-----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, S1Ut4IyYKCO/xDj+UCsTtXTVq3qJBWti53hRyG0O/MLU3/3YODB6N+Nur+nrFwKH 0KuV1MFyQeuubm5u5ifezQ== 0000912057-97-028096.txt : 19970815 0000912057-97-028096.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-028096 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-21010 FILM NUMBER: 97663848 BUSINESS ADDRESS: STREET 1: 1060 MARSH RD CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4153219500 MAIL ADDRESS: STREET 1: 1060 MARSH ROAD CITY: MENLO PARK STATE: CA ZIP: 94025 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 JUNE 30, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD TO Commission file number: 0-21010 CENTURA SOFTWARE CORPORATION (Exact name of registrant as specified in its charter)
CALIFORNIA 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_________ No____X____ As of July 31, 1997, there were 15,334,501 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CENTURA SOFTWARE CORPORATION FORM 10-Q for the Quarter Ended March 31, 1997 INDEX
PAGE NUMBER ----------- PART I FINANCIAL INFORMATION Item 1. Financial Statements and Supplementary Data a) Condensed consolidated balance sheets at June 30, 1997 and December 31, 1996........................................................................ 1 b) Condensed consolidated statements of operations for the three months and six months ended June 30, 1997 and 1996......................................... 2 c) Condensed consolidated statements of cash flows for the six months ended June 30, 1997 and 1996...................................................... 3 d) Notes to condensed consolidated financial statements........................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................................... 7 PART II OTHER INFORMATION Item 1. Legal Proceedings......................................................................... 18 Item 2. Changes in Securities..................................................................... 18 Item 3. Defaults in Senior Securities............................................................. 18 Item 4. Submission of Matters to a Vote of Security Holders....................................... 18 Item 5. Other Information......................................................................... 18 Item 6. Exhibits and Reports on Form 8-K.......................................................... 19
PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents........................................... $ 4,812 $ 6,669 Short-term investments.............................................. 565 2,065 Accounts receivable, less allowances of $2,931 and $2,826........... 8,917 13,574 Other current assets................................................ 4,387 3,516 ----------- ------------ Total current assets.............................................. 18,681 25,824 Property and equipment, at cost, net of accumulated depreciation...... 4,742 3,622 Capitalized software, at cost, net of accumulated amortization........ 3,443 4,226 Long-term investments................................................. 976 1,221 Other assets.......................................................... 2,017 1,812 ----------- ------------ Total assets...................................................... $ 29,859 $ 36,705 ----------- ------------ ----------- ------------ LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities: Current portion of long-term debt................................... $ 10,188 $ 336 Accounts payable.................................................... 6,355 5,683 Accrued compensation and related expenses........................... 2,254 2,484 Other accrued liabilities........................................... 4,057 4,313 Accrued litigation expenses......................................... 209 6,733 Deferred revenue.................................................... 17,795 21,891 ----------- ------------ Total current liabilities......................................... 40,858 41,440 Long-term debt, less current portion.................................. -- 10,032 Other long-term liabilities........................................... 856 2,156 ----------- ------------ Total liabilities................................................. 41,714 53,628 ----------- ------------ Shareholders' Deficit: Common stock, par value $.01 per share; 60,000 shares authorized; 15,301 shares and 13,728 shares issued and outstanding............ 69,896 63,047 Cumulative translation adjustment................................... (505) (513) Accumulated deficit................................................. (81,246) (79,457) ----------- ------------ Total shareholders' deficit....................................... (11,855) (16,923) ----------- ------------ Total liabilities and shareholders' deficit....................... $ 29,859 $ 36,705 ----------- ------------ ----------- ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 1 CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Net revenues: Product............................................................. $ 11,790 $ 11,657 $ 21,304 $ 22,588 Service............................................................. 4,314 3,989 8,400 8,451 --------- --------- --------- --------- Net revenues...................................................... 16,104 15,646 29,704 31,039 --------- --------- --------- --------- Cost of revenues: Product............................................................. 1,301 1,253 2,667 2,499 Service............................................................. 2,272 2,262 4,391 4,457 --------- --------- --------- --------- Cost of revenues.................................................. 3,573 3,515 7,058 6,956 --------- --------- --------- --------- Gross profit.................................................... 12,531 12,131 22,646 24,083 --------- --------- --------- --------- Operating expenses: Sales and marketing................................................. 7,387 7,443 14,010 14,186 Research and development............................................ 2,718 2,656 5,421 5,557 General and administrative.......................................... 1,764 1,667 3,457 3,358 Acquisition expense................................................. 270 -- 531 -- --------- --------- --------- --------- Total operating expenses.......................................... 12,139 11,766 23,419 23,101 --------- --------- --------- --------- Operating income (loss)......................................... 392 365 (773) 982 Other income (expense): Interest income..................................................... 41 192 96 386 Interest expense.................................................... (210) (262) (424) (409) Foreign currency gain (loss)........................................ 78 159 (653) (22) --------- --------- --------- --------- Income (loss) before income taxes..................................... 301 454 (1,754) 937 Provision for income taxes............................................ 25 31 35 193 --------- --------- --------- --------- Net income (loss)..................................................... $ 276 $ 423 $ (1,789) $ 744 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share........................................... $ 0.02 $ 0.03 $ (0.12) $ 0.06 --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares and equivalents........................ 15,289 12,735 15,256 12,694 --------- --------- --------- --------- --------- --------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2 CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net income (loss)..................................................................... $ (1,789) $ 744 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization....................................................... 2,704 2,379 Provision for doubtful accounts..................................................... 247 101 Provision for sales returns and allowances.......................................... 257 649 Valuation of stock warrant issued in connection with factoring agreement............ 102 -- Changes in assets and liabilities: Accounts receivable............................................................... 4,153 788 Other current assets.............................................................. (871) (417) Other assets...................................................................... (272) 29 Accounts payable and accrued liabilities.......................................... (1,506) (4,268) Deferred revenue.................................................................. (4,096) (3,800) Accrued litigation expense........................................................ 9 (994) Other long-term liabilities....................................................... 392 363 --------- --------- Net cash used in operating activities........................................... (670) (4,426) --------- --------- Cash flows from investing activities: Maturities of investments............................................................. 1,746 7,215 Purchases of investments.............................................................. (1) (181) Proceeds from sale of property and equipment.......................................... 462 425 Acquisitions of property and equipment................................................ (2,853) (935) Capitalization of software costs...................................................... (454) (1,351) Capitalization of other intangibles................................................... (129) (112) --------- --------- Net cash provided by (used in) investing activities............................. (1,229) 5,061 --------- --------- Cash flows from financing activities: Repayment of note payable............................................................. (180) (164) Repayment of capital lease obligations................................................ -- (19) Proceeds from issuance of common stock, net........................................... 214 305 --------- --------- Net cash provided by financing activities....................................... 34 122 --------- --------- Effect of exchange rate changes on cash and cash equivalents............................ 8 (50) --------- --------- Net increase (decrease) in cash and cash equivalents.................................... (1,857) 707 Cash and cash equivalents at beginning of period........................................ 6,669 9,865 --------- --------- Cash and cash equivalents at end of period.............................................. $ 4,812 $ 10,572 --------- --------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 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 June 30, 1997, the condensed consolidated statements of operations for the three and six month periods ended June 30, 1997 and 1996, and cash flows for the six month periods ended June 30, 1997 and 1996 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 cash flows have been made for all periods presented. 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, 1996. The results of operations for the three and six month periods ended June 30, 1997, are not necessarily indicative of the operating results to be expected for the full year. The December 31, 1996 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. COMPUTATION OF NET INCOME (LOSS) PER SHARE. Net income (loss) per share is computed using the weighted average number of common and common equivalent shares outstanding. Common stock equivalents (using the modified treasury stock method) have been included in the computation when dilutive. Convertible debentures, which are not common stock equivalents, are excluded in a fully diluted calculation of earnings (loss) per share because their effect is antidilutive. RECENT ACCOUNTING PRONOUNCEMENT. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is effective for the Company's fiscal year ending December 31, 1997. Under SFAS 128, primary earnings per share is replaced by basic earnings per share and fully diluted earnings per share is replaced by diluted earnings per share. If the Company had adopted SFAS 128 for the three and six month periods ended June 30, 1997, the Company's loss per share would have been as follows:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 1997 30, 1997 --------------- ------------- (UNAUDITED) (UNAUDITED) Basic income (loss) per share................................... $ 0.02 $ (0.12) Diluted income (loss) per share................................. $ 0.02 $ (0.12)
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting of comprehensive income and its components in a full set of general-purpose financial statements for periods ending after December 15, 1997. Reclassification of financial statements for earlier periods for comparative purposes is required. The Company will adopt SFAS 130 in 1997 and does not expect such adoption to have a material effect on the consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of An Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information regarding the reporting of operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company will adopt SFAS 131 beginning in 1998 and does not expect such adoption to have a material effect on the consolidated financial statements. 4 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS. In order to conform to the current period presentation, certain reclassifications have been made to the condensed consolidated statements of operations for the three and six month periods ended June 30, 1996 and to the condensed consolidated statement of cash flows for the six months ended June 30, 1996. 2. LITIGATION On May 2, 1994, a lawsuit was filed against the Company and certain of its officers and directors, by a holder of the Company's common stock, on his own behalf and purportedly on behalf of a class of others similarly situated. The lawsuit was subsequently amended, and alleged that the Company made false and misleading statements and failed to disclose material information relating to existing business conditions and the Company's prospects and that officers and directors violated the insider trading laws. The plaintiff was seeking damages of an unstated amount. The Company reached a binding settlement agreement with plaintiffs' counsel in this lawsuit, and gained court approval on September 30, 1996. Under the terms of the agreement, the Company would provide $3 million and 1,875,000 shares to a fund to be distributed among the members of the plaintiff class. The Company also agreed to supplement this payment with up to 625,000 additional shares in the event the value of its common stock was less than an average price of $6.00 per share during certain twenty day trading periods specified by the Court. The Company's directors and officers' liability insurer paid approximately $2 million of the cash contribution to the settlement fund. The Company paid the remaining cash settlement during 1996. The 1995 financial statements include $15.3 million in litigation expense for the agreement and associated legal expenses. As of March 31, 1997, the Company had distributed all common stock shares as required by the settlement agreement. As of June 30, 1997, to the best of the Company's knowledge there were no other pending actions, potential actions, claims or proceedings against the Company that were likely to result in potential damages that would have a material adverse impact on the Company's financial statements. As noted in the section entitled "Factors That May Affect Future Results" under Item 2 herein, 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. 3. TERMINATION OF MERGER AGREEMENT WITH INFOSPINNER INC. On January 6, 1997, the Company entered into a definitive agreement (the "Agreement") to acquire InfoSpinner, Inc. ("InfoSpinner") of Richardson, Texas. The completion of the transaction was subject to the approval of both companies' shareholders as well as other legal requirements. In addition, under the terms of the Agreement, either party had the right to terminate the transaction if the merger had not been consummated by April 30, 1997. As of April 30, 1997, the Company did not obtain the majority vote of the shareholders required for the approval of the proposed merger, and as a result, the board of directors of InfoSpinner elected to exercise its right to terminate the transaction. In addition to the Agreement, the companies also entered into a distributorship agreement (the "Distributorship Agreement") on January 6, 1997, which grants the Company the right to distribute 5 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 3. TERMINATION OF MERGER AGREEMENT WITH INFOSPINNER INC. (CONTINUED) InfoSpinner's Foresite Web Integration Server on a worldwide basis. The Distributorship Agreement remains in full force and effect. 4. FACTORING AGREEMENT On June 26, 1997, the Company entered into a one year agreement to sell, with recourse, certain accounts receivable. Under the terms of the agreement, the Company may sell accounts receivable at an advance rate of eighty percent of the eligible accounts receivable sold. Interest is calculated at the rate of 1.2% per month based on the average daily balance outstanding. As of June 30, 1997 total eligible accounts receivable sold were $2.5 million. On June 30, 1997, in relation to this agreement, the Company issued a warrant to purchase 90,000 shares of common stock at an exercise price of $2.094 per share. The warrant expires on June 30, 2002. The warrant was valued at $102,000 using a risk-free rate of 6.33% and a volatility factor of 55%, and the related charge is included in general and administrative expenses. 6 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 1996. RESULTS OF OPERATIONS: NET PRODUCT REVENUES. Net product revenues increased 1% to $11.8 million for the quarter ended June 30, 1997, from $11.7 million for the quarter ended June 30, 1996. The increase in net product revenues is primarily attributable to increased sales of SQLBASE products and new revenues generated by FORESITE, the Internet integration product sold by the Company pursuant to the Distributorship Agreement with InfoSpinner, Inc. These increases were offset by decreases in sales of SQLWINDOWS and CENTURA products as compared with the same period in the prior year. International sales accounted for $7.5 million or 64% and $7.8 million or 67% of net product revenues for the quarters ended June 30, 1997 and 1996, respectively. Net product revenues decreased 6% to $21.3 million for the six months ended June 30, 1997, from $22.6 million for the six months ended June 30, 1996. International sales accounted for $13.7 million or 64% and $15.2 million or 67% of net product revenues for the six months ended June 30, 1997 and 1996, respectively. The decrease in international sales of $1.5 million is primarily due to decreased sales in the Asia Pacific and Latin America areas, caused primarily by distributor problems in Japan and Brazil early in 1997. The distributor problems resulted in a disruption of sales activities in those regions and was the principal factor contributing to the overall decrease in net product revenue over the six month period as compared with the same period in the prior year. Concurrently with the overall decrease in net product revenue the Company recognized a shift in product revenue mix away from the SQLWINDOWS products to a greater proportion of CENTURA products over the six month period, primarily due to the introduction of the CENTURA products commencing in May 1996. In addition, the Company experienced an increase in SQLBASE revenues and new revenues generated from the FORESITE product in the six month period ended June 30, 1997, compared with the same period in the prior year. 7 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) NET SERVICE REVENUES. Net service revenues increased 8% to $4.3 million for the quarter ended June 30, 1997, from $4.0 million for the quarter ended June 30, 1996. The increase was primarily due to increased technical support revenue, partially offset by a reduction in customer training revenue. International sales accounted for 48% and 39% of total net service revenues for the quarters ended June 30, 1997 and 1996, respectively. Net service revenues remained constant at $8.4 million for the six months ended June 30, 1997 compared with the same period in 1996. International sales accounted for 42% and 39% of total net service revenues for the six months ended June 30, 1997 and 1996, respectively. COST OF PRODUCT REVENUES. Cost of product revenues includes the cost of subcontracted production and the amortization of capitalized software. Cost of product revenues increased 4% to $1.3 million and 7% to $2.7 million over the three and six month periods ended June 30, 1997, from $1.2 million and $2.5 million in the comparable periods in 1996, respectively. These increases were primarily due to the increased amortization of capitalized software related to the CENTURA products, partially offset by reduced production costs. Cost of product revenues as a percentage of product revenues remained constant at 11% for the quarters ended June 30, 1997 and 1996. Cost of product revenues as a percentage of product revenues was 13% and 11% for the six months ended June 30, 1997 and 1996, respectively. 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 were $371,000 and $692,000 for the three and six month periods ended June 30, 1997 compared with $238,000 and $379,000 for the same periods in 1996. COST OF SERVICE REVENUES. Cost of service revenues consists primarily of personnel costs related to product license maintenance, training and technical support. Cost of service revenues remained constant at $2.2 million and $4.4 million for the three and six month periods ended June 30, 1997 compared with the same periods in 1996. Cost of service revenues as a percentage of net service revenues was 53% and 57% for the quarters ended June 30, 1997 and 1996, respectively, and 52% and 53% for the six months ended June 30, 1997 and 1996, respectively. The decrease in the percentage of service cost over service revenue results primarily from increased net service revenue in the quarter ended June 30, 1997 over a cost structure consistent with the prior year. SALES AND MARKETING EXPENSES. Sales and marketing expenses were $7.4 million, or 46% of net revenues, for the quarter ended June 30, 1997, compared with $7.4 million, or 48% of net revenues, for the quarter ended June 30, 1996. For the six months ended June 30, 1997, sales and marketing expenses were $14.0 million, or 47% of net revenues, compared with $14.2 million or 46% of net revenues for the six months ended June 30, 1996. Expenditures for sales and marketing activities reflect the Company's efforts to achieve cost efficiencies by focusing marketing expenditures in specific segments while maintaining spending levels consistent with prior periods. 8 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) RESEARCH AND DEVELOPMENT EXPENSES. The table below sets forth gross research and development expenses, capitalized software development costs, and net research and development expenses in dollar amounts and as a percentage of net revenues for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Gross research and development expenses.......................... $ 2,856 $ 3,185 $ 5,875 $ 6,908 Capitalized internal software development costs.................. (138) (529) (454) (1,351) --------- --------- --------- --------- Net research and development expenses............................ $ 2,718 $ 2,656 $ 5,421 $ 5,557 --------- --------- --------- --------- --------- --------- --------- --------- As a Percentage of Net Revenues: Gross research and development expenses........................ 18% 20% 20% 22% Net research and development expenses.......................... 17% 17% 18% 18%
The decrease in gross research and development expenses, and capitalized internal software development costs primarily reflects expanded development efforts related to the CENTURA product in the first half of 1996. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses remained constant at $1.7 million for the quarters ended June 30, 1997 and 1996, and remained constant at $3.4 million for the six months ended June 30, 1997 and 1996. OTHER INCOME (EXPENSE), NET. Other income (expense), net is comprised of interest income, interest expense, and gains or losses on foreign currency transactions. For the quarter ended June 30, 1997 other income (expense), net was $(0.1) million, compared to $0.1 million for the quarter ended June 30, 1996. This was primarily attributable to a reduction in interest income resulting from a decrease in funds available for investment as compared with the prior year. For the six months ended June 30, 1997 other income (expense), net was $(1.0) million, compared to $(0.1) million for the six months ended June 30, 1996. This was primarily attributable to a reduction in interest income resulting from decreased funds available for investment as compared with the prior year and increased foreign currency losses resulting primarily from the strengthening of the United States Dollar against the British Pound and German Mark between December 31, 1996 and March 31, 1997. PROVISION FOR INCOME TAXES. The provision for income taxes was insignificant for the quarters ended June 30, 1997, June 30, 1996 and for the six months ended June 30, 1997 and was $0.2 million for the six months ended June 30, 1996. The provision primarily relates to foreign withholding taxes. Due to the availability of net operating loss carryforwards arising in prior years, no provision for income taxes was made for the three and six month periods ended June 30, 1997 and 1996. LIQUIDITY AND CAPITAL RESOURCES: At June 30, 1997, the Company had a deficit working capital position of $22.2 million due principally to deferred revenues of $17.8 million, and principal and interest of $11.7 million related to an unsecured floating rate convertible subordinated note. The Company believes that expected cash flows from operations and existing cash balances, may not be sufficient to meet the Company's currently anticipated working capital and capital expenditure requirements during the next 12 months without the successful 9 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) implementation of cost reduction and restructuring programs commencing in the quarter ended September 30, 1997. There can be no assurance that such cost reduction and restructuring programs can be implemented without adversely and disproportionately impacting revenues and operating results. The Company is exploring several options to raise cash for operational or other needs. There can be no assurance that financing will be available on reasonable terms or at all. Any additional equity financing may result in dilution to the Company's shareholders. Net cash used in operating activities for the six months ended June 30, 1997 resulted primarily from the recognition of revenues for which cash had been received in prior periods, net operating losses, and decreases in other long-term liabilities. These uses of cash were offset, in part, by the sale of certain accounts receivable under a factoring agreement, non cash charges for depreciation and amortization and increases in accounts payable and accrued liabilities. Cash used in investing activities totaled $1.2 million due primarily to purchases of property and equipment, which were funded, in part, by maturities of short-term investments. During March 1995, the Company entered into an unsecured floating rate convertible subordinated note and related agreement (the "CA Agreement") with Computer Associates International, Inc. ("CA") for $10.0 million. The note matures on May 1, 1998 and is convertible into common stock at the Company's option on the maturity date for a number of shares based on the market price of the Company's common stock at the time of conversion. Interest on the note is the one-month LIBOR plus 1.25% and is payable quarterly. At the Company's option interest payments may be deferred until the principal is due. Material covenants of the Company under the CA Agreement include the Company's agreement to: pay and discharge its material obligations and liabilities, including tax obligations; continue to engage in business of the same general type currently conducted; refrain from declaring any dividend or from repurchasing or redeeming its common stock or indebtedness; refrain from consolidating or merging (except where the Company is the surviving corporation and incurs no event of default under such note); refrain from incurring senior or pari passu indebtedness or from creating or incurring encumbrances or liens, other than certain permitted liens on its properties. The agreement also requires the Company to maintain a minimum market capitalization of $40.0 million commencing on (and including) November 1, 1997, and continuing through the duration of the note (the "Minimum Market Capitalization Requirement"). If the Company does not meet the Minimum Market Capitalization Requirement, the Company will lose the option to convert the note into common stock, and all outstanding principal and interest will be due and payable on the conversion date, May 1, 1998. Additional financing will be required to meet NASDAQ minimum net worth requirements, fund continuing operations, as well as, to pay the unsecured floating rate convertible subordinated note and related outstanding interest with CA. The Company's capital requirements also may be affected by acquisitions of businesses, products and technologies that are complementary to the Company's business, which the Company considers from time to time. The Company regularly evaluates such opportunities. Any such transaction, if consummated, may further reduce the Company's working capital or require the issuance of equity. FACTORS THAT MAY AFFECT FUTURE RESULTS RECENT COMPANY LOSSES; FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced in the past and expects in the future to continue to experience significant fluctuations in quarterly operating results. There can be no assurance that the restructuring of the Company's business strategies and tactics, commenced in early 1996, will be successful or that the Company will be able to achieve or sustain any such 10 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) profitability on a quarterly or annual basis. In addition, quarterly operating results of the Company will depend on a number of other factors that are difficult to forecast, including, general market demand for the Company's products; the size and timing of individual orders during a quarter; the Company's ability to fulfill such orders; introduction, localization or enhancement of products by the Company; delays in the introduction and/or enhancement of products by the Company and its competitors; market acceptance of new products; reviews in the industry press concerning the products of the Company or its competitors; software "bugs" or other product quality problems; competition and pricing in the software industry; sales mix among distribution channels; customer order deferrals in anticipation of new products; reduction in demand for existing products and shortening of product life cycles as a result of new product introductions; changes in operating expenses; changes in the Company's strategy; personnel changes; foreign currency exchange rates; mix of products sold; inventory obsolescence; product returns and rotations; and general economic conditions. Sales of the Company's products also may be negatively affected by delays in the introduction or availability of new hardware and software products from third parties. The Company's financial results also may vary as a result of seasonal factors including year and quarter end purchasing and the timing of marketing activities, such as industry conventions and tradeshows. Although the Company has operated historically with little or no backlog of traditional boxed product shipments, it has experienced a seasonal pattern of product revenue decline between the fourth quarter and the succeeding first quarter, contributing to lower worldwide product revenues and operating results during such quarters. It has generally realized lower European product revenues in the third quarter as compared to the rest of the year. The Company has also experienced a pattern of recording a substantial portion of its revenues in the third month of a quarter. As a result, product revenues in any quarter are dependent on orders booked in the last month. 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, including delays that may be occasioned by failures of third party product fulfillment firms to produce and ship products, or the actual loss of product orders can cause significant variations in operating results from quarter to quarter. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in sales of the Company's products in relation to the Company's expectations could have an immediate adverse impact on the Company's business, operating results and financial condition. To the extent that the Company's expenses precede or are not subsequently followed by increased revenues, its business, operating results and financial condition could be materially and adversely affected. In addition, the Company currently intends to increase its operating expenses to primarily fund increases in its sales and marketing operations and expand distribution channels. To the extent that such expenses precede or are not subsequently followed by increased net revenues, the Company's business, operating results and financial condition could be materially and adversely affected. Due to the foregoing factors, it is likely that the Company's operating results for some future quarter will fall below the expectations of securities analysts and investors. In such event, the trading price of the Company's common stock could be materially and adversely affected. NEED FOR ADDITIONAL EQUITY FINANCING. The Company will need to seek additional equity financing to meet NASDAQ minimum net worth requirements, continuing operations, as well as, pay the unsecured floating rate convertible subordinated note and related outstanding interest with CA. Furthermore, the Company must achieve a reasonable operating performance to satisfy its current and future financing needs. There can be no assurance that financing will be available on reasonable terms or at all. Any additional equity financing may result in dilution to the Company's shareholders. 11 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) VOLATILITY OF THE COMPANY'S COMMON STOCK PRICE. The market for the Company's common stock is highly volatile. The trading price of the Company's common stock fluctuated widely in 1996 and the first six months in 1997 and may continue to be subject to wide fluctuations in response to quarterly variations in operating and financial results, announcements of new products or customer contracts by the Company or its competitors, litigation and other factors. Any shortfall in revenue or earnings from levels expected by securities analysts or others could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of, or be able to confirm, revenue or earnings shortfalls until late in the fiscal quarter or following the end of the quarter, which could result in an even more immediate and adverse effect on the trading of the Company's common stock. Finally, the Company participates in a highly dynamic industry, which often results in significant volatility of its common stock price. 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 its 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 business could be adversely affected. The Company currently markets the following primary products: CENTURA, SQLWINDOWS, SQLBASE and SQLHOST, as well as FORESITE, the Internet integration product, sold by the Company on a non-exclusive basis pursuant to the Distributorship Agreement with InfoSpinner, Inc. Its strategy is centered on the successful delivery and market acceptance of its CENTURA products and FORESITE product. The release of the CENTURA line of products occurred in May 1996. The Company's success will also depend on the ability of its products 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, the 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 12 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) 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. 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 except Sam Inman, the Company's CEO and President. The loss of the services of any executive officer or other key technical or management personnel of the Company for any reason could have a material adverse effect on the business, operating results and financial condition of the Company. The future success of the Company also depends on its continuing ability to identify, hire, train, motivate and retain other highly qualified technical and managerial personnel. Competition for such personnel is intense and the Company has experienced difficulty in identifying and hiring qualified engineering and software development personnel. There can be no assurance that the Company will be able to attract, assimilate or retain other highly qualified technical and managerial personnel in the future. The inability to attract and retain the necessary technical and managerial personnel could have a material and adverse effect upon its business, operating results and financial condition. HIGHLY COMPETITIVE MARKETS. The markets for software products such as the Company's products are intensely competitive, subject to rapid change and characterized by constant demand for new product features, pressure to accelerate the release of new products and product enhancements and to reduce prices. A number of companies currently offer products that compete directly or indirectly with one or more of the Company's products. Competitors of the Company include, among others, providers of sophisticated database software, originally designed and marketed primarily for use with mainframes and minicomputers, including IBM, Informix Corporation, Ingres, Oracle and Sybase. The Company also faces competition from providers of PC-based software products, including Microsoft and Borland. These competitors offer database server products and front-end tools designed for stand-alone PCs but may currently or may in the future offer additional integrated PC client/server software. In addition, the Company faces competition from providers of software specifically developed for the PC client/server market, including front-end tools offered by Sybase's Powersoft Division, Microsoft, and Forte, and connectivity software competitors, such as IBI Systems, Inc. and Sybase's Micro DecisionWare Division. The Company also faces potential competition from vendors of applications development tools based on 4GLs or CASE technologies. With the emergence of the World Wide Web as an important platform for application development and deployment, additional competitors or potential competitors have emerged. Many of the Company's competitors or potential competitors have longer operating histories and significantly greater financial, managerial, technical, and marketing resources, as well as greater name recognition and a larger installed base, than the Company. A variety of potential actions by any of these 13 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) competitors, including a reduction of product prices, increased promotion, announcement or accelerated introduction of new or enhanced products or features, acquisitions of software applications or technologies from third parties, the formation of strategic alliances, product giveaways or product bundling could have a material adverse effect on the business, operating results and financial condition of the Company. The Company's products experienced increased competition in 1995, 1996 and the first quarter of 1997, resulting in loss of market share. Present or future competitors may be able to develop products comparable or superior to those offered by the Company or adapt more quickly to new technologies or evolving customer requirements. Such competition has in the past and may again in the future result in price reductions and/or loss of market share and has in the past and may again in the future have a material adverse effect on the Company's business, operating results and financial condition. In particular, while the Company is currently developing additional product enhancements that it believes address customer requirements, there can be no assurance that the development or introduction of these additional product enhancements will be successfully completed on a timely basis or that these product enhancements will achieve market acceptance. Accordingly, there can be no assurance that the Company will be able to continue to compete effectively in its markets, that competition will not intensify or that future competition will not have a material adverse effect on the Company's business, operating results and financial condition. MARKET ACCEPTANCE OF PC CLIENT/SERVER SYSTEMS. Substantially all of the Company's revenues have been derived from the licensing of software products for PC client/server systems. Licenses of such products are expected to continue to account for substantially all of the Company's revenues for the foreseeable future. With the increasing focus on enterprise-wide systems, some customers may opt for solutions that favor mainframe or mini-computer solutions. Accordingly, some companies may abandon use of PC client/server systems, which could have a material adverse effect on the Company's future success. COMPONENTIZED MARKETS. The advent of so-called componentized software may alter the way in which customers buy software. As specific software functionality can be bundled into smaller units or objects rather than in broad, highly functional products such as the Company's development tools, customers may be less willing to buy such broad, highly functional products. If such a trend continues, there can be no assurance that the Company will be able to repackage and efficiently distribute its products in such componentized packages. The costs and efforts necessary to package and distribute such components are largely unknown. Failure of the Company to introduce componentized products successfully and cost-effectively could have a material adverse effect on the Company's business, operating results and financial condition. INTERNET SOFTWARE MARKET. The market for Internet software in general, and the segments of such market addressed by the FORESITE products sold by the Company on a non-exclusive basis pursuant to a Distributorship Agreement with InfoSpinner, Inc. and the Company's other products 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 FORESITE products and 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 14 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) Company is not successful in developing, marketing, localizing and selling applications that gain commercial acceptance in these markets and market segments on a timely basis, the Company's business, operating results and financial condition could be materially and adversely affected. DEPENDENCE UPON DISTRIBUTION CHANNELS. The Company relies on relationships with value-added resellers and 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, can cease marketing the Company's products at any time, and may from time to time be granted stock exchange or rotation rights. The introduction of new and enhanced products may result in higher product returns and exchanges. Any product returns or exchanges in excess of recorded allowances could have a material adverse effect on the Company's business, operating results and financial condition. The Company also maintains strategic relationships with a number of vertical software vendors and other technology companies for marketing or resale of the Company's products. Any termination or significant disruption of the Company's relationship with any of its resellers or distributors, or the failure by such parties to renew agreements with the Company, could materially and adversely affect the Company's business, operating results and financial condition. Since 1994 the Company has reduced its resources devoted to North American corporate sales and also decreased its expenditures on corporate and product marketing. The Company expects to rely increasingly on third-party channels for sales of packaged product while focusing its corporate sales efforts on larger opportunities. Failure of the Company to successfully implement, support and manage the 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, which 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 markets, including rapidly growing client/server markets such as Japan, Korea, China/ Hong Kong and Brazil, 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 these 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. 15 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) INTERNATIONAL SALES AND OPERATIONS. 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 products by the Company currently are denominated principally in U.S. dollars. Accordingly, any increase in the value of the U.S. dollar as compared to currencies in overseas markets would increase the foreign currency-denominated cost of the Company's products, which may negatively affect the Company's sales in those markets. In addition, effective copyright and trade secret protection may be limited or unavailable under the laws of certain foreign jurisdictions. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's international operations and, consequently, on the Company's business, operating results and financial condition. PROPRIETARY RIGHTS. The success and ability of the Company to compete is dependent in part upon the Company's proprietary technology. While the Company relies on trademark, trade secret and copyright laws to protect its technology, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and customer support are more essential to establishing and maintaining a technology leadership position. The Company has one patent with respect to its SQLWINDOWS and CENTURA products. The Company believes that the ownership of patents is not presently 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 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. 16 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) There can be no assurance that third parties will not claim infringement by the Company with respect to current or future products, and the Company expects that it will increasingly be subject to such claims as the number of products and competitors in the client/server and Internet connectivity software market grows and the functionality of such products overlaps with other industry segments. In the past, the Company has received notices alleging that its products infringe trademarks of third parties. The Company has historically dealt with and will in the future continue to deal with such claims in the ordinary course of business, evaluating the merits of each claim on an individual basis. There are currently no material pending legal proceedings against the Company regarding trademark infringement. Any such third party claims, whether or not they are meritorious, could result in costly litigation or require the Company to enter into royalty or licensing agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to the Company, or at all. If the Company was found to have infringed upon the proprietary rights of third parties, it could be required to pay damages, cease sales of the infringing products and redesign or discontinue such products, any of which could have a material adverse effect on the Company's business, operating results and financial condition. MANAGEMENT OF POTENTIAL GROWTH; INTEGRATION OF POTENTIAL ACQUISITIONS. In recent years, the Company has experienced both expansion and contraction of its operations each of which has placed significant demands on the Company's administrative, operational and financial resources. To manage future growth, if any, the Company must continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its work force. There can be no assurance that the Company will be able to perform such actions successfully. The Company intends to continue to invest in improving its financial systems and controls in connection with higher levels of operations. Although the Company believes that its systems and controls are adequate for the current level of operations, the Company anticipates that it may need to add additional personnel and expand and upgrade its financial systems to manage any future growth. The Company's failure to do so could have a material adverse effect upon the Company's business, operating results and financial condition. 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 achieve growth, or manage any such growth, and failure to do so could have a material adverse effect on the Company's operating results. LEGAL PROCEEDINGS. 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. 17 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 2, 1994, a lawsuit was filed against the Company and certain of its officers and directors, by a holder of the Company's common stock, on his own behalf and purportedly on behalf of a class of others similarly situated. The lawsuit was subsequently amended, and alleged that the Company made false and misleading statements and failed to disclose material information relating to existing business conditions and the Company's prospects and that officers and directors violated the insider trading laws. The plaintiff was seeking damages of an unstated amount. The Company reached a binding settlement agreement with plaintiffs' counsel in this lawsuit, and gained court approval on September 30, 1996. Under the terms of the agreement, the Company would provide $3 million and 1,875,000 shares to a fund to be distributed among the members of the plaintiff class. The Company also agreed to supplement this payment with up to 625,000 additional shares in the event the value of its common stock was less than an average price of $6.00 per share during certain twenty day trading periods specified by the Court. The Company's directors and officers' liability insurer paid approximately $2 million of the cash contribution to the settlement fund. The Company paid the remaining cash settlement during 1996. The 1995 financial statements include $15.3 million in litigation expense for the agreement and associated legal expenses. As of March 31, 1997, the Company has distributed all common stock shares as required by the settlement agreement. ITEM 2. CHANGES IN SECURITIES -- NOT APPLICABLE ITEM 3. DEFAULTS IN SENIOR SECURITIES -- NOT APPLICABLE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held a special meeting of shareholders on April 17, 1997, to consider and vote on a proposal to approve and adopt the Agreement and Plan of Reorganization dated January 6, 1997 (the "Merger Agreement") by and among the Company, IS Acquisition Corporation, a wholly owned subsidiary of the Company, and InfoSpinner, Inc. (the "InfoSpinner Acquisition"). The required quorum was not achieved as of that date and the special meeting was adjourned until April 28, 1997. The special meeting of shareholders that was adjourned to April 28, 1997, was further adjourned until April 30, 1997. There were no broker non votes at the meeting on April 30, 1997. Out of 13,783,960 shares of common stock outstanding, votes received on the April 30, 1997 meeting date were as follows:
% OF TOTAL NUMBER OF OUTSTANDING VOTES SHARES ---------- ------------- Yes 5,775,323 41.90 No 1,928,497 13.99 Abstained 12,038 .09 Not voted 6,068,102 44.02
ITEM 5. OTHER INFORMATION On May 27, 1997, Anthony Sun resigned from his position of director on the Board of Directors with the Company. 18 CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) On July 1, 1997, Richard J. Heaps resigned from his position as Senior Vice President, Business Development and General Counsel. On May 15, 1997, Helmut G. Wilke resigned from his position as Vice President, European Operations. Michael Moore, previously Vice President for ICON was promoted to Vice President, International Sales. On August 8, 1997, Michael K. Keddington resigned from his position as Vice President, Marketing and North American Sales. Doug Domerque, previously Director, North American Sales was promoted to Vice President, North American Sales. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (numbered in accordance with Item 601 of Regulation S-K) 10.23 Factoring Agreement dated June 26, 1997, between Centura Software Corporation and Pacific Business Funding Corporation 10.24 Warrant to Purchase Common Stock issued June 30, 1997 by Centura Software Corporation to Sand Hill Capital 10.25 1997 Executive Retention Program* 27 Financial Data Schedule
(b) Reports on Form 8-K -- Not Applicable * Management Compensatory Plan or Arrangement 19 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 Date: August 14, 1997 By: /s/ RICHARD A. GELHAUS ----------------------------------------- Richard A. Gelhaus SENIOR VICE PRESIDENT OF FINANCE AND OPERATIONS, CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 20 EX-10.23 2 EXHIBIT 10.23 PACIFIC BUSINESS FUNDING CORPORATION 20195 Stevens Creek Blvd., Suite 220 Cupertino, California 95014 Telephone: (408) 255-9300 Facsimile: (408) 255-9313 FACTORING AGREEMENT This Factoring Agreement (the "Agreement"), dated as of JUNE 26, 1997, is entered into by and between CENTURA SOFTWARE CORPORATION a CALIFORNIA (corporation, ("Seller") having its principal place of business and chief executive office at the address set forth below Seller's signature, and Pacific Business Funding Corporation, a California corporation ("Purchaser") having an office at the address identified above. Capitalized terms used in this Agreement shall have the meanings assigned to them in Section 13, Definitions. 1. PURCHASE OF ACCOUNTS. 1.1. SCHEDULE OF ACCOUNTS. Seller may, at any time, request that Purchaser purchase Accounts. Any such request by Seller shall be made by delivering to Purchaser a Schedule of Accounts (the "Schedule of Accounts") which describes in detail the Accounts Seller is requesting Purchaser to purchase, including, (a) the name and address of the Account Debtor of each such Account, (b) the amount owed by the Account Debtor of each such Account, and (c) the date and number of the invoice evidencing each such Account. Each Schedule of Accounts shall have attached to it an invoice for each Account described on the Schedule of Accounts, and shall be signed by an authorized representative of Seller. 1.2. DISCRETIONARY APPROVAL OF ACCOUNTS. Purchaser may, in its sole discretion, purchase any Account included in a Schedule of Accounts, but is under no obligation to purchase any such Account. Purchaser may exercise its sole discretion in approving each Account and the credit of each Account Debtor before purchasing any Account. 1.3. PAYMENT OF ADVANCE; CREATION OF A BOOK RESERVE. Upon approval, in Purchaser's sole discretion, of any of the Accounts described on a Schedule of Accounts, Purchaser shall pay to Seller as the purchase price for any approved Account Eighty percent (80%) of the face amount of such approved Account (the "Advance"). Purchaser may, from time to time, in its discretion, upon notice to Seller, change the percentage of the Advance. Upon payment of the Advance to Seller, Purchaser shall also create a reserve on Purchaser's books and records with respect to each Purchased Account in an amount equal to the face amount of the Purchased Account minus the Advance for such Purchased Account (the "Reserve"). Notwithstanding the foregoing, in no event shall the Reserve with respect to all Purchased Accounts outstanding at any time be less than Twenty percent (20%) of the Account Balance. Purchaser may, in its discretion, upon notice to Seller, increase the percentage of the Reserve at any time. 1.4. TRANSFER OF ACCOUNTS. At the time Purchaser pays the Advance with respect to any Account, such Account shall constitute a Purchased Account, and Seller hereby absolutely sells, transfers and assigns to Purchaser, all of Seller's right, title and interest in and to each Purchased Account. Seller also hereby sells, transfers and assigns to Purchaser all of the goods represented by each Purchased Account, all of Seller's rights and remedies as an unpaid seller under the California Uniform Commercial Code and other applicable law, including the rights of stoppage in transit, replevin, reclamation, and claim and delivery, and all of Seller's rights in and to all security for each such Purchased Account and guaranties thereof, and all rights against third parties with respect hereto. Any goods recovered or received by Seller shall be set aside, marked with Purchaser's name, and held for Purchaser's account as owner. 1.5. COLLECTION OF ACCOUNTS. Each Purchased Account shall be collected directly by Purchaser. At the request of Purchaser, Seller and Purchaser shall jointly notify each Account Debtor by letter that Purchased Accounts owed by such Account Debtor have been assigned and are payable to Purchaser. Such notification shall be in form and substance satisfactory to Purchaser. Seller shall not take or permit any action to change or revoke any notification without Purchaser's prior written consent and shall not request any Account Debtor to pay any Purchased Account to Seller. Notwithstanding the foregoing, in the event Seller receives any payments of any Purchased Accounts, Seller shall (A) immediately notify Purchaser of such payment, (B) hold such payment in trust and safekeeping for Purchaser, and (C) immediately turn over to Purchaser the identical checks, monies, or other forms of payment received, with any necessary endorsement or assignment. Purchaser shall have the right to endorse Seller's name on all payments received in connection with each Purchased Account and on any other proceeds of Collateral. If Purchaser receives a check or item which is payment for both a Purchased Account and a non-Purchased Account, the funds shall first be applied to the Purchased Account and, so long as there does not then exist an Event of Default or an event that with notice or lapse of time would constitute an Event of Default, the excess shall be remitted to Seller. In the event Purchaser receives any other payments of non-Purchased Accounts, Purchaser shall remit to Seller the collections of such non-Purchased Accounts; PROVIDED, that if any Event of Default or event that with notice or lapse of time or otherwise would constitute an Event of Default then exists, Purchaser shall have no duty to remit any such collections, which collections constitute Collateral, and may apply such collections to reduce the Obligations. 1.6. FULL RECOURSE. The purchase by Purchaser of Purchased Accounts from Seller shall be with full recourse against Seller. Seller shall be liable for any deficiency in the event the Obligations exceed the amount of Purchased Accounts and the other Collateral. 2. FEES AND CUSTOMER PAYMENTS. 2.1. FINANCE FEES. Seller shall pay to Purchaser on each Settlement Date, a finance fee in an amount equal to 1.2 percent (1.2%) per month of the average daily Account Balance outstanding during the Settlement Period ending on such Settlement Date (the "Finance Fees"). Such accrued Finance Fees shall be netted against the Reserve as described in Section 3.3. (PAGE 1 OF 5) 2.2. ADMINISTRATIVE FEE. Seller shall pay to Purchaser on each Settlement Date, an Administrative Fee equal to ZERO percent (0%) of the face amount of each Account purchased by Purchaser during the Settlement Period ending on such Settlement Date (the "Administrative Fee"). All Administrative Fees shall be netted against the Reserve as described in Section 3.3. 2.3. MAXIMUM LAWFUL RATE. In no event shall any charges that may constitute interest hereunder exceed the highest rate permitted under applicable law. In the event that a court of competent jurisdiction makes a final determination that Purchaser has received interest hereunder in excess of the maximum lawful rate, then such excess shall be deemed a payment of principal and the interest payable hereunder deemed amended to the amount payable under the maximum lawful rate. 2.4. CREDITING CUSTOMER PAYMENTS. Upon Purchaser's receipt of payment of a Purchased Account, Purchaser shall promptly credit such customer payment (the "Customer Payments") to the amount outstanding with respect to such Purchased Account. Notwithstanding the foregoing, if any Customer Payment is subsequently dishonored or Purchaser does not receive good funds for any reason, the amount of such uncollected Customer Payment shall be included in the Account Balance as if such Customer Payment had not been received, and Finance Fees shall accrue thereon, and the credit to the specific Purchased Account shall be reversed. Notwithstanding the foregoing, upon the occurrence of an Event of Default, Purchaser shall apply all Customer Payments to Seller's Obligations under this Agreement in such order and manner as Purchaser shall, in its sole discretion, determine. 2.5. ACCOUNTING. Purchaser shall deliver to Seller after each Settlement Date, a statement of Seller's account which shall include an accounting of the transactions for that Settlement Period, including the amount of all Finance Fees, Administrative Fees, Adjustments, Chargeback Amounts, Customer Payments and Purchased Accounts. The accounting shall constitute an account stated and shall be binding on Seller and deemed correct unless Seller delivers to Purchaser a written objection within thirty (30) days after such accounting is mailed to Seller. 3. ADJUSTMENT, CHARGEBACKS AND REMITTANCES. 3.1. ADJUSTMENTS. In the event any Account Debtor asserts any offset, defense, counterclaim, dispute, discount, allowance, right of return, right of recoupment, or warranty claim with respect to a Purchased Account, or pays less than the face amount of such Purchased Account (each, an "Adjustment"), Purchaser may, in its sole discretion, either (A) deduct the amount of the Adjustment in calculating the Remittance, or (B) chargeback to Seller the Purchased Account with respect to which the Adjustment is asserted. Seller shall advise Purchaser immediately upon learning of any Adjustment asserted by any Account Debtor. 3.2. CHARGEBACKS. Purchaser shall have the right to chargeback to Seller any Purchased Account: (A) which remains unpaid ninety (90) calendar days after the invoice date; (B) with respect to which there has been a breach of any warranty, representation, covenant or agreement set forth in this Agreement; (C) with respect to which the Account Debtor asserts any Adjustment; or (D) which is owed by an Account Debtor who has filed, or has had filed against it, any bankruptcy case, insolvency proceeding, assignment for the benefit of creditors, receivership or insolvency proceeding, or who has become insolvent (as defined in the United States Bankruptcy Code) or who is generally not paying its debts as such debts become due. Upon demand by Purchaser, Seller shall pay to Purchaser the full face amount of any Purchased Account which has been charged back to Seller pursuant to this Section 3.2, or to the extent partial payment has been made, the amount by which the face amount of such Purchased Account exceeds such partial payment, together with any attorneys' fees and costs incurred by Purchaser in connection with collecting such Purchased Account (collectively, the "Chargeback Amount"). Purchaser shall advise Seller regarding how the Chargeback Amount shall be paid, which may be by any one or a combination of the following, in Purchaser's sole discretion: (1) payment in cash immediately upon demand; (2) deduction from or offset against any Remittance that would otherwise be payable to Seller; (3) payment from any Advances that may otherwise be made to Seller; (4) adjustment to the Reserve pursuant to Section 1.3 hereof; or (5) delivery of substitute Accounts and a Schedule of Accounts acceptable to Purchaser, which Accounts shall constitute Purchased Accounts. 3.3. REMITTANCE. Purchaser shall remit to Seller after the Settlement Date, the amount, if any, which Purchaser owes to Seller at the end of the Settlement Period based on the following calculations set forth below (the "Remittance"); PROVIDED, that if there then exists any Event of Default or any event or condition that with notice or lapse of time would constitute any Event of Default, Purchaser shall not be obligated to remit any payments to Seller. If the amount resulting from the following calculation is a positive number, such amount is the amount of the Remittance for such Settlement Period. If the resulting amount is a negative number, such amount is the amount owed by Seller to Purchaser. The calculations to be used are as follows: (A) The sum of the following: (1) The Reserve as of the beginning of the subject Settlement Period, PLUS (2) the Reserve created for each Account purchased during the subject Settlement Period; MINUS (B) The sum of the following: (1) Finance Fees accrued during the subject Settlement Period; PLUS (2) Administrative Fees accrued during the subject Settlement Period; PLUS (3) Adjustments during the subject Settlement Period; PLUS (4) Chargeback Amounts, to the extent Purchaser has agreed to accept payment of any such Chargeback Amount by deduction from the Remittance; PLUS (5) All professional fees and expenses as set forth in Section 10 for which oral or written demand has been made by Purchaser during the subject Settlement Period; PLUS (6) the Reserve for the Account Balance as of the first day of the following Settlement Period in the minimum percentage set forth in Section 1.3 hereof. (PAGE 2 OF 5) If the foregoing calculations result in a Remittance payable to Seller, Purchaser shall make such payment by check, subject to Purchaser's rights of offset and recoupment, and its right to deduct any Chargeback Amount as set forth in Section 3.2. If the foregoing calculations result in an amount due to Purchaser from Seller, Seller shall make such payment by any one or a combination of the methods set forth in Section 3.2 hereof for chargebacks, as determined by Purchaser in its discretion. 4. POWER OF ATTORNEY. Seller hereby appoints Purchaser and its designees as Seller's true and lawful attorney in fact, to exercise in Purchaser's discretion, and regardless of whether an Event of Default is then existing, all of the following powers, such powers being coupled with an interest: (A) to notify all Account Debtors with respect to the Purchased Accounts to make payment directly to Purchaser; (B) to receive, deposit, and endorse Seller's name on all checks, drafts, money orders and other forms of payment relating to the Purchased Accounts; (C) to demand, collect, receive, sue, and give releases to any Account Debtor for the monies due or which may become due on or in connection with the Purchased Accounts; (D) to compromise, prosecute, or defend any action, claim, case or proceeding relating to the Purchased Accounts, including the filing of a claim or the voting of such claims in any bankruptcy case, all in Purchaser's name or Seller's name, as Purchaser may elect; (E) to sell, assign, transfer, pledge, compromise, or discharge any Purchased Accounts; (F) to receive, open, and dispose of all mail addressed to Seller for the purpose of collecting the Purchased Accounts; (G) to execute in the name of Seller and file against Seller in favor of Purchaser such financing statements and other agreements as Purchaser deems necessary to evidence or perfect its security interest in the Purchased Accounts and the other Collateral; and (H) to do all acts and things necessary or expedient, in furtherance of any such purposes. Upon the occurrence of an Event of Default, all of the power of attorney rights granted by Seller to Purchaser hereunder shall be applicable with respect to all Collateral. 5. CONTINUING REPRESENTATIONS, WARRANTIES AND COVENANTS. To induce Purchaser to enter into this Agreement and purchase Accounts, and with full knowledge that Purchaser is relying on the truth and accuracy of the following in determining whether to purchase any Account, Seller represents, warrants, covenants and agrees as follows, which representations, warranties, covenants and agreements shall survive the execution and delivery of this Agreement: (A) The information contained in each Schedule of Accounts is true and correct; (B) Each Schedule of Accounts is signed by an authorized representative of Seller, and Purchaser shall have the right to rely on such signature as an authorized signature of Seller; (C) Seller is the sole and absolute owner of each Account described in each Schedule of Accounts and has the legal right to sell, transfer and assign such Account to Purchaser; (D) Seller has performed all obligations required by the Account Debtor in connection with each Account described in each Schedule of Accounts and payment of each such Account is not contingent upon the fulfillment of any obligation or contract, past or future; (E) Each Account described on each Schedule of Accounts is correctly stated therein, is not in dispute, is presently and unconditionally owing at the time stated in the invoice evidencing such Account as attached to the Schedule of Accounts, is not past due or in default, represents a bona fide indebtedness arising from the actual sale of goods or performance of services to an Account Debtor in the ordinary course of Seller's business which has been received and finally accepted by the Account Debtor; (F) Each Account set forth on each Schedule of Accounts is not subject to any offset, defense or counterclaim of any kind, whether bona fide or otherwise, and no agreement has been made under which the Account Debtor may claim any deduction or discount, except as otherwise stated in the Schedule of Accounts; (G) Each Account Debtor identified on each Schedule of Accounts is liable for the amount set forth on such Schedule of Accounts and will not object to the payment for, or the quality or quantity of the goods or services to which any Account described on such Schedule of Accounts relates; (H) Seller, and to Seller's best knowledge, each Account Debtor set forth in each Schedule of Accounts, is and shall remain solvent in that the present saleable value of such entity's assets exceeds the total of such entity's liabilities; (I) Seller has not, as of the time Seller accepts an Advance from Purchaser, filed or had filed against it a petition for relief under the United States Bankruptcy Code; (J) Each Account and all other Collateral are free and clear of any and all liens, security interests and encumbrances of any kind, other than those in favor of Purchaser, and Seller will not assign, transfer, or grant any lien or security interest in any Accounts or other Collateral to any other party, without Purchaser's prior written consent; (K) Seller has not sold, assigned, transferred, pledged or otherwise conveyed any Purchased Accounts to any party other than Purchaser, and Seller shall not sell, assign, transfer, pledge or otherwise convey any Collateral without Purchaser's prior consent, except for the sale of Accounts to Purchaser and the sale of finished inventory in Seller's normal course of business; (L) Seller's name and form of organization are as set forth at the beginning of this Agreement, and Seller's chief executive office, place of business and place where Collateral and records concerning Accounts and other Collateral are kept are as set forth below Seller's signature, and Seller will give Purchaser at least thirty (30) days prior written notice if such name, organization, place of business, location of Collateral or records concerning Collateral is to be changed or added and shall execute any documents necessary to perfect Purchaser's interest in the Purchased Accounts and the other Collateral; and (M) Seller shall pay all of its normal gross payroll for employees, and all federal and state taxes, as and when due, including all payroll and withholding taxes and state sales taxes. 6. GRANT OF SECURITY INTEREST. To secure the prompt payment and performance of all of Seller's Obligations to Purchaser, Seller hereby grants to Purchaser a continuing lien upon and security interest in, and right of set off with respect to, all of Seller's right, title and interest in and to the following, whether now owned by or owing to, or hereafter acquired by or arising in favor of, Seller, and regardless of where located (collectively the "Collateral"): (A) All accounts, accounts receivable, chattel paper, contract rights, documents, instruments, letters of credit, banker's acceptances, drafts, securities and general intangibles, including all claims, causes of action, deposit accounts, rights to receive tax (PAGE 3 OF 5) refunds, rights in and claims under insurance policies (including rights to unearned premiums), customer lists, copyrights, patents, trademarks, rights under license agreements, and other intellectual property of every kind and other rights to payment; (B) All inventory; (C) All monies, remittances, and other amounts due under this Agreement and any other agreement between Purchaser and Seller; (E) All farm products, crops, timber, minerals, and the like (including oil and gas); (F) All books and records relating to the foregoing, including all computer programs, printed output and computer readable data; (G) All accessions to, and substitutions and replacements for, all of the foregoing; and (H) All proceeds and products of the foregoing, whether due to voluntary or involuntary disposition, including insurance proceeds. Seller shall sign and deliver to Purchaser UCC financing statements, in form acceptable to Purchaser. Seller agrees to deliver to Purchaser the originals of all instruments, chattel paper and documents evidencing or related to Purchased Accounts and other Collateral. 7. DEFAULT. The occurrence of any one or more of the following shall constitute an event of default under this Agreement (each, an "Event of Default"): (A) Seller fails to pay any amount owed to Purchaser as and when due under this Agreement or fails to pay any other Obligations as and when due; (B) Any warranty or representation by Seller to Purchaser under this Agreement is incorrect or untrue when made or thereafter becomes untrue or incorrect; (C) Seller fails to perform or breaches any covenant or agreement set forth in this Agreement or any other agreement between Purchaser and Seller; (D) There shall be commenced by or against Seller any voluntary or involuntary case under the United States Bankruptcy Code, or any assignment for the benefit of creditors, or appointment of a receiver or custodian for any of Seller's assets; (E) Seller shall become insolvent in that its debts are greater than the fair value of its assets, or Seller is generally not paying its debts as they become due or is left with unreasonably small capital; (F) Any involuntary lien, garnishment, attachment or the like is issued against or attaches to the Purchased Accounts or the other Collateral; (G) An event of default shall occur under any guaranty executed by any guarantor of the Obligations, or any material provision of any such guaranty shall for any reason cease to be valid or enforceable or any such guaranty shall be repudiated or terminated, including by operation of law; or (H) A default or event of default shall occur under any agreement between Seller and any creditor of Seller who has entered into a subordination agreement with Purchaser. 8. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default, Purchaser may, without notice, (A) without implying any obligation to buy Accounts, cease buying Accounts; (B) accelerate the payment of all Obligations by requiring Seller to repurchase all or any portion of the Purchased Accounts then outstanding for cash in an amount equal to the Advance made for each Purchased Account, and all accrued Finance Fees, Administrative Fees, attorneys' fees and other Obligations then outstanding, which Obligations shall be due and payable in full without demand; (C) exercise all the rights and remedies under this Agreement and under applicable law, including the rights and remedies of a secured party under the California Uniform Commercial Code. Without limiting the generality of the foregoing, Purchaser may (1) exercise all of the power of attorney rights described in Section 4 with respect to all Collateral, and (2) collect, dispose of, sell, lease, use, and realize upon all Purchased Accounts and other Collateral in any commercially reasonable manner. Seller and Purchaser agree that any notice of sale required to be given to Seller shall be deemed to be reasonable if given five (5) days prior to the date on or after which any sale may be held. All remedies set forth herein shall be cumulative and none exclusive. 9. ACCRUAL OF INTEREST. If any amount owed by Seller hereunder is not paid when due, including any amounts due under Section 3.3, Chargeback Amounts, professional fees and expenses under Section 10 and any other Obligations, such amounts shall bear interest at a per annum rate equal to the per annum rate of the Finance Fees until the earlier of (A) payment in good funds or (B) entry of a final judgment therefor, at which time the principal amount of any money judgment remaining unsatisfied shall accrue interest at the highest rate allowed by applicable law. 10. ATTORNEYS' FEES. Seller shall pay to Purchaser immediately upon demand, all costs and expenses, including reasonable fees and expenses of attorneys and other professionals, that Purchaser incurs in connection with any and all of the following: (A) preparing, amending, supplementing, negotiating and enforcing this Agreement, or any other agreement executed in connection herewith; (B) perfecting, protecting or enforcing Purchaser's interest in the Purchased Accounts and the other Collateral; (C) collecting the Purchased Accounts and the Obligations; (D) defending or in any way addressing claims made or litigation initiated by or against Purchaser as a result of Purchaser's relationship with Seller or any guarantor; and (E) representing Purchaser in connection with any bankruptcy case or insolvency proceeding involving Seller, any Purchased Account, any other Collateral or any Account Debtor. Any attorneys' fees and expenses may, at Purchaser's option, be netted against the reserve as set forth in Section 3.3. 11. TERM AND TERMINATION. The term of this Agreement shall be for one (1) year from the date hereof, and from year to year thereafter unless terminated in writing by Purchaser or Seller. Seller and Purchaser shall each have the right to terminate this Agreement at any time. Notwithstanding the foregoing, any termination of this Agreement shall not affect Purchaser's security interest in the Collateral and Purchaser's ownership of the Purchased Accounts, and this Agreement shall continue to be effective, and Purchaser's rights and remedies hereunder shall survive such termination, until all transactions entered into and Obligations incurred hereunder or in connection herewith have been completed and satisfied in full. (PAGE 4 OF 5) 12. MISCELLANEOUS. 12.1. SEVERABILITY. In the event that any provision of this Agreement is held to be invalid or unenforceable, this Agreement will be construed as not containing such provision and the remainder of the Agreement shall remain in full force and effect. 12.2. CHOICE OF LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 12.3. NOTICES. All notices shall be given to Purchaser and Seller at the addresses set forth in this Agreement and shall be deemed to have been delivered and received; (A) if mailed, three (3) calendar days after deposited in the United States mail, first class, postage prepaid; (B) one (1) calendar day after deposit with an overnight mail or messenger service; or (C) on the same date of transmission if sent by hand delivery, telecopy, telefax or telex. 12.4. TITLES AND SECTION HEADINGS. The titles and section headings used herein are for convenience only and shall not be used in interpreting this Agreement. 13. DEFINITIONS. All terms used herein which are defined in the California Uniform Commercial Code shall have the meaning given therein unless otherwise defined in this Agreement. The term "including" is not limiting or exclusive. When used herein, the following terms shall have the following meanings. 13.1. "ACCOUNT" shall mean all accounts, accounts receivable, chattel paper, contract rights, documents, general intangibles, instruments, letters of credit, banker's acceptances, and other rights to payment, and proceeds thereof. 13.2. "ACCOUNT BALANCE" shall mean, on any given day, the gross face amount of all Purchased Accounts unpaid on that day. 13.3. "ACCOUNT DEBTOR" shall have the meaning set forth in the California Uniform Commercial Code and shall include any person liable on any Purchased Account, including any guarantor of the Purchased Account and any issuer of a letter of credit or banker's acceptance. 13.4. "ADJUSTMENT(S)" shall have the meaning set in Section 3.1. 13.5. "ADMINISTRATIVE FEE" shall have the meaning as set forth in Section 2.2. 13.6. "ADVANCE" shall have the meaning set forth in Section 1.3. 13.7. "CHARGEBACK AMOUNT" shall have the meaning set forth in Section 3.2. 13.8. "COLLATERAL" shall have the meaning set forth in Section 6. 13.9. "CUSTOMER PAYMENTS" shall have the meaning set forth in Section 2.4. 13.10. "EVENT OF DEFAULT" shall have the meaning set forth in Section 7. 13.11. "FINANCE FEES" shall have the meaning set forth in Section 2.1. 13.12. "SCHEDULE OF ACCOUNTS" shall have the meaning set forth in Section 1.1. 13.13. "OBLIGATIONS" shall mean all advances, obligations, indebtedness and duties owing by Seller to Purchaser of any kind or nature, present or future, arising under or in connection with this Agreement or any other agreement entered into between Purchaser and Seller, whether direct or indirect, including all Advances, Finance Fees, Administrative Fees, Chargeback Amounts, attorneys' fees and expenses. 13.14. "PURCHASED ACCOUNTS" shall mean all Accounts identified on any Schedule of Accounts delivered by Seller to Purchaser which Purchaser elects to purchase and for which Purchaser makes an Advance, and all monies due or to become due thereunder. 13.15. "REMITTANCE" shall have the meaning set forth in Section 3.3. 13.16. "RESERVE" shall have the meaning set forth in Section 1.3. 13.17. "SETTLEMENT DATE" shall mean the last calendar day of each Settlement Period. 13.18. "SETTLEMENT PERIOD" shall mean each calendar month of each year. IN WITNESS WHEREOF, Seller and Purchaser have executed this Agreement on the day and year written above. "PURCHASER" "SELLER" PACIFIC BUSINESS FUNDING CORPORATION By /s/ Richard A. Gelhaus --------------------------------- By /s/ William Chronert Title Senior Vice President and CFO ----------------------------------- ----------------------------- Title President -------------------------------- ADDRESS OF SELLER, CHIEF EXECUTIVE OFFICE AND LOCATION OF COLLATERAL OTHER LOCATIONS OF COLLATERAL, IF ANY, IN ADDITION TO ABOVE: Street: 1060 Marsh Road ----------------------------- - ------------------------------------- City: Menlo Park ------------------------------- - ------------------------------------- County: San Mateo ----------------------------- - ------------------------------------- State: CA ------------------------------ - ------------------------------------- Zip Code: 94025 --------------------------- Telephone No.: (415) 321-9500 --- -------- Facsimile No.: (415) 321-5471 --- -------- (PAGE 5 OF 5) EX-10.24 3 EXHIBIT 10.24 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: Centura Software Corporation Number of Shares: 90,000 Class of Stock: Common Initial Exercise Price: $2.094 per share Issue Date: June 30, 1997 Expiration Date: June 30, 2002 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SAND HILL CAPITAL LLC ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1. EXERCISE. 1.1 METHOD OF EXERCISE. Holder may exercise this Warrant in whole or in part by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant Section 1.3. 1.3 FAIR MARKET VALUE. If the Shares are traded in a public market, the Fair Market Value of the Shares shall be the average of the closing bid and asked prices of the Common Stock quoted in the over-the-counter market in which the Common Stock is traded or the closing price quoted on any exchange on which the Common Stock is listed, whichever is applicable, as published in the Western Edition of THE WALL STREET JOURNAL for the ten trading days prior to the date of determination of fair market value. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. 1.4 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1 1.5 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.6 REPURCHASE ON SALE, MERGER, OR CONSOLIDATION OF THE COMPANY. 1.6.1 "ACQUISITION". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.6.2 ASSUMPTION OF WARRANT. Upon the closing of any Acquisition the successor entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 STOCK DIVIDENDS, SPLITS, ETC. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 ADJUSTMENTS FOR DILUTING ISSUANCES. If the Company issues additional shares after the date of this Warrant and the consideration per additional share is less than the Warrant Price in effect immediately before such issue, the Warrant Price in effect immediately before such issue shall be reduced, concurrently with such issue, to a price (calculated to the nearest hundredth of a cent) determined by multiplying the Warrant Price by a fraction: 2 (a) the numerator of which is the amount of common stock outstanding immediately before such issue plus the amount of common stock that the aggregate consideration received by the Company for the additional shares would purchase at the Warrant Price in effect immediately before such issue, and (b) the denominator of which is the amount of common stock outstanding immediately before such issue plus the number of such additional shares. 2.4 NO IMPAIRMENT. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. 2.5 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than the Fair Market Value of the Shares as of the date of this Warrant. (b) All Shares that may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. (c) The authorized and issued capital stock of the Company is as follows: TYPE AUTHORIZED ISSUED - ---- ---------- ------ Common Stock 60,000,000 15,238,000 as of 3/31/97 Preferred Stock 2,000,000 -0- All such shares have been duly authorized, validly issued, fully paid and nonassessable. ARTICLE 4. MISCELLANEOUS. 4.1 TERM. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. 3 4.2 LEGENDS. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.2, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 WAIVER. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.6 ATTORNEYS FEES. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. COMPANY AND HOLDER WAIVE ANY RIGHT TO A JURY TRIAL OUT OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS WARRANT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT AND TORT CLAIMS. 4.7 GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. CENTURA SOFTWARE CORPORATION By: /s/ Richard A. Gelhaus -------------------------------- Richard A. Gelhaus Title: Senior V.P. and CFO 4 APPENDIX I NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase _____ shares of the Common Stock of Ventura Software Corporation pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to _________________ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 3. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: --------------------------- (Name) --------------------------- --------------------------- (Address) 4. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. ---------------------------------------- (Signature) - --------------------- (Date) 5 EX-10.25 4 EXHIBIT 10.25 EXHIBIT 10.25 CENTURA SOFTWARE CORPORATION EXECUTIVE RETENTION PROGRAM The following is a brief summary of the Executive Retention Program approved by the Board of Directors of Centura Software Corporation (the "Company") on June 20, 1997 pursuant to which Key Executive Agreements may be entered into by the Company with each of Samuel Inman, Michael Keddington, Earl Stahl and Richard Gelhaus (collectively, "Key Executives"). Terms of the Key Executive Agreements are as follows. Upon consummation of any "Sale of the Company" (as defined below), each Key Executive shall receive, if such Key Executive continues to be employed by the Company at that time: - - payment of an amount equal to the Key Executive's total compensation for fiscal year 1996; and - - continuing coverage under the Company's standard employee benefits package for one year following the effective date of the Sale of the Company. Definitions: "Sale of the Company" means: - - (1) a merger or consolidation that results in more than 50% of the voting stock of the Company or its successor changing ownership (whether or not approved by the Board); or - - (2) the sale of all or substantially all of the Company's assets. EX-27 5 EXHIBIT 27
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 4,812 565 11,848 2,931 27 18,681 20,864 16,122 29,859 40,858 0 0 0 69,896 (80,751) 29,859 21,304 29,704 2,667 7,058 23,419 0 424 (1,754) 35 (1,789) 0 0 0 (1,789) (0.12) (0.12)
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