated loss on the
disposal of the business of $6.4 million, including $2.9 million for operating
losses during the phase-out period. Actual results differing from this estimate
could impact the Company's results favorably or negatively in future periods.
Operating losses incurred from October 1, 1998 to December 31, 1998 were
$670,000.
Loss on Extinguishment of Debt. The Company recorded a loss of $2.4
million on debt extinguishment in the first quarter of 1997 related to acquiring
HNS.
Net Loss and Loss Per Share. The Company realized net losses applicable
to common shareholders of $16.1 million or $0.46 per share in 1996, $39.0
million or $1.02 per share in 1997 and $14.7 million or $0.35 per share in 1998.
Net income for 1998, adjusted to exclude Charges, a specific $5.8 million net
charge to general and administrative expenses and discontinued operations, net
of the effect of income taxes at 39%, would have been $15.4 million or $0.36 per
share. Net income for 1998, excluding all aforementioned charges except the
specific $5.8 million net charge to general and administrative expenses, would
have been $11.9 million, or $0.27 per share. Net income for 1997, adjusted to
exclude Charges, an extraordinary loss on debt extinguishment and discontinued
operations, net of the effect of income taxes at 39%, would have been $13.4
million or $0.33 per share. Net income for 1996, adjusted to exclude Charges and
equity in losses of joint ventures, net of the effect of income taxes at 39%,
would have been $3.4 million or $0.09 per share.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased from $94.3 million at December 31, 1997 to
$79.3 million at December 31, 1998, primarily as a result of repurchases of the
Company's common stock, capital expenditures and an acquisition, offset by
positive cash flows. Cash and short-term investments totaled $102.1 million or
55.6% of total assets at December 31, 1997 and $92.3 million or 51.8% of total
assets at December 31, 1998. Since its inception the Company has financed its
operations through a combination of private and public equity and debt
financing, various credit facilities with a bank and cash flows from operations.
Net cash provided by operating activities was $11.9 million in 1996, $1.6
million in 1997 and $6.2 million in 1998. Net cash used in investing activities
was $1.3 million in 1996, $30.1 million in 1997 and $46.8 million in 1998. The
increase in net cash used in investing activities in 1998 compared to 1997 was a
result of increases in short-term investments and purchases of property and
equipment, offset by decreases in cash expended to acquire companies and
decreases in capitalized software development costs in 1998. The increase in net
cash used by investing activities for 1997 compared to 1996 was primarily a
result of an increase in short-term investments in 1996. Net cash provided by
financing activities was $570,000 in 1996, $59.1 million in 1997 and $3.7
million in 1998. The decrease in net cash provided by financing activities in
1998 compared to 1997 was a result of repurchases of the Company's common stock
in 1998 and a secondary offering of common stock in 1997, offset by the impact
of increased cash
<PAGE> 9
provided in 1998 from the exercise of stock options and purchases of shares
through the employee stock purchase plan. The increase in net cash provided by
financing activities in 1997 compared to 1996 was primarily attributable to the
Company's secondary offering of common stock in 1997.
During 1998 the Company paid all its remaining current portions of
long-term debt and as of December 31, 1998 the Company had no material
borrowings outstanding. Due to its strong cash and short-term investment
position the Company converted its $10 million line of credit to an uncommitted
facility in 1998. Therefore, the Company is not subject to restrictive covenants
or commitment fees. The Company has commitments for operating leases on its
office space totaling $45.4 million through 2008. In conjunction with one lease
the Company was required to provide a standby letter of credit, which was $1.7
million at December 31, 1998.
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
uncommitted 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 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 year, including the effects of the Company's common
stock repurchase program, liquidation of liabilities incurred due to Charges and
discontinued operations and anticipated outlays for the Company's ongoing effort
to enhance and consolidate its information technology infrastructure. The
Company's Board of Directors has approved a stock repurchase program authorizing
the repurchase of up to 10% of the Company's outstanding common stock. There is
a possibility that the Board may increase the authorized level of repurchases.
The Company does not believe that inflation has had a material impact on its
business. However, there can be no assurance that the Company's business will
not be affected by inflation in the future.
YEAR 2000 COMPLIANCE
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 the Company 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.
<PAGE> 10
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 December 31, 1998 Company management estimates that approximately
95% of its product readiness testing has been completed. While most 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 the first quarter of 1999. 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 has implemented a Web site on the Internet
that includes 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 non-core 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 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' Web sites 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 $100,000 to $200,000 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
<PAGE> 11
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 the Company's 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, 1999, 11 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 an adverse effect
on the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has not entered into any transactions using derivative
financial instruments or derivative commodity instruments and believes its
exposure to interest rate risk, foreign currency exchange rate risk and other
relevant market risks is not material.
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 Exhibit 99.1 to this Form 10-K. 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.
<PAGE> 12
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................................... $ 33,059 $ 69,811
Short-term investments ............................................................ 59,248 32,333
Accounts receivable, less allowances for returns and doubtful
accounts of $5,464 and $2,790 in 1998 and 1997,
respectively .............................................................. 35,891 35,017
Royalties receivable, less allowance for doubtful
accounts of $3,614 in 1998 ................................................ 1,730 5,364
Deferred income taxes ............................................................. 2,103 1,892
Other current assets .............................................................. 5,622 3,431
--------- ---------
Total current assets ............................................. 137,653 147,848
--------- ---------
Property and equipment, less accumulated depreciation
and amortization ................................................................... 23,150 18,167
Intangible assets, less accumulated amortization ............................................ 16,803 16,464
Deferred income taxes ....................................................................... 698 909
Other non-current assets .................................................................... 65 171
--------- ---------
$ 178,369 $ 183,559
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................... $ 5,566 $ 8,734
Accrued expenses ................................................................... 31,571 25,835
Deferred revenues .................................................................. 21,213 18,349
Current portion of long-term debt .................................................. -- 623
--------- ---------
Total current liabilities ........................................ 58,350 53,541
--------- ---------
Commitments and contingencies
Zero coupon redeemable preferred stock, no par value; 2,000,000
shares authorized, issued and outstanding ........................................ -- --
Shareholders' equity:
Preferred stock, no par value; 18,000,000 shares authorized;
none issued and outstanding .............................................. -- --
Common stock, $0.0001 par value; 100,000,000 shares
authorized; 42,313,031 and 40,827,856 shares issued
as of December 31, 1998 and 1997, respectively ............................ 4 4
Additional paid-in capital ......................................................... 201,615 189,841
Accumulated deficit ................................................................ (73,528) (58,945)
Accumulated other comprehensive loss ............................................... (622) (882)
Treasury stock, 1,562,100 shares as of December 31, 1998 ........................... (7,450) --
--------- ---------
Total shareholders' equity ....................................... 120,019 130,018
--------- ---------
$ 178,369 $ 183,559
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 13
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Services .............................................................. $ 88,067 $ 63,417 $ 46,225
Software .............................................................. 47,084 54,804 43,020
-------- -------- --------
Total revenues ........................................ 135,151 118,221 89,245
-------- -------- --------
Direct costs:
Services .............................................................. 35,233 22,710 16,346
Software .............................................................. 4,203 7,800 6,766
-------- -------- --------
Total direct costs .................................... 39,436 30,510 23,112
-------- -------- --------
Gross margin ............................... 95,715 87,711 66,133
-------- -------- --------
Operating costs:
Selling and marketing ................................................. 31,545 26,723 25,032
General and administrative ............................................ 30,876 20,775 17,293
Depreciation and amortization ......................................... 8,101 7,096 4,695
Product development ................................................... 10,818 15,267 16,305
Charge for purchased in-process product development, write-off of
software development costs, restructuring, acquisition related
and other charges ............................................ 27,027 40,555 13,475
-------- -------- --------
Total operating costs ............................... 108,367 110,416 76,800
-------- -------- --------
Operating loss ............................. (12,652) (22,705) (10,667)
Interest income, net ........................................................... (4,830) (3,914) (2,838)
Equity in losses of joint ventures ............................................. -- 313 7,204
Minority interest (income) loss ................................................ -- (2) 4
-------- -------- --------
Loss from continuing operations before
income taxes ...................... (7,822) (19,102) (15,037)
Income tax expense ............................................................. 705 3,093 996
-------- -------- --------
Loss from continuing operations ............ (8,527) (22,195) (16,033)
Discontinued operations:
Loss from operations of TrustedLink Procurement business
and TrustedLink Banker division .............................. (1,793) (10,433) (30)
Loss on disposal of TrustedLink Procurement business in 1998,
including provision of $2.9 million for operating losses
during phase-out period, and TrustedLink Banker division in
1997, including provision for operating losses during
phase-out period of $2.3 million ............................. (4,392) (4,000) --
-------- -------- --------
Loss before extraordinary item ............. (14,712) (36,628) (16,063)
Extraordinary loss on debt extinguishment ...................................... -- (2,419) --
-------- -------- --------
Net loss ................................... (14,712) (39,047) (16,063)
Preferred stock dividends ...................................................... -- -- (28)
-------- -------- --------
Net loss applicable to common shareholders . $(14,712) $(39,047) $(16,091)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 14
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Basic and diluted net loss per common share:
Loss from continuing operations ........... $ (0.20) $ (0.58) $ (0.46)
Loss from discontinued operations ......... (0.04) (0.27) --
Loss on disposal of discontinued operations (0.11) (0.11) --
Extraordinary loss on debt extinguishment . -- (0.06) --
Preferred stock dividends ................. -- -- --
------- ------- -------
Net loss per common share ........... $ (0.35) $ (1.02) $ (0.46)
======= ======= =======
Weighted average number of common shares outstanding 41,557 38,162 35,080
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 15
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss applicable to common shareholders ... $(14,712) $(39,047) $(16,091)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ... 260 (744) (138)
-------- -------- --------
Comprehensive Loss ............. $(14,452) $(39,791) $(16,229)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 16
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK, SERIES C COMMON STOCK
------------------------- -------------------
ADDITIONAL DEFERRED
PAID-IN COMPEN-
Shares Amount SHARES AMOUNT CAPITAL SATION
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 .................... 250,000 $ 2,485 32,519,854 $ 3 $ 94,343 $(137)
Exercise of stock options and warrants and
issuance of stock under employee stock
purchase plan ............................ -- -- 1,052,413 -- 2,545 --
Tax benefits from stock plans ................. -- -- -- -- 2,854 --
Conversion of preferred stock, Series C to
common stock ............................. (250,000) (2,489) 316,557 -- 2,489 --
Issuance of common stock and options and
warrants to acquire common stock in
connection with acquisitions ............ -- -- 671,617 -- 6,750 --
Reclassification of putable common stock to
common stock as a result of forfeiture of
put right ................................ -- -- 1,237,500 -- 4,675 --
Other transactions ............................ -- 4 8,655 -- 190 137
Preferred stock dividends ..................... -- -- -- -- -- --
Foreign currency translation adjustment ....... -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- --
-------- ------- ---------- --- -------- -----
BALANCE, DECEMBER 31, 1996 .................... -- -- 35,806,596 3 113,846 --
Exercise of stock options and warrants and
issuance of stock under employee stock
purchase plan ............................ -- -- 1,039,749 -- 5,098 --
Tax benefits from stock plans ................. -- -- -- -- 498 --
Issuance of stock and stock options to purchase
a debenture and acquire minority interest
of subsidiary ............................ -- -- 363,432 -- 6,416 --
Issuance of common stock and vesting of
contingent option in connection with
acquisitions ............................. -- -- 513,079 -- 3,958 --
Issuance of stock in secondary offering, net . -- -- 3,105,000 1 60,025 --
Other transactions ............................ -- -- -- -- -- --
Foreign currency translation adjustment ....... -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- --
-------- ------- ---------- --- -------- -----
BALANCE, DECEMBER 31, 1997 .................... -- -- 40,827,856 4 189,841 --
Exercise of stock options and warrants and
issuance of stock under employee stock
purchase plan ............................ -- -- 1,289,178 -- 11,803 --
Shares purchased .............................. -- -- -- -- -- --
Immaterial pooling-of-interests ............... -- -- 194,497 -- -- --
Foreign currency translation adjustment ....... -- -- -- -- -- --
Other transactions ............................ -- -- 1,500 -- (29) --
Net loss ...................................... -- -- -- -- -- --
-------- ------- ---------- --- -------- -----
BALANCE, DECEMBER 31, 1998 .................... -- $ -- 42,313,031 $ 4 $201,615 $ --
======== ======= ========== === ======== =====
<CAPTION>
ACCUMU-
LATED OTHER TREASURY STOCK
COMPRE- ----------------------
ACCUMU- HENSIVE TOTAL
LATED INCOME/ SHAREHOLDERS'
DEFICIT (LOSS) SHARES AMOUNT EQUITY
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 .................... $ (3,498) $ -- -- $ -- $ 93,196
Exercise of stock options and warrants and
issuance of stock under employee stock
purchase plan ............................ -- -- -- -- 2,545
Tax benefits from stock plans ................. -- -- -- -- 2,854
Conversion of preferred stock, Series C to
common stock ............................. -- -- -- -- --
Issuance of common stock and options and
warrants to acquire common stock in
connection with acquisitions ............ -- -- -- -- 6,750
Reclassification of putable common stock to
common stock as a result of forfeiture of
put right ................................ -- -- -- -- 4,675
Other transactions ............................ (4) -- -- -- 327
Preferred stock dividends ..................... (28) -- -- -- (28)
Foreign currency translation adjustment ....... -- (138) -- -- (138)
Net loss ...................................... (16,063) -- -- -- (16,063)
-------- ----- ---------- ------- --------
BALANCE, DECEMBER 31, 1996 .................... (19,593) (138) -- -- 94,118
Exercise of stock options and warrants and
issuance of stock under employee stock
purchase plan ............................ -- -- -- -- 5,098
Tax benefits from stock plans ................. -- -- -- -- 498
Issuance of stock and stock options to purchase
a debenture and acquire minority interest
of subsidiary ............................ -- -- -- -- 6,416
Issuance of common stock and vesting of
contingent option in connection with
acquisitions ............................. (296) -- -- -- 3,662
Issuance of stock in secondary offering, net . -- -- -- -- 60,026
Other transactions ............................ (9) -- -- -- (9)
Foreign currency translation adjustment ....... -- (744) -- -- (744)
Net loss ...................................... (39,047) -- -- -- (39,047)
-------- ----- ---------- ------- --------
BALANCE, DECEMBER 31, 1997 .................... (58,945) (882) -- -- 130,018
Exercise of stock options and warrants and
issuance of stock under employee stock
purchase plan ............................ -- -- -- -- 11,803
Shares purchased .............................. -- -- (1,562,100) (7,450) (7,450)
Immaterial pooling-of-interests ............... 129 -- -- -- 129
Foreign currency translation adjustment ....... -- 260 -- -- 260
Other transactions ............................ -- -- -- -- (29)
Net loss ...................................... (14,712) -- -- -- (14,712)
-------- ----- ---------- ------- --------
BALANCE, DECEMBER 31, 1998 .................... $(73,528) $(622) (1,562,100) $(7,450) $120,019
======== ===== ========== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 17
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $(14,712) $(39,047) $(16,063)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Allowance for doubtful accounts ......................... 6,288 365 1,384
Charge for purchased in-process product development,
write-off of software development costs, acquisition
related and other non-cash charges ................. 3,981 26,761 13,005
Loss on disposal of discontinued operations ............. 5,737 4,000 --
Loss on debt extinguishment ............................. -- 2,419 --
Depreciation and amortization ........................... 10,847 10,917 8,180
Loss on sale of property and equipment .................. -- 389 54
Discount amortization on investments .................... (153) 88 (723)
Equity in losses of joint ventures ...................... -- 302 7,204
Noncash compensation charges ............................ -- -- 40
Minority interest and other ............................. -- (287) 8
Deferred income taxes ................................... -- 1,110 1,354
(Increase) decrease in:
Accounts receivable ................................ (3,723) (13,336) (6,621)
Royalties receivable ............................... 20 (4,027) 1,890
Other assets ....................................... (2,256) 1,410 (2,488)
Increase (decrease) in:
Accounts payable and accrued expenses .............. (2,724) 9,300 2,144
Deferred revenues .................................. 2,864 1,260 2,510
-------- -------- --------
Net cash provided by operating activities ..... 6,169 1,624 11,878
-------- -------- --------
Cash flows from investing activities:
Short-term investments ............................................ (26,762) (2,577) 22,601
Purchases of property and equipment ............................... (12,887) (8,576) (9,666)
Additions to software development costs ........................... (3,572) (5,014) (4,798)
Investment in acquisitions ........................................ (3,547) (13,924) (9,524)
Proceeds from disposal of property and equipment .................. -- 7 57
-------- -------- --------
Net cash used in investing activities ......... (46,768) (30,084) (1,330)
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 18
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Dividends paid on preferred stock ................................ -- -- (28)
Exercise of stock options and warrants and issuance of
stock under employee stock purchase plan .................... 11,803 5,098 2,545
Principal payments under notes payable and long-term debt ........ (623) (2,968) (3,547)
Proceeds from issuance of common stock ........................... -- 60,026 --
Purchases of common stock ........................................ (7,450) -- --
Repayments under credit agreement ................................ -- (1,550) --
Decrease in restricted cash ...................................... -- -- 50
Increase in note payable to bank, net ............................ -- -- 1,550
Purchase of HNS subordinated debenture ........................... -- (1,500) --
-------- -------- --------
Net cash provided by financing activities ......... 3,730 59,106 570
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .................. (36,869) 30,646 11,118
Cash and cash equivalents at beginning of year ........................ 69,811 35,697 24,258
Effect of exchange rates on cash held in foreign
currencies ....................................................... 65 (76) (53)
Cash received from acquisitions ....................................... 52 3,544 374
-------- -------- --------
Cash and cash equivalents at end of year .............................. $ 33,059 $ 69,811 $ 35,697
======== ======== ========
Supplemental disclosures:
Cash paid for interest ........................................... $ 50 $ 90 $ 407
======== ======== ========
Cash paid for income taxes ....................................... $ 991 $ -- $ 152
======== ======== ========
Supplemental disclosures of noncash investing and financing activities:
Purchase of HNS subordinated debenture in exchange
for common stock ............................................ $ -- $ 4,200 $ --
======== ======== ========
Acquisition of HNS minority interest in exchange
for issuance of options ..................................... $ -- $ 2,216 $ --
======== ======== ========
Long-term debt assumed in acquisition of a
business .................................................... $ -- $ -- $ 670
======== ======== ========
Acquisition of minority interest in exchange for
common stock ................................................ $ -- $ 392 $ --
======== ======== ========
Acquisition of businesses in exchange for assumption of
liabilities and issuance of common stock, options and
warrants to acquire common stock ............................ $ -- $ 454 $ 13,143
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 19
HARBINGER CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND PRESENTATION
Harbinger Corporation and subsidiaries (the "Company") develops,
markets and supports software products and provides computer communications
network and consulting services to enable businesses to engage in E-Commerce.
The Company's products and services are used by customers in targeted
industries, including the petroleum, chemicals, utilities, electronics,
distribution, aerospace, automotive, communications, transportation,
textile/apparel and healthcare industries both in the United States and certain
international markets including Europe, South America and Asia.
The consolidated financial statements of the Company include the
accounts of Harbinger Corporation and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
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. Actual results could differ from those estimates.
REVENUE RECOGNITION
The company adopted Statement of Position 97-2, Software Revenue
Recognition, on January 1, 1998. The implementation of this statement did not
have a material impact on the Company's results of operations.
Services
Revenues derived from services include subscription fees, maintenance
and implementation fees and consulting, outsourcing and training fees.
Subscription fees include both fixed and usage based fees for use of the
Company's Value Added Network ("VAN") and Internet Value Added Server ("IVAS")
and are recognized over the service period and as transactions are processed.
Maintenance and implementation fees are generally billed annually in advance,
include fixed fees for customer support and product updates and are recognized
ratably over the service period. Consulting, outsourcing and training fees are
billed under both time and materials and fixed fee arrangements and are
recognized as services are performed.
Software
Revenues derived from software license fees are recognized upon
shipment, net of estimated returns. Royalty revenues derived through
distribution agreements with third parties 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.
Deferred Revenues
Deferred revenues represent payments received from customers or
billings invoiced to customers for software and services billed in advance of
revenue recognition.
DIRECT COSTS
Direct costs for services include telecommunications charges, the costs
of personnel to conduct network operations and customer support, consulting and
other personnel related-expenses. Direct costs for software include duplication,
packaging and amortization of purchased technology and software development
costs, and royalties paid to third-party distributors.
<PAGE> 20
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash, cash equivalents and short-term investments are stated at cost,
which approximates fair value, and consist primarily of money market funds and
U.S. Treasury bills. The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents. Investments
maturing between three and twelve months from the date of purchase are
classified as short-term investments.
Management determines the appropriate classification of debt securities
at the time of purchase and re-evaluates such designations quarterly. As of
December 31, 1998 debt securities were classified as held-to-maturity as the
Company intended to hold, and had the ability to hold, these securities to
maturity. Held-to-maturity securities are stated at amortized cost, which
approximates fair market value.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and other short-term obligations of the U.S. Government.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives of the assets,
generally three to 10 years. Leasehold improvements are amortized straight line
over the shorter of the lease or estimated useful life of the asset.
INVESTMENTS IN JOINT VENTURES
The Company's 91% investment in Harbinger Net Services, LLC ("HNS")
through December 31, 1996 (see Note 2), its 20% investment in Harbinger N.V.
("HNV") through March 31, 1996 (see Note 2) and its investment in other joint
ventures are accounted for using the equity method of accounting. The Company
applied the equity method of accounting for its investment in HNS because of a
shareholders' agreement among all HNS shareholders which provided for all
significant operating and management decisions for HNS to be vested in the HNS
Board of Managers through December 31, 1996. The HNS Board of Managers was not
controlled by the Company (see Note 2).
INTANGIBLE ASSETS
Purchased Technology, Goodwill and Other Intangible Assets
Purchased technology, goodwill and other intangible assets are
amortized on a straight-line basis over the expected periods to be benefited,
generally five to 10 years. The Company evaluates the recoverability of these
intangible assets at each period end using the undiscounted estimated future net
operating cash flows expected to be derived from such assets. If such evaluation
indicates a potential impairment, the Company uses the fair value to determine
the amount of these intangible assets that should be written off.
Software Development Costs
The Company capitalizes certain software development costs in
accordance with Statement of Financial Accounting Standards No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed.
Costs incurred internally to create a computer software product or to develop an
enhancement to an existing product are charged to expense when incurred as
research and development until technological feasibility has been established
for the product or enhancement. Thereafter, all software production costs are
capitalized and reported at the lower of unamortized cost or net realizable
value. Capitalization ceases when the product or enhancement is available for
general release to customers. Software development costs are amortized on a
product-by-product basis at the greater of the amounts computed using (a) the
ratio of current gross revenues for a product or enhancement to the total
current and anticipated future gross revenues for that product or enhancement,
or (b) the straight-line method over the
<PAGE> 21
remaining estimated economic life of the product or enhancement, not to exceed
five years. The Company evaluates the net realizable value of its software
development costs at each period end using undiscounted estimated future net
operating cash flows expected to be derived from the respective software product
or enhancement. If such evaluation indicates that the unamortized software
development costs exceed the net realizable value, the Company writes off the
amount by which the unamortized software development costs exceed net realizable
value.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method of Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS No. 109"). Under SFAS No. 109, deferred income tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
During 1997 the Company acquired SupplyTech, Inc. and SupplyTech,
International, LLC (collectively, "STI") (see Note 2). Effective January 1, 1995
SupplyTech, Inc. elected to be taxed as an S corporation under the Internal
Revenue Code. The acquisition of SupplyTech, Inc. by the Company terminated the
S corporation status under the Internal Revenue Code. Accordingly, SupplyTech,
Inc. was taxed as a regular corporation in 1997. SupplyTech International, LLC
was incorporated under the laws of the state of Michigan as a limited liability
corporation ("LLC"). As an LLC, SupplyTech International, LLC has elected to be
taxed as a partnership under the Internal Revenue Code. In 1997 SupplyTech
International, LLC's income is included in the Company's consolidated income
subject to regular corporate tax. As a result of these elections, STI has been
taxed in a manner similar to a partnership for 1996 and has not provided for any
federal or state income taxes as the results of operations are passed through
to, and the related income taxes become the individual responsibility of, STI's
shareholders.
The pro forma income tax expense for 1996 reflects the income tax
expense that would have been reported if STI had been a C corporation and
subject to SFAS No. 109 during these periods.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements to conform with the 1998 presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of its
business. The carrying values of cash equivalents, short-term investments,
accounts and royalties receivable, accounts payable, accrued expenses and
deferred revenues approximate fair value due to the short-term maturities of
these assets and liabilities.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's international operations are
translated into U.S. dollars at current exchange rates while the related
statements of operations are translated at average exchange rates during each
reporting period. Net exchange gains or losses resulting from the translation of
assets and liabilities are recorded as cumulative foreign currency translation
adjustments and reported in the consolidated statements of comprehensive loss.
STOCK COMPENSATION PLANS
The Company applies the intrinsic-value-based method of accounting for
its nonvariable stock option plans in accordance with the provisions of
Accounting Principles Board Opinion No. 25, Accounting
<PAGE> 22
for Stock Issued to Employees ("APB Opinion No. 25"), and related
interpretations. As such, compensation expense would generally be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price.
2. ACQUISITIONS
1998 ACQUISITIONS
EDI WORKS! LLC ("EDI WORKS!")
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, with the accumulated
earnings of EDI Works! of $129,000 being added directly to the Company's
accumulated deficit on the date of acquisition. The results of operations of EDI
Works! are included in the Company's consolidated statement of operations for
the year ended December 31, 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 incurred in the consolidated statement
of operations for the year ended December 31, 1998.
MACTEC, INC. ("MACTEC")
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.
1997 ACQUISITIONS
STI
On January 3, 1997 the Company acquired STI for 3,600,000 unregistered
shares of the Company's common stock in transactions accounted for using the
pooling-of-interests method of accounting. In connection with the STI
acquisition, the Company incurred a charge of $12.4 million for acquisition
related expenses, asset write downs and integration costs incurred (including a
$3.2 million charge for the vesting of a contingent option which became
exercisable upon the closing of the merger) (see Note 11). The Company recorded
a net deferred income tax asset during the first quarter of 1997 of $1.8 million
relating to the STI acquisition and provided a valuation allowance against such
net deferred income tax asset to reduce it to zero.
Premenos Technology Corp. ("Premenos")
On December 19, 1997 the Company acquired Premenos, a Delaware
corporation based in Concord, California. In connection with the transaction,
which was accounted for using the pooling-of-interests method of accounting, the
Company issued 8,037,982 shares of its common stock in exchange for all of the
shares of Premenos common stock. All Premenos options and warrants were
converted into the Company's options and warrants in accordance with the
conversion ratio.
In connection with the Premenos acquisition, the Company incurred
charges for acquisition related expenses, asset write downs and integration
costs of $13.7 million in 1998 and $15.3 million in 1997, (see Note 11).
The financial position and results of operations of the Company have
been restated for all periods prior to the mergers to give retroactive effect to
the STI and Premenos acquisitions.
<PAGE> 23
Total revenues and net loss for the individual companies as previously
reported are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Total revenues:
Harbinger Corporation ........... $ 77,414 $ 38,236
STI ............................. -- 17,538
Premenos ........................ 40,807 33,471
-------- --------
$118,221 $ 89,245
======== ========
Net income (loss) applicable to common
shareholders:
Harbinger Corporation ........... $(42,832) $ (8,277)
STI ............................. -- (4,818)
Premenos ........................ 3,785 (2,996)
-------- --------
$(39,047) $(16,091)
======== ========
</TABLE>
Effective January 3, 1997 the operations of Harbinger Corporation and
STI were combined. On September 30, 1998 the Company discontinued its
TrustedLink Procurement ("TLP") business and on December 31, 1997 the Company
discontinued its TrustLink Banker ("Banker") division. The revenues of Harbinger
Corporation reported above have been restated accordingly (see Note 12).
HNS
On January 1, 1997 because of the expiration of restrictions on the
Company's ability to appoint a majority of the HNS Board of Managers, the
Company exercised its rights as majority shareholder of HNS by appointing a
majority of the members of the HNS Board of Managers. As a result, effective
January 1, 1997 the Company began accounting for its investment in HNS by
consolidating the statements of financial position and results of operations of
HNS with those of the Company. Prior to the January 1, 1997 acquisition date the
Company accounted for its investment in HNS using the equity method of
accounting, which resulted in a $7.0 million loss reported in "Equity in losses
of joint ventures" in the statements of operations for the year ended December
31, 1996.
Also on January 1, 1997 the Company entered into a debenture purchase
agreement with the holder of the debenture whereby the Company acquired the
debenture in exchange for $1.5 million in cash and 363,432 shares of the
Company's common stock valued at $4.2 million. The Company recorded an
extraordinary loss on debt extinguishment of $2.4 million in the first quarter
of 1997 related to this transaction.
Immediately after this transaction, the Company acquired the minority
interest in HNS, consisting of 585,335 shares of HNS common stock and stock
options to acquire 564,727 shares of HNS common stock at exercise prices ranging
from $0.70 per share to $1.65 per share, by exchanging cash of $1.6 million and
stock options to acquire 532,975 shares of the Company's common stock at
exercise prices ranging from $10.14 per share to $11.02 per share which were
valued at $2.2 million. Including transaction and other costs of $350,000, the
Company paid $4.1 million for the acquisition of the HNS minority interest which
was accounted for using the purchase method of accounting, with $2.7 million of
the purchase price allocated to in-process product development and charged to
the consolidated statement of operations on January 1, 1997, and $1.4 million
allocated to goodwill and purchased technology. The Company also incurred
acquisition related expenses and asset write-downs related to this acquisition
of $2.0 million in 1997 (see Note 11). The Company recorded a net deferred
income tax asset of approximately $840,000 as a result of this acquisition and
provided a valuation allowance against such net deferred income tax asset to
reduce it to zero.
<PAGE> 24
Smart Solutions for Electronic Commerce, Inc. ("Smart Solutions")
Effective May 1, 1997, the Company acquired all of the common stock of
Smart Solutions, a Michigan corporation based in Traverse City, Michigan, for
$677,000, consisting of 29,635 unregistered shares of the Company's common stock
valued at $454,000 and the assumption of $223,000 in liabilities. The Company
recorded the acquisition using the purchase method of accounting with $100,000
of the purchase price allocated to purchased technology, $71,000 allocated to
tangible assets and $506,000 allocated to goodwill.
Acquion, Inc. ("Acquion")
Effective August 22, 1997, the Company acquired all of the common stock
of Acquion, a California corporation based in Greenville, South Carolina, for
approximately $13.6 million, consisting of $12.0 million in cash and the
assumption of approximately $1.6 million in liabilities including transaction
costs. The Company recorded the acquisition using the purchase method of
accounting with $10.9 million of the purchase price allocated to in-process
product development and charged to the consolidated statement of operations in
1997, $641,000 allocated to purchased technology and $2.0 million allocated to
goodwill. The Company also incurred acquisition related expenses and asset write
downs of $2.5 million during 1997 related to this acquisition (see Note 11). The
Company recorded a net deferred income tax asset of approximately $4.1 million
as a result of this acquisition and provided a valuation allowance against such
net deferred income tax asset to reduce it to zero. TLP, a separate business
within Acquion, was discontinued by the Company on September 30, 1998 (see Note
12).
Atlas Products International, Limited ("Atlas")
Effective October 23, 1997, the Company acquired Atlas, a company
organized under the laws of England, based in Manchester, United Kingdom, for
467,098 unregistered shares of the Company's common stock in a transaction
accounted for using the pooling-of-interests method of accounting. In connection
with the acquisition, the Company incurred charges for acquisition related
expenses, asset write downs and integration costs incurred of $1.4 million in
1998 and $2.0 million in 1997, respectively (see Note 11). The Atlas business
combination was not material, and therefore was accounted for as an immaterial
pooling, with Atlas' accumulated deficit of $296,000 being credited directly to
the Company's accumulated deficit on the date of acquisition.
1996 ACQUISITIONS
NTEX Holding, B.V. ("NTEX")
Effective March 31, 1996 the Company acquired all of the common stock
of NTEX, a Dutch corporation based in Rotterdam, The Netherlands, for $8.0
million, consisting of $3.2 million in cash, 161,670 shares of the Company's
common stock valued at $1.2 million, warrants to acquire 28,125 shares of the
Company's common stock at $7.55 per share valued at $100,500 and the assumption
of $3.5 million in liabilities including transaction costs. The Company recorded
the acquisition using the purchase method of accounting with $4.4 million of the
purchase price allocated to in-process product development and charged to the
consolidated statement of operations on March 31, 1996, $204,000 allocated to
purchased technology, $621,000 allocated to tangible assets and $2.8 million
allocated to goodwill.
INOVIS GmbH & Co. ("INOVIS")
Effective March 31, 1996 the Company acquired all of the common stock
of INOVIS, a German corporation based in Karlsruhe, Germany, for $6.1 million,
consisting of $1.4 million in cash, 315,414 shares of the Company's common stock
valued at $2.4 million, warrants to acquire 45,000 shares of the Company's
common stock at $6.78 per share valued at $104,000, a note payable of $557,000
and the assumption of $1.7 million in liabilities including transaction costs.
The Company recorded the acquisition using the purchase method of accounting
with $3.4 million of the purchase price allocated to in-process product
development and charged to the consolidated statement of operations in 1996,
$600,000 allocated to purchased technology, $1.0 million allocated to tangible
assets and $1.1 million allocated to goodwill.
<PAGE> 25
HNV
Effective March 31, 1996 the Company acquired the remaining outstanding
common stock of HNV, a Dutch corporation based in Hoofddorp, The Netherlands,
for $1.2 million, consisting of 87,097 shares of the Company's common stock
valued at $668,000 and the assumption of $554,000 in liabilities including
transaction costs. The Company recorded the acquisition using the purchase
method of accounting, with $300,000 of the purchase price allocated to
in-process product development and charged to the consolidated statement of
operations in 1996, $518,000 allocated to tangible assets and $447,000 allocated
to goodwill and other intangibles.
Don Valley Technology Corporation ("Don Valley")
Effective May 14, 1996 the Company acquired all the common stock of Don
Valley, a Canadian corporation based in Toronto, Canada, for $2.5 million,
consisting of $1.1 million in cash, 38,917 shares of the Company's common stock
valued at $1.1 million and the assumption of $300,000 in liabilities including
transaction costs. The Company recorded the acquisition using the purchase
method of accounting with $2.0 million of the purchase price allocated to
in-process product development and charged to the consolidated statement of
operations in 1996, a net liability of $37,000 allocated to tangible assets and
$545,000 allocated to goodwill and other intangibles.
Prime Factors, Inc. ("Prime Factors")
Effective July 19, 1996 the Company acquired all the common stock of
Prime Factors, an Oregon corporation based in Eugene, Oregon, for $4.1 million,
consisting of $3.0 million in cash, 31,677 shares of the Company's common stock
valued at $749,000 and the assumption of $351,000 in liabilities including
transaction costs. The Company recorded the acquisition using the purchase
method of accounting with $2.5 million of the purchase price allocated to
in-process product development and charged to the consolidated statement of
operations in 1996, $1.2 million allocated to purchased technology and $411,000
allocated to tangible assets.
Comtech Management Systems, Inc. ("Comtech")
Effective August 1, 1996 the Company acquired all of the common stock
of Comtech, a Texas corporation based in Amarillo, Texas, for $500,000,
consisting of 36,841 shares of the Company's common stock valued at $422,000 and
the assumption of $75,000 in liabilities. The Company recorded the acquisition
using the purchase method of accounting with $114,000 of the purchase price
allocated to tangible assets, $100,000 allocated to purchased technology and
$283,000 allocated to goodwill.
EDI Integration Services Limited ("EISL")
Effective October 15, 1996 the Company acquired all of the common stock
of EISL, a company based in Hampshire, United Kingdom, for $804,000 consisting
of $134,000 in cash and the assumption of a $670,000 note payable. The Company
recorded the acquisition using the purchase method of accounting with $250,000
allocated to purchased technology, $548,000 allocated to goodwill and $6,000
allocated to tangible assets.
PRO FORMA FINANCIAL INFORMATION
The results of operations of the acquired companies have been included
in the Company's consolidated statements of operations beginning on the
following dates: EDI Works!: March 31, 1998; MACTEC: July 9, 1998; HNS: January
1, 1997; Smart Solutions: May 1, 1997; Acquion: August 22, 1997; Atlas: October
1, 1997; NTEX, INOVIS and HNV: March 31, 1996; Don Valley: May 14, 1996; Prime
Factors: July 19, 1996; Comtech: August 1, 1996; EISL: October 15, 1996.
<PAGE> 26
Unaudited pro forma results of operations of the Company for 1998, 1997
and 1996 would not be materially different as a result of the acquisitions of
EDI Works! and MACTEC and are therefore not presented for 1998 or reflected in
1997 and 1996 below.
The unaudited pro forma results of operations of the Company for 1997
and 1996 as if the acquisitions described above had been effected on January 1,
1997 and 1996, respectively, and retroactively adjusted for the impact of the
1998 discontinued operations of TLP and the 1997 discontinued operations of
Banker are summarized as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
-------- -------
<S> <C> <C>
Revenues .............................. $120,363 $97,074
======== =======
Net loss applicable to common
shareholders ................... $(26,173) $(11,505)
======== =======
Net loss per share applicable to common
shareholders ................... $ (0.68) $ (0.32)
======== =======
Weighted average number of common
shares outstanding ............. 38,524 35,772
======== =======
</TABLE>
The unaudited pro forma results do not reflect the charges for
purchased in-process product development. The unaudited pro forma results do not
necessarily represent results which would have occurred if the acquisitions had
taken place on the dates indicated nor are they necessarily indicative of the
results of future operations.
3. PURCHASED TECHNOLOGY AND DISTRIBUTION AGREEMENT
System Software Associates, Inc. ("SSA")
On July 21, 1995 the Company entered into a distribution agreement and
purchased certain software products from SSA in exchange for the issuance of
1,237,500 shares of the Company's common stock valued at $4.7 million at the
date of issuance and the issuance of 4,000,000 shares of the Company's zero
coupon redeemable preferred stock (see Note 9). The Company also provided SSA
with an option to put the 1,237,500 shares of common stock issued back to the
Company for cash on January 31, 1997 exercisable only if the market value of the
common stock on that date was less than $4.00 per share. In September 1996 the
Company registered the 1,237,500 shares of putable common stock. SSA sold all of
the shares during 1996. After 1996 the Company no longer considered SSA to be a
related party.
The terms of the distribution agreement provide for SSA to pay the
Company royalties through December 2000 based upon future software and service
revenues that SSA derives from the sale of the Company's products, including
certain minimum royalties of $5.7 million for 1996. The Company recognizes
revenue from this arrangement based upon sales made by SSA to end-users.
The Company allocated the consideration associated with these
transactions of $4.8 million (including transaction costs of $122,000) as
follows: $2.3 million to purchased technology and $2.5 million to the
distribution agreement based upon the estimated fair values of the purchased
technology and distribution agreement at the date of the exchange. During 1997
the purchased technology was written down due to the acquisition of other
replacement technology that was licensed to SSA.
The Company had a net provision of $3.6 million in its allowance for
doubtful accounts related to royalty receivables due from SSA at December 31,
1998. Also in 1998 the intangible asset associated with the distribution
agreement was written off based upon estimated future net cash flows from the
arrangement (see Note 11).
<PAGE> 27
General Electric Information Services, Inc. ("GEIS")
On December 31, 1995 the Company entered into an alliance agreement
with GEIS and an agreement to purchase certain software products from GEIS. The
total purchase price was $2.5 million, consisting of $300,000 in cash and the
assumption of a note payable to GEIS in the amount of $2.2 million. The Company
recorded the purchase of the technology and the alliance agreement based upon
fair value with $1.2 million of the purchase price allocated to in-process
product development and charged to the consolidated statement of operations in
1995, $375,000 allocated to purchased technology, $950,000 allocated to the
alliance agreement and $15,000 allocated to tangible assets. During 1997 the
purchased technology was written down due to the acquisition of other
replacement technology that will be licensed to GEIS and the distribution
agreement was written down based upon future expectations of net cash flows from
the arrangement (see Note 11).
Certain terms of the alliance agreement include the referral of
customers to the Company by GEIS, the performance of certain software
maintenance services by GEIS and a $1.2 million guaranteed payment by GEIS to
the Company for the two-year period ended December 31, 1997, relating to
software maintenance revenues to be paid by GEIS to the Company. GEIS'
subsequent sales to end-users exceeded the $1.2 million guaranteed payment each
year.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998
and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Computer and communications
equipment .............. $34,632 $26,115
Furniture, fixtures and leasehold
improvements ........... 10,210 7,486
Other ........................... 438 187
------- -------
45,280 33,788
Less accumulated depreciation ... (22,130) (15,621)
------- -------
$23,150 $18,167
======= =======
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1998 and
1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Purchased technology (Note 11) ............. $ 1,521 $ 2,523
Goodwill, GEIS alliance and SSA distribution
agreements (Notes 3 and 11) ............ 12,130 9,514
Software development costs (Note 11) ....... 9,041 10,473
------- -------
22,692 22,510
Less accumulated amortization .............. (5,889) (6,046)
------- -------
$16,803 $16,464
======= =======
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1998 and 1997
(in thousands):
<PAGE> 28
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Accrued salaries and wages ............ $ 9,522 $ 8,011
State income, property, sales and
other taxes .................. 3,870 3,227
Accrued severance, lease
exit costs and other (Note 11) 6,129 3,689
Accrued discontinued operations
costs (Note 12) .............. 6,518 3,685
Accrued integration costs incurred
(Note 11) ................... 1,358 3,940
Other accrued expenses ................ 4,174 3,283
------- -------
$31,571 $25,835
======= =======
</TABLE>
7. INCOME TAXES
The provision for income tax expense (benefit) includes income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities and any increase
or decrease in the valuation allowance for deferred income tax assets.
During 1997 the Company acquired STI (see Note 2). Effective January 1,
1995 SupplyTech, Inc. elected to be taxed as an S corporation under the Internal
Revenue Code. The acquisition of SupplyTech, Inc. by the Company terminated the
S corporation status under the Internal Revenue Code. Accordingly, SupplyTech,
Inc. was taxed as a regular corporation in 1997. SupplyTech International, LLC
was incorporated under the laws of the state of Michigan as a limited liability
corporation ("LLC"). As an LLC, SupplyTech International, LLC has elected to be
taxed as a partnership under the Internal Revenue Code. In 1997, SupplyTech
International, LLC's income is included in the Company's consolidated income
subject to regular corporate tax. As a result of these elections, STI has been
taxed in a manner similar to a partnership for 1996 and has not provided for any
federal or state income taxes as the results of operations are passed through
to, and the related income taxes become the individual responsibility of, STI's
shareholders.
Upon termination of SupplyTech, Inc.'s S corporation status in 1997,
the net deferred income tax asset of $1.8 million was fully provided for by a
valuation allowance.
The pro forma income tax expense for 1996 reflects the income tax
expense that would have been reported if STI had been a C corporation and
subject to SFAS No. 109 during this period.
Income (loss) from continuing operations before income taxes for the
years ended December 31, 1998, 1997 and 1996 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. operations ..................... $ (5,835) $(21,063) $ (6,583)
Foreign operations .................. (1,987) 1,961 (8,454)
-------- -------- --------
Total loss from continuing
operations before income taxes $ (7,822) $(19,102) $(15,037)
======== ======== ========
</TABLE>
Income tax expense (benefit) from continuing operations for the years
ended December 31, 1998, 1997 and 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal ............... $ 442 $ 581 $ (330)
Foreign ............... (124) 1,187 10
State ................. 387 215 (38)
------ ------ ------
Total current 705 1,983 (358)
------ ------ ------
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Deferred:
Federal ............... -- 981 1,064
Foreign ............... -- -- 167
State ................. -- 129 123
------ ------ ------
Total deferred -- 1,110 1,354
------ ------ ------
Total income tax expense ..... $ 705 $3,093 $ 996
====== ====== ======
</TABLE>
The Company's income taxes currently payable for federal and state
purposes have been reduced by the tax benefit derived from stock option
transactions. The benefit, which totaled $498,000 and $2.9 million for the years
ended December 31, 1997 and 1996, respectively, has been credited directly to
stockholders' equity.
There is no income tax expense or benefit for discontinued operations
of TLP (from operations) in 1998. There was no income tax expense for
discontinued operations of Banker (from operations) in 1997 or 1996. There was
no income tax expense or benefit relating to loss on disposal of TLP or Banker
or extraordinary loss on debt extinguishment.
Pro forma income tax expense (benefit) from continuing operations for
the year ended December 31, 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Current:
Federal ............... $ (330)
Foreign ............... 10
State ................. (38)
-------
Total current (358)
-------
Deferred:
Federal ............... 1,064
Foreign ............... 167
State ................. 123
-------
Total deferred 1,354
-------
Pro forma income tax expense . $ 996
=======
</TABLE>
Income tax expense (benefit) differs from the amounts computed by
applying the federal statutory income tax rate of 34% to income (loss) from
continuing operations before income taxes as a result of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) ........ $(2,660) $ (6,495) $(5,113)
Increase (decrease) in income tax expense (benefit)
resulting from:
State income taxes, net of federal income tax
benefit ................................... 255 227 56
Tax-exempt income ................................ (168) (157) (130)
Loss from STI .................................... -- -- 1,630
Change in tax status of STI ...................... -- (1,798) --
Nondeductible charge for purchased in-process
product development and other costs ....... 488 1,431 3,134
Increase (decrease) in the valuation allowance for
deferred income tax assets ................ 2,758 10,003 1,494
Other ............................................ 32 (118) (75)
------- -------- -------
$ 705 $ 3,093 $ 996
======= ======== =======
</TABLE>
<PAGE> 30
Pro forma income tax expense (benefit) differs from the amounts
computed by applying the federal statutory income tax rate of 34% to income
(loss) from continuing operations before income taxes as a result of the
following (in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Computed "expected" income tax expense (benefit) ... $(5,113)
Increase (decrease) in income tax expense (benefit)
resulting from:
State income taxes, net of federal income tax
benefit .............................. 56
Tax-exempt income ........................... (130)
Nondeductible charge for purchased in-process
product development and other costs .. 3,134
Increase in the valuation allowance for
deferred income tax assets ........... 2,819
Other ....................................... 230
-------
$ 996
=======
</TABLE>
The significant components of deferred income tax expense (benefit)
from continuing operations for the years ended December 31, 1998, 1997 and 1996
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- ------
<S> <C> <C> <C>
Deferred income tax benefit ....... $(2,759) $(12,399) $ (140)
Increase in the valuation allowance
for deferred income tax assets 2,759 13,509 1,494
------- -------- ------
$ -- $ 1,110 $1,354
======= ======== ======
</TABLE>
The significant components of pro forma deferred income tax expense
(benefit) from continuing operations for the year ended December 31, 1996 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Deferred income tax expense ......... $(1,465)
Increase in the valuation allowance
for deferred income tax assets 2,819
-------
$ 1,354
=======
</TABLE>
The income tax effects of the temporary differences that give rise to
the Company's deferred income tax assets and liabilities as of December 31, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards ............ $ 4,269 $ 5,544
Deferred revenue ............................ -- 1,486
Intangible assets ........................... 7,446 7,924
Accrued expenses ............................ 16,639 9,484
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Discontinued operations ..................... 3,241 829
Research tax credit ......................... 2,082 2,082
Other ....................................... 790 790
------- -------
Gross deferred income tax assets ..... 34,467 28,139
Valuation allowance ................................ (27,842) (22,671)
-------
Deferred income tax assets, net of the valuation
allowance ..................................... 6,625 5,468
Deferred income tax liabilities - principally due to
software development costs .................... (3,824) (2,667)
------- -------
Net deferred income tax assets ....... 2,801 2,801
Less current deferred income tax assets ............ 2,103 1,892
------- -------
Noncurrent deferred income tax assets .............. $ 698 $ 909
======= =======
</TABLE>
In 1998 there was no change in net deferred income tax assets. The
decrease in net deferred income tax assets for the years ended December 31, 1997
and 1996 was $1.1 million and $1.4 million, respectively. During 1998, the net
increase in the valuation allowance was $5.2 million. A valuation allowance is
established to reduce the deferred income tax assets to the level at which it is
"more likely than not" that the tax benefits will be realized. Realization of
tax benefits of deductible temporary differences and operating loss and tax
credit carryforwards depends on having sufficient taxable income within the
carryback and carryforward periods. Sources of taxable income that may allow for
the realization of tax benefits include: (a) taxable income in the current year
or prior years that is available through carryback, (b) future taxable income
that will result from the reversal of existing taxable temporary differences,
and (c) future taxable income generated by future operations. The Company
continually reviews the adequacy of the valuation allowance and recognizes these
benefits as reassessment indicates that it is more likely than not that the
benefits will be realized.
As a result of the 1997 acquisition of the minority interest in HNS
(see Note 2), the Company acquired certain intangible assets for which it
provided a valuation allowance of $840,000 on the related deferred taxes. The
Company also acquired certain intangible assets in the Acquion acquisition (see
Note 2) for which it provided a valuation allowance of approximately $4.1
million on the related deferred taxes. The Company acquired net operating losses
and research tax credit carryforwards in the Premenos acquisition (see Note 2)
of approximately $1.3 million and $1.7 million, respectively. The utilization of
these net operating loss and research tax credit carryforwards is restricted
based on the ability of Premenos, as a separate company, to generate taxable
income.
During 1996 the Company acquired foreign net operating loss
carryforwards in the NTEX and HNV acquisitions (see Note 2) of approximately
$6.5 million and $3.1 million, respectively. The Company established a valuation
allowance relating to the carryforwards of $2.4 million and $1.1 million,
respectively, which is included in the valuation allowance at December 31, 1996.
If the benefit from these net operating loss carryforwards is realized, the
Company will reduce the related valuation allowance and will reduce goodwill
recorded in connection with these transactions. For the year ended December 31,
1996 the Company realized a portion of these foreign net operating loss
carryforwards and recognized deferred foreign income tax expense of $93,000 and
$74,000 relating to the reduction in the valuation allowance for these
carryforwards and reduced goodwill associated with these acquisitions by a like
amount.
At December 31, 1998 the Company has domestic and foreign net operating
loss carryforwards and research tax credit carryforwards of approximately $22.2
million, $11.8 million and $2.1 million, respectively. The domestic net
operating loss carryforwards expire at various dates through the year 2020
unless utilized, the foreign net operating loss carryforwards do not expire and
the research tax credit carryforwards expire beginning in 2007 through 2012. The
Company's domestic net operating loss carryforwards at December 31, 1998 include
$22.2 million in income tax deductions related to stock options excluded from
the table of deferred income tax assets above, which will be reflected as a
credit to additional paid-in capital when realized.
<PAGE> 32
8. LONG-TERM DEBT
The Company had no debt outstanding at December 31, 1998. The Company's
current portion of long-term debt at December 31, 1997 of $623,000 was paid off
during 1998.
9. REDEEMABLE PREFERRED STOCK
In 1995 the Company issued 4,000,000 shares of zero coupon redeemable
preferred stock to SSA (see Note 3). The zero coupon redeemable preferred stock
issued has no voting or dividend rights, vests at a rate of 1,000,000 shares per
year only if SSA attains certain royalty targets for the years 1997 through
2000, and contains mandatory redemption provisions of $0.67 per share payable in
cash or the Company's common stock, at the option of the holder, thirty days
after the end of each year. The Company will accrete the zero coupon redeemable
preferred stock to its redemption price as it becomes probable that it will be
earned through a charge to direct costs of software in the period earned. The
royalty targets for 1998 and 1997 were not met and 2,000,000 of the shares of
the zero coupon redeemable preferred stock have been forfeited.
10. SHARHEOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to an aggregate of 20,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions on the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. At December 31, 1998
there were 2,000,000 shares of zero coupon redeemable preferred stock issued and
outstanding (see Note 9).
COMMON STOCK
On April 24, 1998 the Board of Directors declared a three-for-two stock
split in the form of a stock dividend on the Company's common stock paid on May
15, 1998 to shareholders of record on May 1, 1998. All share, per share and
shareholders' equity amounts included in the Company's consolidated financial
statements have been retroactively restated to reflect the split for all periods
presented.
WARRANTS
The Company issued warrants in December 1997 related to the acquisition
of Premenos. The warrants enable the holders to acquire 26,199 shares of the
Company's common stock at $5.63 per share, representing the exchange ratio
agreed to in the merger agreement. As of December 31, 1998 all warrants were
outstanding.
The Company issued warrants in July 1996 to two related parties in
connection with certain performance criteria related to the HNV acquisition. The
warrants enable the holders to acquire 112,500 shares of the Company's common
stock at $12.33 per share, representing the fair value of the common stock at
the date of issuance. During 1998, 84,375 warrants were exercised and 28,125
warrants were canceled, leaving no warrants outstanding at December 31, 1998.
The Company issued warrants in April 1996 related to the acquisition of
NTEX and INOVIS. The warrants enable the holders to acquire 73,125 shares of the
Company's common stock at a range of $7.55 to $7.61 per share, representing the
fair value of the common stock at the date of issuance. There are 45,000
warrants outstanding as of December 31, 1998, all at an exercise price of $7.61.
<PAGE> 33
STOCK COMPENSATION PLANS
As of December 31, 1998 the Company has five stock-based compensation
plans, of which four are related to stock options and one is related to stock
purchases, more fully described below.
Stock Options
The Company's 1989 Stock Option Plan (the "1989 Plan") and 1996 Stock
Option Plan (the "1996 Plan") and together combined (the "Plans") provide for
the grant of options to officers, directors, consultants and key employees. The
1996 Plan was amended in 1998 to add 1,050,000 options available for grant. The
maximum number of shares of stock that may be issued under the 1996 Plan may not
exceed the sum of 8,737,500 options plus an amount equal to the number of all
shares that are either not subject to options granted under the 1989 Plan or
were subject to options granted thereunder that expire without exercise to
officers, directors, consultants and key employees. There were 2,075,055 options
available for grant at December 31, 1998. Options granted under the terms of the
1996 Plan generally vest ratably over four years and are granted with an
exercise price no less than the fair market value of the common stock on the
grant date. Options granted prior to July 1994 vest ratably over three years and
options granted since July 1994 vest ratably over four years. All options
granted expire seven years from the date of grant. At December 31, 1998 there
were options outstanding to purchase 6,902,026 shares of the Company's common
stock, of which options to purchase 1,699,767 shares were exercisable. In 1998
the Board of Directors authorized a repricing of certain unexercised employee
stock options held by employees other than certain senior executive officers.
The number of shares repriced to $6.91 was approximately 2.6 million. The
four-year vesting period for all repriced shares began in October 1998.
In 1993 the Board of Directors authorized the creation of a stock
option plan for nonemployee members of the Company's Board of Directors (the
"Nonemployee Directors Plan"). The Nonemployee Directors Plan was amended in
1998 to add 187,500 options, for a total of 525,000 shares of common stock
reserved for issuance under the Nonemployee Directors Plan at an option price no
less than the fair market value of the common stock on the option grant date.
Options expire seven years from the date of grant. The options granted under the
Nonemployee Directors Plan vest ratably in the year of grant based on attendance
at regularly scheduled board meetings. Options which have not vested in the year
of grant expire and become available for grant under the Nonemployee Directors
Plan. At December 31, 1998 there were options outstanding and exercisable to
purchase 249,749 shares of the Company's common stock and there were 177,939
options available for grant under the Nonemployee Directors Plan.
In addition to outstanding options granted under the Company's Plans
and Nonemployee Directors Plan, the Company has granted options to acquire
157,500 shares of common stock to certain existing and former nonemployee
directors for past services. As of December 31, 1998, 120,000 of these options
were outstanding and exercisable.
At December 31, 1998 the Company has five stock-based compensation
plans which are described herein. The Company applies APB Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. The compensation cost that would have been charged against
income for its plans was $13.5 million $9.2 million and $3.5 million for 1998,
1997 and 1996, respectively, had compensation cost for the Company's five
stock-based compensation plans been determined consistent with SFAS No. 123. The
Company's net loss and loss per share would have been the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C> <C>
Net loss applicable to As reported $ (14,712) $ (39,047) $ (16,091)
common shareholders Pro forma $ (28,254) $ (48,221) $ (19,592)
Basic and diluted loss As reported $ (0.35) $ (1.02) $ (0.46)
per common share Pro forma $ (0.68) $ (1.26) $ (0.56)
</TABLE>
<PAGE> 34
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
1998: dividend yield of 0.5%; expected volatility of 82.6%; risk-free interest
rate of 5.3%, and expected lives of five years for all of the Plan options;
1997: dividend yield of 0.5%; expected volatility of 67.3%; risk-free interest
rate of 5.7%; and expected lives of five years for all of the Plan options;
1996: dividend yield of 0.5%; expected volatility of 57.8%; risk-free interest
rates of 5.9%; and expected lives of five years for all of the Plan options.
A summary of the status of the Company's stock option plans as of
December 31, 1998, 1997 and 1996 and changes during the years ended on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Fixed Options (000s) Price (000s) Price (000s) Price
- ---------------------------------------- ---------- ------------ ------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ....... 7,267 $10.73 4,567 $ 7.51 3,537 $ 3.12
Granted ................................ 5,185 12.55 4,497 13.99 2,365 11.92
Exercised .............................. (1,118) 8.79 (858) 3.61 (979) 1.91
Forfeited/canceled ..................... (4,044) 16.70 (939) 17.19 (356) 8.54
Outstanding at end of year ............. 7,290 8.90 7,267 10.73 4,567 7.51
Options exercisable at end of year ..... 2,070 1,875 1,510
Weighted average fair value of
options granted during the year .... $ 6.72 $ 6.03 $ 4.98
</TABLE>
The following table summarizes information about nonvariable stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ --------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Life (Years) Price at 12/31/98 Price
----------------------- ------------ ------------ ------ --------------- --------
<S> <C> <C> <C> <C> <C> <C>
$0.01 - $2.83 879,435 1.96 $2.32 762,846 $ 2.24
$2.84 - $6.89 236,004 3.61 $4.92 142,386 $ 5.25
$6.91 - $6.91 2,780,561 6.81 $6.91 -- --
$7.61 - $7.78 1,047,480 4.94 $7.75 318,316 $ 7.77
$8.71 - $11.61 1,156,033 5.88 $11.10 452,445 $10.95
$11.78 - $16.75 541,850 6.18 $13.41 292,511 $13.56
$18.17 - $35.00 648,412 6.27 $21.94 101,021 $24.27
--------- ---------
$ 0.01 - $35.00 7,289,775 5.61 $ 8.90 2,069,525 $ 7.88
========= =========
</TABLE>
Employee Stock Purchase Plan
The Company offers employees the right to purchase shares of the
Company's common stock at 85% of the market price, as defined, pursuant to the
Employee Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan,
full-time employees, except persons owning 5% or more of the Company's common
stock, are eligible to participate after six months of employment. Employees may
contribute up to 15% of their annual salary toward the Purchase Plan up to a
maximum of $15,000 per year. A maximum of 487,500 shares of common stock are
reserved for issuance under the Purchase Plan. During the years ended December
31, 1998, 1997 and 1996 shares issued under the Purchase Plan were 89,247,
160,813 and 40,170, respectively. A portion of shares issued in 1997 and 1996
disclosed above were authorized under
<PAGE> 35
existing purchase plans of acquired companies and are excluded from the
calculation of shares available to issue under the Purchase Plan.
Under SFAS No. 123, compensation cost is recognized for the fair value
of the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions for 1998: dividend yield of 0.5%; expected
volatility of 82.6%; and risk-free interest rate of 5.2%; for 1997: dividend
yield of 0.5%; expected volatility of 67.3% and risk-free interest rate of 5.7%;
for 1996: dividend yield of 0.5%; expected volatility of 57.8%; and risk-free
interest rate of 5.9%. The expected life of the employees' purchase rights was
three months for all years. The weighted average fair value of those purchase
rights granted in 1998, 1997 and 1996 was $7.11, $5.95 and $5.62, respectively.
The impact of the Purchase Plan on the Company's pro forma net loss and loss per
share presentation required per SFAS 123 has been included in Stock Options
above.
11. CHARGE FOR PURCHASED IN-PROCESS PRODUCT DEVELOPMENT, WRITE-OFF OF
SOFTWARE DEVELOPMENT COSTS, RESTRUCTURING, ACQUISITION RELATED AND
OTHER CHARGES
In connection with acquisitions made in 1998, 1997 and 1996 and
restructurings in 1998 and 1997, the Company incurred charges for purchased
in-process product development, write-off of software development costs,
restructuring, acquisition related and other charges ("Charges"). A summary of
the components, as adjusted for discontinued TLP, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
In-process product development.............................. $ -- $ 2,853 $ 12,649
Integration costs........................................... 13,154 14,319 826
Transaction charges......................................... 638 9,515 --
Lease termination........................................... 2,335 -- --
Intangible asset write-downs................................ 3,963 8,431 --
Asset write-downs........................................... 396 1,599 --
Severance costs............................................. 4,281 3,838 --
Other costs to exit activities.............................. 2,260 -- --
-------- -------- --------
$ 27,027 $ 40,555 $ 13,475
======== =======- ========
</TABLE>
Integration costs associated with business combinations include costs
incurred for such activities as cross training, planning, product integration
and marketing. For 1998 and 1997 approximately $4.1 million and $7.8 million of
integration costs, respectively, included certain internal expense allocations
which may recur in other expense categories in the future.
Charges for in-process product development are recorded as a result of
acquiring research and development efforts through business combinations that,
at the date of acquisition, have not yet generated commercializable products and
have no alternative future use. The valuations for such purchased in-process
product developments are made with the assistance of third-party experts based
on fair value. Intangible asset write-downs consist primarily of capitalized
software and goodwill that have become impaired as a result of product
phase-outs. Certain Charges involve management estimates, as follows: lease
termination costs and other costs to exit activities, which include anticipated
liabilities and obligations associated with phasing out products. Actual results
could vary from these estimates.
12. DISCONTINUED OPERATIONS
In the third quarter of 1998 the Board of Directors approved the
discontinuance of TLP, expected to be sold or liquidated within 12 months.
Revenues from TLP were $2.9 million and $2.5 million for the years ended
December 31, 1998 and 1997, respectively. The results of operations for TLP for
all years presented are reported in the accompanying reclassified statements of
operations under discontinued operations. The Company also provided for an
estimated anticipated loss on the disposal of TLP of $6.4
<PAGE> 36
million during 1998. The balance at December 31, 1998 was $5.1 million. The
anticipated loss on the disposal of TLP contains certain management estimates,
included but not limited to sales proceeds, lease exist costs and length of
operations beyond the measurement date. Actual results could vary from such
estimates. No income tax benefit was recognized in 1998 or 1997 due to the
Company's net operating loss carryforwards. The operating loss incurred for TLP
from the measurement date to December 31, 1998 was $670,000.
The assets and liabilities of TLP are included in the Company's
consolidated balance sheets as of December 31, 1998 and 1997 and are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Accounts receivable........................... $ 454 $ 762
Other current assets.......................... 106 61
Property and equipment, net................... 766 633
Intangible assets, net........................ 2,454 2,669
Deferred revenue.............................. (45) (760)
Current liabilities........................... (281) (1,367)
------- -------
$ 3,454 $ 1,998
======= =======
</TABLE>
In the fourth quarter of 1997 the Board of Directors approved the
discontinuance of Banker. Revenues from Banker were $4.0 million and $3.5
million for the years ended December 31, 1997 and 1996, respectively. The
results of operations for Banker for all years presented are reported in the
accompanying reclassified statements of operations under discontinued
operations. In the fourth quarter of 1997, the Company provided for an
anticipated loss of $4.0 million related to the phase out of Banker operations.
No income tax expense or benefit was recognized in 1997 or 1996 due to the
Company's net operating loss carryforwards. As of December 31, 1998 the disposal
of Banker was substantially complete and $2.0 million in estimated losses not
incurred was recorded as a reduction to "Loss on disposal of TrustedLink Banker"
on the statements of operations in 1998. The operating loss of Banker during
1998 was $280,000. The assets and liabilities of Banker included in the
Company's consolidated balance sheets were immaterial at December 31, 1998 and
consisted of $1.8 million in current liabilities and $500,000 in accounts
receivable, equipment and other current assets at December 31, 1997.
13. OTHER RELATED PARTY TRANSACTIONS
The Company received $284,000, $465,000 and $600,000 in 1998, 1997 and
1996, respectively, in revenue from an affiliated company that is partially
owned by an employee of one of the Company's foreign subsidiaries. This same
affiliated company also billed the Company $189,000, $63,000 and $350,000 in
1998, 1997 and 1996, respectively, for services that the affiliated company
provided to the Company.
The Company has a note receivable of $50,000 from an executive officer
with an annual interest rate of 9%, renewable at the end of each year.
Prior to the acquisition, one of Premenos' directors was a partner of a
law firm which provided various legal services to Premenos. In 1996, such legal
services included representation related to the acquisition of subsidiaries. Two
other directors of Premenos also provided training and consulting services to
the Company from time to time. Amounts incurred for all such services in 1997
and 1996 were $493,000 and $879,000, respectively.
In 1996 the Company had related party revenues totaling $6.9 million
from HNS and SSA (see Note 3).
<PAGE> 37
14. SEGMENT INFORMATION, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
SEGMENT INFORMATION
The Company operates in a single industry segment: the development,
marketing and supporting of software products and the providing of network and
consulting services to enable businesses to engage in E-Commerce. The Company
managed its business along geographical lines, thus resulting in three
reportable segments: North America, Europe and Asia Pacific and Latin America.
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies. Revenues are attributed to a
reportable segment based on the location of the customer. Management evaluates
the performance of each segment on the basis of operating income, excluding
integration and restructuring charges and certain net general and administrative
charges. Intersegment royalties are calculated based upon revenues, as defined,
derived from the sales of certain software products at agreed upon percentages
between the segments. The measurement of long-term assets is not a significant
factor in management's evaluation of the results of the reportable segments. At
December 31, 1998 the Company was in the process of implementing a new
organizational structure and anticipates that its reportable segments may be
different in 1999.
A summary of the Company's reportable segments as of and for the years
ended December 31, 1998, 1997 and 1996 is presented below (in thousands):
<TABLE>
<CAPTION>
Latin
America
and
North Asia
America Europe Pacific Total
------------------ ------------------ ------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
1998 $115,800 $ 20,285 $ 2,950 $139,035
1997 $ 98,816 $ 17,676 $ 3,272 $119,764
1996 $ 78,796 $ 10,787 $ 358 $ 89,941
Intersegment royalties:
1998 $ 3,884 $ -- $ -- $ 3,884
1997 $ 1,543 $ -- $ -- $ 1,543
1996 $ 696 $ -- $ -- $ 696
Operating income:
(as defined)
1998 $ 18,747 $ 754 $ 637 $ 20,138
1997 $ 16,071 $ 1,300 $ 479 $ 17,850
1996 $ 2,433 $ 370 $ 5 $ 2,808
</TABLE>
<TABLE>
<CAPTION>
Revenues 1998 1997 1996
- -------- --------- --------- --------
<S> <C> <C> <C>
Total gross revenues for reportable segments $ 139,035 $ 119,764 $ 89,941
Elimination of intersegment royalties (3,884) (1,543) (696)
--------- --------- --------
Total consolidated revenues $ 135,151 $ 118,221 $ 89,245
========= ========= ========
<CAPTION>
Operating income, (as defined) 1998 1997 1996
- ------------------------------ --------- --------- --------
<S> <C> <C> <C>
Total operating income for reportable segments $ 20,138 $ 17,850 $ 2,808
Charges for integration and restructuring (27,027) (40,555) (13,475)
Certain net general and administrative costs (5,763) -- --
--------- --------- --------
Total consolidated operating loss $ (12,652) $ (22,705) $(10,667)
========= ========= ========
</TABLE>
GEOGRAPHIC INFORMATION
Revenues attributed to the United States, the Company's country of
domicile, are substantially the same as revenues reported for the reportable
segment of North America (above) for all years. Revenues
<PAGE> 38
derived from customers in foreign countries did not exceed 10% in any one
country of the Company's consolidated revenues in 1998, 1997 or 1996.
The Company's long-lived assets, excluding net intangible and deferred
tax assets, for the years ended December 31, 1998, 1997 and 1996 were as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
United States $ 21,203 $ 16,215 $ 14,057
Foreign countries 1,947 1,952 869
--------- --------- --------
$ 23,150 $ 18,167 $ 14,926
========= ========= ========
</TABLE>
MAJOR CUSTOMERS
No single customer comprised greater than 10% of the Company's
consolidated revenues in 1998, 1997 or 1996.
15. COMMITMENTS
401(K) PROFIT SHARING PLAN
During 1998 the Company consolidated its three separate 401(k) savings
and retirement plans into one plan for all its domestic employees. In general,
all domestic employees are eligible to participate in the plan after one month
of employment and may contribute up to 15% of their annual salary up to the
maximum allowed by the Internal Revenue Code. Under the consolidated plan, the
Company matches employee contributions at 50% to a maximum of 4% of their annual
contribution subject to a $2,200 limit per employee. Prior to consolidating the
plans the Company's matching contributions in 1997 and 1996 varied from a range
of discretionary to 50% of employees' contributions. Total Company contributions
for its 401(k) plans totaled $736,000, $454,000 and $194,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
CREDIT FACILITY
During 1998 the Company converted its $10.0 million committed line of
credit to an uncommitted credit facility. There are no restrictive covenants or
commitment fees associated with the uncommitted facility. No amounts were
outstanding at December 31, 1998 and 1997.
LEASES
The Company leases office facilities, automobiles, fixtures and
equipment under operating leases which extend through 2005. Rent expense under
all operating leases was approximately $5.5 million, $4.3 million and $3.2
million for the years ended December 31, 1998, 1997 and 1996, respectively. At
December 31, 1998 the Company is obligated under these agreements to make the
following lease payments (in thousands):
<TABLE>
<CAPTION>
Operating
Leases
----------------
<S> <C>
1999.............................................. $ 7,216
2000.............................................. 6,818
2001.............................................. 6,542
2002.............................................. 5,720
2003.............................................. 4,947
Thereafter........................................ 14,152
-------
Total minimum lease payments...................... $45,395
=======
</TABLE>
<PAGE> 39
In conjunction with one building lease, the Company was required to
provide a standby letter of credit, which was $1.7 million at December 31, 1998.
CONTINGENCIES
The Company is involved in claims and other legal actions arising out
of the ordinary course of business. While the ultimate results and outcome
cannot be determined, management does not expect that they will have a material
adverse effect on the Company's results of operations or financial position.
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Harbinger Corporation:
We have audited the accompanying consolidated balance sheets of Harbinger
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive loss, shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the 1996
financial statements of Premenos Technology Corp. and subsidiaries, which
statements reflect total revenues constituting 38% of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Premenos Technology Corp. and subsidiaries for 1996, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors with
respect to 1996, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harbinger
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Atlanta, Georgia
February 5, 1999
<PAGE> 1
EXHIBIT 21.1
HARBINGER CORPORATION
LIST OF SUBSIDIARIES
Harbinger NV
Harbinger GmbH
Harbinger Holdings BV
Harbinger Computer Centrum, BV
Harbinger Data Communications, BV
Harbinger de Mexico, S de R.L. de C.V.
Harbinger International s.r.l.
Harbinger Corporation
Acquion, Inc.
Harbinger Corporation (Delaware)
Harbinger Holdings, Inc.
Harbinger SA (France)
Harbinger Canada Corp.
Prime Factors, Inc.
Harbinger U.K.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Harbinger Corporation:
We consent to incorporation by reference in the Registration Statements (No.
333-61893), (No. 333-30219), (No. 333-96774), (No. 333-42959) and (No.
333-03247) on Form S-8 of Harbinger Corporation of our reports dated February 5,
1999, relating to the consolidated balance sheets of Harbinger Corporation as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, comprehensive loss, shareholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 1998, and the related
financial statement schedule, which reports appear in the 1998 Annual Report on
Form 10-K of Harbinger Corporation.
Our reports dated February 5, 1999, which included reference to other auditors
with respect to 1996, as they related to the 1996 financial statements of
Premenos Technology Corp. and subsidiaries, which are included in the
consolidated financial statements of Harbinger Corporation, are based solely on
the report of the other auditors as it relates to the amounts included for
Premenos Technology Corp. and subsidiaries for 1996.
/s/ KPMG LLP
Atlanta, Georgia
March 26, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the 1998 Annual Report on Form 10-K of Harbinger
Corporation and to the incorporation by reference in the registration statements
of Harbinger Corporation on Form S-8 (File Nos. 333-61893, 333-96774, 333-03247,
333-30219 and 333-42959) of our report dated January 31, 1997, except for
Paragraph 3 of Note 16 as to which the date is March 16, 1997, on our audit of
the consolidated financial statements and financial statement schedule of
Premenos Technology Corp. and subsidiaries as of December 31, 1996, and for the
year then ended, which report is included in the Premenos Technology Corp. 1996
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HARBINGER CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,059
<SECURITIES> 59,248
<RECEIVABLES> 41,355
<ALLOWANCES> 5,464
<INVENTORY> 0
<CURRENT-ASSETS> 137,653
<PP&E> 45,280
<DEPRECIATION> 22,130
<TOTAL-ASSETS> 178,369
<CURRENT-LIABILITIES> 58,350
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 120,015
<TOTAL-LIABILITY-AND-EQUITY> 178,369
<SALES> 47,084
<TOTAL-REVENUES> 135,151
<CGS> 4,203
<TOTAL-COSTS> 39,436
<OTHER-EXPENSES> 108,367
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> (7,822)
<INCOME-TAX> 705
<INCOME-CONTINUING> (8,527)
<DISCONTINUED> (6,185)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,712)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED
CONSOLIDATED FINANCIAL STATEMENTS OF HARBINGER CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 69,811
<SECURITIES> 32,333
<RECEIVABLES> 37,807
<ALLOWANCES> 2,790
<INVENTORY> 0
<CURRENT-ASSETS> 147,848
<PP&E> 33,788
<DEPRECIATION> 15,621
<TOTAL-ASSETS> 183,559
<CURRENT-LIABILITIES> 53,541
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 130,014
<TOTAL-LIABILITY-AND-EQUITY> 183,559
<SALES> 54,804
<TOTAL-REVENUES> 118,221
<CGS> 7,800
<TOTAL-COSTS> 30,510
<OTHER-EXPENSES> 110,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> (19,102)
<INCOME-TAX> 3,093
<INCOME-CONTINUING> (22,195)
<DISCONTINUED> (14,433)
<EXTRAORDINARY> (2,419)
<CHANGES> 0
<NET-INCOME> (39,047)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE RESTATED
CONSOLIDATED FINANCIAL STATEMENTS OF HARBINGER CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 35,697
<SECURITIES> 29,844
<RECEIVABLES> 22,418
<ALLOWANCES> 2,425
<INVENTORY> 0
<CURRENT-ASSETS> 95,640
<PP&E> 25,706
<DEPRECIATION> 10,780
<TOTAL-ASSETS> 131,199
<CURRENT-LIABILITIES> 35,248
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 94,115
<TOTAL-LIABILITY-AND-EQUITY> 131,199
<SALES> 43,020
<TOTAL-REVENUES> 89,245
<CGS> 6,766
<TOTAL-COSTS> 23,112
<OTHER-EXPENSES> 76,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224
<INCOME-PRETAX> (15,037)
<INCOME-TAX> 996
<INCOME-CONTINUING> (16,033)
<DISCONTINUED> (30)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,091)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995, or the
Reform Act, Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities law
liability in connection with these statements. We intend to qualify both our
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 these 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 that 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 our written or
oral forward-looking statements. We do not undertake any obligation to update or
revise this Safe Harbor Compliance Statement for Forward-Looking Statements to
reflect future developments. In addition, we do not undertake any 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 Statement supersedes the Safe Harbor Statement filed as Exhibit 99.1
to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
We provide the following risk factor disclosure in connection with our
continuing effort to qualify our 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 our management that could cause
actual results to differ materially from those in forward-looking statements
include the disclosures contained in the Annual Report on Form 10-K to which
this statement is appended as an exhibit and also include the following:
OUR OPERATING RESULTS COULD FLUCTUATE, CAUSING OUR STOCK PRICE TO FALL.
Although we have been able to grow our revenue and operating income
(before special charges) in the past, we cannot assure that we will be able to
continue to grow our revenue and operating income at historical levels or that
fluctuations in revenue or operating income growth will not occur in future
periods. The following factors could impact the future rate of growth in revenue
or operating income:
- 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; and
- our success in developing electronic commerce products and
services acceptable to the market.
In addition, if our quarterly revenue or operating results fall below
the expectations of investors or public market analysts, the price of our common
stock could fall substantially. Our quarterly operating results have in the past
and may in the future vary or decrease significantly depending on factors over
which we have limited or no control, such as:
- revenue from software sales;
- the timing of new product and service announcements;
- changes in pricing policies by us and our competitors;
- market acceptance of new and enhanced versions of our
products;
- conversion of customers to Year 2000 ready solutions;
- the size and timing of significant orders;
- changes in operating expenses, strategy or personnel;
- government regulation;
<PAGE> 2
- the introduction of alternative technologies; and
- the effect of acquisitions.
We are currently upgrading our enterprise resource planning systems.
Our management believes that the successful installation and implementation of
these systems are prerequisites to our success. Any significant delay in the
installation or failure in the implementation of one or more of these systems
could have a material adverse effect on our business and financial results. We
have experienced losses in the past, and at September 30, 1998, we had an
accumulated deficit of approximately $81.8 million. We operate with virtually no
software product order backlog because our 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 is rapidly
evolving, and our revenues in any period may be significantly affected by the
announcements and product offerings of our competitors as well as alternative
technologies. Our IVAS product is more complex and expensive compared to our
other electronic commerce and Internet products introduced to date, and will
generally involve significant investment decisions by prospective customers.
Accordingly, we expect that in selling our IVAS product, we 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. Our expense levels are
based, in part, on our expectations as to future revenues. If revenue levels are
below expectations, we may be unable or unwilling to reduce expenses
proportionately and operating results are likely to be adversely affected. As a
result, we believe that period-to-period comparisons of our 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 our operating results will be
below the expectations of public market analysts and investors.
IF WE CANNOT INTEGRATE ACQUIRED COMPANIES WITH OUR BUSINESS, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED.
We have completed a number of acquisitions in the past two fiscal years
and may complete additional acquisitions of complementary businesses in the
future. Our most recent acquisitions include the Materials Management Division
of MACTEC, Inc.; EDIWorks! L.L.C.; Premenos Technology Corp., or Premenos; Atlas
Products International, Limited and its affiliate; Acquion, Inc., or Acquion;
SupplyTech, Inc. and its affiliated entities, or SupplyTech; and the minority
interests of Harbinger NET Services, LLC, or HNS. Our completed acquisitions
present a number of risks and challenges, including:
- the integration of the software products of the acquired
companies into our current suite of products;
- the integration of the sales forces of acquired companies into
our existing sales operations;
- the coordination of customer support services;
- the conversion of acquired companies into a uniform
infrastructure;
- the integration of international operations of acquired
companies with our international affiliates; and
- the diversion of our management's attention from other
business concerns.
We cannot assure that we can successfully assimilate our operations and
integrate our software products with recently-acquired operations, software
products and technologies or that we will be successful in repositioning our
products on a timely basis to achieve market acceptance. Any adverse
developments associated with our integration efforts could have a material
adverse effect on our business and financial results.
We cannot ensure that we will be able to continue to identify suitable
acquisition candidates available for sale at reasonable prices, consummate any
acquisition or successfully integrate any acquired business into our operations.
Operational and software integration problems may arise if we undertake 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;
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- integration costs; and
- the amortization of expenses related to goodwill and other
intangible assets.
Future acquisitions may 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 we
have little or no direct prior experience and the potential loss of key
employees of the acquired company. The occurrence of any of these risks could
materially affect our business and financial results. Although we have cash
resources of approximately $75 million at March 26, 1999, to the extent we
desire to finance a future acquisition, we cannot assure that we will be able to
secure financing for such a transaction on reasonable terms or at all. See "We
must successfully manage our growth."
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST OTHER COMPANIES.
The electronic commerce, network services and products businesses are
intensely competitive, and we have many competitors with substantially greater
financial, marketing, personnel and technological resources than we have. We may
not be able to compete successfully against current and future competitors, and
competitive pressures faced by us could hurt our business and financial results.
Other companies offer products and services that may be considered by customers
to be acceptable alternatives to our products and services. Certain companies
also operate private computer networks for transacting business with their
trading partners, and we expect other companies to offer products and services
competitive with our Templar, Express and IVAS products and services. We expect
that other companies may develop and implement similar computer-to-computer
networks, some of which may be "public" networks such as ours and others may be
"private," providing services only to a specific group of trading partners,
thereby reducing our ability to increase sales of our network services. In
addition, several companies offer PC-based, midrange NT and UNIX, and mainframe
and Internet computer software products which compete with our software
products. Advanced operating systems and applications software from Microsoft
and other vendors also may offer electronic commerce functions that limit our
ability to sell our software products.
We believe that the continuing acceptance of electronic commerce 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 our 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 our agreements with our network subscribers generally are terminable upon
30 days' notice, we do not have the contractual right to prevent our customers
from changing to a competing network. See "We must continue to advance our
technology and comply with industry requirements to remain competitive."
Companies that currently offer products and/or services that compete
with various of our 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.
THERE ARE MANY RISKS ASSOCIATED WITH THE 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 ours. In addition to our Internet-related
products and services, several of our existing competitors 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. We cannot assure that the Internet will become an
accepted method of
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electronic commerce. We cannot assure that Templar end user software and IVAS
products, which enable electronic commerce over the Internet, will be accepted
in the Internet market or will be competitive with other products based on
evolving technologies. If the Internet becomes an accepted method of electronic
commerce, we could lose network customers from our VAN, which would reduce
recurring revenue from network services and have a material adverse effect on
our business and financial condition. Even if customers choose our Internet
solutions, the revenue gained from the sale of these solutions may not offset
the loss of revenue from the sale of our traditional EDI solutions.
The use of our 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. We cannot assure 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. We cannot assure 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 us. If the necessary infrastructure or complementary services
or facilities are not developed, or if the Internet does not become a viable
commercial marketplace, our business and financial results will be materially
adversely affected.
WE MUST SUCCESSFULLY MANAGE OUR GROWTH.
We have recently experienced significant growth in revenue, operations
and personnel as we have made strategic acquisitions, added subscribers to our
Value Added Network, or VAN, and Internet Value Added Server, or IVAS, and
increased the number of licensees of our software products. This growth could
continue to place a significant strain on our management and operations,
including our 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 our ability to
successfully expand our products, services and markets and to manage our
operations and 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 our business and financial results.
We recognize revenues for software license fees upon shipment, net of
estimated returns. Customers using our PC products are permitted to return
products after delivery for a specified period, generally 30 days. We generally
have experienced returns of approximately 10% to 20% of the PC product license
fees, and we record revenues after a deduction for estimated returns. Any
material increase in our return experience could have an adverse effect on our
business and financial results.
WE HAVE EXPERIENCED CHARGES THAT RESULTED IN NET LOSSES FOR THE FIRST AND THIRD
QUARTERS OF 1998.
In the first and third quarters of 1998, we 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,
we reported a net loss for each of the first and third quarters of 1998 and have
reported 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 that may recur
in the future and may result in an increase in some expense categories in our
results of operations in future periods.
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WE MUST CONTINUE TO ADVANCE OUR TECHNOLOGY AND COMPLY WITH INDUSTRY REQUIREMENTS
TO REMAIN COMPETITIVE.
The electronic commerce industry is characterized by rapid
technological change, frequent new product and service introductions and
evolving industry standards. Our future success will depend in significant part
on our 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. We cannot assure
that we will be successful in timely developing, acquiring or marketing new or
enhanced products or services that respond to technological change and evolving
industry standards, and that meet the requirements of the marketplace and
achieve market acceptance. In the past, we have experienced delays in the
commencement of commercial shipments of new products and enhancements, resulting
in delays or losses of product revenues. These 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 our business and financial results.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We believe that our continued growth and profitability will require
expansion of our international operations through our international
subsidiaries, in the United Kingdom, The Netherlands, Germany, Italy, France and
Mexico. This expansion will require financial resources and significant
management attention. Our ability to successfully expand our business
internationally will also depend upon our ability to attract and retain both
talented and qualified managerial, technical and sales personnel and electronic
commerce services customers outside the United States and our ability to
continue to effectively manage our domestic operations while focusing on
international expansion. Certain of our international subsidiaries have
experienced operating losses in their recent histories and some have experienced
significant operating losses in their recent histories. Any inability of our
international subsidiaries to penetrate international markets in a timely and
profitable manner could have a material adverse affect on our business and
financial results.
During 1998, our growth in revenue has been adversely affected by
management issues associated with our European operations and general softness
in demand in the European markets. Moreover, our ability to successfully
implement our international strategy may require installation and operation of a
value-added network and implementation of our IVAS software in additional
countries, as well as additional improvements to our infrastructure and
management information systems, including our international customer support
systems. In addition, we cannot assure that we will be able to maintain or
increase international market demand for our 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
our results of operations. We have 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.
THE INABILITY TO ATTRACT AND MAINTAIN MANAGEMENT AND OTHER PERSONNEL MAY
ADVERSELY AFFECT US.
Our success is largely dependent upon our executive officers and key
sales and technical personnel, the loss of one or more of whom could have a
material adverse effect on our business and financial results. Our future
success will depend in large part upon our ability to attract and retain
talented and qualified personnel. In particular, we believe that it will be
important for us 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. Our inability of to
locate and retain such personnel may have a material adverse effect on our
business and financial results. We cannot assure that we can retain our key
employees or that we can attract
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qualified personnel in the future. We currently carry key-person life insurance
policies on the lives of Messrs. Howle and Travers.
YEAR 2000 AND EURO CONVERSION RISKS MAY ADVERSELY AFFECT US.
It is possible that our currently-installed computer systems, software
products or other business systems, or those of our 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 2000 and thereafter without error or interruptions. The latest versions of
our products released or to be released are believed to be Year 2000 ready, but
we are still in the process of confirming this. We are also in the process of
determining the extent to which our earlier software products as implemented in
our installed customer base are Year 2000 ready, as well as the impact of any
non-readiness on us and our customers.
We currently anticipate 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 that are Year 2000 ready. Additional efforts are being made to
modify or replace other non-ready software, systems and equipment used by us
internally, including third party software, before the end of 1999. Further, we
are aware of the risk that third parties, including vendors and our customers,
will not adequately address the Year 2000 problem and the resultant potential
adverse impact on our business and financial results. However, we cannot assure
that we will identify all such year 2000 problems in our computer systems or
those of our vendors in advance of their occurrence or that we will be able to
successfully remedy any problems that are discovered.
We believe 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 our
business or financial results, although we can make no assurance to that effect.
Regardless of whether our products are Year 2000 ready, we cannot assure that
customers will not assert Year 2000 related claims against us. We believe 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 us. 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 customers, to reevaluate their current software needs, and as a result
switch to other systems or suppliers. In addition, our failure to identify and
remedy Year 2000 problems could put us 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 our business
and financial results.
Effective January 1, 1999, eleven of the 15 member countries of the
European Union adopted a single European currency, the euro, as their common
legal currency. Like many companies that operate in Europe, various aspects of
our business will be affected by the conversion to the euro. We are currently
finalizing our evaluation of the effect of the conversion on our products and
systems. The failure to adequately address the euro conversion issues could
affect our ability to offer software and services in the affected countries, as
well as our ability to operate internal systems. While we believe that we can
successfully remediate all related issues, we cannot assure that we will do so
in a timely manner. The failure to do so could have a material adverse effect on
our business and financial results.
WE ARE DEPENDENT UPON OUR ALLIANCE PARTNERS.
We have various agreements with alliance partners for the distribution
and marketing of certain of our software products. These alliance partners pay
us royalties representing a percentage of fees generated from the sale of
software licensed from us. For the year ended December 31, 1996, revenues from
one of these alliance partners
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were approximately $5.7 million, which equaled the contractual minimum royalty
during 1996. There is no minimum royalty obligation after 1996, and we have
experienced and believe that revenues from this alliance partner will decline in
the future.
WE MAY BE CONFRONTED WITH DEFECTS IN OUR SOFTWARE.
Software products as complex as those offered by us may contain
undetected errors or failures when first introduced or when new versions are
released. If software errors are discovered after introduction, we could
experience delays or lost revenues during the period required to correct these
errors. We cannot assure that, despite testing by us and by current and
potential customers, errors will not be found in new products or releases after
commencement of commercial shipments. These errors could result 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
our business and financial results.
WE ARE DEPENDENT ON OUR DATA CENTERS, WHICH COULD BE DESTROYED OR DAMAGED.
Our network service operations are dependent upon the ability to
protect computer equipment and the information stored in our 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 we have taken, we
cannot assure that a fire or other natural disaster, including national,
regional or local telecommunications outages, would not result in a prolonged
outage of our network services. In the event of a disaster, and depending on the
nature of the disaster, it may take from several minutes to several days before
our off-site computer system can become operational for all of our customers,
and use of the alternative off-site computer would result in substantial
additional cost to us. In the event that an outage of our network extends for
more than several hours, we will experience a reduction in revenues by reason of
such outage. In the event that such outage extends for one or more days, we
could potentially lose many of our customers, which would have a material
adverse effect on our business and financial results.
WE ARE DEPENDENT ON CERTAIN LICENSE ARRANGEMENTS WITH THIRD PARTIES.
We rely on certain technology that we license from third parties and
other products that are integrated with internally developed software and used
in our products to perform key functions or to add important features. We cannot
assure that we 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 our products and services
until equivalent technology, if available, is identified, licensed and
integrated, which could have a material adverse effect on our business and
financial results.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT
US.
We rely primarily on a combination of copyright, patent and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect our proprietary rights. We seek to protect our software, documentation
and other written materials principally under trade secret and copyright laws,
which afford only limited protection. We presently have one patent for an
electronic document interchange test facility and a patent application pending
for an EDI communication system. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. We cannot assure that
our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology. In distributing
many of our products, we rely 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, we have licensed our products to users and distributors in other
countries, and the laws of some foreign countries do not protect our proprietary
rights to as great an extent as the laws of the United States. We do not believe
that any of our products infringe the proprietary rights of third parties. We
cannot assure, however, that third parties will not claim infringement by us
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with respect to current or future products, and we have agreed to indemnify many
of our customers for the full cost of such claims. We expect 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 us to enter into royalty or
licensing agreements and indemnify our customers against resulting liability, if
any. Such royalty or licensing agreements, if required, may not be available on
terms acceptable to us or at all, which could have a material adverse effect on
our business and financial results.
WE MAY BE SUBJECT TO CHANGING GOVERNMENTAL REGULATIONS.
Our network services are transmitted to our 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 our business and financial
results. The Telecommunications Act of 1996, or the Act, amended the federal
telecommunications laws by lifting restrictions on regional telephone companies
and others competing with us 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 us 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, we cannot
assure that future legislative or regulatory efforts to limit use of the
Internet in a manner harmful to us 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 our business. We
cannot predict the impact, if any, that the Act and future court opinions,
legislation, regulations or regulatory changes in the United States or other
countries may have on our business. Our management believes that we are in
compliance with all material applicable regulations. Our Templar product
incorporates encryption technology that 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 we cannot assure that these products will remain
exportable.
OUR CHARTER AND BYLAWS MAY INHIBIT A TAKEOVER OF OUR BUSINESS.
Our 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 our shareholders. The rights of the holders of our 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 we have
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 our outstanding voting
stock. In addition, our charter and bylaws contain provisions that may
discourage proposals or bids to acquire us. This could limit the price that
certain investors might be willing to pay in the future for shares of our common
stock. Our charter provides for a classified board of directors with three-year,
staggered terms for its members. The classification of the our Board could have
the effect of making it more difficult for a third party to acquire control of
us.
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