-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KIw/+E+bLhAxs73fbgk1p4AaJjmzpwhtUj5H0RP/sUfPjLWnProBx4PwQYLl2Eb+ yBo503wDw/6EeiMddE3MIA== 0000895021-99-000017.txt : 19991117 0000895021-99-000017.hdr.sgml : 19991117 ACCESSION NUMBER: 0000895021-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTURA SOFTWARE CORP CENTRAL INDEX KEY: 0000895021 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942874178 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21010 FILM NUMBER: 99755185 BUSINESS ADDRESS: STREET 1: 975 ISLAND DR CITY: REDWOOD SHORES STATE: CA ZIP: 94065 BUSINESS PHONE: 6505963400 MAIL ADDRESS: STREET 1: 1060 MARSH ROAD CITY: MENLO PARK STATE: CA ZIP: 94025 10-Q 1 FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1999 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- Form 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Period From _____ to _____ Commission file number: 0-21010 Centura Software Corporation (Exact name of registrant as specified in its charter) DELAWARE 94-2874178 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 975 ISLAND DRIVE, REDWOOD SHORES, CALIFORNIA 94065 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650) 596-3400 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of October 31, 1999, there were 35,420,609 shares of the Registrant's Common Stock outstanding. CENTURA SOFTWARE CORPORATION FORM 10-Q for the Quarter Ended September 30, 1999 INDEX PART I FINANCIAL INFORMATION Item 1. Financial Statements and Supplementary Data a) Condensed consolidated balance sheets at September 30, 1999 and December 31, 1998 b) Condensed consolidated statements of operations for the three and nine months ended September 30, 1999 and 1998 c) Condensed consolidated statements of cash flows for the three and nine months ended September 30, 1999 and 1998 d) Notes to condensed consolidated financial statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II OTHER INFORMATION Item 1. Legal proceedings Item 2. Changes in securities and use of proceeds Item 3. Defaults in senior securities Item 4. Submission of matters to a vote of security holders Item 5. Other information Item 6. Exhibits and reports on Form 8-K CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (IN THOUSANDS, EXCEPT PER SHARE DATA) September 30, December 31
1999 1998 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents.................. $4,182 $6,414 Accounts receivable, less allowances of $1, 623 and $1,321....................... 14,179 12,988 Other current assets....................... 3,924 3,627 ------------ ------------ Total current assets..................... 22,285 23,029 Property and equipment, net................... 3,876 2,888 Capitalized software, net..................... 1,007 1,542 Goodwill, net................................. 2,563 0 Other intangible assets, net.................. 3,880 770 Other assets.................................. 1,419 1,143 ------------ ------------ Total assets............................. $35,030 $29,372 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term obligations... $875 $0 Accounts payable........................... 3,131 2,798 Accrued compensation and related expenses.. 1,254 1,567 Short-term borrowings...................... 2,406 2,663 Other accrued liabilities.................. 2,803 1,744 Deferred revenue........................... 13,285 13,274 ------------ ------------ Total current liabilities................ 23,754 22,046 Long-term liabilities......................... 620 53 Stockholders' Equity: Preferred stock, no par value; 2,000 shares authorized; none issued and outstanding... -- -- Common stock, par value $.01 per share; 60,000 shares authorized; 35,421 and 29,598 shares issued and outstanding............ 91,695 85,690 Accumulated other comprehensive income..... (453) (426) Accumulated deficit........................ (80,586) (77,991) ------------ ------------ Total stockholders' equity ............... 10,656 7,273 ------------ ------------ Total liabilities and stockholders' equity $35,030 $29,372 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended September 30, September 30, ------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- ---------- Net revenues: Product............................. 7,823 $8,811 20,447 $25,377 Service............................. 5,949 5,310 16,605 14,563 --------- --------- --------- ---------- Net revenues...................... 13,772 14,121 37,052 39,940 --------- --------- --------- ---------- Cost of revenues: Product............................. 673 1,370 2,634 3,556 Service............................. 1,022 1,079 2,922 3,241 Amortization of acquired products... 134 0 179 0 --------- --------- --------- ---------- Cost of revenues.................. 1,829 2,449 5,735 6,797 --------- --------- --------- ---------- Gross profit...................... 11,943 11,672 31,317 33,143 --------- --------- --------- ---------- Operating expenses: Sales and marketing................. 7,223 6,759 20,402 18,930 Engineering and product development. 2,327 2,093 6,682 5,589 General and administrative.......... 1,808 1,786 6,104 5,294 Amortization of goodwill............ 199 0 260 0 --------- --------- --------- ---------- Total operating expenses.......... 11,557 10,638 33,448 29,813 --------- --------- --------- ---------- Operating income (loss).......... 386 1,034 (2,131) 3,330 Other income (expense): Interest income..................... 33 110 142 249 Interest expense.................... (80) (113) (234) (428) Imputed value of warrants issued.... 0 0 0 (990) Foreign currency gain (loss)........ 154 163 (302) (118) --------- --------- --------- ---------- Income before income taxes............. 493 1,194 (2,525) 2,043 Provision for income taxes............. 31 90 70 204 --------- --------- --------- ---------- Net income............................. 462 $1,104 (2,595) $1,839 ========= ========= ========= ========== Basic net income per share............. $0.01 $0.04 $(0.08) $0.07 ========= ========= ========= ========== Basic weighted average common shares... 35,413 29,599 32,045 26,696 ========= ========= ========= ========== Diluted net income per share........... $0.01 $0.04 $(0.08) $0.07 ========= ========= ========= ========== Diluted weighted average common shares. 35,413 29,714 32,045 27,191
========= ========= ========= ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (IN THOUSANDS) Nine Months Ended
September 30, ---------------------- 1999 1998 ---------- ---------- Cash flows from operating activities: Net income (loss)....................................... ($2,595) $1,839 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization......................... 2,817 2,666 Loss on disposal of fixed assets...................... 0 327 Provision for doubtful accounts, sales returns and allowances....................................... (211) (109) Issuance of stock warrants............................ 0 990 Changes in assets and liabilities: Accounts receivable................................... 808 (1,253) Other current assets.................................. 633 (218) Other assets.......................................... 181 146 Accounts payable and accrued liabilities.............. (777) (1,549) Deferred revenue...................................... (1,498) (1,802) ---------- ---------- Net cash provided by (used in) operating activities. (642) 1,037 ---------- ---------- Cash flows from investing activities: Net cash acquired on acquisition........................ 23 0 Maturaties (Purchases) of investments................... 60 (114) Acquisition of property and equipment................... (726) (908) Capitalization of software costs........................ (308) (428) Capitalization of other intangibles..................... (52) (78) ---------- ---------- Net cash used in investing activities............... (1,003) (1,528) ---------- ---------- Cash flows from financing activities: Proceeds from (repayment of) short-term borrowings, net. (257) 2,415 Repayment of capital lease obligation................... (303) 0 Proceeds from issuance of common stock, net............. 0 1,898 ---------- ---------- Net cash provided by (used in)financing activities.. (560) 4,313 ---------- ---------- Effect of exchange rate changes on cash and cash equivalents.............................................. (27) (36) ---------- ---------- Net increase (decrease)in cash and cash equivalents....... (2,232) 3,754 Cash and cash equivalents at beginning of period.......... 6,414 3,974 ---------- ---------- Cash and cash equivalents at end of period................ 4,182 7,728 ========== ========== Supplemental disclosure of non cash financing activities: Conversion of convertible debt and accrued interest for common stock.................................... $ 0 $12,251 ========== ========== Conversion of operating lease to capital lease........ $1,300 $ 0 ========== ========== Acquired net assets associated with the Raima acquisition includes: Fair value of tangible assets......................... 4,734 Fair value of acquired products....................... 2,670 Fair value of acquired workforce...................... 670 Goodwill.............................................. 2,752 Fair value of liabilities assumed..................... (3,227) ---------- 7,599 ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Summary of Significant Accounting Policies Method of Preparation. The condensed consolidated balance sheet as of September 30, 1999, the condensed consolidated statements of operations for the three month and nine month periods ended September 30, 1999 and 1998, and cash flows for the nine month periods ended September 30, 1999 and 1998 have been prepared by Centura Software Corporation (the "Company") without audit. In the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations, and of cash flows have been made for all periods presented. As discussed in Note 2, the Company completed its acquisition of Raima Corporation ("Raima") on June 7, 1999. The acquisition was accounted for using the purchase method of accounting and accordingly, the net assets and results of operations of Raima have been included in the Company's condensed consolidated financial statements since the acquisition date. The financial data should be reviewed in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of operations for the three month and nine month periods ended September 30, 1999 are not necessarily indicative of the operating results to be expected for the full year. The December 31, 1998 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Such disclosures are contained in the Company's Annual Report on Form 10-K. Net Income (Loss) Per Share. Basic net income (loss) per share is computed using the weighted-average number of shares of common stock outstanding during each respective period. Diluted net income (loss) per share is computed using the weighted-average number of shares of common stock and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation if their effect is antidilutive. The following is a reconciliation of the computation for basic and diluted net income (loss) per share:
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (in thousands, except per shar Net income (loss) $462 $1,104 ($2,595) $1,839 ========= ========= ========= ========= Shares calculation: Average basic shares outstanding. 35,413 29,599 32,045 26,696 Effect of dilutive securities -- 115 -- 495 Total shares used to compute --------- --------- --------- --------- diluted net income (loss) per share 35,413 29,714 32,045 27,191 ========= ========= ========= ========= Basic net income (loss) per share $0.01 $0.04 ($0.08) $0.07 ========= ========= ========= ========= Diluted net income (loss) per share $0.01 $0.04 ($0.08) $0.07 ========= ========= ========= =========
Antidilutive options and warrants to purchase 10,904,307 and 8,256,628 shares of common stock were outstanding at September 30, 1999 and September 30, 1998, respectively. Revenue Recognition. The Company receives licensing fees from certain resellers (including original equipment manufacturers) under product licensing arrangements. Revenue from these resellers is recognized upon shipment of product, if collection of the resulting receivable is probable and no ongoing obligation exists. If an ongoing obligation exists, such fees are recorded as revenue as product is sold and reported to the Company by the reseller. For licensing agreements with end-users, fees are recognized upon shipment of the product, if collection of the resulting receivable is probable and no ongoing obligation exists. If an ongoing obligation exists, revenue is deferred based on vendor-specific objective evidence of the undelivered element. If vendor-specific objective evidence does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. Service revenues from customer maintenance fees for ongoing customer support and product updates, including maintenance bundled with software licenses, is recognized ratably over the period of the contract. When licensing agreements terminate, the Company records any licensing fees previously not recognized. Revenue from other services, including training, is recognized as the service is performed. The Company also enters into agreements with certain of its distributors involving boxed product. Revenues from these distributors are generally recognized when the product is shipped and are reduced by management's estimate of anticipated stock exchanges based on historical experience. Commencing January 1, 1999, the Company has recognized revenues in accordance with Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." During 1998, the Company recognized revenues in accordance with Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition." Prior to 1998, the Company recognized revenues in accordance with Statement of Position No. 91-1, "Software Revenue Recognition." Long-Lived Assets. The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Comprehensive Income (Loss). The Company reports components of comprehensive income (loss) in its annual consolidated statement of shareholders' equity. Other comprehensive income (loss) consists of net income and foreign currency translation adjustments. The Company's total comprehensive earnings were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (in thousands) (in thousands) Net income (loss) $462 $1,104 ($2,595) $1,839 Other comprehensive gain (loss) (194) 32 (27) 68 --------- --------- --------- --------- Total comprehensive income (loss) 268 1,136 (2,622) 1,907 ========= ========= ========= =========
Recent Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments, embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company will adopt SFAS 133 in the first quarter of the fiscal year ending December 31, 2001 and has not yet evaluated the impact of adoption and its effects on the Company's results of operations, financial position, capital resources or liquidity. 2. Acquisitions On June 7, 1999 the Company acquired all the outstanding shares of Raima Corporation ("Raima"), a Seattle-based vendor of cross-platform micro databases and data management tools for real-time, Windows, and Unix-based applications. Under the terms of the agreement, the former shareholders of Raima received a gross amount of 5,800,000 shares (subject to certain adjustments) of the Company's common stock valued at $1.031 per share. The Company also incurred approximately $1.6 million in acquisition related expenses. The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of Raima and the fair market value of the acquired assets and liabilities have been included in the financial statements of the Company as of June 7, 1999. The total purchase price of $7.6 million was allocated to assets acquired, including tangible and intangible assets and liabilities assumed, based on their respective estimated fair values at the acquisition date. The estimate of fair value of the net assets acquired is based on an independent appraisal, and management estimates. The purchase consideration included 5.8 million shares of Centura common stock valued at approximately $6.0 million, and other consideration of $1.6 million. The total purchase price was allocated as follows (in thousands):
Fair value of tangible assets....... $4,734 Fair value of acquired products..... 2,670 Fair value of acquired workforce.... 670 Goodwill............................ 2,752 Fair value of liabilities assumed... (3,227) --------- Goodwill............................ $7,599 =========
The identified intangible assets are being amortized over the periods of benefit, ranging from thirty-six to sixty months. The following table represents pro forma information as if Centura and Raima had been combined as of the beginning of the periods presented. The pro forma data are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations of future periods or the results that actually would have resulted had Centura and Raima been a combined company during the specified periods. The pro forma results include the effects of the purchase price allocation from amortization of the acquisition related intangible assets. Pro Forma Unaudited (in thousands, except per share data)
For the Nine Months Ended September 30, 1999 1998 --------- --------- Net revenue........................... $43,386 $46,778 Net income (loss)..................... (1,202) 2,898 Basic income (loss) per share......... ($0.03) $0.09 Basic weighted average common shares.. 35,421 32,518 Diluted net income (loss) per share... ($0.03) $0.09 Diluted weighted average common shares 35,421 33,015
4. Reclassifications In order to conform with the condensed consolidated balance sheet at December 31, 1998, and the condensed consolidated statement of cash flows for the three months and nine months ended September 30, 1999, certain reclassifications have been made to the condensed consolidated balance sheet and statement of cash flows for the nine months ended September 30, 1999. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Centura provides secure embedded database, connectivity and development solutions for the Internet Appliance, intelligent device, and the e-business marketplace. The Company's product offerings address the growing demand for complete and secure systems for always, occasionally, and connected on-demand mobile enterprise, Internet Appliance, intelligent devices and scalable e-business solutions. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this Quarterly Report on Form 10-Q. In evaluating the Company's business, prospective investors should carefully consider the following factors in addition to the other information presented in this report. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I-Item 1 of this Quarterly Report, and the audited consolidated financial statements and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Results of Operations: Net Product Revenue. Net product revenue decreased 11% to $7.8 million for the three months ended September 30, 1999, from $8.8 million for the three months ended September 30, 1998. The decrease in net product revenue is primarily due to decreases in net sales of the development tools product line. Development tools revenue decreased 40% to $2.0 million for the quarter ended September 30, 1999, as compared with $3.3 million for the quarter ended September 30, 1998. From time to time the Company has recognized increases in the quarterly revenue during quarters in which a new version of a major product is released. In the quarter ended September 30, 1998, the Company released version 1.5 of its flagship development tool, Centura Team Developer. A principal reason for the decline in development tools revenue for the three-months ended September 30, 1999 is that the Company released no new versions of comparable products during this quarter. International product revenue accounted for $3.9 million or 50% and $4.6 million or 52% of net product revenue for the three-months ended September 30, 1999 and 1998, respectively. Net product revenue decreased 19% to $20.4 million for the nine months ended September 30, 1999, from $25.4 million for the nine months ended September 30, 1998, primarily due to the same factors which caused the quarter over quarter decrease. Development tools revenue decreased 30% to $5.3 million for the nine-month period ended September 30, 1999, as compared with $7.6 million for the nine-month period ended September 30, 1998. International net product revenue accounted for $11.9 million or 58% and $13.0 million or 51% of net product revenue for the nine-month period ending September 30, 1999 and September 30, 1998 respectively. Net Service Revenue. Net service revenue increased 12% to $5.9 million for the quarter ended September 30, 1999, from $5.3 million for the quarter ended September 30, 1998. International sales accounted for $2.8 million or 46% and $2.7 million or 51% of total net service revenue for the quarters ended September 30, 1999 and 1998, respectively. Net service revenue increased 14% to $16.6 million for the nine-month period ended September 30, 1999, from $14.6 million for the nine-month period ended September 30, 1998. International sales accounted for $8.4 million or 51% and $7.5 million or 52% for the nine-month period ending September 30, 1999 and September 30, 1998 respectively. Cost of Product Revenue. Cost of product revenue includes the cost of production, royalties to third parties and the amortization of capitalized software. Cost of product revenue decreased 51% to $0.7 million for the quarter ended September 30, 1999, as compared with $1.4 million in the quarter ended September 30, 1998. Cost of product revenue as a percentage of product revenue decreased to 9% from 16% for the quarters ended September 30, 1999 and 1998, respectively. The decrease in cost of product revenue as a percentage of product revenue for the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998 is primarily related to higher royalty costs in 1998. Cost of product revenue decreased 26% to $2.6 million for the nine- month period ended September 30, 1999, as compared with $3.6 million for the nine-month period ended September 30, 1998. The decrease in cost of product revenue was due primarily to a decrease in royalty costs and amortization of capitalized software. The decrease in royalty costs was principally due to the write-off of assets during the first nine months of 1998, which were greater than the write-off of assets during the same period in the current year. The decrease in amortization of the capitalized software costs for the nine-month period ended September 30, 1999 as compared with the nine-month period ended September 30, 1998 is due primarily to the write-off of certain capitalized software costs during 1998, which were not anticipated to be recoverable in future periods. In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", the Company capitalizes internal development costs on a project when the technological feasibility of such project has been determined. The Company ceases capitalizing such expenses when the products derived from the project are released for sale. The capitalized costs are then amortized ratably over the useful life of the products, generally estimated to be two to three years. Amortization of capitalized software costs, which includes software purchased from third parties, was $223,000 and $843,000 for the three and nine month periods ended September 30, 1999 compared with $373,000 and $1,177,000 for the same periods in 1998. Cost of Service Revenue. Cost of service revenue consists primarily of personnel costs related to technical support, training and product license maintenance. Cost of service revenue decreased marginally to $1.0 million from $1.1 million for the three-month periods ended September 30, 1999 and 1998, respectively. For the nine months ended September 30, 1999 and 1998, cost of service revenue were $2.9 million and $3.2 million, respectively. Cost of service revenue as a percentage of net service revenue were 17% and 20% for the quarters ended September 30, 1999 and 1998, respectively, and 18% and 22% for the nine-month period ended September 30, 1999 and 1998 respectively. During fiscal year 1999, the Company amortized $179,000 of capitalized costs for acquired products. Sales and Marketing Expenses. Sales and marketing expenses are primarily comprised of personnel related expenses, advertising and promotional expenses. Sales and marketing expenses were $7.2 million and $20.4 million for the three and nine-month periods ended September 30, 1999, compared with $6.8 million and $18.9 million for the same periods in 1998. Sales and marketing expense increased for the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998 primarily due to increased staffing in the Company's sales and marketing organization following the Raima acquisition, in addition to one-time severance costs following a reorganization of the European sales and marketing organization. The increase in sales and marketing expenses for the nine-month period ended September 30, 1999 is principally due to the same factors which caused the quarter over quarter increase. Engineering and Product Development Expenses. The table below sets forth gross engineering and product development expenses, capitalized software development costs, and net research and development expenses in dollar amounts and as a percentage of net revenue for the periods indicated (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Gross engineering and product development costs................. $2,380 $2,159 $6,991 $6,017 Capitalized software development cos (53) (66) (309) (428) --------- --------- --------- --------- Net engineering and product development costs................. $2,327 $2,093 $6,682 $5,589 ========= ========= ========= ========= As a percentage of net revenues: Gross engineering and product development costs................. 17% 15% 19% 15% Net engineering and product development costs................. 17% 15% 18% 14%
Gross engineering and product development expenses increased 10% to $2.4 million from $2.2 million for the quarters ended September 30, 1999 and 1998 respectively, and increased 16% to $7.0 million from $6.0 million for the nine months ended September 30, 1999 and September 30, 1998, respectively. The increases are due primarily to increases in personnel as the Company expands its efforts to leverage core technologies into next generation products, combined with increased personnel related costs as a a result of the Raima acquisition. The Company believes that the development of new products and the enhancement of existing products is essential to its continued success, and the Company intends to continue to devote substantial resources to new product development. General and Administrative Expenses. General and administrative expenses are comprised primarily of staffing and related expenses, rent and facilities expense, depreciation, and outside services. General and administrative expenses remained relatively consistent for the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998 primarily due to increased personnel related costs as a result of the Raima acquisition offset by decreases in consulting and legal expenses. General and administrative expenses increased 15% to 6.1 million for the nine-month period ended September 30, 1999 from $5.3 million for the nine-month period ended September 30, 1998, primarily due to increased bad debt expense and increased personnel costs. During fiscal year 1999, the Company recognized $260,000 of amortization for goodwill. Other Income (Expense), Net. Other income (expense), net is comprised of interest income, interest expense, gains or losses on foreign currency transactions, and the imputed value of warrants issued during the respective periods. For the quarter ended September 30, 1999 other income (expense) decreased to $0.1 million from $0.2 in the same quarter of the prior year. Other income (expense), net decreased to $(0.4) million for the nine month period ended September 30, 1999, from $(1.3) million for the same period in the prior year, primarily due to the imputed value of warrants issued in the first two quarters of 1998. Provision for Income Taxes. The provision for income taxes primarily relates to foreign withholding taxes. Due to the availability of net operating loss carryforwards arising in prior years, no provision for U.S. income taxes was made for the three-month periods ended September 30, 1999 and 1998. Liquidity and Capital Resources: At September 30, 1999, the Company had a negative working capital position of $1.5 million, including a liability for deferred revenue of $13.3 million. Deferred revenue generally represents obligations to deliver software or services in future periods. Excluding deferred revenue, working capital would have been $11.8 million. Net cash used in operating activities for the nine months ended September 30, 1999 was $0.6 million, which resulted primarily from decreases in accounts receivable and other current assets, offset by decreases in accounts payable, accrued liabilities and deferred revenue. Cash used in investing activities totaled $1.0 million, which principally reflects acquisition costs, the purchase of equipment and capitalization of software development costs, offset by cash acquired on acquisition, and maturaties of investments. Cash used in financing activities totaled $0.6 million and related to repayment of short-term borrowings and repayment of a capital lease obligation. Effective January 1, 1999, the Company entered into a three-year, non-cancelable capital lease. The lease bears interest at an annual rate of 7.95%. Leased assets were approximately $1.3 million on a cost basis, and are being depreciated on a straight-line basis over three years. At September 30, 1999 the Company had $8.6 million in unsecured foreign currency forward contracts, denominated in various currencies, as part of a program to reduce the financial exposure arising from foreign denominated monetary assets and liabilities. The deferred product and support revenue of $13.3 million at September 30, 1999 reflect a delay in recognition of revenue in accordance with Generally Accepted Accounting Principles and require minimal use of future resources of the Company. The Company has an asset based loan facility with Coast Business Credit (the "Facility"), which provides borrowings of up to $5.0 million secured by the Company's accounts receivables, combined with a $0.5 million capital equipment facility. The Facility bears interest at 2.25% above the Bank of America Reference Rate, and provides for the ability to reduce interest cost based on the achievement of certain financial covenants. The Facility also requires that the Company maintain a minimum net worth of negative $8.0 million. The Facility matures in January 2000 and provides for the ability to extend the agreement for one year at the option of the Company. As of September 30, 1999 there was $2.4 million drawn against the Facility. The Company believes that expected cash flows from operations and existing cash balances, will be sufficient to meet the Company's currently anticipated working capital and capital expenditure requirements for the next 12 months. The Company may, however, choose to raise cash for operational or other needs sometime in the future. If the Company needs further financing, there can be no assurance that it will be available on reasonable terms or at all. Any additional equity financing will result in dilution to the Company's stockholders. The Company's capital requirements also may be affected by acquisitions of businesses, products and technologies that are complementary to the Company's business, which the Company may consider from time to time. The Company regularly evaluates such opportunities. Any such transaction, if consummated, may further reduce the Company's working capital or require the issuance of equity. Year 2000 Issue. Some computers, software, and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Millennium Bug" or "Year 2000 Problem". Assessment. The Year 2000 Problem could affect computers, software, and other equipment used, operated, or maintained by the Company. Accordingly, the Company reviewed its internal computer programs and systems to ensure that the programs and systems are Year 2000 compliant. The Company presently believes that its major internal computer systems are Year 2000 compliant. The cost of these efforts has not been material to the Company's financial position or results of operations to date, however there can be no assurance that Year 2000 Problems will not arise which could result in the need for significant future expenditures. Software Sold to Consumers. All current products developed by Centura are designed to allow developers to record, store and process and present calendar dates occurring on or after January 1, 2000 with the same degree of accuracy that such products process dates occurring before such date. However, customers that may not be compliant may experience cash flow difficulties and could negatively affect the Company's accounts receivables Days Sales Outstanding (DSO) or bad debt reserves. The Company has requested compliance letters from its large customers. Moreover, the Company has created Centura Team2000, which is a service that determines whether any application built in CTD or SQLWindows is Year 2000 compliant. The Company charges for this service, but does not, however, mandate that the service be purchased. This is a proactive step to mitigate possible damage that may result from customer non-compliance. Internal Infrastructure. The Company has identified substantially all of the major computers, software applications, and related equipment used in connection with its internal operations that required modification, upgrades, or replacement to minimize the possibility of a material disruption to its business. The Company has substantially completed the process of modifying, upgrading, and replacing major systems that have been identified as adversely affected. Systems Other than Information Technology Systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, photocopiers, telephone switches, security systems, and other common devices may be affected by the Year 2000 Problem. The Company has taken action to ensure that its internal systems are Year 2000 Compliant. The total cost to the Company of completing any required modifications, upgrades, or replacements of these internal systems has not been material to the Company's business or results of operations. Suppliers. Centura has communicated with third party suppliers of the major computers, software, and other equipment used, operated, or maintained by the Company to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. However, the Company has limited or no control over the actions of these third party suppliers. Thus, while the Company expects that it will be able to resolve any significant Year 2000 Problems with these systems, there can be no assurance that these suppliers will resolve any or all Year 2000 Problems with these systems before the occurrence of a material disruption to the business of the Company or any of its customers. Any failure of these third parties to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operation. Customers. The Company communicated with its customers to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. However, the Company has limited or no control over the actions of its customers. Thus, while the Company expects that it will be able to resolve any significant Year 2000 Problems with its internal systems and products, there can be no assurance that its customers will resolve any or all Year 2000 Problems with their systems before the occurrence of a material disruption to the business of the Company. Any failure of these third parties to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operation. Disclaimer. Management believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, one cannot accurately predict how many Year 2000 Problem-related failures will occur, or the severity, duration, or financial consequences of these perhaps inevitable failures. The discussion of the Company's efforts, and management's expectations, relating to Year 2000 compliance are forward-looking statements. The Company's ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. While the Centura has substantially completed the implementation of Year 2000 related upgrades appropriate for the Company's internal systems and equipment and Year 2000 compliance issues in the systems of customers, vendors and other related parties, there can be no assurance that problems will not arise as a result of the Year 2000 issue. Quantitative and Qualitative Disclosure about Market Risk The Company enters into short-term forward contracts to reduce the risks associated with foreign currency fluctuations. The Company recognized gains of $0.2 million for each of the three-month periods ended September 30, 1999 and September 30, 1998, and losses of $0.3 million and $0.1 million for the nine month periods ended September 30, 1999 and September 30, 1998, respectively, all of which were related to foreign currency fluctuations. At September 30, 1999, the Company had $8.6 million in forward contracts denominated in five currencies: German Deutsche Marks, British Pound Sterling, Netherlands Guilders, Italian Lira and Australian Dollars. The carrying value of the instruments approximate their fair value as the Company records entries to "mark-to-market" the respective contracts on a monthly basis. The respective gains and losses from forward contracts are included in other income (expense). Factors That May Affect Future Results: The Company has experienced in the past and expects in the future to continue to experience significant fluctuations in quarterly operating results. The Company has at times recognized a substantial portion of its net revenues in the last month or last few weeks of a quarter. The Company generally ships products as orders are received and, therefore, has little or no backlog. As a result, quarterly sales and operating results generally depend on a number of factors that are difficult to forecast, including, among others, the volume and timing of and ability to fulfill orders received within the quarter. Operating results also may fluctuate due to factors such as demand for the Company's products, introduction, localization or enhancement of products by the Company and its competitors, market acceptance of new products, reviews in the industry press concerning the products of the Company or its competitors, changes or anticipated changes in pricing by the Company or its competitors, mix of distribution channels through which products are sold, mix of products sold, returns from the Company's distributors and general economic conditions. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. In addition, because the Company's staffing and other operating expenses are based in part on anticipated net revenues, a substantial portion of which may not be generated until the end of each quarter, delays in the receipt or shipment of orders and ability to achieve anticipated revenue levels can cause significant variations in operating results from quarter to quarter. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in sales of the Company's products in relation to the Company's expectations could have an immediate adverse impact on the Company's business, operating results and financial condition. In addition, the Company currently intends to increase its operating expenses to fund greater levels of sales and marketing operations and expand distribution channels. To the extent that such expenses proceed or are not subsequently followed by increased net revenues, the Company's business, operating results and financial condition could be materially and adversely affected. In the future, the Company may make acquisitions of complementary companies, products or technologies. Managing acquired businesses entails numerous operational and financial risks, including difficulties in assimilating acquired operations, diversion of management's attention to other business concerns, amortization of acquired intangible assets and potential loss of key employees or customers of acquired operations. There can be no assurance that the Company will be able to effectively complete or integrate acquisitions, and failure to do so could have a material adverse effect on the Company's operating results. As of the date hereof, the Company has no understanding or agreement with any other entity regarding any potential acquisition or combination, the consummation of which is probable. Dependence On Key Personnel. The Company's future performance is substantially dependent on the performance of its executive officers and key product development, technical, sales, marketing and management personnel. The Company does not have employment or non-competition agreements with any of its employees. The loss of the services of any executive officer or other key technical or management personnel of the Company for any reason could have a material adverse effect on the business, operating results and financial condition of the Company. The future success of the Company also depends on its continuing ability to identify, hire, train, motivate and retain other highly qualified technical and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to attract, assimilate or retain other highly qualified technical and managerial personnel in the future. The inability to attract and retain the necessary technical and managerial personnel could have a material and adverse effect upon its business, operating results and financial condition. Recent Company Losses; Fluctuations In Quarterly Results. The Company has experienced in the past and may in the future continue to experience significant fluctuations in quarterly operating results. The Company reported a profit of $2.1 million for fiscal year ended December 31, 1998, a loss of $0.6 million for fiscal year 1997, and a profit of $2.0 million for 1996. There can be no assurance that the restructuring efforts the Company has engaged in to date will be successful or that the Company will be able to sustain profitability on a quarterly or annual basis. Many of the Company's product licensing arrangements are subject to revenue recognition on a per-unit deployed basis as the Company's deferred obligation to such customers is gradually extinguished. Revenue recognition in such cases is therefore dependent upon the business activities of the Company's customers and the timely and accurate reporting of such activities to the Company, which makes predictability of the related revenue extremely uncertain. In addition, quarterly operating results of the Company will depend on a number of other factors that are difficult to forecast, including, general market demand for the Company's products; the size and timing of individual orders during a quarter; the Company's ability to fulfill such orders; introduction, localization or enhancement of products by the Company; delays in the introduction and/or enhancement of products by the Company and its competitors; market acceptance of new products; reviews in the industry press concerning the products of the Company or its competitors; software "bugs" or other product quality problems; competition and pricing in the software industry; sales mix among distribution channels; customer order deferrals in anticipation of new products; reduction in demand for existing products and shortening of product life cycles as a result of new product introductions; changes in operating expenses; changes in the Company's strategy; personnel changes; foreign currency exchange rates; mix of products sold; inventory obsolescence; product returns and rotations; and general economic conditions. Sales of the Company's products also may be negatively affected by delays in the introduction or availability of new hardware and software products from third parties. The Company's financial results also may vary as a result of seasonal factors including year and quarter end purchasing and the timing of marketing activities, such as industry conventions and tradeshows. Stock Option Plans. From time to time, the Company issues shares of common stock pursuant to its 1992 Employee Stock Purchase Plan and pursuant to options granted under its 1995 Incentive Stock Option Plan, 1998 Employee Stock Option Plan (for non-officer employees) and 1996 Directors' Stock Option Plan. Additional options remain outstanding and are exercisable pursuant to the Company's 1986 Incentive Stock Option Plan, which terminated in July 1996. In addition, the Company has issued non-plan options to the Company's Chief Executive Officer, Chief Operating Officer and Sr. Vice President of Alliances, exercisable for a total of 1,500,000 shares. New Product Risks; Rapid Technological Change. The markets for the Company's software products and services are characterized by rapid technological developments, evolving industry standards, swift changes in customer requirements and computer operating environments, and frequent new product introductions and enhancements. As a result, the success of the Company depends substantially upon its ability to continue to enhance existing products, develop and introduce in a timely manner, new products incorporating technological advances and meet increasing customer expectations, all on a timely and cost-effective basis. To the extent one or more competitors introduce products that better address customer needs, the Company's businesses could be adversely affected. The Company's success will also depend on the ability of its primary products, eSNAPP, SQLBASE, SQLBASE SAFEGARDE, CENTURA TEAM DEVELOPER, SQLWINDOWS, CENTURA NET.DB, SQLHOST, VELOCIS, and RDM to perform well with existing and future leading, industry-standard application software products intended to be used in connection with RDBMS. Any failure to deliver these products as scheduled or their failure to achieve early market acceptance as a result of competition, technological change, failure of the Company to timely release new versions or upgrades, failure of such upgrades to achieve market acceptance or otherwise, could have a material adverse effect on the business, operating results and financial condition of the Company. In addition, commercial acceptance of the Company's products and services could be adversely affected by critical or negative statements or reports by industry and financial analysts concerning the Company and its products, or other factors such as the Company's financial performance. If the Company is unable to develop and introduce new products or enhancements to existing products in a timely manner in response to changing market conditions or customer requirements, its business, operating results and financial condition could be materially and adversely affected. The Company depends substantially upon internal efforts for the development of new products and product enhancements. The Company has in the past experienced delays in the development of new products and product versions, which resulted in loss or delays of product revenues, and there can be no assurance that the Company will not experience further delays in connection with its current product development or future development activities. Also, software products as complex as those offered by the Company may contain undetected errors when first introduced or as new versions are released. The Company has in the past discovered software errors in certain of its new products and enhancements, respectively, after their introduction. Although the Company has not experienced material adverse effects resulting from any such errors to date, there can be no assurance that errors will not be found in new products or releases after commencement of commercial shipments, resulting in adverse product reviews and a loss of or delay in market acceptance, which could have a material adverse effect upon the Company's business, operating results and financial condition. From time to time, the Company or its competitors may announce new products, product versions, capabilities or technologies that have the potential to replace or shorten the life cycles of the Company's existing products. The Company has historically experienced increased returns of a particular product version following the announcement of a planned release of a new version of that product. The Company provides allowances for anticipated returns, and believes its existing policies result in the establishment of allowances that are adequate, and have been adequate in the past, but there can be no assurance that product returns will not exceed such allowances in the future. The announcement of currently planned or other new products may cause customers to delay their purchasing decisions in anticipation of such products, which could have a material adverse effect on business, operating results and financial condition of the Company. Year 2000 Issue. Some computers, software, and other equipment include programming code in which calendar year data is abbreviated to only two digits as a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Millennium Bug" or "Year 2000 Problem". Assessment. The Year 2000 Problem could affect computers, software, and other equipment used, operated, or maintained by the Company. Accordingly, the Company reviewed its internal computer programs and systems to ensure that the programs and systems are Year 2000 compliant. The Company presently believes that its major internal computer systems are Year 2000 compliant. The cost of these efforts has not been material to the Company's financial position or results of operations to date, however there can be no assurance that Year 2000 Problems will not arise which could result in the need for significant future expenditures. Software Sold to Consumers. All current products developed by Centura are designed to allow developers to record, store and process and present calendar dates occurring on or after January 1, 2000 with the same degree of accuracy that such products process dates occurring before such date. However, customers that may not be compliant may experience cash flow difficulties and could negatively affect the Company's accounts receivables Days Sales Outstanding (DSO) or bad debt reserves. The Company has requested compliance letters from its large customers. Moreover, the Company has created Centura Team2000, which is a service that determines whether any application built in CTD or SQLWindows is Year 2000 compliant. The Company charges for this service, but does not, however, mandate that the service be purchased. This is a proactive step to mitigate possible damage that may result from customer non-compliance. Internal Infrastructure. The Company has identified substantially all of the major computers, software applications, and related equipment used in connection with its internal operations that required modification, upgrades, or replacement to minimize the possibility of a material disruption to its business. The Company has substantially completed the process of modifying, upgrading, and replacing major systems that have been identified as adversely affected. Systems Other than Information Technology Systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, photocopiers, telephone switches, security systems, and other common devices may be affected by the Year 2000 Problem. The Company has taken action to ensure that its internal systems are Year 2000 Compliant. The total cost to the Company of completing any required modifications, upgrades, or replacements of these internal systems has not been material to the Company's business or results of operations. Suppliers. Centura has communicated with third party suppliers of the major computers, software, and other equipment used, operated, or maintained by the Company to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. However, the Company has limited or no control over the actions of these third party suppliers. Thus, while the Company expects that it will be able to resolve any significant Year 2000 Problems with these systems, there can be no assurance that these suppliers will resolve any or all Year 2000 Problems with these systems before the occurrence of a material disruption to the business of the Company or any of its customers. Any failure of these third parties to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operation. Customers. The Company communicated with its customers to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. However, the Company has limited or no control over the actions of its customers. Thus, while the Company expects that it will be able to resolve any significant Year 2000 Problems with its internal systems and products, there can be no assurance that its customers will resolve any or all Year 2000 Problems with their systems before the occurrence of a material disruption to the business of the Company. Any failure of these third parties to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operation. Disclaimer. Management believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, one cannot accurately predict how many Year 2000 Problem-related failures will occur, or the severity, duration, or financial consequences of these perhaps inevitable failures. The discussion of the Company's efforts, and management's expectations, relating to Year 2000 compliance are forward-looking statements. The Company's ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. While the Centura has substantially completed the implementation of Year 2000 related upgrades appropriate for the Company's internal systems and equipment and Year 2000 compliance issues in the systems of customers, vendors and other related parties, there can be no assurance that problems will not arise as a result of the Year 2000 issue. ongoing compliance review. Embeddable Database Market. Since database capacity is often indicative of differences in customer application, segments within the PC client/server market in which the Company competes can generally be distinguished and segregated by the target capacity of the database utilized. The Company generally markets its database products in environments utilizing capacity ranging from small, Smart Device environments to those of multiple Gigabytes. Competitors of the Company, including Microsoft, Sybase, Pervasive and Oracle, generally have product offerings which compete with the Company's products in some or all of these capacity ranges. In addition, some of these competitors are providers of sophisticated database software, originally designed and marketed primarily for use with mainframes and minicomputers, which, if successfully re-configured to provide similar functionality in PC client/server, or smaller capacity environments, could materially and adversely impact the Company's revenues, results of operations and financial condition. Competition. The market for client/server system software is intensely competitive and rapidly changing. The Company's products are specifically targeted at the emerging portion of this market relating to embeddable PC and Web client/server software, and the Company's current and prospective competitors offer a variety of solutions to address this market segment. Development tools and Connectivity Markets. The Company faces competition from providers of software specifically developed for the PC client/server market, such as Oracle, Sybase, Microsoft, Inprise and Forte, and connectivity software competitors, such as IBI Systems, Inc. and Sybase. The Company also faces potential competition from vendors of applications Centura Team Developer/SQLWindows based on 4GLs (generation languages) or CASE (Computer Aided Software Engineers) technologies. With the emergence of the World Wide Web as an important platform for application development and deployment and a variety of newly created development tools that export JavaTM- program language connectivity, additional competitors or potential competitors have emerged. The principal competitive factors affecting the market for the Company's products include breadth of distribution and name recognition, product architecture, performance, functionality, price, product quality, and customer support. The Company experienced increased competition during 1998, 1997, 1996, and 1995, resulting in loss of market share. The Company must continue to introduce enhancements to its existing products and offer new products on a timely basis in order to remain competitive. However, even if the Company introduces such products in this manner, it may not be able to compete effectively because of the significantly larger resources available to many of the Company's competitors. There can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's business, operating results and financial condition. See "Competition." Internet Software Market. The market for Internet software in general, and the segments of such market addressed by the Company's products in particular, are relatively new. The future financial performance of the Company will depend in part on the continued expansion of this market and these market segments and the growth in the demand for other products developed by the Company, as well as increased acceptance of the Company's products by MIS professionals. There can be no assurance that the Internet software market and the relevant segments of the market will continue to grow, that the Company will be able to respond effectively to the evolving requirements of the market and market segments, or that MIS professionals will accept the Company's products. If the Company is not successful in developing, marketing, localizing and selling applications that gain commercial acceptance in these markets and market segments on a timely basis, the Company's business, operating results and financial condition could be materially and adversely affected. See "Industry Overview." Dependence Upon Distribution Channels. The Company relies on relationships with value-added resellers and independent third party distributors for a substantial portion of its sales and revenues. Some of the Company's resellers and distributors also offer competing products. Most of the Company's resellers and distributors are not subject to any minimum purchase requirements, they can cease marketing the Company's products at any time, and they may from time to time be granted stock exchange or rotation rights. Moreover, the introduction of new and enhanced products may result in higher product returns and exchanges from distributors and resellers. Any product returns or exchanges in excess of recorded allowances could have a material adverse effect on the Company's business, operating results and financial condition. The Company also maintains strategic relationships with a number of vertical software vendors and other technology companies for marketing or resale of the Company's products. Any termination or significant disruption of the Company's relationship with a major portion of its resellers or distributors, or the failure by such parties to renew agreements with the Company, could materially and adversely affect the Company's business, operating results and financial condition. Since 1994 the Company has reduced its resources devoted to North American corporate sales and also decreased its expenditures on corporate and product marketing. Failure of the Company to successfully implement, support and manage its sales strategies could have a material adverse effect on the Company. The distribution channels through which client/server software products are sold have been characterized by rapid change, including consolidations and financial difficulties of distributors, resellers and other marketing partners including certain of the Company's current distributors. The bankruptcy, deterioration in financial condition or other business difficulties of a distributor or retailer could render the Company's accounts receivable from such entity uncollectible, and this could result in a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that distributors will continue to purchase the Company's products or provide the Company's products with adequate promotional support. Failure of distributors to do so could have a material and adverse effect on the Company's business, operating results and financial condition. In a number of international markets the Company has entered into quasi-exclusive, multi-year agreements with independent companies that have also licensed the use of the Company's name. These agreements are in place to increase the Company's opportunities and penetration in such markets where the rapid adoption of client/server technologies is anticipated. While the Company believes that to date these agreements have increased the Company's penetration in such markets, there can be no certainty that this performance will continue nor that these relationships will remain in place. The Company's future cost of maintaining its business in these markets could increase substantially if these agreements are not renewed. Dependence On Third Party Organizations. The Company is increasingly dependent on the efforts of third party "partners", including consultants, system houses and software developers to implement, service and support the Company's products. These third parties increasingly have opportunities to select from a very broad range of products from the Company's competitors, many of whom have greater resources and market acceptance than the Company. In order to succeed, the Company must actively recruit and sustain relationships with these third parties. There can be no assurance that the Company will be successful in recruiting new partners or in sustaining its relationships with its existing partners. International Sales And Operations. International sales represented 54%, 58% and 60% of the Company's net revenues for the years ended December 31, 1998, 1997 and 1996, respectively. A key component of the Company's strategy is continued expansion into international markets, and the Company currently anticipates that international sales, particularly in new and emerging markets, will continue to account for a significant percentage of total revenues. The Company will need to retain effective distributors, and hire, retain and motivate qualified personnel internationally to maintain and/or expand its international presence. There can be no assurance that the Company will be able to successfully market, sell, localize and deliver its products in these international markets. In addition to the uncertainty as to the Company's ability to sustain or expand its international presence, there are certain risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements and government controls, problems and delays in collecting accounts receivable, tariffs, export license requirements and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, political and economic instability, fluctuations in currency exchange rates, seasonal reductions in business activity during summer months in Europe and certain other parts of the world, restrictions on the export of critical technology, and potentially adverse tax consequences, which could adversely impact the success of international operations. Sales of the Company's products are denominated both in local currencies of the respective geographic region and in US dollars, depending upon the economic stability of that region and locally accepted business practices. Accordingly, any increase in the value of the US dollar relative to local currencies in these markets may negatively impact revenues, results of operations and financial condition. An increase in the relative value of the US dollar would serve to increase the relative foreign currency cost to the customer of a US dollar denominated purchase, which may negatively affect the Company's sales in foreign markets. In addition, the US dollar value of a sale denominated in a region's local currency decreases in proportion to relative increases in the value of the US dollar. In addition, effective copyright and trade secret protection may be limited or unavailable under the laws of certain foreign jurisdictions. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's international operations and, consequently, on the Company's business, operating results and financial condition. Proprietary Rights. The success and ability of the Company to compete is dependent in part upon the Company's proprietary technology. While the Company relies on trademark, trade secret and copyright laws to protect its technology, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and customer support are more essential to establishing and maintaining a technology leadership position. The Company has patent rights with respect to its SQLWINDOWS, and CENTURA TEAM DEVELOPER products, and as filed patent applications related to its SQLBASE SAFEGARDE products. The Company believes that the ownership of patents is not necessarily a significant factor in its business and that its success does not depend on the ownership of patents, but primarily on the innovative skills, technical competence and marketing abilities of its personnel. Also, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology. The source code for the Company's proprietary software is protected both as a trade secret and as a copyrighted work. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use their products or technology without authorization, or to develop similar technology independently. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. The Company intends to apply for new patents as appropriate opportunities and need become evident. The Company generally enters into confidentiality or license agreements with its employees, consultants and vendors, and generally controls access to and distribution of its software, documentation and other proprietary information. Despite efforts to protect proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that is regarded as proprietary. Policing such unauthorized use is difficult. There can be no assurance that the steps taken by the Company will prevent misappropriation of the Company's technology or that such agreements will be enforceable. In addition, litigation may be necessary in the future to enforce intellectual property rights, to protect trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that third parties will not claim infringement by the Company with respect to current or future products, and the Company expects that it will increasingly be subject to such claims as the number of products and competitors in the client/server and Internet connectivity software market grow and the functionality of such products overlaps with other industry segments. In the past, the Company has received notices alleging that its products infringe trademarks of third parties. The Company has historically dealt with and will in the future continue to deal with such claims in the ordinary course of business, evaluating the merits of each claim on an individual basis. There are currently no material pending legal proceedings against the Company regarding trademark infringement. Any such third party claims, whether or not they are meritorious, could result in costly litigation or require the Company to enter into royalty or licensing agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to the Company, or at all. If the Company was found to have infringed upon the proprietary rights of third parties, it could be required to pay damages, cease sales of the infringing products and redesign or discontinue such products, any of which could have a material adverse effect on the Company's business, operating results and financial condition. Legal Proceedings. Other than as described in Item 1 of Part II hereof, there are currently no material pending legal proceedings against the Company or any of its subsidiaries, other than ordinary routine litigation incidental to the business of the Company. The Company operates, however, in a complex and volatile industry in which disputes, litigation, regulatory proceedings and other actions are a necessary risk of doing business. There can be no assurance that the Company will not participate in such legal proceedings and that the costs and charges will not have a material adverse impact on the Company's future success. PART II OTHER INFORMATION Item 1. Legal Proceedings As of September 30, 1999, to the best of the Company's knowledge there were no pending actions, potential actions, claims or proceedings against the Company that could reasonably be expected to result in material damages to the Company which would have a material adverse effect on its business, results of operations or financial condition. As noted in the "Legal Proceedings" section under "Risk Factors" above, the Company exists in a volatile legal and regulatory environment and it is not possible to anticipate or estimate the potential adverse impact of unknown claims or liabilities against the Company, its officers and directors, and as such no estimate is made in the Company's financial statements for such unknown claims or liabilities. Item 2. Changes in Securities and Use of Proceeds-Not Applicable Item 3. Defaults In Senior Securities-Not Applicable Item 4. Submission Of Matters To A Vote Of Security Holders-Not Applicable Item 5. Other Information-Not Applicable Item 6. Exhibits And Reports On Form 8-K-Not Applicable SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTURA SOFTWARE CORPORATION By: /s/ Richard Lucien ___________________________________ November 15, 1999 Richard Lucien Vice President of Finance and Chief Financial Officer EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999. 1,000 3-MOS DEC-31-1999 JUN-30-1999 SEP-30-1999 4,182 0 15,802 1,623 0 22,285 3,876 0 35,030 23,754 0 0 0 91,695 (81,039) 35,030 7,823 13,772 673 1,829 11,557 0 80 493 31 462 0 0 0 462 $0.01 $0.01
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