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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, 1999
[ ] 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)
GEORGIA 58-1817306
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1277 LENOX PARK BOULEVARD 30319
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Office)
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:
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
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 8, 2000 as reported by The Nasdaq Stock Market, was
approximately $977,432,495. 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 8, 2000, Registrant had
outstanding approximately 39,594,515 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held April 25, 2000 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 REVENUES COULD DECREASE AS WE TRANSITION TO A BUSINESS
MODEL THAT EMPHASIZES RECURRING SERVICES REVENUES", "OUR OPERATING RESULTS COULD
FLUCTUATE, CAUSING OUR STOCK PRICE TO FALL", AND "WE MUST SUCCESSFULLY MANAGE
OUR GROWTH." 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 ("B2B") electronic commerce ("e-commerce")
products and services, offering comprehensive, scalable, standards-based,
solutions for businesses of all sizes. The Company develops, markets and
supports B2B e-commerce software products and provides network communications
and consulting services that help businesses fully automate the cycle of
transactions required in the electronic procurement of goods and services.
Harbinger is differentiated in the B2B e-commerce market by its core competency,
which focuses on the end-to-end process of building, managing and integrating
complete electronic trading communities (e.g., groups of companies that
regularly exchange B2B e-commerce transactions). The Company believes that this
end-to-end process requires domain expertise both as a technology and services
provider, but also as a trusted intermediary, which includes managing the
exchange and integration of mission-critical transactions, developing and
facilitating electronic procurement catalogs ("e-catalogs"), enabling and
deploying electronic marketplaces and vertical market exchanges, and managing
the on-going trading relationships between businesses using these marketplaces
and exchanges to communicate their purchasing and settlement transactions with
each other.
Harbinger's software products enable businesses to engage in e-commerce
with one another by fully integrating e-commerce into their business
infrastructure and operations. The 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
via the Internet and legacy networks. Harbinger offers the software as
customer-licensed applications for operation on an end-user's server, or on a
subscription basis as an Application Service Provider (ASP) in which the
software is hosted on Harbinger's servers and accessed by customers via the
Internet. Harbinger provides e-commerce delivery and implementation services for
its software, including installation, training and on-going customer support,
and additionally the integration of the software (and resulting e-commerce data)
with a customer's business systems. Delivery and implementation services can
also include outsourcing services for the operations management of a customer's
e-commerce systems, and management of a customer's e-commerce trading community
program. Harbinger additionally offers e-commerce network communications and
trusted intermediary services via its e-commerce portal on the Internet. The
e-commerce center facilitates electronic transaction exchange between businesses
using Internet Protocol ("IP"), the underpinning for the Internet, Intranets,
Extranets, Web sites and e-mail, and over standard telephone lines using non-IP
protocols, such as X.400, X.25 and Bisync. The Company's B2B e-commerce products
and services are deployed in many combinations to suit the individual needs of
its customers, resulting in a comprehensive, scalable, standards-based,
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,
2000, the Company's
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customers included leading U.S. and multi-national corporations and government
agencies, including the following:
<TABLE>
<S> <C> <C>
3M Companies Environmental Protection Agency Proctor and Gamble
Abbott Labs Exxon Reebok International
Allied Signal Federal Express Sears
Ameritech Ford Shell
Amoco General Electric Southern Company
AT&T General Motors Southwestern Bell
Baxter Healthcare Georgia Power Sports Authority
Bell Atlantic GroceryLink Sprint
Bell Canada Hewlett-Packard Swisscom
Bellcore Hitachi Data Systems Telstra
BellSouth Honda Tennessee Valley Authority
Caterpillar IBM Texaco
Chevron Internal Revenue Service Texas Instruments
Compaq Computer John Deere The Limited
Daimler-Chrysler Johnson & Johnson Timberland
Dell Computer Johnson Controls Toys R Us
Deutsche Telekom Kmart TRW
Detroit Edison Lucent Technologies United Parcel Service
Digital Equipment Corp. MCI United Technologies
Duke Power Mitsubishi Upjohn
DuPont Mobil US Dept., of Transportation
Dutch PTT Post Northern Telecom US Dept. of Defense
Eastman Chemical Northrop Grumman US Postal Service
Eli Lilly Pacific Gas & Electric Wal-Mart
</TABLE>
Harbinger focuses day-to-day business operations on five corporate
priorities: (i) revenue growth; (ii) customer value renewal; (iii)
knowledgeable, committed and motivated team; (iv) operational excellence; and,
(v) infrastructure expansion. To achieve its objectives in these areas, the
Company announced that during 2000 it expected to: (a) increase market awareness
of Harbinger as the leading B2B e-commerce solutions provider; (b) capitalize on
its e-commerce center (harbinger.netSM) as the leading portal for
mission-critical B2B e-commerce; (c) complete the conversion of its
approximately 40,000 existing customers to Internet-enabled products and
services; and, (d) maintain operational excellence throughout the Company.
B2B 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 B2B e-commerce
was standards-based data exchange, which facilitated the computer-to-computer
exchange of business transactions between trading partners using formatted
messages. The transactions, typically purchase orders, shipping notices,
invoices and related confirmations, 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-based
networks including the Internet became more prominent in the B2B e-commerce
market and have greatly expanded the opportunity for software functionality,
types of transactions and the data communications of such transactions between
businesses.
The advantages of B2B e-commerce typically include one-time or eliminated
data entry, reduced clerical workload, elimination of paper records, rapid,
accurate and secure exchange of business data, and reduced operating and
inventory carrying costs. B2B e-commerce, for example, facilitates uniform data
communications between trading partners in different industries, including
customers, suppliers, common carriers, banks and other financial institutions.
Standards-based data exchange remains a cornerstone of e-commerce and has
historically been the source of the majority of Harbinger's revenue. The Company
expects IP-based revenue to increase as a percentage of its total revenue.
Nevertheless, many B2B e-commerce transactions, including those generated by new
IP-based software applications, follow a common transaction flow originally
established using standards-based data exchange.
Transaction Flow. B2B e-commerce transactions follow specific execution
methods. The following outlines a typical purchasing transaction. First, a
trading partner (the "sending partner") creates with its computer, either
manually or
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electronically, the raw business data for the purchase order. Business data for
manual transactions may be created by selecting items from an e-catalog, whereas
automated transactions may be dynamically created by the sending partner's
business systems according to predetermined criteria for inventory levels, sales
forecasts, etc. Second, e-commerce software on the sending partner's computer
converts the raw business data into an acceptable, standards-based, e-commerce
purchase order. Third, the purchase order, now in e-commerce format, is
electronically transmitted through telecommunications links from the sending
partner's computer to the central server of a trusted third party that serves as
the transactional 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. Fourth, the intermediary receives and processes the transaction for
subsequent delivery to the intended trading partner (the "receiving partner").
Fifth, the receiving partner uses e-commerce software, but not necessarily the
same brand of e-commerce software employed by the sending partner, to act on the
purchase order. Sixth, based on the receiving partner's actions, a follow-up
transaction (e.g., order confirmation) is created and communicated back to the
sending partner ostensibly following the same procedures outlined in steps 1-4
above. The transaction exchange, following prescribed execution methods and
standard transaction sets (i.e., quotes, purchase orders, shipping and receiving
notices, invoices, payments and related transaction), continues between the
partners through invoicing and settlement.
Trading Communities. Groups of companies that regularly trade with each
other generate a significant number of repetitive business transactions. These
groups and the individual companies that comprise their trading communities are
prospects for the implementation of B2B e-commerce solutions. Early market
expansion of B2B e-commerce and its associated trading communities was made
possible through the establishment of repetitive standard transactions sets
based on the ANSI X.12 and UN/EDIFACT formats. There are now subsets of these
standards in use across specific industries such as automotive, banking,
chemical, financial, grocery, healthcare, petroleum, retail and utilities. The
adoption of these standards-based formats as an accepted means of transaction
exchange has occurred, in part, because many groups and trade organizations and
many large companies within vertical communities increasingly recommend or
require their member organizations or trading partners to adopt such formats as
the primary method of communicating business transactions. The vast majority of
today's B2B e-commerce transactions utilize these standard and subset formats.
With the growth of IP-based e-commerce, the market is also seeing new formats
emerge such as extensible markup language ("XML") and open buying over the
Internet ("OBI"), which like standards-based data exchange in the 1980s must
first achieve market acceptance.
Marketplaces and Vertical Market Exchanges. Several B2B e-commerce trading
models have evolved in the market over time including enterprise-centric,
consortium and open market. The predominant model, enterprise-centric (also
"e-hub" and "hub and spoke"), dates back to the 1980s, where large companies
within a trading group exercised substantial influence over how the group
exchanged B2B e-commerce transactions. This one-to-many trading model grew up in
vertical markets where there were clear industry leaders conducting business
around a specialized group of products. Within B2B e-commerce, the consortium
and open market trading models have emerged in recent years. The consortium
model is similar to the enterprise-centric model except that several large
enterprises, sometimes in joint-ventures which include e-commerce technology
suppliers, band together to build a marketplace for the exchange of
commodity-oriented goods and services. In contrast, the open market model is a
many-to-many marketplace for the exchange of commodity-oriented goods and
services, where no clear business leaders can dominate the playing field.
Transactions within these trading models can flow via Internet or Extranet,
public and private third-party networks. The process of building, managing and
integrating complete electronic trading communities around these e-commerce
trading models has a cascading effect across business segments and markets.
Large companies attract mid-market companies, who in turn attract smaller
enterprises to engage in B2B e-commerce, thus creating an integrated and
automated supply chain. This natural evolution and growth results in potential
new customers for B2B e-commerce software, network communications and consulting
services.
According to GartnerGroup, B2B e-commerce transactions will grow to reach
$7.3 trillion worldwide by 2004. Furthermore, Company management estimates that
of the 3 million U.S. companies with five or more employees, approximately
200,000 (including virtually all of the Fortune 500) have elected to date to
make use of B2B e-commerce, representing about $45 billion in transaction value.
Although many of these businesses are members of existing trading communities,
the Company believes that the majority use B2B e-commerce to communicate with
only a small percentage of their suppliers, distributors and customers. For B2B
e-commerce to achieve analyst growth estimates over the next few years, the
Company believes penetration and adoption rates within the mid-market and small
enterprise will need to sharply increase. Adoption of B2B 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 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.
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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 over 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 B2B
e-commerce telecommunications, there are significant actual and perceived
concerns relating to the use of the Internet for commercial transactions. These
concerns include 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 when the Internet is
used to transport commercial, mission-critical, B2B e-commerce transactions.
To solve the current problems with using the Internet and other IP networks
for transporting B2B e-commerce transactions, the Company offers a series of
products and services. The harbinger.net e-commerce center provides trusted
intermediary services including those for message integrity and accountability,
and centralized online customer support. Harbinger software products that
operate as Extranets, but do not require a Web browser interface, include secure
communications to harbinger.net using secure sockets layer ("SSL"), a security
protocol that is widely accepted for IP networks. Harbinger Express is an
e-commerce Extranet product using a Web browser interface and the browser's
native SSL component for secure transmission of transactions to harbinger.net.
Harbinger Templar(R) is an e-commerce e-mail product using patented and industry
standard encryption technologies for the highly secure transmission of
transactions to harbinger.net and directly between trading partners.
THE HARBINGER SOLUTION
The Harbinger solution to address B2B e-commerce focuses on building,
managing and integrating complete electronic trading communities. The Company
believes that facilitating this end-to-end process requires a combination of
technologies and services, surrounding centralized trusted intermediary services
that link businesses together in organized trading communities. The Company
believes the following components for trading community development
differentiates it from competitors in the market.
- E-Commerce Center, Trusted Intermediary. The Company offers
harbinger.net, a transaction portal and e-commerce center, 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 also hosts the Company's
Application Services business, as well as marketplaces and vertical
market exchanges operated by the Company on behalf of itself and
others, some of whom are joint-venture partners. Trading services
include subscription-based vertical market trading communities,
electronic storefronts, online customer care, e-commerce resource
center, e-commerce directory and various interconnections to numerous
private networks and VANs.
- Catalog Data Management. The Company offers a range of tools and
services for buyers and suppliers to quickly build and maintain
e-catalogs with fully rationalized data elements for fast search and
retrieval by popular catalog engines. E-Catalogs can be hosted on a
subscription basis on harbinger.net under the Company's Application
Service Provider (ASP) program.
- Application Services and Software. The Company offers a fully scalable
range of e-commerce software products for trading communities to
create marketplaces and vertical market exchanges, build Internet
storefronts, implement data security and encryption, and conduct IP
and non-IP telecommunications. The Company offers the software as
customer-licensed applications for operation on the end-user's server,
or on a subscription basis as an ASP where the software is hosted on
Harbinger's servers and accessed via connection to harbinger.net.
- Data Transformation Services and Software. The Company offers a fully
scalable range of e-commerce software products to perform data
transformation between e-commerce formats (XML, X12, EDIFACT) and the
integration of resulting data to its customers business processes and
systems. The Company offers the software as customer-licensed
applications for operation on the end-user's server, or on a
subscription basis as an ASP where the software is hosted on
Harbinger's servers and accessed via connection to harbinger.net.
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- Delivery and Implementation Services. The Company offers a full
complement of e-commerce delivery and implementation services for its
software including installation, training and on-going customer
support, and additionally the integration of the software with a
customer's business systems. Services can also include outsourcing
services for the operations management of a customer's e-commerce
systems, and complete development, deployment and management of a
customer's e-commerce trading community program.
STRATEGY
The Company's objective is to be a leading worldwide provider of IP-based,
B2B 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 conduct B2B e-commerce over IP networks. The Company's focus
is on building, managing and integrating complete electronic trading communities
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 revenue-related traffic to the
harbinger.net e-commerce center and increasing market awareness and acceptance
for the Company and its solutions in the marketplace. The Company offers its
customers the flexibility of purchasing Harbinger's solution as a licensed
application set or on a subscription basis as a network-delivered service via
harbinger.net.
Migrate Customers to IP-based Products and Services. The Company believes
IP-enabled products and services amplify its ability to provide enhanced
features and improved service levels to its customers. As a result, throughout
1999 the Company engaged in a comprehensive marketing effort to migrate its
customers to IP-based products and services, with a goal of achieving a 50%
penetration by year-end. The Company is continuing the migration program during
2000 and intends to achieve further penetration by year-end.
Provide a Comprehensive Range of Integrated Products and Services. All
products and services offered by the Company are or are expected to be
IP-enabled, and include e-commerce software for use on the full range of
commonly used computer platforms 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 life cycles. Customer self-services for problem reporting,
trouble shooting, software updates and similar services are available via online
connection to the harbinger.net e-commerce center. The software supports
standard formats and transactions for e-commerce, including X12, EDIFACT and
XML, and is designed to be adaptable to emerging B2B e-commerce facilitates such
as OBI, RosettaNet and BizTalk. While certain software is designed for
installation by the customer, more sophisticated e-commerce applications often
require delivery and implementation assistance provided by Harbinger's
professional services group. Such instances typically include specific customer
requirements for data transformation, as well as integration of the resulting
data with the customer's business systems including popular enterprise resource
planning ("ERP") systems. Finally, all the products and services are compatible
with the Company's harbinger.net e-commerce center and seeks to drive recurring
revenue through subscription and transaction volume.
Focus on Building, Managing and Integrating 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 and leading enterprises 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 products and services to facilitate the adoption and
implementation of B2B e-commerce solutions across these industries.
Develop New B2B Technologies. The Company's research and development
("R&D") organization is continually working to improve the features, performance
and serviceability of its going-forward products and services. The group follows
the Software Process Handbook and Product Life Cycle Methodology to adhere to
the Software Engineering Institute Capability Maturity Model, which measures the
quality and stability of software per line of code. The R&D group is currently
evaluating an upgrade to its development standards for 2000, such as Rational
Unified process, to better standardize its software development around
object-oriented programming. Additionally, the Company is currently engaged to
develop new B2B e-commerce products and services through Harbinger Labs, a
separate group within its R&D organization. Harbinger Labs is focused on new B2B
e-commerce technologies for rollout in the 2001 through 2004 timeframe.
Penetrate Worldwide Markets. The Company intends to aggressively pursue
worldwide B2B e-commerce opportunities in Europe, the Middle East and Africa
("EMEA"), and Asia-Pacific and Latin American ("APLA") theaters. The
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Company has a direct presence in the United States, Canada, Germany, Italy,
Mexico, The Netherlands and the United Kingdom. Indirect channels are maintained
through distributors in countries where Harbinger does not have a direct
presence and complements the Company's direct sales, marketing and support
initiatives in the EMEA and APLA theaters.
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 through its ability to
deliver products and services to customers at the lowest possible cost, with the
highest degree of quality and efficiency, backed by expert customer care. The
Company is implementing total quality management ("TQM") processes across the
organization and expects to achieve ISO 9001 certification by year-end 2000. The
Company strives to make itself the easiest to do business among all B2B
e-commerce providers.
Pursue Strategic Acquisitions and Alliances. The Company intends to enter
new vertical markets, penetrate additional geographic markets and expand its B2B
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 B2B
e-commerce products and services.
Investment Division for Emerging Marketplace. The Company announced in
January 2000 that it was forming a new investment division with $25 million
allocated to capitalize emerging marketplaces and vertical market exchanges
hosted on harbinger.net. Vulcan Ventures, Inc., Paul Allen's venture capital
firm and one of the Company's largest and longest standing shareholders, also
plans to invest side by side with Harbinger as the Company builds equity stakes
in the emerging Internet startups. The division will be separately staffed, and
allow the Company to evaluate new opportunities and make investment decisions in
a highly competitive and rapidly changing market environment.
CAPABILITIES
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.
<TABLE>
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NAME DESCRIPTION
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<S> <C>
E-COMMERCE CENTER, TRUSTED
INTERMEDIARY
harbinger.net Transaction portal and support center
for businesses to conduct e-commerce
with suppliers, distributors and
customers, regardless of their data and
communications requirements. Includes
hosted Application Services for
Harbinger software and provides service
point for hosted marketplaces and
vertical market exchanges. Offers online
customer care and e-commerce content and
information for industry professionals.
CATALOG DATA MANAGEMENT
Harbinger Knowbility(TM) Software tools and services for buyers
and suppliers to build and maintain
e-catalogs with fully rationalized data
elements for fast search and retrieval
by popular catalog engines.
</TABLE>
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<TABLE>
<CAPTION>
COMPUTER
OPERATING
NAME FUNCTION SYSTEMS
---- -------- -------
<S> <C> <C>
E-COMMERCE APPLICATION SERVICES AND
SOFTWARE
ASP Subscription-based access and
usage of Harbinger software and
transaction services hosted on
harbinger.net.
Marketplaces and Vertical Market Advanced IP gateway technology Windows NT, UNIX
Exchanges and back-office e-commerce
infrastructure for managing and
operating electronic marketplaces
and vertical market exchanges.
Harbinger Express Web-based e-commerce software for Windows 95, Windows 98,
creating and exchanging e-commerce Windows 2000,
transactions (XML, X12, EDIFACT, Windows NT
etc.) using a Web browser or an
optional thick-client desktop
application.
Harbinger TrustedLink(TM) Data transformation and integration Windows 95, Windows 98,
software for creating and exchanging Windows 2000, Windows NT,
e-commerce transactions UNIX, OS/400, MVS
(XML, X12, EDIFACT, etc.)
Harbinger Instant Net Presence Internet storefront software for Windows 95, Windows 98,
any business to develop an Windows 2000, Windows NT
e-commerce web site, including an
online catalog and ordering suite.
Harbinger Templar Data encryption and communications Windows 95, Windows 98,
software for highly secure exchange Windows 2000, Windows NT,
of e-commerce transactions via e-mail UNIX
over the IP networks
Harbinger Prime Factors(TM) Data encryption software for multiple Windows 95, Windows 98,
platforms and applications, including Windows 2000, Windows NT,
ANSI X12.58 and X12.42 standards, UNIX, OS/400, MVS,
generalized file security, ANSI X9.9 OS/390
and ATM sharing credit and debit networks.
E-COMMERCE SERVICES
Harbinger Business Community
Integration Outsourcing services for building, managing and integrating complete electronic
trading communities with suppliers, distributors and customers. Includes
complete marketing programs, information seminars, support materials,
telemarketing, trading format creation and distribution, software and services
delivery, installation assistance, testing and certification of e-commerce
software and telecommunications with trading partners.
Harbinger Operations Management Outsourcing services for operating Harbinger software applications hosted on
customer's servers. Includes onsite or remote operation, administration and support of
customer's e-commerce systems and resources.
Professional Services Consulting, project management, installation, integration and ongoing
services for Harbinger software applications.
</TABLE>
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<TABLE>
<CAPTION>
COMPUTER
OPERATING
NAME FUNCTION SYSTEMS
---- -------- -------
<S> <C>
E-Commerce Project Services Development and implementation of e-commerce solutions leveraging Harbinger's
application services and software.
Training Classroom, on-site and Internet-based training classes in the use and operations of
Harbinger software applications.
Customer Support Online customer self-service and telephone hotline support in the use and
operations of Harbinger software applications, documentation and network services.
Includes electronic software updates.
</TABLE>
E-COMMERCE CENTER
harbinger.net. harbinger.net is an IP-based portal for
application-to-application e-commerce. harbinger.net serves 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.net also serves as an Application
Service Provider network, hosting Harbinger e-commerce applications and
e-catalogs, which are accessed and used by customers on a subscription basis.
Similarly, harbinger.net also hosts marketplaces and vertical market exchanges
sponsored by leading business entities, sometimes in joint venture relationships
with Harbinger. Harbinger believes that its B2B e-commerce network service
offering is one of the largest 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 e-commerce services. The harbinger.net e-commerce center supports real-time
transactions, open network and application interfaces, online customer
self-service facilities and e-commerce content for industry professionals. The
features, services and capabilities of harbinger.net fall into three general
categories: Transaction Services; Customer Services, and Content Services.
Portal Transaction Services
- Applications Services - Harbinger software applications hosted and
available on a subscription basis.
- Catalog Data Management - harbinger.net will enable the aggregation
and rationalization of catalog content for business-to-business
E-Commerce. Tools and services that allow businesses to submit, review
and modify catalog data and then control the release of e-catalogs to
customers. These services are facilitated via harbinger.net through
the use of browser utilities and FTP technologies.
- Marketplaces and Vertical Market Exchanges - comprehensive
marketplaces and vertical market exchanges hosted on harbinger.net.
Includes complete back-office infrastructure for customer initiation,
support, billing, etc.
- Internet Storefronts - hosting environment for Internet storefronts.
- 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 many services of harbinger.net require
IP technologies, other protocols and transports are available,
including: Async, Bisync, SNA, X.400 and OFTP.
- 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 and
others), private VANs, and X.400 Networks.
- Value-Added Processing - transactions traversing harbinger.net can be
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.
- 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.
- Security - several security and encryption mechanisms are supported
for harbinger.net transactions, including SSL and S/MIME.
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- Web E-Commerce (Harbinger Express) - harbinger.net provides a Web
transaction portal supporting all levels of browser-side applications.
- Transformation and Integration 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.
- 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 transaction tracking system which
includes a flexible, powerful browser interface to enable tracing of
every transaction, with exact times and checkpoints for each stage of
processing and transport.
- Customer Services - harbinger.net also provides the customer services
for 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, including XML,
ANSI X12, UN/EDIFACT, OBI, eCo, ANX, 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 e-commerce directory component of
harbinger.net is an open directory of businesses trading
electronically.
- 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.
CATALOG DATA MANAGEMENT
Harbinger Knowbility. Harbinger Knowbility is a comprehensive suite of
software tools for buyers and suppliers to create, load, manage and maintain
e-catalogs. Rationalizing data from existing paper catalogs and electronic
repositories to create e-catalogs is often the number one challenge faced by
companies trying to establish an online purchasing system. The Knowbility suite
produces fully rationalized data elements for fast search and accurate retrieval
by popular catalog search engines. E-catalog data and technology have been
applied in both supply chain management initiatives for production goods and
services, and maintenance, repair and operating ("MRO") supplies for
non-production goods and services. Additionally, Harbinger offers complete
outsourcing services for e-catalog development and maintenance, Application
Service for hosting of e-catalogs on harbinger.net.
APPLICATION SERVICES AND SOFTWARE
Harbinger Application Services. Harbinger Application Services provides
businesses of all sizes subscription-based access and usage of Harbinger
e-commerce software, which is hosted for them on the harbinger.net e-commerce
center. In a market experiencing rapid advancement and change, many businesses
are opting to "rent" (ASP) versus "own" (license) software applications, thus
conserving capital for other strategic initiatives. Harbinger Application
Services can be tailored to the specific needs of each business including any
combination of software usage, transaction exchange and support services across
the complete range of Harbinger e-commerce software and e-catalog tools.
Harbinger Marketplaces and Vertical Market Exchanges. Harbinger
Marketplaces and Vertical Market Exchanges are power by Harbinger's advanced IP
gateway technologies for rapidly creating, deploying, managing and operating
electronic marketplaces, which conform to the enterprise-centric, consortium and
open market trading models in today's environment for B2B e-commerce. Deploying
a full-service, real-time, end-to-end electronic marketplace requires more than
a Web site.
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<PAGE> 11
Harbinger's one-to-many and many-to-many online exchanges may be operated on the
sponsor's servers or hosted on harbinger.net under Harbinger's ASP program, and
can be configured with complete front- and back-office e-commerce
infrastructures to manage the entire customer life cycle from recruitment to
registration, to on-going transaction exchange and billing.
Harbinger Express. Harbinger Express is a Web-enabled application that
allows a business on one end of an e-commerce transaction to exchange
transactions with their trading partner using only an Internet connection and
standard Web browser. Frequently the application is used by small and mid-size
enterprises ("SME") that have been reluctant to implement full-scale e-commerce
systems within their businesses. Express applications are often sponsored by
larger enterprises wanting to expand their trading communities with SME trading
partners. Express automatically translates e-commerce transactions to and from
hypertext markup language ("HTML") so that trading partners using a Web browser
on one end of an exchange receive e-commerce transactions as Web pages, while
more sophisticated trading partners on the other end of an exchange receive
e-commerce transactions in their preferred format (i.e., XML, X12, EDIFACT,
etc.). For more complex business requirements, the SMEs can use an optional
Windows client application, which supports offline document processing and
application integration.
Harbinger TrustedLink. Harbinger TrustedLink is a family of data
transformation and integration software that permits the rapid creation and
exchange of e-commerce transactions across a comprehensive range of e-commerce
standards such as XML, X12 and EDIFACT. The product family is used by businesses
of all sizes engaged in full-scale e-commerce programs. TrustedLink facilitates
the creation and control of business transactions, such as purchase orders and
invoices, and provides data integration and messaging functions for directly
interacting with a company's internal business systems, including popular ERP
systems.
The Windows version of TrustedLink is the leading B2B e-commerce software
product for the desktop computer market. The OS/400 version of TrustedLink is
the leading B2B e-commerce 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-sized business or as a departmental or dedicated processor in a larger
business.
Harbinger Instant Net Presence. Harbinger INP allows a company to establish
an Internet storefront for their business including a professional Web site and
online catalog and ordering suite. The software is designed for SMEs typically
implementing their first e-commerce sites and requires no programming skills.
Users create their Internet storefront by entering information to the software
following an interview format. The storefront can be previewed locally on the
desktop using the embedded Microsoft Internet Explorer software, and published
for use on the Internet via Harbinger's ASP program hosted on harbinger.net.
Harbinger Templar. Harbinger Templar is an open, standards-based solution
for enabling secure transmission of digitally designed electronic documents,
including XML, X12 and EDIFACT documents, over the Internet and other IP
networks. 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. Harbinger
markets an exportable version of Templar in compliance with current U.S. export
control laws and regulations applicable to encryption technology. Harbinger
Templar is protected under U.S. Patent.
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 operate on computer platforms such as desktop
PCs, mid-range UNIX and AS/400, DEC and Tandem machines to MVS mainframes.
E-COMMERCE SERVICES
Harbinger Business Community Integration. Harbinger Business Community
Integration ("BCI") offers outsourcing services for building, managing and
integrating complete electronic trading communities with suppliers, distributors
and customers. Many companies do not want the burden of finding new trading
partners, integrating them into existing e-commerce program, or managing the
ongoing electronic relationships across all trading partners. BCI is a tailored
service to meet the specific trading community needs of each business. The
program includes full-service capabilities for implementation
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<PAGE> 12
and execution of marketing programs, information seminars, support materials,
telemarketing, trading format creation and distribution, software and services
delivery, installation assistance, testing and certification of e-commerce
software and telecommunications with all trading partners.
Harbinger Operations Management (Outsourcing). Harbinger Operations
Management provides outsourcing services for the operation of Harbinger software
applications hosted on customers' servers. Many companies want to conserve
in-house IT resources for strategic initiatives other than e-commerce, opting to
rely on outside expert services for the operation and maintenance of their
e-commerce infrastructure. Operations Management is a tailored service to meet
the specific e-commerce operational needs of each customer. Harbinger staff
provides outsourcing services either onsite or remotely.
Professional Services. Harbinger Professional Services is staffed by
technical consultants providing project management, installation, integration
and ongoing services for Harbinger software applications and e-commerce
implementations. This is particularly important for the many companies today
that are building end-to-end e-commerce infrastructures, which include
application-to-application interfaces between their internal business systems
and those of their trading partners. These integrated trading relationships
require e-commerce software to be tightly coupled with internal business
systems, including ERP systems, and communicate in real-time via the Internet or
near real-time via private networks and VANs. Harbinger Professional Services
specializes in the delivery and implementation of Harbinger software within
complex trading environments.
E-Commerce Project Services. Harbinger E-Commerce Project Services
specializes in the development and implementation of e-commerce solutions that
leverage Harbinger applications and services.
Education. Harbinger Education provides classroom, on-site and
Internet-based training classes in the use and operations of harbinger software
applications.
Customer Service. Harbinger Customer Service provides extensive customer
care and ongoing support facilities related to the use and operation of
Harbinger software applications, network services and the business processes
associated with e-commerce. Customers can tailor their support program to
include annual maintenance with software updates and product enhancements, along
with any combination of no-charge and fee-based services. Harbinger operates
multiple hotline "help desks" across North America, Europe and Mexico. 24x7
customer self-services for problem reporting, trouble shooting, software
upgrades and downloads are available via online connection to the harbinger.net
e-commerce center.
SALES AND MARKETING
Harbinger's principal marketing strategy focuses on establishing complete
electronic trading communities and expanding the number of trading partners
using Harbinger software and the harbinger.net e-commerce center. 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 B2B e-commerce within
trading communities primarily conforming to the enterprise-centric trading model
and secondarily to the consortium and open market trading models. Within its
direct selling operations, the Company utilizes a solutions selling approach to
address the needs of its customers and prospective customers.
Direct. Harbinger has direct selling operations based in North America,
Europe and Mexico. Applying the best practices associated with solutions
selling, the Company's direct sales organization seeks to have customers license
or subscribe to (under an ASP program) its software and sell network and
e-commerce services to businesses of all sizes that address the needs and
requirements of those businesses e-commerce objectives. As of March 1, 2000, the
Company employed approximately 250 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
Latin 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 who 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
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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, Clarus,
Computer Associates, Computer Generated Solutions, Concur, daly.commerce, Data
General, Deloitte Consulting, Entrust Technologies, Ernst & Young,
Hewlett-Packard, IBM, Intentia, JBA, J.D. Edwards, MAPICS, Marcam, Microsoft,
OnDisplay, Optika, Oracle, Peachtree Software, PeopleSoft,
PricewaterhouseCoopers, PurchaseSoft, RightWorks, SAP, Sprint, Sun-Netscape
Alliance, Sybase, Syntegra Unisys and UUNET Technologies for distribution of its
products worldwide.
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PRODUCT DEVELOPMENT
The Company continues to assess the needs of businesses in various trading
communities and to develop software programs and network services, which
facilitate B2B e-commerce transactions via the harbinger.net e-commerce center,
or directly over standard telephone lines. The Company's product development
efforts currently are focused on providing a full range of B2B e-commerce
solutions to Harbinger customers and prospective 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.
COMPETITION
The B2B e-commerce services and computer software markets are highly
competitive. Numerous companies supply B2B e-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 e-commerce transactions and e-catalog
systems and services. Several of the Company's most significant competitors
provide network services and related software products and services. The Company
believes that many of its competitors have significantly greater financial and
personnel resources than the Company, due in part either to their revenue and
profitability, or market capitalization.
The market for Internet B2B e-commerce software and services is also highly
competitive, ranging from small companies with limited resources to large
companies with substantially greater financial and marketing resources than the
Company. The Company believes that existing competitors are likely to expand the
range of their e-commerce services to include Internet-based capabilities, and
that new competitors, which may include telephone companies and media companies,
are likely to increasingly offer services which utilize the Internet to provide
B2B e-commerce 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.
The Company believes the principal competitive factors in the commercial
B2B e-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 one U.S. patent for an EDI
communication system and for technology utilized in the Company's Templar
product. 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. There can be no assurance, however, that the cost to the Company of
addressing these allegations will not increase in the future. 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
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delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing 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 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 READINESS
The Company spent considerable internal and external resources from 1997
through 1999 preparing for the "Year 2000" computer issue. The Year 2000 issue
relates to the ability of a computer system to properly process data beginning
on January 1, 2000. The Company's efforts were spent to ensure that its computer
products were "Year 2000 Ready," as defined, and that its internal core
information technology (IT) and non-IT systems were Year 2000 Ready.
The Company believes it successfully implemented its Year 2000 program, as
evidenced by the continued successful operation of its computer products and
core internal IT and non-IT systems. The Company has not encountered any
significant problems with its third-party customers, financial institutions,
vendors and others with whom it conducts business. The Company will continue to
monitor its product performance and core IT and non-IT systems throughout 2000
to ensure ongoing performance. While there can be no assurance that no Year 2000
related issues will arise, as of December 31, 1999, the
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Company believes, based on information currently available, that Year
2000-related events are not likely to have a material effect on its results of
operation, financial condition or liquidity.
The total pre-tax cost associated with Year 2000 modifications of the
Company's products was approximately $1 million to $2 million, funded from the
Company's internal operating cash flows. Such costs do not include costs for new
internal software or for modifications to existing internal software for the
Company's IT systems, as these projects were not accelerated due to the Year
2000 issue.
EMPLOYEES
As of March 8, 2000, the Company had approximately 1,003 full-time
employees. Approximately 309 are technical personnel engaged in maintaining or
developing the Company's products or performing related services, approximately
200 are marketing and sales personnel, approximately 314 are customer support
and operations personnel, and approximately 180 are involved in administration
and finance.
EXECUTIVE OFFICERS
The current executive officers of the Company and their ages as of March
24, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James M. Travers 48 President and Chief Executive Officer
Dave Bursiek 62 Executive Vice President and General Manager,
Customer Solutions and Enhancements Division
Daniel L. Manack 42 Senior Vice President and General Manager, EC
Solutions Division
James K. McCormick 43 Chief Financial Officer
Douglas L. Roberts 43 Senior Vice President, Worldwide Sales
</TABLE>
Mr. Travers, age 48, has been a director of the Company since March 1999.
He has served as President and Chief Executive Officer of the Company since
January 2000. He served as President and Chief Operating Officer from October
1998 until January 2000, 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.
From 1978 through 1994, Mr. Travers served in various managerial positions with
Texas Instrument's Information Technology Group, including Vice President for
North American Field Operations, and from June 1992 through December 1994 as
Director of Business Development for Texas Instrument's Worldwide Applications
Software Business.
Mr. Bursiek, age 62, 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.
Mr. Manack, age 42, 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. From June 1980 through August 1994, Mr.
Manack served in various managerial positions with Texas Instruments.
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Mr. McCormick, age 43, has served as Chief Financial Officer of the Company
since April 1, 1999. From September 1997 until February 1999, he served as Chief
Financial Officer, Treasurer and Secretary of Knology Holdings, Inc., a
telecommunications service provider. From 1992 until August 1997, he worked as
Corporate Controller and Treasurer for United Dairy Farmers, Inc., which is a
holding company for dairy retail and manufacturing companies.
Mr. Roberts, age 43, has served as Senior Vice President - Worldwide Sales
of the Company since April 1999. From October 1995 until April 1999, he served
as Senior Vice President - Sales, of BellSouth Wireless Data, a
telecommunications wireless data provider. From October 1993 until October 1995,
he served as Vice President - General Manager - International of Software AG, a
software firm.
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
communications lines. These transmissions are governed by legislative and
regulatory policies establishing charges, terms and conditions affecting
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 their 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 legislative efforts to govern communications especially over
the Internet (most notably, provisions of the Communications Decency 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. The Children's Online Privacy Protection Act becomes
effective April 21, 2000, and this and future governmental privacy initiatives
may affect the Company's provision of services. Also, some countries, such as
Germany, have adopted laws regulating aspects of the Internet, and there are a
number of bills recently adopted or currently being considered in the United
States at the federal and state levels involving electronic transactions,
encryption and digital signatures, all of which may impact the Company. The
Company cannot predict the impact, if any, that these laws 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 99,560 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 and Oklahoma, occupying approximately 39,800; 26,000; 73,615; 21,789;
2,100; and 14,700 square feet, respectively. In addition, the Company also has
offices in The Netherlands, Germany, the United Kingdom, Italy and Mexico
occupying approximately 1,600; 14,546; 7,600; 2,228 and 1,614 square feet,
respectively. The Company's offices are generally located in suburban office
park environments.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved from time to time in various legal proceedings
incidental to the conduct of its business. In addition, on September 13, 1999,
the Company and three of its current or former officers and directors, C. Tycho
Howle, David Leach and Joel G. Katz, were named in a purported class action
lawsuit alleging violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. The complaint alleged that during a class period running
from February 4, 1998 through October 1, 1998 defendants made materially false
and misleading statements, and failed to disclose material facts regarding the
Company's business condition, future prospects and integration of acquisitions.
According to the complaint, these purported
16
<PAGE> 18
misrepresentations and omissions artificially inflated the price of the
Company's common stock throughout the class period and resulted in substantial
losses by members of the purported class. On January 13, 2000, the Court entered
an order appointing lead plaintiffs and lead plaintiffs' counsel. On March 6,
2000, plaintiffs filed an amended complaint reiterating and expanding upon the
basic claims asserted in the original complaint by, among other things, adding
allegations regarding the Company's accounting practices. Plaintiffs seek
certification of the case as a class action, a declaration that defendants
violated the federal securities laws, unspecified money damages according to
proof, interest, attorneys' fees and costs. The Company believes all claims
asserted in the action are without merit, and intends to defend the case
vigorously.
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, 1999.
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, 1998 $ 25 1/2 $ 16
June 30, 1998 $ 27 9/16 $ 20 1/4
September 30, 1998 $ 24 3/8 $ 5 3/4
December 31, 1998 $ 9 3/4 $ 3 1/2
March 31, 1999 $ 8 9/16 $ 5 1/16
June 30, 1999 $ 14 1/16 $ 6 1/8
September 30, 1999 $ 17 7/16 $ 10 5/8
December 31, 1999 $ 34 $ 13 1/4
</TABLE>
The closing sale price of the Company's Common Stock as reported by The
Nasdaq Stock Market on March 8, 2000 was $32.50.
The number of shareholders of record of the Company's Common Stock as of
March 8, 2000, was approximately 245.
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.
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(In thousands, except per share data) Years Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ 155,514 $ 135,151 $ 118,221 $ 89,245 $ 60,077
Direct costs................................... $ 50,997 $ 38,217 $ 30,510 $ 23,112 $ 14,994
--------- --------- --------- --------- ---------
Gross margin................................... $ 104,517 $ 96,934 $ 87,711 $ 66,133 $ 45,083
========= ========= ========= ========= =========
Operating income (loss)........................ $ 12,630 $ (12,652) $ (22,705) $ (10,667) $ 1,314
========= ========= ========= ========= =========
Net income (loss) applicable to common
Shareholders............................. $ 16,560 $ (14,712) $ (39,047) $ (16,091) $ (444)
========= ========= ========= ========= =========
Diluted net income (loss) per share of common
stock.......................................... $ 0.41 $ (0.35) $ (1.02) $ (0.46) $ (0.02)
========= ========= ========= ========= =========
Weighted average number of
Common shares outstanding.................. 40,739 41,557 38,162 35,080 28,573
========= ========= ========= ========= =========
</TABLE>
Supplemental Information
STATEMENTS OF OPERATIONS DATA AS ORIGINALLY REPORTED
(EXCLUDING ACQUISITIONS ACCOUNTED FOR UNDER THE
POOLING-OF-INTERESTS METHOD OF ACCOUNTING):
<TABLE>
<CAPTION>
(In thousands except per share data) Years Ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues*...................................... $ 155,514 $ 135,151 $ 90,415 $ 38,236 $ 19,846
========= ========= ========= ========= =========
Operating income*.............................. $ 14,176 $ 20,138 $ 18,791 $ 7,619 $ 2,807
========= ========= ========= ========= =========
Net income applicable to common shareholders**. $ 10,762 $ 15,396 $ 12,647 $ 4,672 $ 1,363
========= ========= ========= ========= =========
Diluted net income per share**................. $ 0.26 $ 0.36 $ 0.31 $ 0.18 $ 0.07
========= ========= ========= ========= =========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
(In thousands) As of December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital................................ $ 79,234 $ 79,303 $ 94,307 $ 60,392 $ 73,167
========= ========= ========= ========= =========
Total assets................................... $ 169,459 $ 178,369 $ 183,559 $ 131,199 $ 125,867
========= ========= ========= ========= =========
Long-term obligations, redeemable preferred
stock and puttable common stock............ $ - $ - $ - $ 1,608 $ 7,116
========= ========= ========= ========= =========
Shareholders' equity........................... $ 124,774 $ 120,019 $ 130,018 $ 94,118 $ 93,196
========= ========= ========= ========= =========
</TABLE>
* The results of operations of Premenos, a pooling-of-interests, are excluded
from all periods prior to the merger in 1Q97. 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 and $8.8 million of
pre-tax charges for 1998, 1997 and 1996, respectively, for purchased
in-process product development, write-off of software development costs,
restructuring, acquisition-related and other charges. Excludes $1.5 million
and $5.8 million in net general and administrative charges for 1999 and
1998 principally related to provisions for doubtful accounts.
** Excludes all charges per note * above. In addition, excludes $80,000, $7.0
million and $954,000 for 1999, 1996 and 1995, respectively, of equity in
losses of joint ventures. Also excludes $2.4 million loss on extinguishment
of debt in 1997. Excludes operating losses of all discontinued operations
and income and losses on disposals of discontinued operations totaling $1.4
million, $6.2 million and $14.4 million in 1999, 1998 and 1997,
respectively. The resulting net income applicable to common shareholders is
tax effected at 39%.
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
ABOUT THE COMPANY
Harbinger Corporation (the Company) generates revenues from e-commerce
enablement services and from licensing software that facilitates the exchange of
electronic data between businesses. Revenues for enablement services principally
include transaction fees on harbinger.net, the Company's e-commerce portal;
subscription fees for access to applications hosted on harbinger.net (ASP);
software maintenance; and professional service fees for operations management
(outsourcing), business community integration (BCI), training, consulting and
project management. Transaction and subscription fees are a combination of
access and usage charges and are recognized as incurred each month. Software
maintenance is billed in advance with revenue deferred and recognized ratably
over the one-year service period. Revenues for professional services are based
on actual services rendered and are recognized as the services are performed.
License fees for software are generally recognized upon shipment, net of
estimated returns. Software revenues also include royalties due the Company
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.
The Company also analyzes its mix of revenues in terms of the recurring
versus nonrecurring nature of the revenue streams. The Company includes revenues
from ongoing software maintenance and transactions on harbinger.net, together
with operations management, BCI and ASP services in its definition of recurring
revenues. Recurring revenues are recognized ratably over the contract period as
services are provided or may be billed and recognized on monthly subscription
terms generally over a two- to three-year period. The Company defines
nonrecurring revenues to include one-time professional service enablement
contracts, typically for consulting, project management or implementation
services, and software licenses.
The Company seeks to maximize its recurring revenue streams in order to: 1)
promote customer retention, 2) provide increased visibility into long-term
revenue and cash flow generating capabilities, and 3) decrease the revenue and
cash flow risk associated with singular professional service and software
license contracts. Accordingly, in 1999 the Company increased its sales and
marketing efforts in its recurring revenue programs. The Company also seeks to
maximize the use of the public Internet as a means of conducting
business-to-business e-commerce. Since 1994, the Company has invested in
enabling its products and services to the Internet and is actively encouraging
its current customer base to migrate to Internet-capable technologies.
STOCK REPURCHASE PROGRAM
On April 2, 1999 the Board of Directors approved the purchase of 10% of the
Company's outstanding common stock over the next 12 months. As of December 31,
1999 the Company had repurchased 4,323,050 shares of common stock at an
aggregate cost of $25.0 million.
ACQUISITIONS AND INVESTMENTS
The Company acquired two companies in 1998 through a combination of $3.5
million in cash and the issuance of 194,497 shares of the Company's common
stock. The Company completed six acquisitions in 1997 through a combination of
cash totaling $15.1 million, the issuance of 12,514,000 shares of the Company's
common stock and the issuance of 533,000 stock options. The acquisitions
completed during 1998 and 1997 are described in Note 2 to the Company's
accompanying financial statements.
In conjunction with these acquisitions the Company assigned personnel to
facilitate the integration of the acquired companies into the Company's
operations. As a result, certain payroll and associated costs (Integration
Activity Costs) directly related to integration activities are reflected as
restructuring and acquisition-related charges within the line titled, "Charge
for purchased in-process product development, write-off of software development
costs, restructuring, acquisition-related and other charges" in the consolidated
statements of operations for 1998 and 1997. These costs and their impact on
year-over-year comparisons are more fully explained in note 2 to the
consolidated financial statements and the following Results of Operations.
19
<PAGE> 21
During 1999 the Company became a one-third owner of GLINK, LLC (GLINK), a
joint venture established to develop an electronic marketplace for the grocery
industry. The Company accounts for its ownership in GLINK using the equity
method of accounting, which requires the Company to record its share of income
and losses of GLINK to the consolidated statements of operations under "Equity
in losses of joint ventures" in the period they occur.
In the fourth quarter of 1999 the Company announced a substantial increase
in its investment in advertising, public relations, sales and technology in
order to enhance the awareness of its position as a supplier of e-commerce
enablement solutions in an expanding marketplace for business-to-business
e-commerce. The investments totaled approximately $3 million in the fourth
quarter of 1999, and are estimated to be about $25 million in 2000.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percentage
relationship of consolidated statements of operations data items to total
revenues for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- -----
<S> <C> <C> <C>
Revenues:
Services....................................... 69.9% 65.2% 53.6%
Software....................................... 30.1 34.8 46.4
----- ----- -----
Total revenues.............................. 100.0 100.0 100.0
Direct costs:
Services....................................... 29.9 25.5 19.2
Software....................................... 2.9 2.8 6.6
----- ----- -----
Total direct costs......................... 32.8 28.3 25.8
----- ----- -----
Gross margin.............................. 67.2 71.7 74.2
----- ----- -----
Operating costs:
Selling and marketing........................ 25.4 23.4 22.6
General and administrative................... 19.9 23.8 17.6
Depreciation and amortization................ 6.1 6.0 6.0
Product development.......................... 7.7 7.9 12.9
Charge for purchased in-process product
development, write-off of software
development costs, restructuring,
acquisition-related and other charges...... - 20.0 34.3
---- ----- -----
Total operating costs.................. 59.1 81.1 93.4
---- ----- -----
Operating income (loss)............. 8.1 (9.4) (19.2)
Interest income, net........................... 2.2 3.6 3.3
Equity in losses of joint ventures............. - - (0.3)
---- ----- -----
Income (loss) from continuing operations
before income taxes.................. 10.3 (5.8) (16.2)
Income tax expense............................. (0.5) (0.5) (2.6)
---- ----- -----
Income (loss) from continuing operations 9.8 (6.3) (18.8)
Loss from operations of TrustedLink Procurement
Business and TrustedLink Banker division..... - (1.3) (8.8)
Income (loss) on disposal of TrustedLink Procurement
Business and TrustedLink Banker division,
including Provisions for operating losses
during phase-out Periods..................... 0.9 (3.3) (3.4)
---- ----- -----
Income (loss) before extraordinary item 10.7 (10.9) (31.0)
Extraordinary loss on debt extinguishment...... - - (2.0)
---- ----- -----
Net income (loss) .................. 10.7% (10.9)% (33.0)%
==== ===== =====
</TABLE>
20
<PAGE> 22
1999 COMPARED TO 1998
Revenues. Total revenues increased 15% to $155.5 million in 1999 from
$135.2 million in 1998. Revenues for services increased 23.4% to $108.7 million
in 1999 from $88.1 million in 1998. This increase is attributable to growth in
the Company's operations management and professional services, as well as growth
in transaction fees on harbinger.net.
Revenues from software sales decreased 0.6% to $46.8 million in 1999 from
$47.1 million in 1998. In the fourth quarter of 1998, the Company phased out
about 40% of its product lines (collectively referred to as Sunset Products) and
discontinued relationships with certain third-party resellers of the Company's
software products. The decline in 1999 software sales is primarily attributable
to this phase-out. On a pro forma basis, software sales, net of Sunset Products
and discontinued third-party resellers, increased 24.3% to $40.8 million in 1999
from $32.9 million in 1998. The Company is in the process of upgrading its
products to accommodate public Internet data protocols and Windows functionality
and is actively migrating its customer base from old to new technology
platforms. Approximately 23% of software revenues were derived from these
migrations in 1999.
Direct Costs. Direct costs for services increased to $46.4 million in 1999
from $34.5 million in 1998. As a percentage of service revenues, these costs
were 42.7% in 1999 and 39.2% in 1998. The increase in direct services costs as a
percentage of services revenues primarily reflects the effects of a higher
proportion of lower-margin professional enablement services revenues in 1999 and
the effect of reallocating personnel costs to Integration Activity Costs in
1998. Direct software costs increased to $4.6 million in 1999 from $3.7 million
in 1998. Direct software costs as a percentage of software revenues were 9.8% in
1999 and 7.9% in 1998. The increase in direct software costs as a percentage of
software revenues is primarily due to an increase in amortization of capitalized
software costs while software revenues remained relatively flat due to the
phase-out of Sunset Products.
Selling and Marketing. Selling and marketing expenses increased 25% to
$39.6 million in 1999 from $31.6 million in 1998. As a percentage of revenues
these expenses were 25.4% in 1999 and 23.4% in 1998. The increase in selling and
marketing expenses as a percentage of revenues reflects an increase in sales
force personnel in 1999 and an incremental investment in marketing and brand
awareness for harbinger.net. In addition, the increase in 1999 is partially
attributable to the effect of reallocating personnel costs to Integration
Activity Costs in 1998.
General and Administrative. General and administrative expenses decreased
4% to $31.0 million in 1999 from $32.2 million in 1998. As a percentage of
revenues these expenses were 19.9% in 1999 and 23.8% in 1998. Included in 1999
is a $3.3 million charge recorded in the fourth quarter for aged accounts
receivable, offset by $1.8 million in credits recorded in the first nine months
for recovery of outstanding royalty receivables from a specific customer that
had been reserved for in 1998. Included in 1998 is a $5.8 million net charge
recorded for outstanding royalty and accounts receivable from a reseller and
certain other customer accounts. Excluding the aforementioned net charges,
general and administrative expenses would have been $29.5 million or 18.9% of
revenues in 1999 and $26.4 million or 19.5% of revenues in 1998. The increase in
adjusted general and administrative expenses is primarily attributable to the
effect of reallocating personnel costs to Integration Activity Costs in 1998,
and increases in office space and investments in information technology in 1999.
Depreciation and Amortization. Depreciation and amortization increased 18%
to $9.5 million in 1999 from $8.1 million in 1998. As a percentage of revenues
these expenses were 6.1% in 1999 and 6.0% in 1998. The increase in depreciation
and amortization is due to the purchase of computer hardware and software
associated with the Company's investment in its information technology
infrastructure during 1999 and the latter half of 1998.
Product Development. Total expenditures for product development, including
capitalized software development costs, increased 24% to $17.6 million in 1999
from $14.1 million in 1998. Total expenses for product development increased 11%
to $11.8 million in 1999 from $10.6 million in 1998. As a percentage of revenues
total product development expenses decreased to 7.6% in 1999 from 7.9% in 1998.
The increase in product development expenses is primarily attributable to
increased development of Internet-based products, the 1999 addition of Harbinger
Labs, the Company's development group devoted to next generation product
development, and the effect of reallocating personnel costs to Integration
Activity Costs in 1998. The Company capitalized software development costs of
$5.8 million and $3.6 million in 1999 and 1998, respectively. In the third
quarter of 1999 the Company capitalized $1.6 million of development costs for
software that was originally being developed for internal use by the Company's
information technology group. Marketing and licensing efforts on this product
were initiated in the third quarter of 1999 and the first license of this
product was sold in the fourth quarter of 1999. Excluding this item, capitalized
software development costs were $4.2 million or 26.6% of total expenditures for
product development in 1999 and $3.6 million or 25.0% of product development in
1998. The increase in amounts capitalized reflects an increase in
21
<PAGE> 23
development activities associated with products that have reached technological
feasibility. Amortization of capitalized software development costs included in
direct costs of software totaled $2.0 million and $1.6 million in 1999 and 1998,
respectively.
Charge for Purchased In-Process Product Development, Write-off of Software
Development Costs, Restructuring, Acquisition-related and Other Charges
(Charges). The Company incurred Charges of $27.0 million in 1998 related to the
costs of integrating its acquisitions in 1998 and 1997 and its restructuring in
1998. Approximately $4.1 million in 1998 Charges were personnel costs
reallocated to Integration Activity Costs. The integration activities were
completed by the end of 1998 and the internal resources and their associated
costs are recorded in their original operating cost categories in 1999. (See
note 10 to the accompanying audited consolidated financial statements.)
Income Taxes. The Company recorded income tax expense of $813,000 and
$705,000 in 1999 and 1998, respectively. 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, 1999 of $2.8 million, net of a valuation allowance. Future
decreases of $3.3 million in the total valuation allowance of $18.9 million at
December 31, 1999 relate to foreign net operating loss carryforwards and will
reduce the intangibles associated with those acquisitions as the 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 disposal of Banker was substantially
completed by December 31, 1998. During 1999 the Company recovered the remaining
loss reserve estimates associated with the disposal of Banker as contingencies
related with the disposal were resolved. The recovery of the reserve in 1999 for
Banker is reported in the accompanying consolidated statements of operations
under "Income (loss) on disposal of discontinued operations." At December 31,
1999 the Company had a remaining reserve of $3.3 million for TLP related to
certain remaining contingencies. (See note 11 to the accompanying audited
consolidated financial statements.)
Net Income (Loss) and Earnings (Loss) Per Share. The Company realized
net income of $16.6 million or $0.41 per diluted share in 1999 and a net loss of
$14.7 million or $0.35 per diluted share in 1998. In order to facilitate
comparison of operating results year over year, the Company also presents its
earnings by adjusting for certain charges and tax-affecting the results at a 39%
effective rate (core earnings). A comparison of 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Supplemental Information:
(In thousands, except per share data) 1999 1998
----------- -----------
<S> <C> <C>
Operating income (loss)..................... $ 12,630 $ (12,652)
Charges..................................... - 27,027
Certain general and administrative charges
net of recoveries....................... 1,546 5,763
----------- -----------
Adjusted operating income................... 14,176 20,138
Taxable interest income, net................ 3,467 4,404
----------- -----------
Core earnings before income taxes........... 17,643 24,542
----------- -----------
Core earnings net of income taxes at 39%.... 10,762 14,970
----------- -----------
Non-taxable interest income................. - 426
----------- -----------
Core earnings............................... $ 10,762 $ 15,396
=========== ===========
Core earnings per share..................... $ 0.26 $ 0.36
=========== ===========
Weighted average number of diluted
shares outstanding...................... 40,739 43,306
=========== ===========
</TABLE>
Core earnings declined in 1999 compared to 1998 primarily as a result of
the Company's investment in technology and marketing of the Company's e-commerce
portal, harbinger.net, in the first three quarters of 1999, as well as the
fourth quarter launch of its marketing and brand awareness campaign for the
Company as a whole. The Company expects to continue
22
<PAGE> 24
this program in 2000 as well as increasing its sales force and enhancing its
technologies in order to position itself as a primary service provider to the
anticipated growing number of businesses seeking e-commerce solutions over the
next few years. As a result of these investments the Company expects a further
decline in core earnings in 2000.
1998 COMPARED TO 1997
Revenues. Total revenues increased 14% to $135.2 million in 1998 from
$118.2 million in 1997. Revenues for services increased 38.9% to $88.1 million
from $63.4 million in 1997. This increase is partly attributable to acquisitions
made in 1998, and also reflects growth in transaction fees, professional
services and maintenance. Transaction fees increased as a result of an increase
in subscribers to the Company's VAN and IVAS networks, plus an increase in the
average transaction volume per customer each year. Software revenues decreased
14.1% to $47.1 million in 1998 from $54.8 million in 1997, primarily due to
decreased royalty revenues from resellers.
Direct Costs. Direct costs for services increased to $34.5 million in 1998
from $22.7 million in 1997. As a percentage of service revenues these costs were
39.2% in 1998 and 35.8% in 1997. The increase in direct costs as a percentage of
service revenues is primarily attributable to a larger percentage of
lower-margin professional enablement services in 1998. The Company increased its
emphasis on enablement services in response to market demand for e-commerce
solutions integration. The increase in direct costs in 1998 compared to 1997 was
partially offset by the reallocation of personnel costs to Integration Activity
Costs in 1998. Direct software costs decreased to $3.7 million in 1998 from $7.8
million in 1997. Direct software costs as a percentage of software revenues were
7.9% in 1998 and 14.2% in 1997. The decrease in direct software costs is due to
decreased software amortization resulting from a write-off of 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-party resellers in 1998.
Selling and Marketing. Selling and marketing expenses increased 18% to
$31.6 million in 1998 from $26.7 million in 1997. As a percentage of revenues
these expenses were 23.4% in 1998 and 22.6% in 1997. The increase in selling and
marketing expenses as a percentage of revenues reflects an increase in sales and
marketing personnel and related selling costs offset by a decrease in
reallocated personnel costs to Integration Activity Costs.
General and Administrative. General and administrative expenses increased
55% to $32.2 million in 1998 from $20.8 million in 1997. As a percentage of
revenues these expenses were 23.8% in 1998 and 17.6% in 1997. The increase in
general and administrative expenses is primarily due to a $5.8 million net
charge recorded for outstanding royalty and accounts receivable from a reseller
and certain other customer accounts. Excluding the impact of this net charge,
general and administrative expenses would have increased to $26.4 million or
19.5% of revenues for 1998. The increase in adjusted general and administrative
expenses as a percentage of revenues 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 personnel costs reallocated to Integration Activity
Costs in 1998 compared to 1997.
Depreciation and Amortization. Depreciation and amortization increased 14%
to $8.1 million in 1998 from $7.1 million in 1997. As a percentage of revenues
these expenses remained the same. The increase in depreciation and amortization
is a result of additions to fixed assets and increased intangible assets
acquired through business combinations in 1998.
Product Development. Total expenditures for product development, including
capitalized software development costs, decreased 30% to $14.1 million in 1998
from $20.3 million in 1997. Total expenses for product development decreased to
$10.6 million in 1998 from $15.3 million in 1997. As a percentage of revenues
total product development expenses decreased to 7.9% in 1998 from 12.9% in 1997.
The decrease in product development expenses is primarily attributable to
efficiencies gained in consolidating development resources of acquired
companies, and the impact of personnel costs reallocated to Integration Activity
Costs. The Company capitalized software development costs of $3.6 million and
$5.0 million in 1998 and 1997, respectively, which represented 25.0% and 24.7%
of total expenditures for product development in these respective periods. The
decrease in amounts capitalized reflects a decrease in development activities
associated with products that have reached technological feasibility.
Amortization of capitalized software development costs included in direct costs
of software totaled $1.6 million and $3.7 million in 1998 and 1997,
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 $27.0 million in 1998 and $40.6 million in 1997 as a
result of 15 acquisitions and two restructurings from 1996 to 1998.
Approximately $4.1 million in 1998 and $7.8 million in
23
<PAGE> 25
1997 in Charges were personnel costs reallocated to Integration Activity Costs.
(See note 11 to the accompanying audited consolidated financial statements.)
Income Taxes. The Company recorded income tax expense of $705,000 and $3.1
million in 1998 and 1997, respectively. 1998 tax expense decreased approximately
77% as compared with 1997. This is primarily due to profits in foreign taxing
jurisdictions in 1997 that could not be offset by domestic net operating losses.
Foreign tax expense was $1.2 million in 1997 as compared with a benefit of
$100,000 in 1998. 1997 tax expense also included deferred taxes of $1.1 million.
In 1998 there was no deferred tax expense because all deferred tax assets had
been fully reserved for with an allowance.
Discontinued Operations. The Company discontinued TLP on September 30, 1998
and 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 1998 and 1997 are
reported in the accompanying reclassified audited consolidated statement of
operations under "Loss from operations of TrustedLink Procurement business and
TrustedLink Banker division." For Banker, the Company in 1997 provided for an
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
completed and $2.0 million in anticipated losses not incurred was recorded as a
reduction to "Income (loss) on disposal of TrustedLink Banker" on the statement
of operations in 1998.
For TLP, the Company provided for an anticipated loss on the disposal of
the business of $6.4 million, including $2.9 million for operating losses during
the phase-out period. (See note 11 to the accompanying audited consolidated
financial statements.)
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 the acquisition
of Harbinger Net Services (HNS). (See note 2 to the accompanying audited
consolidated financial statements.)
Net Loss and Loss Per Share. The Company realized net losses of $14.7
million or $0.35 per share in 1998 and $39.0 million or $1.02 per share in 1997.
In order to facilitate comparison of operating results year over year, the
Company also presents its earnings by adjusting for certain charges, and
tax-affecting the results at a 39% effective rate (core earnings). A comparison
of 1998 and 1997 is provided as follows:
<TABLE>
<CAPTION>
Supplemental Information
(In thousands, except per share data) 1998 1997
--------- ---------
<S> <C> <C>
Operating loss.............................. $ (12,652) $ (22,705)
Charges..................................... 27,027 40,555
Certain general and administrative charges
net of recoveries....................... 5,763 -
--------- ---------
Adjusted operating income................... 20,138 17,850
Taxable interest income, net................ 4,404 3,488
--------- ---------
Core earnings before income taxes........... 24,542 21,338
--------- ---------
Core earnings net of income taxes at 39%.... 14,970 13,017
--------- ---------
Non-taxable interest income................. 426 418
--------- ---------
Core earnings............................... $ 15,396 $ 13,435
========= =========
Core earnings per share..................... $ 0.36 $ 0.33
========= =========
Weighted average number of diluted
shares outstanding...................... 43,306 40,692
========= =========
</TABLE>
Core earnings increased in 1998 compared to 1997 primarily as a result of a
decrease in product development expenses in 1998 which was realized by
consolidating the development resources of acquired companies.
LIQUIDITY AND CAPITAL RESOURCES
24
<PAGE> 26
Cash and short-term investments decreased $19.3 million to $73.0 million at
December 31, 1999 compared to $92.3 million at December 31, 1998, primarily due
to 1999 stock repurchases totaling $17.6 million and a $17.2 million investment
in information technology and capitalized software, offset by $15.6 million of
positive cash flows from operations and exercises of options and warrants.
Management expects the Company will continue to fund its operations,
investment needs and capital expenditures through cash flows generated from
operations, cash on hand, and additional equity and debt capital if necessary.
Several factors could have an impact on the Company's cash flow in the future,
including the effects of the Company's strategic investment in marketing and
sales and technology development, currently projected to be $25 million in
additional spending that will substantially be recorded to selling and marketing
expenses on the consolidated statement of operations in 2000. Additionally, the
Company recently announced the creation of a $25 million venture division
focused on investing in new vertical market portal opportunities in 2000. The
Company also anticipates continued liquidation of liabilities incurred due to
Charges and discontinued operations. Further, management is authorized to
repurchase additional Company stock if favorable pricing scenarios develop in
the future. Liquidity could also be negatively impacted as a result of a
shareholder class action lawsuit filed against the Company in 1999. Although the
outcome of this action cannot be determined at this time, management does not
believe the outcome will have a material adverse effect on the Company's
financial position.
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 READINESS
The Company spent considerable internal and external resources from 1997
through 1999 preparing for the "Year 2000" computer issue. The Year 2000 issue
relates to the ability of a computer system to properly process data beginning
on January 1, 2000. The Company's efforts were spent to ensure that its computer
products were "Year 2000 Ready," as defined, and that its internal core
information technology (IT) and non-IT systems were Year 2000 Ready.
The Company believes it successfully implemented its Year 2000 program, as
evidenced by the continued successful operation of its computer products and
core internal IT and non-IT systems. The Company has not encountered any
significant problems with its third-party customers, financial institutions,
vendors and others with whom it conducts business. The Company will continue to
monitor its product performance and core IT and non-IT systems throughout 2000
to ensure ongoing performance. While there can be no assurance that no Year 2000
related issues will arise, as of December 31, 1999, the Company believes, based
on information currently available, that Year 2000-related events are not likely
to have a material effect on its results of operation, financial condition or
liquidity.
The total pre-tax cost associated with Year 2000 modifications of the
Company's products was approximately $1 million to $2 million, funded from the
Company's internal operating cash flows. Such costs do not include costs for new
internal software or for modifications to existing internal software for the
Company's IT systems, as these projects were not accelerated due to the Year
2000 issue.
EURO CONVERSION
Effective January 1, 1999, 11 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 the
Company's business were affected by the conversion to the euro. The Company has
not experienced any significant impact in its internal IT systems or its
customer products as a result of the euro conversion.
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.
25
<PAGE> 27
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, the potential decline in software revenues as the Company
transitions to a business model that emphasizes recurring services revenues,
quarterly fluctuations in results, the management of growth, market acceptance
of the Company's recently introduced BCI, ASP, portal and operations management
products and services, loss of customers due to the Company's migration efforts
from legacy technologies to Internet- and Windows-enabled products and services,
potential service disruptions associated with network enhancements and upgrades
of harbinger.net, liability for disruption of data traffic due to unauthorized
intervention and access into harbinger.net, the impact of Year 2000 readiness
and other risks. For further information about these and other factors that
could affect the Company's future results, please see Exhibit 99.1 in the
Company's December 31, 1999 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.
26
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements are filed together with this report.
See pages 61 to 88, which are incorporated herein by reference. Quarterly
Results of Operations are set forth below.
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED
--------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.................................................. $ 33,503 $ 38,726 $ 40,912 $ 42,373
========= ========= ========= =========
Gross margin.............................................. $ 21,746 $ 25,749 $ 27,735 $ 29,287
========= ========= ========= =========
Operating income.......................................... $ 1,556 $ 4,771 $ 6,226 $ 77
========= ========= ========= =========
Net income................................................ $ 2,341 $ 5,277 $ 7,728 $ 1,214
========= ========= ========= =========
Net income per share...................................... $ 0.06 $ 0.13 $ 0.19 $ 0.03
========= ========= ========= =========
Weighted average number of common
Shares outstanding.................................... 40,451 39,681 40,812 41,539
========= ========= ========= =========
Net income (excluding charges listed separately below)*... $ 1,039 $ 3,068 $ 3,929 $ 2,726
========= ========= ========= =========
Net income per share (excluding charges listed
Separately below)*.................................... $ 0.03 $ 0.08 $ 0.10 $ 0.07
========= ========= ========= =========
</TABLE>
<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.............................................. $ 22,248 $ 24,200 $ 25,128 $ 25,358
========= ========= ========= =========
Operating income (loss)................................... $ (2,296) $ 1,339 $ (16,755) $ 5,060
========= ========= ========= =========
Net income (loss)......................................... $ (1,338) $ 1,960 $ (23,444) $ 8,110
========= ========= ========= =========
Net income (loss) per share............................... $ (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 (excluding charges listed separately below)**.. $ 4,418 $ 4,696 $ 2,980 $ 3,302
========= ========= ========= =========
Net income per share (excluding charges listed
Separately below)**................................... $ 0.10 $ 0.11 $ 0.07 $ 0.08
========= ========= ========= =========
</TABLE>
* Excludes $750,000, $502,000 and $502,000 for the quarters ended March 31,
June 30 and September 30, 1999, respectively, of credits recorded in
general and administrative costs for the recovery of specific accounts
receivable reserved for in 1998. In the quarter ended December 31, 1999
excludes a charge of $3.3 million in general and administrative costs
related to an increase in the allowance for doubtful accounts for aged
accounts receivable. Also excludes income on discontinued operations of
TrustedLink Banker division (Banker) of $1.4 million in the quarter ended
September 30, 1999 and an $80,000 loss in equity of joint ventures in the
quarter ended December 31, 1999. The resulting adjusted net income is tax
affected at 39% in lieu of tax expense of $113,000, $254,000 and $572,000
in the quarters ended March 31, June 30 and September 30, 1999,
respectively, and a tax benefit of $125,000 in the quarter ended December
31, 1999.
** 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 of allowance
for doubtful accounts for the quarters ended September 30 and December 31,
1998, respectively. Also excludes losses on discontinued operations of
TrustedLink Procurement business (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 Banker for the quarter ended December
31, 1998. The resulting adjusted net income is tax affected at 39%, in lieu
of tax expense of $136,000 and $560,000 in the quarters ended March 31 and
September 30, 1998, respectively.
27
<PAGE> 29
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,
2000 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,
2000 under the caption "Executive Compensation."
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,
2000 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,
2000 under the caption "Certain Transactions."
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 Consolidated Financial Statements of Harbinger
Corporation, related Notes thereto, and the Independent Auditors' Report as set
forth under Item 8 of this report on Form 10-K may be found in pages 61 to 88,
filed herewith.
2 Financial Statement Schedules
(i) The following Financial Statement Schedule of Harbinger
Corporation for the Years Ended December 31, 1997, 1998 and 1999 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.
56
<PAGE> 30
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
- -------------------------------------- ------------ ---------- ------------ ---------- ------------ ----------
Allowance for returns and
doubtful Accounts (in thousands):
<S> <C> <C> <C> <C> <C> <C>
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
1999 ....................... $ 9,078 $ 4,352 $ -- $ 9,580(B) $(14,555)(A) $ 8,455
Allowance for deferred tax assets (in
thousands):
1997 ....................... $ 4,798 $ 13,509 $ 4,364 $ -- $ -- $ 22,671
1998 ....................... $ 22,671 $ 5,171 $ -- $ -- $ -- $ 27,842
1999 ....................... $ 27,842 -- $ -- $ -- $ (8,894) $ 18,948
</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.
57
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Harbinger Corporation:
Under date of February 10, 2000, we reported on the consolidated balance sheets
of Harbinger Corporation and subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operations, comprehensive income (loss),
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999 as contained in the Harbinger Corporation 1999
Annual Report on Form 10-K. In connection with our audit of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule as listed in the accompanying index. 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, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Atlanta, Georgia
February 10, 2000
58
<PAGE> 32
(b) Reports on Form 8-K. The Company filed the following reports on
Form 8-K during the quarter ended December 31, 1999.
(i) Report on Form 8-K filed September 30, 1999 with respect to
the Company's announcement of a shareholder class action filed
in United States District Court for the District of Georgia
against the Company and certain of its current and former
officers and directors.
(c) Exhibits. The following exhibits are filed as part of, or are
incorporated by reference into, this report on Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
---------- ----------------------------------------------
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 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).
10.1 Employment Agreement between the Company and Mr. James M.
Travers effective as of January 19, 2000.
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 Dave Bursiek
(incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.4 Form of Amendment to Employment Agreement of Messrs. Manack,
McCormick and Roberts (incorporated by reference to Exhibit
10.24 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998).
10.5 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).
59
<PAGE> 33
10.6 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).
10.7 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).
10.8 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).
10.9 Amended and Restated 1993 Stock Option Plan for Nonemployee
Directors.
10.10 Harbinger Corporation 1996 Stock Option Plan.
10.11 Amended and Restated Harbinger Corporation Employee Stock
Purchase Plan.
10.12 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).
10.13 Amendment No. 1 to Lease between the Company and 1277 Lenox
Park Blvd., LLC dated June 5, 1997 (incorporated by reference
to Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998).
21.1 List of Subsidiaries of Company.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule for the Year Ended December 31, 1999.
27.2 Restated Financial Data Schedule for the Year Ended December
31, 1998.
99.1 Safe Harbor Compliance Statement.
60
<PAGE> 34
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
ASSETS 1999 1998
------ ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 12,934 $ 33,059
Short-term investments............................................... 60,086 59,248
Accounts receivable, less allowances for returns and doubtful
accounts of $8,455 and $5,464 in 1999 and 1998, respectively..... 43,975 35,891
Royalties receivable, less allowance for doubtful
accounts of $3,614 in 1998....................................... 1,200 1,730
Deferred income taxes................................................ 2,103 2,103
Other current assets................................................. 3,621 5,622
---------- ----------
Total current assets........................................ 123,919 137,653
---------- ----------
Property and equipment, less accumulated depreciation
and amortization.................................................... 26,339 23,150
Intangible assets, less accumulated amortization......................... 16,863 16,803
Deferred income taxes.................................................... 698 698
Other non-current assets................................................. 1,640 65
---------- ----------
$ 169,459 $ 178,369
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable..................................................... $ 7,478 $ 5,566
Accrued expenses..................................................... 15,995 31,571
Deferred revenues.................................................... 21,212 21,213
---------- ----------
Total current liabilities................................... 44,685 58,350
---------- ----------
Commitments and contingencies
Zero coupon redeemable preferred stock, no par value; 0 and 2,000,000
shares authorized, issued and outstanding as of
December 31, 1999 and 1998.......................................... - -
Shareholders' equity:
Preferred stock, no par value; 20,000,000 and 18,000,000
shares authorized as of December 31, 1999 and 1998
respectively; none issued and outstanding........................ - -
Common stock, $0.0001 par value; 100,000,000 shares
authorized; 43,404,247 and 42,313,031 shares issued
as of December 31, 1999 and 1998, respectively................... 4 4
Additional paid-in capital........................................... 208,226 201,615
Accumulated deficit.................................................. (56,968) (73,528)
Accumulated other comprehensive loss................................. (1,444) (622)
Treasury stock, 4,323,050 shares and 1,562,100 shares as of December
31, 1999 and 1998, respectively................................. (25,044) (7,450)
---------- ----------
Total shareholders' equity.................................. 124,774 120,019
---------- ----------
$ 169,459 $ 178,369
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE> 35
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Services.......................................................... $ 108,673 $ 88,067 $ 63,417
Software ......................................................... 46,841 47,084 54,804
--------- --------- ---------
Total revenues............................................ 155,514 135,151 118,221
--------- --------- ---------
Direct costs:
Services.......................................................... 46,442 34,487 22,710
Software.......................................................... 4,555 3,730 7,800
--------- --------- ---------
Total direct costs........................................ 50,997 38,217 30,510
--------- --------- ---------
Gross margin......................................... 104,517 96,934 87,711
--------- --------- ---------
Operating costs:
Selling and marketing............................................. 39,559 31,618 26,723
General and administrative........................................ 30,970 32,205 20,775
Depreciation and amortization..................................... 9,522 8,100 7,096
Product development............................................... 11,836 10,636 15,267
Charge for purchased in-process product development, write-off of
software development costs, restructuring, acquisition-related
and other charges............................................. - 27,027 40,555
--------- --------- ---------
Total operating costs.................................... 91,887 109,586 10,416
--------- --------- ---------
Operating income (loss).............................. 12,630 (12,652) (22,705)
Interest income, net................................................... 3,467 4,830 3,914
Equity in losses of joint ventures..................................... (80) - (313)
Minority interest income.............................................. - - 2
--------- --------- ---------
Income (loss) from continuing operations before
income taxes..................................... 16,017 (7,822) (19,102)
Income tax expense..................................................... (813) (705) (3,093)
--------- --------- ---------
Income (loss) from continuing operations............. 15,204 (8,527) (22,195)
Discontinued operations:
Loss from operations of TrustedLink Procurement
business and TrustedLink Banker division...................... - (1,793) (10,433)
Income (loss) on disposal of TrustedLink Procurement
business, and TrustedLink Banker division, including
provisions for operating losses during phase-out
periods....................................................... 1,356 (4,392) (4,000)
--------- --------- ---------
Income (loss) before extraordinary item.............. 16,560 (14,712) (36,628)
Extraordinary loss on debt extinguishment.............................. - - (2,419)
--------- --------- ---------
Net income (loss).................................... $ 16,560 $ (14,712) $ (39,047)
========= ========= =========
Basic earnings (loss) per share........................................ $ 0.43 $ (0.35) $ (1.02)
========= ========= =========
Weighted average number of shares outstanding.......................... 38,938 41,557 38,162
========= ========= =========
Diluted earnings (loss) per share...................................... $ 0.41 $ (0.35) $ (1.02)
========= ========= =========
Weighted average number of common shares
outstanding assuming dilution..................................... 40,739 41,557 38,162
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
62
<PAGE> 36
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss)................................................ $ 16,560 $ (14,712) $ (39,047)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments....................... (822) 260 (744)
--------- --------- ---------
Comprehensive income (loss).................................. $ 15,738 $ (14,452) $ (39,791)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE> 37
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ............. 35,806,596 $ 3 $ 113,846 $ (19,593)
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 (296)
Issuance of stock in secondary offering,
net .................................. 3,105,000 1 60,025 --
Other transactions ..................... -- -- -- (9)
Foreign currency translation adjustment -- -- -- --
Net loss ............................... -- -- -- (39,047)
---------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1997 ............. 40,827,856 4 189,841 (58,945)
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 -- -- 129
Foreign currency translation adjustment -- -- -- --
Other transactions ..................... 1,500 -- (29) --
Net loss ............................... -- -- -- (14,712)
---------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1998 ............. 42,313,031 4 201,615 (73,528)
Exercise of stock options and warrants
and issuance of stock under employee
stock purchase plan .................. 1,091,216 -- 6,611 --
Shares purchased ....................... -- -- -- --
Foreign currency translation adjustment -- -- -- --
Net income ............................. -- -- -- 16,560
---------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1999 ............. 43,404,247 $ 4 $ 208,226 $ (56,968)
========== ========== ========== ===========
<CAPTION>
TREASURY STOCK
--------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE SHAREHOLDERS'
LOSS SHARES AMOUNT EQUITY
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ............. $ (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 ......................... -- -- -- 3,662
Issuance of stock in secondary offering,
net .................................. -- -- -- 60,026
Other transactions ..................... -- -- -- (9)
Foreign currency translation adjustment (744) -- -- (744)
Net loss ............................... -- -- -- (39,047)
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 ............. (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
Foreign currency translation adjustment 260 -- -- 260
Other transactions ..................... -- -- -- (29)
Net loss ............................... -- -- -- (14,712)
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 ............. (622) (1,562,100) (7,450) 120,019
Exercise of stock options and warrants
and issuance of stock under employee
stock purchase plan .................. -- -- -- 6,611
Shares purchased ....................... -- (2,760,950) (17,594) (17,594)
Foreign currency translation adjustment (822) -- -- (822)
Net income ............................. -- -- -- 16,560
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1999 ............. $ (1,444) (4,323,050) $ (25,044) $ 124,774
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
64
<PAGE> 38
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................... $ 16,560 $(14,712) $(39,047)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Allowance for returns and doubtful accounts ........... 12,072 10,016 4,709
Charge for purchased in-process product development,
write-off of software development costs, acquisition-
related and other noncash charges ................... -- 3,981 26,761
Income (loss) on disposal of discontinued operations .. (1,356) 5,737 4,000
Loss on debt extinguishment ........................... -- -- 2,419
Depreciation and amortization ......................... 11,530 10,847 10,917
Loss on sale of property and equipment ................ -- -- 389
Discount amortization on investments .................. -- (153) 88
Equity in losses of joint ventures .................... 197 -- 302
Minority interest and other ........................... -- -- (287)
Deferred income taxes ................................. -- -- 1,110
Changes in operating assets and liabilities:
Accounts receivable ................................. (20,815) (7,451) (17,680)
Royalties receivable ................................ 530 20 (4,027)
Other assets ........................................ 1,454 (2,256) 1,410
Accounts payable and accrued expenses ............... (11,183) (2,724) 9,300
Deferred revenues ................................... (1) 2,864 1,260
-------- -------- --------
Net cash provided by operating activities ........ 8,988 6,169 1,624
-------- -------- --------
Cash flows from investing activities:
Net purchases of short-term investments .................... (838) (26,762) (2,577)
Purchases of property and equipment ........................ (11,398) (12,887) (8,576)
Additions to software development costs .................... (5,806) (3,572) (5,014)
Investment in acquisitions and joint venture ............... (300) (3,547) (13,924)
Proceeds from disposal of property and equipment ........... -- -- 7
Proceeds from sale of discontinued operations .............. 500 -- --
Net additions to notes receivable .......................... (125) -- --
-------- -------- --------
Net cash used in investing activities ............ (17,967) (46,768) (30,084)
-------- -------- --------
</TABLE>
65
<PAGE> 39
HARBINGER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Exercise of stock options and warrants and issuance of
stock under employee stock purchase plan .................. 6,611 11,803 5,098
Principal payments under notes payable and long-term debt ... -- (623) (2,968)
Proceeds from issuance of common stock ...................... -- -- 60,026
Purchases of common stock ................................... (17,594) (7,450) --
Repayments under credit agreement ........................... -- -- (1,550)
Purchase of subordinated debenture .......................... -- -- (1,500)
-------- -------- --------
Net cash (used in) provided by financing activities .. (10,983) 3,730 59,106
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........... (19,962) (36,869) 30,646
Cash and cash equivalents at beginning of year ................. 33,059 69,811 35,697
Effect of exchange rates on cash held in foreign currencies .... (163) 65 (76)
Cash received from acquisitions ................................ -- 52 3,544
-------- -------- --------
Cash and cash equivalents at end of year .................... $ 12,934 $ 33,059 $ 9,811
======== ======== ========
Supplemental disclosures:
Cash paid for interest ...................................... $ -- $ 50 $ 90
======== ======== ========
Cash paid for income taxes .................................. $ 788 $ 991 $ --
======== ======== ========
Supplemental disclosures of noncash investing and
financing activities:
Purchase of subordinated debenture in exchange
for common stock .......................................... $ -- -- $ 4,200
======== ======== ========
Acquisition of minority interest in exchange for issuance of
common stock ........................................... $ -- $ -- $ 2,216
======== ======== ========
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
======== ======== ========
Issuance of notes receivable in exchange
for sale of discontinued operations ....................... $ 800 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
66
<PAGE> 40
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, provides computer communications networks and
provides professional 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Services
Revenues for services principally include subscription fees for
transactions on harbinger.net, the Company's e-commerce portal; software
maintenance; and professional service fees for outsourcing, training and
e-commerce enablement. Subscription fees are a combination of monthly access
charges and transaction-based usage charges and are recognized as incurred each
month. Software maintenance is billed in advance with revenue deferred and
recognized ratably over the one-year service period. Revenues for professional
services are based on actual services rendered and are recognized as services
are performed.
Software
The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, and SOP 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2. Revenue is derived from the sale of
software licenses, hardware and software services and is allocated to each
element of the arrangement based on the relative fair values of the elements
established by the price charged when the respective element is sold separately.
Revenues derived from software license fees are recognized upon
shipment, net of estimated returns. Software revenues also include royalties due
to the Company under distribution agreements with third parties that are
recognized either on shipment of software to a distributor or upon sales to end
users by a distributor, depending on the terms of the distribution agreement.
In December 1998 the Accounting Standards Committee of the American
Institute of Certified Public Accountants issued SOP 98-9, Software Revenue
Recognition with Respect to Certain Transactions. SOP 98-9 is effective for
fiscal years beginning after March 15, 1999 and the Company does not expect a
material change to its accounting for revenues as a result of adopting the
provisions of SOP 98-9.
Deferred Revenues
Deferred revenues represent payments received from customers or
billings invoiced to customers for software and services billed in advance of
revenue recognition.
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<PAGE> 41
DIRECT COSTS
Direct costs for services include network asset depreciation and
amortization, telecommunications charges and the costs of personnel to manage
network operations, customer support, professional service engagements and
consulting. Direct costs for software include duplication, packaging and
shipping of software, amortization of purchased technology and software
development costs and royalties paid to third-party distributors.
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 12 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, 1999 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.
NONMONETARY TRANSACTION
The Company accounts for nonmonetary transactions based on the fair
value of the assets or services involved. During 1999 the Company acquired
software to use in its internal purchasing system as part of its overall ERP
project in exchange for certain Company software products that the acquiring
company used internally. The fair value, based on a combination of market
comparables, competitive bids and prior sales histories, was $330,000. This
value was recorded as property and equipment on the consolidated balance sheets
and as software revenue on the consolidated statements of operations.
INVESTMENTS IN JOINT VENTURES
During 1999 the Company became one-third owner of GLINK, LLC (GLINK), a
joint venture established to develop an electronic marketplace for the grocery
industry. The Company accounts for its ownership in GLINK using the equity
method of accounting, which requires the Company to record its share of income
and losses of GLINK to the consolidated statements of operations under "Equity
in losses of joint ventures" in the period they occur. The Company also applied
the equity method of accounting for its holdings in other immaterial joint
ventures in 1997 that have since been dissolved.
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.
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<PAGE> 42
Software Development Costs
The Company capitalizes certain software development costs in
accordance with Statement of Financial Accounting Standards (SFAS) 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 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, such amount is written off.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method of SFAS No. 109, Accounting for Income Taxes. 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements to conform with the 1999 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
quarterly 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 income (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 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.
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<PAGE> 43
2. ACQUISITIONS AND INVESTMENTS
1999 INVESTMENT
GLINK
The Company became one-third owner of GLINK, a joint venture
established to develop an electronic marketplace for the grocery industry. The
Company made an initial $300,000 cash investment, which was recorded in "Other
assets" on the consolidated balance sheets (see note 13) .
1998 ACQUISITIONS
EDI Works! LLC (EDI Works!)
Effective March 31, 1998 the Company acquired 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 statements of operations for the year ended December
31, 1998. In connection with the EDI Works! acquisition the Company recorded a
charge of $805,000 for acquisition-related expenses, asset write-downs and
integration costs (see note 10).
MACTEC, Inc. (MACTEC)
Effective July 9, 1998 the Company acquired substantially all of the
assets of the Materials Management Division of MACTEC, located in Tulsa,
Oklahoma, for approximately $3.5 million in cash. The Company recorded the
acquisition using the purchase method of accounting, with approximately $3.5
million recorded to goodwill in 1998 and an additional $128,000 recorded to
goodwill in 1999. The goodwill will be amortized ratably over 10 years.
1997 ACQUISITIONS
SupplyTech, Inc. (STI)
On January 3, 1997 the Company acquired STI for 3,600,000 unregistered
shares of the Company's common stock in a transaction accounted for using the
pooling-of-interests method of accounting. Effective January 3, 1997 the results
of operations of the Company and STI were retroactively combined. 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 10). 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
10).
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<PAGE> 44
The financial position and results of operations of the Company have
been restated for all periods presented to give retroactive effect to the
Premenos acquisition. Total revenues and net income (loss) for the Company and
Premenos as previously reported are as follows (in thousands):
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Total revenues:
Harbinger Corporation.......... $ 77,414
Premenos....................... 40,807
-----------
$ 118,221
===========
Net income (loss):
Harbinger Corporation.......... $ (42,832)
Premenos....................... 3,785
-----------
$ (39,047)
===========
</TABLE>
On September 30, 1998 the Company discontinued its TrustedLink
Procurement business (TLP) and on December 31, 1997 the Company discontinued its
TrustedLink Banker division (Banker). The revenues of Harbinger Corporation
reported above have been restated accordingly (see note 11).
Harbinger Net Services (HNS)
On January 1, 1997 the Company exercised its rights as majority
shareholder of HNS to appoint 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 balance sheets and statements 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.
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 remaining
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 10). 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.
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.
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<PAGE> 45
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 10). 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
11).
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 recorded 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 10). 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.
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; and Atlas:
October 1, 1997.
Unaudited pro forma results of operations of the Company for 1998 would
not be materially different as a result of the 1998 acquisitions of EDI Works!
and MACTEC and are therefore not presented for 1998.
3. PURCHASED TECHNOLOGY AND DISTRIBUTION AGREEMENTS
System Software Associates, Inc. (SSA)
On May 26, 1999 the Company executed an agreement (the Agreement) with
SSA terminating its distributor arrangement that had existed since 1995. Under
the Agreement, SSA paid the Company a total of approximately $2.0 million in
settlement of certain royalty receivables, maintenance services provided to
SSA's customers by the Company from 1995 through 1999 and an additional license
of source code provided to SSA. The settlement proceeds were allocated pro-rata
to the three components of the Agreement based on their relative fair values.
The following credits were recorded to the Company's accompanying consolidated
statement of operations in 1999: $1.0 million to general and administrative
costs for collection of accounts that had been reserved for in 1998, $628,000 to
direct costs of services for reimbursement of maintenance costs, and $420,000 to
software revenue for license of source code.
At December 31, 1998 the Company had a net provision of $3.6 million in
its allowance for doubtful accounts related to royalty receivables due from 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 8). 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. In
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<PAGE> 46
1998 the intangible asset associated with the distribution agreement was written
off based upon estimated future net cash flows from the arrangement (see note
10).
General Electric Information Services, Inc. (GEIS)
On September 30, 1999 the Company entered into an agreement with GEIS
that terminated all prior existing arrangements between the Company and GEIS
relating to GEIS' distribution and support of a certain product. As part of the
1999 agreement GEIS paid the Company $665,000 for the license of certain object
and source codes.
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 was licensed to GEIS and the distribution agreement
was written down based upon future expectations of net cash flows from the
arrangement (see note 10).
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.
Distribution Agreement
On February 5, 2000 the Company entered into an agreement with an
existing distributor whereby the distributor agreed to pay $1.2 million to the
Company for royalties owed from prior agreements dating back to 1992. This
amount was recorded as software revenues in the fourth quarter of 1999 in the
accompanying consolidated statements of operations.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Computer and communications
equipment .................. $ 45,648 $ 34,632
Furniture, fixtures and leasehold
Improvements ............... 10,900 10, 210
Other ........................... 83 438
-------- --------
Less accumulated depreciation and 56,631 45,280
amortization ............... (30,292) (22,130)
-------- --------
$ 26,339 $ 23,150
======== ========
</TABLE>
73
<PAGE> 47
5. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Purchased technology (note 10) ............. $ 1,296 $ 1,521
Goodwill, GEIS alliance and SSA distribution
agreements (notes 3 and 10) ............ 12,130 8,222
Software development costs (note 10) ....... 9,041 17,250
-------- --------
26,768 22,692
Less accumulated amortization .............. (9,905) (5,889)
-------- --------
$ 16,863 $ 16,803
======== ========
</TABLE>
74
<PAGE> 48
6 ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accrued salaries, wages and benefits $ 5,816 $ 9,522
State income, property, sales and
other taxes ................... 1,168 3,870
Accrued severance, lease
exit costs and other (note 10) 2,750 6,129
Accrued discontinued operations
costs (note 11) ............... 3,336 6,518
Accrued integration costs
incurred (note 10) ............ 169 1,358
Other accrued expenses ............. 2,756 4,174
------- -------
$15,995 $31,571
======= =======
</TABLE>
7. INCOME TAXES
Income (loss) from continuing operations before income taxes for the
years ended December 31, 1999, 1998 and 1997 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. operations ...... $ 13,708 $ (5,835) $(21,063)
Foreign operations ... 2,309 (1,987) 1,961
-------- -------- --------
$ 16,017 $ (7,822) $(19,102)
======== ======== ========
</TABLE>
Income tax expense from continuing operations for the years ended
December 31, 1999, 1998 and 1997 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal ........... $ -- $ 442 $ 581
Foreign ........... 495 (124) 1,187
State ............. 318 387 215
------- ------- -------
Total current ... 813 705 1,983
------- ------- -------
Deferred:
Federal ........... -- -- 981
State ............. -- -- 129
------- ------- -------
Total deferred .. -- -- 1,110
------- ------- -------
$ 813 $ 705 $ 3,093
======= ======= =======
</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 for the year ended December
31, 1997, has been credited directly to stockholders' equity.
There is no income tax expense or benefit for discontinued operations
of TLP (from operations) in 1999 and 1998. There was no income tax expense for
discontinued operations of Banker (from operations) in 1997. There was no income
tax expense or benefit relating to loss on disposal of TLP or Banker or
extraordinary loss on debt extinguishment.
75
<PAGE> 49
Income tax expense 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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) ........ $ 5,445 $ (2,660) $ (6,495)
Increase (decrease) in income tax expense (benefit)
resulting from:
State income taxes, net of federal income tax
benefit ........................................... 210 255 227
Tax-exempt income .................................... (13) (168) (157)
Change in tax status of STI .......................... -- -- (1,798)
Nondeductible charge for purchased in-process
product development and other costs ............... -- 488 1,431
Increase (decrease) in the valuation allowance for
deferred tax assets allocated to income tax expense (5,092) 2,759 10,003
Other ................................................ 263 31 (118)
-------- -------- --------
$ 813 $ 705 $ 3,093
======== ======== ========
</TABLE>
The significant components of deferred income tax expense (benefit)
from continuing operations for the years ended December 31, 1999, 1998 and 1997
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Deferred income tax expense (benefit) ............ $ 5,092 $ (2,759) $(12,399)
Increase (decrease) in the valuation allowance for
deferred income tax assets ............ (5,092) 2,759 13,509
-------- -------- --------
$ -- $ -- $ 1,110
======== ======== ========
</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, 1999
and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards ................ $ 12,655 $ 4,269
Intangible assets ............................... 1,588 7,446
Accrued expenses ................................ 5,807 13,992
Discontinued operations ......................... 1,301 1,762
Research tax credit ............................. 1,561 2,082
Other ........................................... 132 790
-------- --------
Gross deferred income tax assets ............. 23,044 30,341
Valuation allowance ................................ (18,624) (23,716)
-------- --------
Deferred income tax assets, net of the valuation
allowance ........................................ 4,420 6,625
Deferred income tax liabilities - principally due to
software development costs ....................... (1,619) (3,824)
-------- --------
Net deferred income tax assets ............... 2,801 2,801
Less current deferred income tax assets ............ 2,103 2,103
-------- --------
Noncurrent deferred income tax assets .............. $ 698 $ 698
======== ========
</TABLE>
During 1999 the net decrease in the valuation allowance was $5.1
million. During 1998 the net increase in the valuation allowance was $2.8
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
76
<PAGE> 50
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.
The Company acquired net operating losses and research tax credit
carryforwards in the 1997 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.
At December 31, 1999 the Company had domestic and foreign net operating
loss carryforwards and research tax credit carryforwards of approximately $48.0
million, $11.8 million and $1.5 million, respectively. The domestic net
operating loss carryforwards expire at various dates through 2021 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, 1999 include
$30.5 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.
8. REDEEMABLE PREFERRED STOCK
In 1995 the Company issued 4,000,000 shares of zero coupon redeemable
preferred stock to SSA. The zero coupon redeemable preferred stock issued had no
voting or dividend rights, vested at a rate of 1,000,000 shares per year only if
SSA attained certain royalty targets for the years 1997 through 2000, and
contained mandatory redemption provisions of $0.67 per share payable in cash or
the Company's common stock, at the option of the holder, 30 days after the end
of each year. The royalty targets for 1998 and 1997 were not met and 2,000,000
of the shares of the zero coupon redeemable preferred stock were forfeited by
December 31, 1998. The remaining 2,000,000 shares were terminated in 1999 per
the terms of an agreement executed between the Company and SSA on May 26, 1999
that dissolved the distributor relationship (see note 3).
9. SHAREHOLDERS' 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. As of December 31, 1999
there were no shares of redeemable preferred stock issued and outstanding.
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 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, 1999, 25,913 warrants were
exercised and 286 warrants were cancelled, leaving no warrants outstanding.
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 were 20,000
warrants outstanding as of December 31, 1999, all at an exercise price of $7.61.
STOCK COMPENSATION PLANS
77
<PAGE> 51
As of December 31, 1999 the Company had five stock-based compensation
plans, of which four were related to stock options and one was related to stock
purchases, more fully described below.
78
<PAGE> 52
Stock Options
The Company's 1989 Stock Option Plan (the 1989 Plan) and 1996 Stock
Option Plan (the 1996 Plan), 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 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 1,044,628 options available
for grant at December 31, 1999. 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 vested 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, 1999 there were options
outstanding to purchase 6,373,845 shares of the Company's common stock, of which
options to purchase 2,358,682 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, 1999 there were options outstanding and exercisable to
purchase 372,749 shares of the Company's common stock and 57,939 options
available to grant.
In addition to outstanding options granted under the 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, 1999, all of these options had been exercised.
At December 31, 1999 the Company had 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 nonvariable stock option plans and
its stock purchase plan. Had compensation cost for the Company's five
stock-based compensation plans been determined in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income (loss) and
income (loss) per share would have been the pro forma amounts indicated below
(in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported ............. $ 16,560 $ (14,712) $ (39,047)
Pro forma ............... $ 287 $ (28,254) $ (48,221)
Diluted income (loss) per share:
As reported ............. $ 0.41 $ (0.35) $ (1.02)
Pro forma ............... $ 0.01 $ (0.68) $ (1.26)
</TABLE>
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:
1999: dividend yield of 0.5%, expected volatility of 92.9%, risk-free interest
rate of 6.17% and expected lives of five years for all the Plan options; 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.
79
<PAGE> 53
A summary of the Company's stock option plans as of and for the years
ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Nonvariable Options (000s) Price (000s) Price (000s) Price
-------------------------------- ------- --------- ------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 7,290 $ 8.90 7,267 $ 10.73 4,567 $ 7.51
Granted ........................ 2,029 $ 9.98 5,185 $ 12.55 4,497 $ 13.99
Exercised ...................... (992) $ 5.95 (1,118) $ 8.79 (858) $ 3.61
Forfeited/canceled ............. (1,049) $ 8.87 (4,044) $ 16.70 (939) $ 17.19
------ ------ ----
Outstanding at end of year ..... 7,278 $ 9.57 7,290 $ 8.90 7,267 $ 10.73
====== ====== ======
Options exercisable at end of
year ........................... 2,731 $ 9.30 2,070 $ 7.88 1,875 $ 6.01
Weighted average fair value of
options granted during the
year ........................... $10.15 $ 6.72 $6.03
</TABLE>
The following table summarizes information about nonvariable stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
---------------------- ----------- ------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 2.83 522,144 1.71 2.65 510,894 2.64
$ 2.84 - $ 6.89 519,293 5.31 5.95 113,751 4.19
$ 6.91 - $ 6.91 1,909,981 5.81 6.91 349,717 6.91
$ 7.61 - $ 7.78 883,266 3.95 7.75 498,015 7.77
$ 8.71 - $ 10.50 1,410,194 6.39 10.21 171,953 10.18
$ 10.67 - $ 13.50 1,053,433 4.95 11.48 636,390 11.37
$ 13.61 - $ 35.00 979,889 5.55 19.03 450,712 18.41
--------- ---------
$ 0.01 - $ 35.00 7,278,200 5.21 9.57 2,731,432 9.30
========= =========
</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, 1999, 1998 and 1997 shares issued under the Purchase Plan were 96,000,
89,247 and 160,813,
80
<PAGE> 54
respectively. A portion of the shares issued in 1997 disclosed above was
authorized under existing purchase plans of acquired companies and is excluded
from the calculation of shares available to issue under the Purchase Plan.
Under SFAS No. 123, compensation cost is disclosed for the fair value
of the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions for 1999: dividend yield of 0.5%, expected
volatility of 92.9% and risk-free interest rate of 6.17%; 1998: dividend yield
of 0.5%, expected volatility of 82.6%, and risk-free interest rate of 5.3%; and
for 1997: dividend yield of 0.5%, expected volatility of 67.3% and risk-free
interest rate of 5.7%. 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 1999, 1998 and 1997 was $10.32, $7.11 and $5.95, respectively.
The impact of the Purchase Plan on the Company's pro forma net income (loss) and
income (loss) per share presentation required per SFAS No. 123 has been included
in Stock Options above.
10 CHARGE FOR PURCHASED IN-PROCESS PRODUCT DEVELOPMENT, WRITE-OFF OF
SOFTWARE DEVELOPMENT COSTS, RESTRUCTURING, ACQUISITION-RELATED
AND OTHER CHARGES
In connection with acquisitions 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
------- -------
<S> <C> <C>
In-process product development $ -- $ 2,853
Integration costs ............ 13,154 14,319
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
======= =======
</TABLE>
Integration costs associated with business combinations include costs
incurred for cross training, planning, product integration and marketing. For
1998 and 1997 approximately $4.1 million and $7.8 million of integration costs,
respectively, resulted from the redirection of internal resources and their
associated costs (Integration Activity Costs) to manage integration activities.
At December 31, 1999 the accrued liabilities related to the Charges were
approximately $3.0 million, compared to $7.5 million at December 31, 1998 (see
note 6). The reduction to accrued liabilities in 1999 was all due to cash
payments made. The liabilities at December 31, 1999 consist primarily of
reserves for lease terminations, severance costs and legal fees. The remaining
liabilities involve management estimates and the actual results could vary from
these estimates.
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.
11. DISCONTINUED OPERATIONS
The Company discontinued TLP on September 30, 1998 and established a
$6.4 million reserve for the estimated loss on disposal of TLP, including $2.9
million for anticipated operating losses during the phase-out period. In the
second quarter of 1999 the Company sold the intangible assets and certain
property and equipment of TLP for $1.3 million, comprised of cash of $500,000
and a note receivable of $800,000. The resulting loss on disposal of TLP was
$2.0 million. Repayment on the note will occur at the earlier of the buyer
achieving certain sales targets or December 31, 2000.
81
<PAGE> 55
At December 31, 1999, the remaining balance in the loss reserve was
$3.3 million, available for certain remaining contingencies associated with the
disposal of TLP. Such contingencies primarily relate to lease termination costs,
customer transition issues and collection risks associated with notes and
accounts receivable. Management presently does not have an estimate on when
these final contingencies will settle.
The operating loss during the phase-out period from the measurement
date of September 30, 1998 to December 31, 1999 was $1.2 million.
The results of operations for TLP for 1998 and 1997 are reported in the
accompanying reclassified statements of operations under "Loss from operations
of TrustedLink Procurement business and TrustedLink Banker division". Revenues
from TLP for the years ended December 31, 1998 and 1997 were $2.9 million and
$2.5 million, respectively. No income tax benefit was recognized in 1998 or 1997
due to the Company's net operating loss carryforwards.
The assets and liabilities of TLP are included in the Company's
consolidated balance sheets as of December 31, 1999 and 1998 and are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accounts receivable ....... $ 457 $ 454
Other current assets ...... 62 106
Property and equipment, net -- 766
Intangible assets, net .... -- 2,454
Deferred revenues.......... -- --
Other current liabilities . (67) (281)
------- -------
$ 452 $ 3,454
======= =======
</TABLE>
In the fourth quarter of 1997 the Board of Directors approved the
discontinuance of Banker. Revenues from Banker were $4.0 million for the year
ended December 31, 1997. The results of operations for Banker for all years
presented are reported in the accompanying reclassified statements of operations
under "Loss from operations of TrustedLink Procurement business and TrustedLink
Banker division". In the fourth quarter of 1997 the Company established a $4.0
million reserve for the estimated loss on disposal of Banker, including $2.3
million for anticipated operating losses during the phase-out period. No income
tax expense or benefit was recognized in 1997 due to the Company's net operating
loss carryforwards. As of December 31, 1998 the disposal of Banker was
substantially completed and $2.0 million in estimated losses not incurred was
recorded as a reduction to "Loss on disposal of TrustedLink Banker" on the
statement of operations. During 1999 the remaining contingencies associated with
Banker were settled and $1.4 million in estimated losses not incurred was
recorded as a reduction to "Loss on disposal of TrustedLink Banker" in 1999. 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, 1999 and 1998.
A reconciliation of the amounts appearing on the consolidated
statements of operations for the years ended December 31, 1999, 1998 and 1997 is
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Loss from operations of:
TLP ............................................. $ -- $ (1,793) $(10,311)
Banker .......................................... -- -- (122)
-------- -------- --------
$ -- $ (1,793) $(10,433)
======== ======== ========
Income (loss) on disposal, including provisions for
operating losses during phase-out periods, for:
TLP ............................................. $ -- $ (6,392) $ --
Banker .......................................... 1,356 2,000 (4,000)
-------- -------- --------
$ 1,356 $ (4,392) $ (4,000)
======== ======== ========
</TABLE>
82
<PAGE> 56
12. EARNINGS (LOSS) PER SHARE
The following sets forth the computations of basic and diluted earnings
(loss) per share for the years ended December 31, 1999, 1998 and 1997 (in
thousands except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Basic earnings per share:
Income (loss) from continuing operations ........... $ 0.39 $ (0.20) $ (0.58)
Loss from discontinued operations .................. -- (0.04) (0.27)
Income (loss) on disposal of discontinued operations 0.04 (0.11) (0.11)
Extraordinary loss on debt extinguishment .......... -- -- (0.06)
---------- ---------- ----------
Net earnings (loss) per share .................. $ 0.43 $ (0.35) $ (1.02)
========== ========== ==========
Weighted average number of shares outstanding: .......... 38,938 41,557 38,162
========== ========== ==========
Earnings per share assuming dilution:
Income (loss) from continuing operations ........... $ 0.38 $ (0.20) $ (0.58)
Loss from discontinued operations .................. -- (0.04) (0.27)
Income (loss) on disposal of discontinued operations 0.03 (0.11) (0.11)
Extraordinary loss on debt extinguishment .......... -- -- (0.06)
---------- ---------- ----------
Net earnings (loss) per share .................. $ 0.41 $ (0.35) $ (1.02)
========== ========== ==========
Weighted average number of shares outstanding: .......... 38,938 41,577 38,162
Effect of potentially dilutive stock options ............ 1,801 -- --
---------- ---------- ----------
Weighted average number of shares
outstanding assuming dilution ...................... 40,739 41,557 38,162
========== ========== ==========
</TABLE>
Options to purchase l.6 million shares of common stock outstanding during
1999 were excluded from the computation of diluted earnings per share because
the options' exercise price was greater than the average market price of the
common shares, and therefore, the effect would be antidilutive.
Options to purchase 4.4 million and 3.0 million shares of common stock
outstanding during 1998 and 1997, respectively, were excluded from the
computation of diluted earnings per share due to their antidilutive effect as a
result of the Company's loss from continuing operations in those years.
13. OTHER RELATED PARTY TRANSACTIONS
During 1999 the Company became one-third owner of GLINK, which licensed
certain Company software for $250,000 and contracted for $252,000 in
professional services for which the Company received a 12-month note receivable
that matures on September 30, 2000. One-third of the aforementioned revenues
were eliminated in consolidation. Additionally, the Company provided $80,000 in
consulting services to GLINK in 1999 that was recorded as work-in-process and
deferred revenue on the accompanying consolidated balance sheets because payment
terms by GLINK had not been finalized (see note 2).
The Company received notes receivable during the first quarter of 1999
totaling $605,000 from five employees who were former shareholders of EDI
Works!. The terms of the full-recourse notes are 18 months with an annual
interest rate of 8.75%. Interest accrues on a monthly basis with principal and
interest due at the end of the term of the notes. At December 31, 1999 four of
the notes, including interest, were paid in full to the Company resulting in a
remaining balance of principal and interest of $135,000.
The Company received $40,000, $284,000 and $465,000 in 1999, 1998 and
1997, 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 $22,000, $189,000 and $63,000 in
1999, 1998 and 1997, respectively, for services.
83
<PAGE> 57
The Company has a note receivable of $50,000 from a former executive
officer with an annual interest rate of 9%, renewable at the end of each year.
At December 31, 1999 this note was fully reserved, as it is anticipated this
debt will be forgiven as part of a severance agreement (see note 6).
Prior to the acquisition of Premenos, one of Premenos' directors was a
partner of a law firm that provided various legal services to Premenos. 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
were $493,000.
14. SEGMENT INFORMATION, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
SEGMENT INFORMATION
The Company operates in a single industry segment: the establishment
and management of e-commerce relationships between businesses. The Company
manages 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
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 and services 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.
A summary of the Company's reportable segments as of and for the years
ended December 31, 1999, 1998 and 1997 is presented below (in thousands):
<TABLE>
<CAPTION>
Asia
Pacific
and
North Latin
America Europe America Total
-------- -------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
1999 .............. $133,685 $ 22,653 $ 4,309 $160,647
1998 .............. $115,800 $ 20,285 $ 2,950 $139,035
1997 .............. $ 98,816 $ 17,676 $ 3,272 $119,764
Intersegment royalties:
1999 .............. $ 5,133 $ -- $ -- $ 5,133
1998 .............. $ 3,884 $ -- $ -- $ 3,884
1997 .............. $ 1,543 $ -- $ -- $ 1,543
Operating income
(as defined):
1999 .............. $ 9,294 $ 3,831 $ 1,051 $ 14,176
1998 .............. $ 18,747 $ 754 $ 637 $ 20,138
1997 .............. $ 16,071 $ 1,300 $ 479 $ 17,850
</TABLE>
84
<PAGE> 58
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Total gross revenues for reportable segments .. $ 160,647 $ 139,035 $ 119,764
Elimination of intersegment royalties ......... (5,133) (3,884) (1,543)
--------- --------- ---------
Total consolidated revenues ... $ 155,514 $ 135,151 $ 118,221
========= ========= =========
Operating income (as defined):
Total operating income for reportable segments $ 14,176 $ 20,138 $ 17,850
Charges for integration and restructuring ..... (27,027) (40,555)
Certain net general and administrative costs .. (1,546) (5,763) --
--------- --------- ---------
Total consolidated operating income (loss) $ 12,630 $ (12,652) $ (22,705)
========= ========= =========
</TABLE>
85
<PAGE> 59
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 presented. Revenues derived from
customers in foreign countries did not exceed 10% in any one country of the
Company's consolidated revenues in 1999, 1998 or 1997.
The Company's long-lived assets, excluding net intangible and deferred
tax assets, as of December 31, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
United States .................... $23,984 $21,203
Foreign countries ................ 2,355 1,947
------- -------
$26,339 $23,150
======= =======
</TABLE>
MAJOR CUSTOMERS
No single customer comprised greater than 10% of the Company's
consolidated revenues in 1999, 1998 or 1997.
15. COMMITMENTS AND CONTINGENCIES
401(K) PROFIT SHARING PLAN
During 1998 the Company consolidated its three separate 401(k) savings
and retirement plans into one plan (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 salary, subject to a $2,200 limit per employee. Prior to consolidating
the plans the Company's matching contributions in 1997 varied from a range of
discretionary to 50% of employees' contributions. Total Company contributions
for its 401(k) plans totaled $776,000, $736,000 and $454,000 for the years ended
December 31, 1999, 1998 and 1997, 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, 1999 and 1998.
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 $5.9 million, $5.5 million and $4.3
million for the years ended December 31, 1999, 1998 and 1997, respectively. At
December 31, 1999 the Company is obligated under these agreements to make the
following lease payments (in thousands):
<TABLE>
<S> <C>
2000........................................... $ 6,127
2001........................................... 5,332
2002........................................... 4,056
2003........................................... 3,675
2004........................................... 3,626
Thereafter..................................... 9,727
--------
Total minimum lease payments............. $ 32,543
========
</TABLE>
In conjunction with one building lease, the Company was required to
provide a standby letter of credit, which was $350,000 at December 31, 1999.
86
<PAGE> 60
CONTINGENCIES
The Company is involved in claims and other legal actions arising out
of the ordinary course of business, including discontinued operations and the
phase-out of certain non-strategic software products. Additionally, a
shareholder class action lawsuit was filed against the Company in September 1999
(see part I, Item 3 of the Company's December 31, 1999 Form 10-K). While the
ultimate results and outcomes 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.
87
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Harbinger Corporation:
We have audited the accompanying consolidated balance sheets of Harbinger
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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 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 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 financial position of Harbinger
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/S/ KPMG LLP
Atlanta, Georgia
February 10, 2000
88
<PAGE> 62
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, 2000.
HARBINGER CORPORATION
By: /s/ James M. Travers
--------------------------
James M. Travers
President and Chief Executive Officer
89
<PAGE> 63
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James M. Travers Chief Executive Officer; March 30, 2000
------------------------
James M. Travers President; Director
/s/ David T. Leach Vice Chairman; Director March 30, 2000
------------------------
David T. Leach
/s/ James K. McCormick Chief Financial Officer; March 30, 2000
----------------------
James K. McCormick (Principal Financial Officer;
Principal Accounting Officer)
/s/ William D. Savoy Director March 30, 2000
----------------------
William D. Savoy
/s/ William B. King Director March 30, 2000
----------------------
William B. King
/s/ Stuart L. Bell Director March 30, 2000
------------------------
Stuart L. Bell
/s/ Benn R. Konsynski Director March 30, 2000
---------------------
Benn R. Konsynski
/s/ Ad Nederlof Director March 30, 2000
---------------------
Ad Nederlof
/s/ Klaus Neugebauer Director March 30, 2000
---------------------
Klaus Neugebauer
/s/ David Hildes Director March 30, 2000
----------------------
David Hildes
/s/ John Lowenbereg Director March 30, 2000
---------------------
John Lowenberg
90
<PAGE> 64
EXHIBIT LIST
EXHIBIT
NUMBER DESCRIPTION
---------- ----------------------------------------------
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 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).
10.1 Employment Agreement between the Company and Mr. James M.
Travers effective as of January 19, 2000.
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 Dave Bursiek
(incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.4 Form of Amendment to Employment Agreement of Messrs. Manack,
McCormick and Roberts (incorporated by reference to Exhibit
10.24 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Amended and Restated 1993 Stock Option Plan for Nonemployee
Directors.
10.10 Harbinger Corporation 1996 Stock Option Plan.
10.11 Amended and Restated Harbinger Corporation Employee Stock
Purchase Plan.
10.12 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).
10.13 Amendment No. 1 to Lease between the Company and 1277 Lenox
Park Blvd., LLC dated June 5, 1997 (incorporated by reference
to Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998).
21.1 List of Subsidiaries of Company.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule for the Year Ended December 31, 1999.
27.2 Restated Financial Data Schedule for the Year Ended December
31, 1998.
99.1 Safe Harbor Compliance Statement.
<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 (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 report dated February 10,
2000, relating to the consolidated balance sheets of Harbinger Corporation as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, comprehensive income (loss), shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1999, and the
related financial statement schedule, which report appear in the 1999 Annual
Report on Form 10-K of Harbinger Corporation.
/s/ KPMG LLP
Atlanta, Georgia
March 28, 2000
<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
DEC-31-1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,934
<SECURITIES> 60,086
<RECEIVABLES> 52,430
<ALLOWANCES> 8,455
<INVENTORY> 0
<CURRENT-ASSETS> 123,919
<PP&E> 56,631
<DEPRECIATION> 30,292
<TOTAL-ASSETS> 169,459
<CURRENT-LIABILITIES> 44,685
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 124,770
<TOTAL-LIABILITY-AND-EQUITY> 169,459
<SALES> 46,841
<TOTAL-REVENUES> 155,514
<CGS> 4,555
<TOTAL-COSTS> 50,997
<OTHER-EXPENSES> 91,887
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,017
<INCOME-TAX> 813
<INCOME-CONTINUING> 15,204
<DISCONTINUED> 1,356
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,560
<EPS-BASIC> 0.43
<EPS-DILUTED> 0.41
</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
DEC-31-1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<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> 3,730
<TOTAL-COSTS> 38,217
<OTHER-EXPENSES> 109,586
<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-BASIC> (0.35)
<EPS-DILUTED> (0.35)
</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 them 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.
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
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 Annual Report on Form 10-K for the year
ended December 31, 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 REVENUES COULD DECREASE AS WE TRANSITION TO A BUSINESS MODEL THAT EMPHASIZES
RECURRING SERVICES REVENUES.
We are currently transitioning our business model to focus on providing
our customers with the ability to have their electronic commerce application
hosted on harbinger.net as a subscription service. We expect that this model
will provide us with an increase in recurring services revenues, but will also
result in a decrease in up-front licensing and sales revenue. Under our new
model, we provide "Application Hosting," which involve applications owned or
licensed by us, or third-party-owned applications licensed by our customers that
are hosted by us on harbinger.net. Our management believes that this service
will allow our customers to access software, connectivity and support services
without having to bear significant up-front licensing expenditures. Any delay in
the installation of our IP-enabled products or the failure in the implementation
of this service could have a material adverse affect on our business and
financial results. We are also making equity investments in companies from which
we expect to derive license and recurring revenue. The success of these
companies are dependent on may factors, and their inability to create revenues
will result in lower than expected payments to us. In addition, our business and
financial results could also suffer if our revenue from increased volume
experienced by existing and new customers does not make up for our loss in
revenue from the decrease in the per-customer amount of up-front licensing and
charges per message.
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 this growth will
continue or that fluctuations in revenue or operating income growth will not
occur in the future. The following factors could impact the future rate of
growth in our revenue or operating income:
o the discontinuance of historical or acquired lines of business or
products and a decrease in the rate of growth of X12 and EDIFACT data
transformation software sales;
o our success in focusing development on electronic commerce products and
services acceptable to the market; and
o our success in selling complex B2B e-commerce solutions to large
enterprise customers.
<PAGE> 2
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:
o revenue from software sales and services;
o the timing of new product and service announcements;
o changes in pricing policies by us and our competitors;
o market acceptance of new and enhanced versions of our products;
o conversion of customers to solutions that are IP-enabled;
o the size and timing of significant orders;
o changes in operating expenses, strategy or personnel;
o government regulation;
o the introduction of alternative technologies; and
o the effect of acquisitions.
We have experienced losses in the past, and at December 31, 1999, we
had an accumulated deficit of approximately $60.0 million. We have taken
integration and restructuring related charges in the past and may take similar
charges in the future related to these or similar items. 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 and data transformation software products 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
marketplace and vertical market exchange software and infrastructure products
are more complex and expensive compared to our other electronic commerce and
Internet products introduced to date, and orders of these products will
generally involve significant investment decisions by prospective customers.
Accordingly, we expect that in selling our marketplace and vertical market
exchange software and infrastructure, 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.
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
harbinger.net, our B2B e-commerce center, 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 affect on our
business and financial results.
WE HAVE RECENTLY INTRODUCED SEVERAL NEW PRODUCTS, AND MARKET ACCEPTANCE OF THESE
PRODUCTS IS CRITICAL TO OUR SUCCESS.
We recently introduced our BCI, ASP, marketplace and vertical market
exchange and operations management products. As of December 31, 1999, 32
customers were utilizing these products. Broad and timely acceptance of our
recently-introduced products, which is critical to our future success, is
subject to a number of significant risks. These risks include:
o Our ability to successfully market and sell these products;
o Our product's ability to support large numbers of buyers and suppliers;
<PAGE> 3
o Operating resource management and procurement on the Internet is a new
market;
o Our need to enhance the features and services of our products; and
o Our need to significantly expand our internal resources to support
planned growth of our network.
Although we expect to derive a significant portion of long-term future
revenue from our recently introduced products, we have not yet finalized our
pricing and revenue model for the services associated with these products. If
these products do not achieve the level of market acceptance that we anticipate,
our business and financial results would suffer.
NETWORK ENHANCEMENTS, UPGRADES AND OTHER FACTORS COULD CAUSE SERVICE DISRUPTIONS
OF OUR HARBINGER.NET.
As we enhance and upgrade our harbinger.net platform, our customers
could suffer temporary service interruptions. Other factors, such as
unauthorized intervention and access into our servers may also cause service on
harbinger.net to be disrupted. We are taking steps to ensure that such
disruptions do not occur, and that any disruptions that do occur will be
minimal. However, if not rectified in a manner satisfactory to our customers,
any disruptions in our harbinger.net network could result in a loss of customers
and a decline in service revenues, which would severely harm our business.
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 three fiscal
years and may complete additional acquisitions of complementary businesses in
the future. Our profitability may be adversely affected by our ability to
effectively and efficiently integrate these recently acquired companies as well
as our ability to integrate companies that we acquire in the future. Our
acquisitions present a number of risks and challenges, including:
o the integration of the software products of the acquired companies into
our current suite of products;
o the integration of the sales forces of acquired companies into our
existing sales operations;
o the coordination of customer support services;
o the conversion of acquired companies into a uniform infrastructure;
o the integration of international operations of acquired companies with
our international affiliates; and
o 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 affect on our business and financial results.
If we find it necessary to engage in additional acquisitions, we cannot
assure that we will be able 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:
o potentially dilutive issuances of equity securities;
o the incurrence of additional debt;
o the write-off of in-process product development and capitalized product
costs;
o integration costs; and o 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. In addition, if we
consummate a significant acquisition in which the consideration consists of
stock or other securities, our current shareholders' equity could be
significantly diluted. If we consummate a significant acquisition in which the
consideration included cash, we could be required to use a substantial portion
of our available cash to consummate the acquisition. Acquisition financing may
not be available on favorable terms, or at all.
See "We must successfully manage our growth."
<PAGE> 4
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST OTHER COMPANIES.
The business-to-business e-commerce market is new, rapidly evolving and
intensely competitive, and we expect competition to intensify in the future.
Barriers to entry are minimal in some segments, and competitors may develop and
offer similar services in the future. Our business could be severely harmed if
we are not able to compete successfully against current or future competitors.
Although we believe that there may be opportunities for several providers of
products and services similar to ours, a single provider may dominate the
market. We believe there is no current dominant provider in our market. We
expect that additional companies will offer competing B2B e-commerce solutions
in the future.
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 electronic marketplaces for transacting business with their trading
partners, and we expect other companies to offer products and services
competitive with our Templar, Express and marketplace and vertical market
exchange 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 that
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 business-to-business
Internet-based 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
harbinger.net 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.
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 electronic commerce. We cannot assure that Templar end-user
software and marketplace and vertical market exchange 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
certain customers to other solutions offered by our competitors, which would
reduce recurring revenue from network services and have a material adverse
affect 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 e-commerce
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
<PAGE> 5
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 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 development, acquisition 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
affect 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 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.
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 affect 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 and retain 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 affect on our
business and financial results. We cannot assure that we can retain our key
employees or that we can attract qualified personnel in the future. We currently
carry a key-person life insurance policy on our CEO, James M. Travers.
YEAR 2000 RISKS MAY ADVERSELY AFFECT US.
<PAGE> 6
The term "year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
was approached and reached. Our failure to appropriately address a material year
2000 issue, or the failure by any third parties who provide goods or services
that are critical to our business activities to appropriately address their year
2000 issues, could have a material adverse affect on our financial condition,
liquidity or results of operations.
Since entering the year 2000, we have not experienced any significant
disruptions related to the year 2000 issue, nor are we aware of any significant
year 2000-related disruptions impacting our customers or suppliers. While we
will continue to monitor our business critical information technology assets, we
do not anticipate that we will experience any significant year 2000-related
disruptions to our internal systems, nor on those of our customers and
suppliers. The costs related to our year 2000 initiative will total
approximately $2.0 million, substantially all of which were incurred in the year
ended December 31, 1999.
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. If our current or future alliance partners are not
able to successfully resell our products, our business will suffer.
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 affect on
our business and financial results.
WE ARE DEPENDENT ON OUR DATA CENTERS, WHICH COULD BE DESTROYED OR DAMAGED.
Our harbinger.net 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, our own internal errors 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 affect 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 affect on our business and
financial results.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT
US.
<PAGE> 7
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 a patent for an
electronic document interchange test facility and a patent 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 currently infringe the proprietary rights of third
parties. We cannot assure, however, that third parties will not claim
infringement by us 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 affect 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 online services 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 affect 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 this product is 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
<PAGE> 8
charter provides for a classified board of directors with three-year, staggered
terms for its members. The classification of the Board could have the effect of
making it more difficult for a third party to acquire control of us.
