-----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, C10JLVbr73uOPLAsxOpQS+SSDi/rmKIQs/psfiR0ziXOVH+DUR3DcBUT6QWvltK9 y2Lmu91BW5W3IIv1Sq8jcQ== 0001047469-98-031276.txt : 19980817 0001047469-98-031276.hdr.sgml : 19980817 ACCESSION NUMBER: 0001047469-98-031276 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: SEC FILE NUMBER: 000-21010 FILM NUMBER: 98687243 BUSINESS ADDRESS: STREET 1: 975 ISLAND DR CITY: REDWOOD SHORES STATE: CA ZIP: 94025 BUSINESS PHONE: 6505963400 MAIL ADDRESS: STREET 1: 1060 MARSH ROAD CITY: MENLO PARK STATE: CA ZIP: 94025 10-Q 1 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, 1998 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, 1998, there were 29,598,725 shares of the Registrant's Common Stock outstanding. CENTURA SOFTWARE CORPORATION FORM 10-Q for the Quarter Ended June 30, 1998 INDEX
Page Number ------ PART I FINANCIAL INFORMATION Item 1. Financial Statements and Supplementary Data a) Condensed consolidated balance sheets at June 30, 1998 and December 31, 1997 . . . . 1 b) Condensed consolidated statements of operations for the three months and six months ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 c) Condensed consolidated statements of cash flows for the six months ended June 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 d) Notes to condensed consolidated financial statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 8-15 PART II OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 16 Item 3. Defaults in Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 17-18 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except per share data) June 30, December 31, 1998 1997 -------- ------------ ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 7,262 $ 3,974 Accounts receivable, less allowances of $1,526 and $1,621 . . . . 9,829 11,744 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 259 Other current assets. . . . . . . . . . . . . . . . . . . . . . . 2,840 3,089 ------- ------- Total current assets. . . . . . . . . . . . . . . . . . . . . 20,135 19,066 Property and equipment, at cost, net of accumulated depreciation . . . 3,023 3,511 Capitalized software, at cost, net of accumulated amortization . . . . 2,131 2,573 Long-term investments. . . . . . . . . . . . . . . . . . . . . . . . . 1,377 1,263 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,610 1,787 ------- ------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $28,276 $28,200 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities: Subordinated Notes Payable. . . . . . . . . . . . . . . . . . . . $ - $10,000 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 3,452 4,244 Accrued compensation and related expenses . . . . . . . . . . . . 1,586 1,521 Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . 1,836 1,581 Other accrued liabilities . . . . . . . . . . . . . . . . . . . . 1,524 5,334 Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . 13,139 14,618 ------- ------- Total current liabilities . . . . . . . . . . . . . . . . . . 21,537 37,298 Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . 856 856 ------- ------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . 22,393 38,154 Shareholders' Equity (Deficit): Preferred stock, no par value; 2,000 shares authorized; none issued . . . . . . . . . . . . . . . . . . . . - - Common stock, par value $.01 per share; 60,000 shares authorized; 29,592 shares and 15,784 shares issued and outstanding. . . . . . . . . . . . . . 85,775 70,636 Cumulative translation adjustment . . . . . . . . . . . . . . . . (520) (484) Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (79,372) (80,106) ------- ------- Total shareholders' equity (deficit) . . . . . . . . . . . . 5,883 (9,954) ------- ------- Total liabilities and shareholders' equity (deficit) . . . . $28,276 $28,200 ------- ------- ------- ------- 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 Six Months Ended June 30, Ended June 30, ---------------------- ------------------- 1998 1997 1998 1997 ------- ------- ------- ------- Net revenues: Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,982 $11,790 $16,566 $21,304 Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,065 4,314 9,253 8,400 ------- ------- ------- ------- Net revenues. . . . . . . . . . . . . . . . . . . . . . . . . 13,047 16,104 25,819 29,704 Cost of revenues:. . . . . . . . . . . . . . . . . . . . . . . . . . . Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903 1,301 2,185 2,667 Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,067 2,272 2,163 4,391 ------- ------- ------- ------- Cost of revenues. . . . . . . . . . . . . . . . . . . . . . . 1,970 3,573 4,348 7,058 ------- ------- ------- ------- Gross profit . . . . . . . . . . . . . . . . . . . . . . . 11,077 12,531 21,471 22,646 Operating expenses:. . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . 6,941 7,387 12,768 14,010 Research and development. . . . . . . . . . . . . . . . . . . . . 1,357 2,718 2,901 5,421 General and administrative. . . . . . . . . . . . . . . . . . . . 1,797 1,764 3,507 3,457 Acquisition expense . . . . . . . . . . . . . . . . . . . . . . . - 270 - 531 ------- ------- ------- ------- Total operating expenses. . . . . . . . . . . . . . . . . . . 10,095 12,139 19,176 23,419 ------- ------- ------- ------- Operating income (loss). . . . . . . . . . . . . . . . . . 982 392 2,295 (773) Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 91 41 138 96 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . (113) (210) (314) (424) Imputed value of warrants issued in connection with debt conversion. . . . . . . . . . . . . . . . . . . . . . . . . . . . (549) - (990) - Foreign currency gain (loss). . . . . . . . . . . . . . . . . . . (117) 78 (281) (653) ------- ------- ------- ------- Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . 294 301 848 $(1,754) Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . 106 25 114 35 ------- ------- ------- ------- Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188 $ 276 $ 734 $(1,789) ------- ------- ------- ------- ------- ------- ------- ------- Basic net income (loss) per share . . . . . . . . . . . . . . . . . . $ 0.01 $ 0.02 $ 0.03 $ (0.12) ------- ------- ------- ------- ------- ------- ------- ------- Basic weighted average common shares . . . . . . . . . . . . . . . . 29,566 15,289 25,220 15,256 ------- ------- ------- ------- ------- ------- ------- ------- Diluted net income (loss) per share . . . . . . . . . . . . . . . . . $ 0.01 $ 0.02 $ 0.03 $ (0.12) ------- ------- ------- ------- ------- ------- ------- ------- Diluted weighted average common shares . . . . . . . . . . . . . . . 30,875 16,069 25,898 15,256 ------- ------- ------- ------- ------- ------- ------- ------- 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, ------------------------- 1998 1997 -------- --------- Cash flows from operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 734 $(1,789) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . 1,813 2,704 Provision for doubtful accounts, sales returns and allowances. . . . . . . . . . . . . . . . . . . . . . . . . . (95) 504 Issuance of stock warrants . . . . . . . . . . . . . . . . . 990 102 Changes in assets and liabilities: Accounts receivable. . . . . . . . . . . . . . . . . . . . 2,010 4,153 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . 55 189 Other current assets . . . . . . . . . . . . . . . . . . . 249 (1,060) Other assets . . . . . . . . . . . . . . . . . . . . . . . 113 (272) Accounts payable and accrued liabilities . . . . . . . . . (2,286) (1,497) Deferred revenue . . . . . . . . . . . . . . . . . . . . . (1,479) (4,096) Other long-term liabilities. . . . . . . . . . . . . . . . - 392 ------- ------- Net cash provided by (used in) operating activities. . . 2,104 (670) Cash flows from investing activities: Maturities of investments . . . . . . . . . . . . . . . . . . . . - 1,746 Purchase of investments . . . . . . . . . . . . . . . . . . . . . (114) (1) Acquisitions of property and equipment. . . . . . . . . . . . . . (407) (2,853) Capitalization of software costs. . . . . . . . . . . . . . . . . (362) (454) Proceeds from sale of property and equipment. . . . . . . . . . . - 462 Capitalization of intangibles and other assets. . . . . . . . . . (50) (129) ------- ------- Net cash provided by (used in) investing activities . . . (933) (1,229) Cash flows from financing activities: Repayment of note payable . . . . . . . . . . . . . . . . . . . . - (180) Proceeds from short term borrowings . . . . . . . . . . . . . . . 255 - Proceeds from issuance of common stock, net . . . . . . . . . . . 1,898 214 ------- ------- Net cash provided by financing activities . . . . . . . . 2,153 34 Effect of exchange rate changes on cash and cash equivalents . . . . . (36) 8 ------- ------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . 3,288 (1,857) Cash and cash equivalents at beginning of period . . . . . . . . . . . 3,974 6,669 ------- ------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . $7,262 $4,812 ------- ------- ------- ------- 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, 1998, the condensed consolidated statements of operations for the three and six month periods ended June 30, 1998 and 1997, and cash flows for the six month periods ended June 30, 1998 and 1997 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, 1997. The results of operations for the three and six month periods ended June 30, 1998, are not necessarily indicative of the operating results to be expected for the full year. The December 31, 1997 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Such disclosures are contained in the Company's Annual Report on Form 10K. DERIVATIVE INSTRUMENTS. During the first quarter of 1997, the Company recognized a loss of $731,000 attributed to foreign currency fluctuations on net assets denominated in foreign currencies. As a result, the Company enters into short-term forward contracts to reduce the risks associated with such foreign currency fluctuations. For the quarter ended June 30, 1998, the Company recognized a loss of $117,000 related to foreign currency fluctuations. At June 30, 1998, the Company had $5,831,000 in forward contracts denominated in five currencies; German Deutsche Marks, British Pound Sterling, Netherland Guilders, Italian Lira and Australian Dollars. The carrying value of the instruments approximate their fair value as the Company records entries to "mark-to-market" the respective contracts on a monthly basis. The respective gains and losses from forward contracts are included in other income (expense). NET INCOME (LOSS) PER SHARE. Basic earnings per share is computed using the weighted average number of shares of common stock. Diluted earnings per share is computed using the weighted average number of shares of common stock, common equivalent shares outstanding during the period. Common equivalent shares consist of stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation if their effect is antidilutive. Antidilutive options and warrants to purchase 1,065,217 and 442,633 were outstanding at June 30, 1998 and June 30, 1997, respectively. Debt convertible to 5,765,087 shares of common stock was outstanding at June 30, 1997, and was antidilutive. No such debt was outstanding as of June 30, 1998. The following is a reconciliation of the computation for basic and diluted EPS: 4
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------- ------------- ------------- ------------- (in thousands, except per share data) Net income (loss) $188 $276 $734 $(1,789) ------------- ------------- ------------- ------------- Shares calculation Average basic shares outstanding 29,566 15,289 25,220 15,256 Effect of dilutive securities Options 1,309 780 678 - ------------- ------------- ------------- ------------- Total shares used to compute diluted earnings per share 30,875 16,069 25,898 15,256 ------------- ------------- ------------- ------------- Earnings (loss) per basic share $0.01 $0.02 $0.03 $(0.12) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Earnings (loss) per diluted share $0.01 $0.02 $0.03 $(0.12) ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
REVENUE RECOGNITION. In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Positions No 97-2 ("SOP 97-2"), "Software Revenue Recognition", which the Company has adopted for transactions entered into beginning January 1, 1998. SOP 97-2 provides guidance for recognizing revenue on software transactions and supersedes SOP 91-1 "Software Revenue Recognition". In March 1998, the AICPA issued Statement of Position No. 98-4 ("SOP 98-4") "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition". SOP 98-4 defers, for one year, the application of certain passages in SOP 97-2 which limit what is considered vendor-specific objective evidence ("VSOE") necessary to recognize revenue for software licenses on multiple-element arrangements when undelivered elements exist. Additional guidance is expected to be provided prior to adoption of the deferred provision of SOP 97-2. The Company will determine the impact, if any, the further guidance will have on current revenue recognition practices when issued. COMPREHENSIVE INCOME (LOSS). The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This Statement also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. Other comprehensive earnings consist of currency translation adjustments. Annual financial statements for prior periods will be reclassified, as required. The Company's total comprehensive earnings were as follows:
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------- ------------- ------------- ------------- (in thousands) Net income(loss) $188 $276 $734 $(1,789) Other comprehensive loss (gain) (25) 77 36 (8) ---- ---- ---- ------- Total comprehensive income (loss) 213 $199 698 (1,781) ---- ---- ---- ------- ---- ---- ---- -------
RECENT ACCOUNTING PRONOUNCEMENTS. In September 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 for the fiscal year ending December 31, 1998 and does not expect such adoption to have a material effect on the consolidated financial statements. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. It also provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. The Company 5 has not yet determined the impact, if any, of adopting this statement. The disclosures prescribed by SOP 98-1 will be effective for the Company's consolidated financial statements for the fiscal year ending December 31, 1999. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments, embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The company will adopt SFAS 133 in the first quarter of the fiscal year ending December 31, 2000 and has not yet evaluated the impact of adoption and its effects on the Company's results of operations, financial position, capital resources or liquidity. RECLASSIFICATIONS. In order to conform to the condensed consolidated balance sheet and statement of cash flows for the six months ended June 30, 1998, certain reclassifications have been made to the condensed consolidated balance sheet at December 31, 1997 and statement of cash flows for the six months ended June 30, 1997. 2. LITIGATION On September 17, 1997, Technology Venture (Software) Holdings Limited, formerly known as Eagerquest Investments Limited ("Eagerquest") filed suit against the Company in the United States District Court for the Central District of California alleging that the Company acted improperly with respect to its contract with Eagerquest for the distribution of the Company's products in the territories of Hong Kong and China and that the Company's actions illegally damaged Eagerquest. While the formal settlement document has not yet been signed, the Company has reached an agreement in principle with Eagerquest to resolve outstanding differences and to dismiss the lawsuit. The Company does not believe this will have an adverse material affect on the Company's financial situation or business prospects. Other than the above, there are currently no material pending legal proceedings against the Company or any of its subsidiaries. The Company operates in an environment, however, where litigation may occur in the course of its normal business operations. In the complex and volatile industry in which the Company operates, 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 material adverse impact on the Company's future success. 3. SHORT-TERM BORROWINGS In January 1998, the Company entered into a $5,000,000 asset based loan facility with Coast Business Credit, the "Facility." The loan provides for borrowings of up to $5,000,000, secured by the Company's accounts receivable, combined with a $500,000 capital equipment facility. The Facility bears interest at 1.75% above the Bank of America Reference Rate, and provides for the ability to reduce interest cost based on the achievement of certain financial covenants. The Facility matures in January 2000 and provides for the ability to extend the agreement for one year at the option of the Company. The facility replaces an accounts receivable factoring agreement entered into by the Company in June 1997. As of June 30, 1998 there was $1,836,000 drawn against the $5,000,000 loan facility. 4. CONVERSION OF NOTE PAYABLE In February 1998, Computer Associates, Inc. ("CA"), and Newport Acquisition Company, LLP ("NAC") entered into a Note Purchase and Sale Agreement (with the Company's consent) and the Company and NAC entered into a Note Conversion Agreement (the "Agreements"). Under the terms of the Agreements, a promissory note, plus accrued interest, in the amount of $12,251,000, payable to CA (the "CA Note") was acquired by NAC, and immediately converted into 11,415,094 shares of the Company's common stock (the "Shares"). In February 1998, in connection with the Agreements, the Company entered into a Warrant Purchase Agreement with CA wherein the Company sold and issued to CA, at an issuance price of $.001 per share, a warrant to purchase 500,000 shares of the Company's common stock. The warrant is exercisable at $1.906 per share and expires on February 27, 2004. The warrants were valued at $300,000 using a risk-free rate of 5.5% and a volatility factor of 65% and the related charge is included in other income (expense) in the first quarter of 1998. 6 Also, in consideration of services rendered in connection with the Conversion of Note Payable, the Company issued to Rochon Capital Group, Ltd. warrants to purchase 283,019 shares of the Company's common stock at an exercise price of $2.12 (the "Rochon Conversion Warrants"). The Rochon Conversion Warrants expire on February 27, 2003. The warrants were valued at $141,000. Included with the Note Conversion Agreement is an Investor Rights Agreement ("IRA") between the Company and NAC that carries certain anti-dilution rights for two years. In June 1998, the Company and NAC entered into an agreement to amend the IRA. The amendment included modifications to the IRA that limit NAC's anti-dilution rights related to certain transactions, including the grant of stock options to employees and shares that may be issued as consideration in connection with certain strategic transactions, such as, an acquisition, asset purchase, or license agreement. In consideration for these modifications, the Company issued to NAC warrants to purchase up to 893,320 shares of common stock at an exercise price of $1.81 and up to 300,000 shares of common stock at an exercise price of $2.09, both expiring on June 11, 2003. The warrants for the 893,320 shares were valued at $393,800 by an independent specialty investment banking firm, using a modified Black Scholes method with a risk free rate of 5.51% and a volatility factor of 62.77%. The warrants for the 300,000 shares were valued at $155,300 by an independent specialty investment banking firm, using a modified Black Scholes method with a risk-free rate of 5.48% and a volatility factor of 62.77%. The related charges are included in other income (expense) in the second quarter of 1998. 5. PRIVATE PLACEMENT In February 1998, pursuant to the terms of Stock Purchase Agreements, the Company completed a private placement of 2,330,191 shares of the Company's common stock (the "Private Placement"), resulting in gross proceeds to the Company of $2,470,000. In connection with the Private Placement the Company issued warrants to purchase 582,548 shares of the Company's common stock. The warrants are exercisable at $1.25 per share and expire on February 28, 2003. Also, in consideration of services rendered in connection with the Private Placement, the Company issued to Rochon Capital Group, Ltd. warrants to purchase 71,698 shares of the Company's common stock at an exercise price of $2.12 (the "Rochon Private Placement Warrants"). The Rochon Private Placement Warrants expire on February 27, 2003. The Company registered the foregoing shares and warrants under the Securities Act of 1933, as amended on a Form S-3 declared effective on May 18, 1998. 7 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, 1997. Results of Operations: NET PRODUCT REVENUES. Net product revenues decreased 32% to $8.0 million for the quarter ended June 30, 1998, from $11.8 million for the quarter ended June 30, 1997. The decrease in net product revenues is primarily attributable to decreased sales of Centura tools products while SQLBase database revenues remained approximately constant. International sales accounted for $3.7 million or 46% and $7.5 million or 64% of net product revenues for the quarters ended June 30, 1998 and 1997, respectively. The decline in international sales is primarily attributable to decreased sales in Europe and the Asia-Pacific region as compared with the second quarter of 1997. For the three month period ended June 30, 1998, one customer comprised approximately 29% of the Company's net product revenues. Net product revenues decreased 22% to $16.6 million for the six months ended June 30, 1998, from $21.3 million for the six months ended June 30, 1997. International sales accounted for $8.4 million or 51% and $13.7 million or 64% of net product revenues for the six months ended June 30, 1998 and 1997, respectively. The decrease in international sales is primarily due to decreased sales in Europe. SQLBase product revenues increased approximately 6% in the first half of 1998 as compared with the six month period ended June 30, 1997. For the six month period ended June 30, 1998, one customer comprised approximately 18% of the Company's net product revenues. NET SERVICE REVENUES. Net service revenues increased 17% to $5.1 million for the quarter ended June 30, 1998, from $4.3 million for the quarter ended June 30, 1997. The increase was primarily due to increased sales of license maintenance support. International sales accounted for 53% and 48% of total net service revenues for the quarters ended June 30, 1998 and 1997, respectively. Net service revenues were $9.3 million and $8.4 million for the six months ended June 30, 1998 and 1997, respectively. International sales accounted for 52% in the first half of 1998 and 42% in the first half of 1997. COST OF PRODUCT REVENUES. Cost of product revenues includes the cost of subcontracted production and the amortization of capitalized software. Cost of product revenues decreased 31% to $0.9 million in the 1998 second quarter, principally due to a reduction in the amortization of capitalized software as compared with the 1997 second quarter. Cost of product revenues decreased 18% to $2.2 million over the six month period ended June 30, 1998 as compared with the same period in the prior year. The decrease was primarily due to a reduction in the amortization of capitalized software in the SQLBase product line. Cost of product revenues as a percentage of product revenues remained constant at 11% for the quarters ended June 30, 1998 and 1997. Cost of product revenues as a percentage of product revenues was also constant at 13% for the six months ended June 30, 1998 and 1997, 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, which include the software purchased from third parties, were $298,000 and $804,000 for the three and six month periods ended June 30, 1998 compared with $644,000 and $1,237,000 for the same periods in 1997. 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 decreased to $1.1 million from $2.3 million for the three month periods ended June 30, 1998 and 1997, respectively. For the six months ending June 30, 1998 and 1997, cost of services revenues were $2.2 million and $4.4 million, respectively. Cost of service revenues as a percentage of net service revenues was 21% and 53% for the quarters ended June 30, 1998 and 1997, respectively, and 23% and 52% for the six months ended June 30, 1998 and 1997, respectively. These decreases were due principally to a reduction of the Company's work force, outsourcing of front end telephone support, and the streamlining of operations which took effect in the third quarter of 1997. 8 SALES AND MARKETING EXPENSES. Sales and marketing expenses were $6.9 million, or 53% of net revenues, for the quarter ended June 30, 1998, compared with $7.4 million, or 46% of net revenues, for the quarter ended June 30, 1997. For the six months ended June 30, 1998, sales and marketing expenses were $12.8 million, or 49% of net revenues, compared with $14.0 million or 47% of net revenues for the six months ended June 30, 1997. The reduction in sales and marketing expense reflects the Company's commitment to control spending, while continuing its worldwide marketing efforts. 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 Six Months Ended Ended June 30, June 30, -------------------- ------------------- 1998 1997 1998 1997 ------ ------ ------ ------ (in thousands) Gross research and development expenses. . . . . . . . . . . $1,690 $2,856 $3,263 $5,875 Capitalized internal software development costs. . . . . . . (333) (138) (362) (454) ------ ------ ------ ------ Net research and development expenses. . . . . . . . . . . . $1,357 $2,718 $2,901 $5,421 ------ ------ ------ ------ ------ ------ ------ ------ As a Percentage of Net Revenues: Gross research and development expenses. . . . . . . . . 13% 18% 13% 20% Net research and development expenses. . . . . . . . . . 10% 17% 11% 18%
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses was approximately constant for the quarters ended June 30, 1998 and 1997, respectively, and $3.5 million and $4.0 million for the six months ended June 30, 1998 and 1997, respectively. 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, 1998 other income (expense), net was $(0.7) million, compared to $(0.1) million for the quarter ended June 30, 1997. This was primarily attributable to the imputed value of warrants of $0.5 million issued in connection with the Company's conversion of debt during the first quarter of 1998 and the subsequent amendment to the debt conversion agreement in the second quarter of 1998. (See Note 4 of the Notes to Condensed Consolidated Financial Statements). For the six months ended June 30, 1998 other income (expense), net was $(1.4) million, compared to $(1.0) million for the six months ended June 30, 1997. This was primarily attributable to the imputed value of warrants of $(1.0) million issued in connection with the Company's conversion of debt during the first quarter of 1998, offset by $0.4 million reduced foreign currency losses due to the purchase of foreign currency forward contracts in the principal currencies in which the Company conducts business. PROVISION FOR INCOME TAXES. The provision for income taxes was $0.1 million for both the quarter ended June 30, 1998 and for the first six months of 1998, and was insignificant for the corresponding periods of 1997. The provision primarily relates to foreign withholding taxes. Due to the availability of net operating loss carryforwards arising in prior years, no provision for U.S. income taxes was made for the three and six month periods ended June 30, 1998 and 1997. YEAR 2000 ISSUE. The Company has commenced, for all of its information systems, a year 2000 date conversion project to address all necessary code changes, testing and implementation of mission critical applications. The "Year 2000 Issue" arises because most computer systems and programs were designed to handle only a two-digit year, as opposed to a four digit year. Management has not completed its assessment of all of the potential Year 2000 compliance expenses and the related potential effect on the Company's earnings. LIQUIDITY AND CAPITAL RESOURCES: In the first quarter of 1998 the Company completed a note payable conversion and private placement of common 9 stock, as described in Notes 4 and 5 of the Notes to the Condensed Consolidated Financial Statements. Together with the net income for the period, this resulted in a net increase in shareholder's equity of $15.0 million at the end of the first quarter of 1998. At June 30, 1998, the Company had a deficit working capital position of $1.4 million, including a liability for deferred revenues of $13.1 million. Excluding deferred revenues, working capital would have been $11.7 million. This represents an increase in working capital of $16.8 million from December 31, 1997. Net cash provided by operating activities for the six months ended June 30, 1998 was $2.1 million, which resulted primarily from a decrease in accounts receivable, depreciation and amortization, net income and issuance of stock warrants, partially offset by decreases in accounts payable and accrued liabilities (principally comprised of interest on the CA Note), and deferred revenue. Cash used in investing activities totaled $0.9 million which related primarily to the purchases of property and equipment and capitalization of software development costs. Cash from financing activities totaled $2.2 million of which $1.9 million is primarily from the private placement and $0.3 million is proceeds from short-term borrowings. At June 30, 1998 the Company had $5.8 million in unsecured foreign currency contracts, denominated in various currencies, as part of a program to hedge the financial exposure arising from foreign denominated monetary assets and liabilities. The deferred product and support revenues of $13.1 million at June 30, 1998 reflects a delay in recognition of revenue in accordance with Generally Accepted Accounting Principles and requires minimal use of future resources of the Company. The Company believes that expected cash flows from operations and existing cash balances, will be sufficient to meet the Company's currently anticipated working capital and capital expenditure requirements for the next 12 months. The Company may, however, choose to raise cash for operational or other needs sometime in the future. If the Company needs further financing, there can be no assurance that it will be available on reasonable terms or at all. Any additional equity financing will result in dilution to the Company's shareholders. The Company's capital requirements also may be affected by acquisitions of businesses, products and technologies that are complementary to the Company's business, which the Company may consider from time to time. The Company regularly evaluates such opportunities. Any such transaction, if consummated, may further reduce the Company's working capital or require the issuance of equity. FACTORS THAT MAY AFFECT FUTURE RESULTS: CHANGES IN STRATEGIC DIRECTION: RESTRUCTURING. In efforts to stem losses and maximize return on the Company's core assets and technologies, the Company has restructured its operations and announced changes in strategic direction several times in recent financial periods. The first of these changes, which began in December 1995, encompassed a change in the Company's name from Gupta Corporation to Centura Software Corporation and the identification of a flagship product bearing the name CENTURA. In early 1997, the Company refocused its marketing and sales efforts away from RDBMS and development tools products to a middleware connectivity product and a related Merger Agreement with Infospinner, Inc. ("InfoSpinner"). In the second half of 1997, however, the Company restructured and refocused operations on its core competencies, products and technologies and severed its distribution arrangement with Infospinner. There can be no assurance that the restructuring efforts the Company has engaged in to date will be successful or that the Company will be able to sustain profitability on a quarterly or annual basis. In addition, there can be no assurance that the Company's management will not deem it appropriate to undertake other major restructuring efforts or changes in strategic direction in the future or to what degree any of these efforts will result in improved operational performance, if at all. RECENT CHANGES IN SENIOR MANAGEMENT. In the fourth quarter of 1997, the Company announced significant changes in senior management. Such changes included the election and appointment of Scott R. Broomfield as Chief Executive Officer, the appointment of John W. Bowman as Chief Financial Officer, Kathy Lane as Senior Vice President of Marketing, and the election of Messrs. Jack King, Philip Koen and Earl Stahl to the Company's Board of Directors, and the retirement of Samuel M. Inman, III, Earl Stahl and Richard Gelhaus from their positions as officers of the Company. In February 1998 the Company announced the election of Messrs. William D. Nicholas and Peter Micciche to the Board of Directors and the appointment of Scott R. Broomfield to the position of Chairman & CEO. There can be no assurance that the new management team will be successful in the execution of its objectives or that the successful execution of these objectives will result in improved operating results or financial position 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. 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. In addition, the Company is in the process of recruiting a Chief Technology Officer. The Company considers this position critical to the success of its ongoing competitive position in defined markets and operations. There can be no assurance that an appropriate individual will be 10 located to fill this position on a timely basis on terms reasonable to the Company, or at all. The future success of the Company also depends on its continuing ability to identify, hire, train, motivate and retain other highly qualified technical and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to attract, assimilate or retain other highly qualified technical and managerial personnel in the future. The inability to attract and retain the necessary technical and managerial personnel could have a material and adverse effect upon its business, operating results and financial condition. RECENT COMPANY LOSSES; FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced in the past and may in the future continue to experience significant fluctuations in quarterly operating results. The Company reported a loss of $0.6 million for fiscal year 1997, a profit of $2.0 million for 1996, and a loss of $44.1 million for 1995. There can be no assurance that the restructuring efforts the Company has engaged in to date will be successful or that the Company will be able to sustain profitability on a quarterly or annual basis. Many of the Company's product licensing arrangements are subject to revenue recognition on a per-unit deployed basis as the Company's deferred obligation to such customers is gradually extinguished. Revenue recognition in such cases is therefore dependent upon the business activities of the Company's customers and the timely and accurate reporting of such activities to the Company, which makes predictability of the related revenue extremely uncertain. In addition, quarterly operating results of the Company will depend on a number of other factors that are difficult to forecast, including, general market demand for the Company's products; the size and timing of individual orders during a quarter; the Company's ability to fulfill such orders; introduction, localization or enhancement of products by the Company; delays in the introduction and/or enhancement of products by the Company and its competitors; market acceptance of new products; reviews in the industry press concerning the products of the Company or its competitors; software "bugs" or other product quality problems; competition and pricing in the software industry; sales mix among distribution channels; customer order deferrals in anticipation of new products; reduction in demand for existing products and shortening of product life cycles as a result of new product introductions; changes in operating expenses; changes in the Company's strategy; personnel changes; foreign currency exchange rates; mix of products sold; inventory obsolescence; product returns and rotations; and general economic conditions. Sales of the Company's products also may be negatively affected by delays in the introduction or availability of new hardware and software products from third parties. The Company's financial results also may vary as a result of seasonal factors including year and quarter end purchasing and the timing of marketing activities, such as industry conventions and tradeshows. DILUTIVE AND POTENTIAL DILUTIVE EFFECT TO SHAREHOLDERS. In February 1998, Computer Associates, Inc. ("CA"), and Newport Acquisition Company, LLP ("NAC") entered into a Note Purchase and Sale Agreement and the Company and NAC entered into a Note Conversion Agreement (the "Agreements"). Under the terms of the Agreements, a promissory note, plus accrued interest, in the amount of $12,251,000, payable to CA (the "CA Note") was acquired by NAC, and immediately converted into 11,415,094 shares of the Company's common stock (the "Shares"). In February 1998, in connection with the Agreements, the Company entered into a Warrant Purchase Agreement with CA wherein the Company sold and issued to CA, at an issuance price of $.001 per share, a warrant to purchase 500,000 shares of the Company's common stock. The warrant is exercisable at $1.906 per share and expires on February 27, 2004. The warrants were valued at $300,000 using a risk-free rate of 5.5% and a volatility factor of 65% and the related charge is included in other income (expense) in the first quarter of 1998. Also, in consideration of services rendered in connection with the Conversion of Notes Payable, the Company issued to Rochon Capital Group, Ltd. warrants to purchase 283,019 shares of the Company's common stock at an exercise price of $2.12 (the "Rochon Conversion Warrants"). The Rochon Conversion Warrants expire on February 27, 2003. The warrants were valued at $141,000. Included with the Note Conversion Agreement is an Investor Rights Agreement ("IRA") between the Company and NAC that carries certain anti-dilution rights for two years. In June 1998, the Company and NAC entered into an agreement to amend the IRA. The amendment included modifications to the IRA that limit NAC's anti-dilution rights related to certain transactions, including the grant of stock options to employees and shares that may be issued as consideration in connection with certain strategic transactions, such as, an acquisition, asset purchase, or license agreement. In consideration for these modifications, the Company issued to NAC warrants to purchase up to 893,320 shares of common stock at an exercise price of $1.81 and up to 300,000 shares of common stock at an exercise price of $2.09, both expiring on June 11, 2003. The warrants for the 893,320 shares were valued at $393,800 by an independent specialty investment banking firm, using a modified Black Scholes method with a risk free rate of 5.51% and a volatility factor of 62.77%. The warrants for the 300,000 shares were valued at $155,300 by an independent specialty investment banking firm, using a modified Black Scholes method with a risk-free rate of 5.48% and a volatility factor of 62.77%. The related charges are included in other income (expense) in the second quarter of 1998. Also in February 1998, pursuant to the terms of Stock Purchase Agreements, the Company completed a private placement of 2,330,191 shares of the Company's common stock (the "Private Placement"), resulting in gross proceeds to the Company of $2,470,000. In connection with the Private Placement the Company issued warrants to purchase 582,548 shares of the Company's common stock. The warrants are exercisable at $1.25 per share and expire on February 28, 2003. Also, in consideration of services rendered in connection with the Private Placement, the Company issued to Rochon Capital Group, Ltd. warrants to purchase 71,698 shares of the Company's common stock at an exercise price of $2.12 (the "Rochon Private 11 Placement Warrants"). The Rochon Private Placement Warrants expire on February 27, 2003. The Company registered the foregoing shares and warrants under the Securities Act of 1933, as amended on a Form S-3 declared effective on May 18, 1998. STOCK OPTION PLANS. From time to time, the Company issues shares of common stock pursuant to its 1992 Employee Stock Purchase Plan and pursuant to options granted under its 1995 Incentive Stock Option Plan, 1998 Employee Stock Option Plan (for non-officer employees) and 1996 Directors' Stock Option Plan. Additional options remain outstanding and are exercisable pursuant to the Company's 1986 Incentive Stock Option Plan, which terminated in July 1996. In addition, the Company has issued non-plan options to the Company's Chief Executive Officer, Chief Financial Officer and Sr. Vice President of Marketing, exercisable for a total of 1,500,000 shares. NEW PRODUCT RISKS; RAPID TECHNOLOGICAL CHANGE. The markets for the Company's software products and services are characterized by rapid technological developments, evolving industry standards, swift changes in customer requirements and computer operating environments, and frequent new product introductions and enhancements. As a result, the success of the Company depends substantially upon its ability to continue to enhance existing products, develop and introduce in a timely manner, new products incorporating technological advances and meet increasing customer expectations, all on a timely and cost-effective basis. To the extent one or more competitors introduce products that better address customer needs, the Company's businesses could be adversely affected. The Company's success will also depend on the ability of its primary products, SQLBASE, CENTURA TEAM DEVELOPER, SQLWINDOWS, CENTURA NET.DB, and SQLHOST, to perform well with existing and future leading, industry-standard application software products intended to be used in connection with RDBMS. Any failure to deliver these products as scheduled or their failure to achieve early market acceptance as a result of competition, technological change, failure of the Company to timely release new versions or upgrades, failure of such upgrades to achieve market acceptance or otherwise, could have a material adverse effect on the business, operating results and financial condition of the Company. In addition, commercial acceptance of the Company's products and services could be adversely affected by critical or negative statements or reports by industry and financial analysts concerning the Company and its products, or other factors such as the Company's financial performance. If the Company is unable to develop and introduce new products or enhancements to existing products in a timely manner in response to changing market conditions or customer requirements, its business, operating results and financial condition could be materially and adversely affected. The Company depends substantially upon internal efforts for the development of new products and product enhancements. The Company has in the past experienced delays in the development of new products and product versions, which resulted in loss or delays of product revenues, and there can be no assurance that the Company will not experience further delays in connection with its current product development or future development activities. Also, software products as complex as those offered by the Company may contain undetected errors when first introduced or as new versions are released. The Company has in the past discovered software errors in certain of its new products and enhancements, respectively, after their introduction. Although the Company has not experienced material adverse effects resulting from any such errors to date, there can be no assurance that errors will not be found in new products or releases after commencement of commercial shipments, resulting in adverse product reviews and a loss of or delay in market acceptance, which could have a material adverse effect upon the Company's business, operating results and financial condition. From time to time, the Company or its competitors may announce new products, product versions, capabilities or technologies that have the potential to replace or shorten the life cycles of the Company's existing products. The Company has historically experienced increased returns of a particular product version following the announcement of a planned release of a new version of that product. The Company provides allowances for anticipated returns, and believes its existing policies result in the establishment of allowances that are adequate, and have been adequate in the past, but there can be no assurance that product returns will not exceed such allowances in the future. The announcement of currently planned or other new products may cause customers to delay their purchasing decisions in anticipation of such products, which could have a material adverse effect on business, operating results and financial condition of the Company. YEAR 2000 ISSUE: The "Year 2000 Issue" arises because most computer systems and programs were designed to handle only a two-digit year, as opposed to a four digit year. When the year 2000 begins these computers may interpret "00" as the year 1900 and could either stop processing date-related computations or could process them incorrectly. As customers and potential customers of the Company begin to devote incremental resources to this issue, resources previously allocated to other information systems requirements may be redirected to address the Year 2000 issue. To the extent that the Company's products are not selected as part of a customer's overall Year 2000 solution, redirection of these customer resources could have a material adverse effect on the Company's results of operations and financial condition. In addition, the Year 2000 Issue creates risk for the Company from unforeseen problems in its internal computer systems and from third parties with which the Company interacts. Such failures of the Company's and/or third parties' computer systems could have material impact on the Company's ability to conduct its business, and to process and account for the transfer of funds electronically. While the Company has begun the implementation of Year 2000 related upgrades appropriate for the Company's internal systems and equipment and Year 2000 compliance issues in the systems of customers, vendors and other related parties, there can be no assurance that problems will not arise as a result of the Year 2000 issue. 12 EMBEDDABLE DATABASE MARKET. Since database capacity is often indicative of differences in customer application, segments within the PC client/server market in which the Company competes can generally be distinguished and segregated by the target capacity of the database utilized. The Company generally markets its database products in environments utilizing capacity ranging from small, Smart Device environments to those of multiple Gigabytes. Competitors of the Company, including Microsoft, Sybase, Pervasive and Oracle, generally have product offerings which compete with the Company's products in some or all of these capacity ranges. In addition, some of these competitors are providers of sophisticated database software, originally designed and marketed primarily for use with mainframes and minicomputers, which, if successfully re-configured to provide similar functionality in PC client/server, or smaller capacity environments, could materially and adversely impact the Company's revenues, results of operations and financial condition. COMPETITION. The market for client/server system software is intensely competitive and rapidly changing. The Company's products are specifically targeted at the emerging portion of this market relating to embeddable PC and Web client/server software, and the Company's current and prospective competitors offer a variety of solutions to address this market segment. TOOLS AND CONNECTIVITY MARKETS. The Company faces competition from providers of software specifically developed for the PC client/server market, such as Oracle, Sybase, Microsoft, Inprise and Forte, and connectivity software competitors, such as IBI Systems, Inc. and Sybase. The Company also faces potential competition from vendors of applications development tools based on 4GLs (generation languages) or CASE (Computer Aided Software Engineers) technologies. With the emergence of the World Wide Web as an important platform for application development and deployment and a variety of newly created tools that export Java-TM- program language connectivity, additional competitors or potential competitors have emerged. The principal competitive factors affecting the market for the Company's products include, breadth of distribution and name recognition, product architecture, performance, functionality, price, product quality, customer support. The Company experienced increased competition during 1997, 1996, and 1995, resulting in loss of market share. The Company must continue to introduce enhancements to its existing products and offer new products on a timely basis in order to remain competitive. However, even if the Company introduces such products in this manner, it may not be able to compete effectively because of the significantly larger resources available to many of the Company's competitors. There can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's business, operating results and financial condition. See "Competition". INTERNET SOFTWARE MARKET. The market for Internet software in general, and the segments of such market addressed by the Company's products in particular, are relatively new. The future financial performance of the Company will depend in part on the continued expansion of this market and these market segments and the growth in the demand for other products developed by the Company, as well as increased acceptance of the Company's products by MIS professionals. There can be no assurance that the Internet software market and the relevant segments of the market will continue to grow, that the Company will be able to respond effectively to the evolving requirements of the market and market segments, or that MIS professionals will accept the Company's products. If the Company is not successful in developing, marketing, localizing and selling applications that gain commercial acceptance in these markets and market segments on a timely basis, the Company's business, operating results and financial condition could be materially and adversely affected. See "Industry Overview". DEPENDENCE UPON DISTRIBUTION CHANNELS. The Company relies on relationships with value-added resellers and independent third party distributors for a substantial portion of its sales and revenues. Some of the Company's resellers and distributors also offer competing products. Most of the Company's resellers and distributors are not subject to any minimum purchase requirements, they can cease marketing the Company's products at any time, and they may from time to time be granted stock exchange or rotation rights. Moreover, the introduction of new and enhanced products may result in higher product returns and exchanges from distributors and resellers. Any product returns or exchanges in excess of recorded allowances could have a material adverse effect on the Company's business, operating results and financial condition. The Company also maintains strategic relationships with a number of vertical software vendors and other technology companies for marketing or resale of the Company's products. Any termination or significant disruption of the Company's relationship with a major portion of its resellers or distributors, or the failure by such parties to renew agreements with the Company, could materially and adversely affect the Company's business, operating results and financial condition. Since 1994 the Company has reduced its resources devoted to North American corporate sales and also decreased its expenditures on corporate and product marketing. Failure of the Company to successfully implement, support and manage its sales strategies could have a material adverse effect on the Company. The distribution channels through which client/server software products are sold have been characterized by rapid change, including consolidations and financial difficulties of distributors, resellers and other marketing partners including certain of the Company's current distributors. The bankruptcy, deterioration in financial condition or other business difficulties of a distributor or retailer could render the Company's accounts receivable from such entity uncollectible, and this could result in a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that distributors will continue to purchase the Company's products or provide the Company's products with adequate promotional support. Failure of distributors to do so could have a material and adverse effect on the Company's business, operating results and financial condition. 13 In a number of international markets the Company has entered into quasi-exclusive, multi-year agreements with independent companies that have also licensed the use of the Company's name. These agreements are in place to increase the Company's opportunities and penetration in such markets where the rapid adoption of client/server technologies is anticipated. While the Company believes that to date these agreements have increased the Company's penetration in such markets, there can be no certainty that this performance will continue nor that these relationships will remain in place. The Company's future cost of maintaining its business in these markets could increase substantially if these agreements are not renewed. DEPENDENCE ON THIRD PARTY ORGANIZATIONS. The Company is increasingly dependent on the efforts of third party "partners", including consultants, system houses and software developers to implement, service and support the Company's products. These third parties increasingly have opportunities to select from a very broad range of products from the Company's competitors, many of whom have greater resources and market acceptance than the Company. In order to succeed, the Company must actively recruit and sustain relationships with these third parties. There can be no assurance that the Company will be successful in recruiting new partners or in sustaining its relationships with its existing partners. INTERNATIONAL SALES AND OPERATIONS. International sales represented 58%, 60% and 61% of the Company's net revenues for the years ended December 31,1997, 1996 and 1995, respectively. A key component of the Company's strategy is continued expansion into international markets, and the Company currently anticipates that international sales, particularly in new and emerging markets, will continue to account for a significant percentage of total revenues. The Company will need to retain effective distributors, and hire, retain and motivate qualified personnel internationally to maintain and/or expand its international presence. There can be no assurance that the Company will be able to successfully market, sell, localize and deliver its products in these international markets. In addition to the uncertainty as to the Company's ability to sustain or expand its international presence, there are certain risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements and government controls, problems and delays in collecting accounts receivable, tariffs, export license requirements and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, political and economic instability, fluctuations in currency exchange rates, seasonal reductions in business activity during summer months in Europe and certain other parts of the world, restrictions on the export of critical technology, and potentially adverse tax consequences, which could adversely impact the success of international operations. Sales of the Company's products are denominated both in local currencies of the respective geographic region and in US dollars, depending upon the economic stability of that region and locally accepted business practices. Accordingly, any increase in the value of the US dollar relative to local currencies in these markets may negatively impact revenues, results of operations and financial condition. An increase in the relative value of the US dollar would serve to increase the relative foreign currency cost to the customer of a US dollar denominated purchase, which may negatively affect the Company's sales in foreign markets. In addition, the US dollar value of a sale denominated in a region's local currency decreases in proportion to relative increases in the value of the US dollar. In addition, effective copyright and trade secret protection may be limited or unavailable under the laws of certain foreign jurisdictions. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's international operations and, consequently, on the Company's business, operating results and financial condition. PROPRIETARY RIGHTS. The success and ability of the Company to compete is dependent in part upon the Company's proprietary technology. While the Company relies on trademark, trade secret and copyright laws to protect its technology, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and customer support are more essential to establishing and maintaining a technology leadership position. The Company has one patent with respect to its SQLWINDOWS and CENTURA TEAM DEVELOPER products. The Company believes that the ownership of patents is not necessarily a significant factor in its business and that its success does not depend on the ownership of patents, but primarily on the innovative skills, technical competence and marketing abilities of its personnel. Also, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology. The source code for the Company's proprietary software is protected both as a trade secret and as a copyrighted work. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use their products or technology without authorization, or to develop similar technology independently. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. The Company intends to apply for new patents as appropriate opportunities and need becomes evident. The Company generally enters into confidentiality or license agreements with its employees, consultants and vendors, and generally controls access to and distribution of its software, documentation and other proprietary information. Despite efforts to protect proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that is regarded as proprietary. Policing such unauthorized use is difficult. There can be no assurance that the steps taken by the Company will prevent misappropriation of the Company's technology or that such agreements will be enforceable. In addition, litigation may be necessary in the future to enforce intellectual property rights, to protect trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results and financial condition. 14 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. LEGAL PROCEEDINGS. Other than as described in Item 1 of Part II hereof, there are currently no material pending legal proceedings against the Company or any of its subsidiaries, other than ordinary routine litigation incidental to the business of the Company. The Company operates, however, in a complex and volatile industry in which disputes, litigation, regulatory proceedings and other actions are a necessary risk of doing business. There can be no assurance that the Company will not participate in such legal proceedings and that the costs and charges will not have a material adverse impact on the Company's future success. 15 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On September 17, 1997, Technology Venture (Software) Holdings Limited, formerly known as Eagerquest Investments Limited ("Eagerquest") filed suit against the Company in the United States District Court for the Central District of California alleging that the Company acted improperly with respect to its contract with Eagerquest for the distribution of the Company's products in the territories of Hong Kong and China and that the Company's actions illegally damaged Eagerquest. While the formal settlement document has not yet been signed, the Company has reached an agreement in principle with Eagerquest to resolve outstanding differences and to dismiss the lawsuit. The Company does not believe this will have an adverse material affect on the Company's financial situation or business prospects. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) SECURITIES SOLD. On February 28, 1998 the Company issued and sold to purchasers in a Private Placement 2,330,191 shares of the Company's Common Stock (the "PP Shares") and warrants exercisable for 1,082,548 shares of the Company's Common Stock (the "PP Warrants"). The Company also issued and sold to Computer Associates International, Inc. ("CA") a warrant exercisable for 500,000 shares of the Company's Common Stock (the "CA Warrant"). The Company also converted a convertible promissory note plus accrued interest (collectively, the "Note") held by Newport Acquisition Company No. 2, LLC ("NAC") into 11,415,094 shares of the Company's Common Stock. (the "NAC Shares"). The Company also issued to Rochon Capital Group, Ltd. ("Rochon"), its financial advisor, warrants exercisable for a total of 354,717 shares of the Company's Common Stock (the "Rochon Warrants") in partial consideration for Rochon's services in connection with the foregoing transactions. (b) UNDERWRITERS AND OTHER PURCHASERS. There were no underwriters for the foregoing transactions. The PP Shares and PP Warrants were offered only to a group of accredited investors. The CA Warrant was offered only to CA, an accredited investor. The NAC Shares were offered only to NAC, an accredited investor. The Rochon Warrants were offered only to Rochon, an accredited investor. (c) CONSIDERATION. The PP Shares and PP Warrants were sold for an aggregate offering price of $2,470,502. The CA Warrant was sold for an aggregate offering price of $500. The NAC Shares were sold in consideration of NAC's cancellation of the Note in the aggregate principal amount of $10,000,000 plus accrued interest through February 27, 1998 of $2,251,771. (d) EXEMPTION FROM REGISTRATION CLAIMED. The foregoing transactions were exempt from registration under the Securities Act of 1933, as amended (the "Act") pursuant to Rule 506 of Regulation D, which provides an exemption for sales without regard to the dollar amount of the offering, provided that there are no more than 35 purchasers, and the sale satisfies all terms and conditions of Rules 501 and 502 under the Act. (e) TERMS OF CONVERSION OR EXERCISE. The PP Warrants are exercisable at a price of $1.25 per share and expire on February 28, 2003. The CA Warrant is exercisable at a price of $1.906 per share and expires on February 27, 2004. The Rochon Warrants are exercisable at a price of $2.12 per share and expire on February 27, 2003. ITEM 3. DEFAULTS IN SENIOR SECURITIES _ NOT APPLICABLE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 The Company held it's Annual Meeting of shareholders on June 17, 1998. There were present at the meeting, in person or represented by proxy, the holders of 26,441,900 shares of Common Stock, which represented approximately 89.5% of the outstanding shares of Common Stock entitled to vote. The matters voted on at the meeting and the votes cast were as follows: 1. All Management's nominees for directors were elected as listed below:
Name of Nominee Votes Cast --------------- ---------- Scott R. Broomfield . . . . . . . . . . . For 26,304,774 Withheld 137,126 Samuel M. Inman, III . . . . . . . . . . . For 25,897,490 Withheld 544,410 Jack King. . . . . . . . . . . . . . . . . For 26,295,592 Withheld 146,308 Philip Koen . . . . . . . . . . . . . . . For 26,296,892 Withheld 145,008 Peter Micciche . . . . . . . . . . . . . . For 26,293,108 Withheld 148,792 William D. Nicholas . . . . . . . . . . . For 26,301,892 Withheld 140,008 Earl M. Stahl. . . . . . . . . . . . . . . For 26,283,933 Withheld 157,967
2. The approval of an amendment to the Company's 1995 Stock Option Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 1,000,000 shares to an aggregate of 3,000,000 shares. There were 17,322,660 shares of Common Stock voting in favor, 629,248 shares of Common Stock voting against, 407,006 shares of Common Stock abstaining and 8,082,986 non-votes. 3. The approval of amendments to the Company's 1996 Directors Stock Option Plan: (i) to increase the number of shares of Common Stock reserved for issuance thereunder by 500,000 shares to an aggregate of 1,000,000 shares; (ii) to increase the number of shares underlying stock options granted to each nonemployee director from 50,000 to 100,000 shares; and (iii) to reduce the number of years over which new nonemployee director option grants will vest from four (4) years to three (3) years. There were 17,286,164 shares of Common Stock voting in favor, 699,569 shares of Common Stock voting against, 373,181 shares of Common Stock abstaining and 8,082,986 non-votes. 4. The approval of an amendment to the Company's 1992 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 1,000,000 shares to an aggregate of 1,400,000 shares. There were 17,856,364 shares of Common Stock voting in favor, 404,457 shares of Common Stock voting against, 98,093 shares of Common Stock abstaining and 8,082,986 non-votes. 5. The approval of (i) a change in the Company's state of incorporation from California to Delaware by means of a merger of the Company with and into a wholly owned Delaware subsidiary of the Company, (ii) assumption of the Company's employee benefit plans and stock option and purchase plans by the Delaware subsidiary and (iii) revisions in the Company's indemnification agreements with its officers and directors to conform such agreements to Delaware law; provided that (i) the Certificate of Incorporation and Bylaws of the Delaware subsidiary permit the Company's shareholders to act by written consent and (ii) the Bylaws of the Delaware subsidiary permit any shareholder or group of shareholders of the Company holding at least 20% of the outstanding capital stock of the Company to call special stockholder meetings in accordance with the Delaware General Corporation Law and the Company's Bylaws. There were 17,134,834 shares of Common Stock voting in favor, 1,129,845 shares of Common Stock voting against, 76,742 shares of Common Stock abstaining and 8,100,479 non-votes. 6. The ratification of the appointment of Price Waterhouse LLP (now PricewaterhouseCoopers LLP) as the 17 Company's independent public accountants for the fiscal year ending December 31, 1998. There were 26,312,643 shares of Common Stock voting in favor, 97,059 shares of Common Stock voting against, 32,198 shares of Common Stock abstaining and 0 non-votes. ITEM 5. OTHER INFORMATION _ NOT APPLICABLE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule (b) The Company filed the following report on Form 8-K during the quarter ended June 30, 1998: Report Date: June 13, 1998 (filed June 30, 1998) Item 5: Other Events The Company announced that it had successfully completed its 1998 Annual Shareholder's Meeting and had reached agreement with Newport Acquisition Company No. 2, LLC ("NAC") to amend the Investor Rights Agreement ("IRA") dated February 27, 1998 between the Company and NAC. Pursuant to such amendment, certain terms of NAC's antidilution protection were modified and the Company agreed to accelerate registration of approximately 11.4 million shares of the Company's Common Stock held by NAC and warrants held by NAC exercisable for approximately 1.2 million shares of the Company's Common Stock. 18 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTURA SOFTWARE CORPORATION By: ___________________________________________ August 14, 1998 John W. Bowman Senior Vice President Of Finance And Operations, Chief Financial Officer (Principal Financial and Accounting Officer) 19 EX-27 2 FDS
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 7,262 0 11,355 1,526 204 20,135 20,897 17,874 28,276 21,537 0 0 0 85,775 (78,902) 28,276 16,566 25,819 2,185 4,348 19,176 0 314 848 114 734 0 0 0 734 0.03 0.03
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