-----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, JTkBfsffebEUyYdPkwiiX0tmQtL7EboRHFLiLBYmPOpw2V0J1XhL+MfCb/0I7o7g 3xycSpGVDvIX6pZ9pRCjrg== 0000950144-98-012908.txt : 19981118 0000950144-98-012908.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950144-98-012908 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARBINGER CORP CENTRAL INDEX KEY: 0000947116 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 581817306 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26298 FILM NUMBER: 98751373 BUSINESS ADDRESS: STREET 1: 1277 LENOX PK BLVD CITY: ATLANTA STATE: GA ZIP: 30319 BUSINESS PHONE: 4048414334 10-Q 1 HARBINGER CORP 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [MARK ONE] |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0-26298 HARBINGER CORPORATION (Exact name of registrant as specified in its charter)
GEORGIA 58-1817306 (State or other Jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization) 1277 LENOX PARK BOULEVARD 30319 ATLANTA, GEORGIA (Zip Code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 467-3000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of shares of the issuer's class of capital stock outstanding as of November 4, 1998, the latest practicable date, is as follows: 41,299,357 shares of Common Stock, $.0001 par value. 2 HARBINGER CORPORATION FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - (unaudited) September 30, 1998 and December 31, 1997.................................................... Consolidated Statements of Operations (unaudited) - Three Months and Nine Months Ended September 30, 1998 and 1997................... Consolidated Statements of Comprehensive Loss (unaudited) - Three Months and Nine Months Ended September 30, 1998 and 1997............. Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 1998 and 1997.............................. Notes to Consolidated Financial Statements (unaudited)......................... Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... PART II. OTHER INFORMATION Item 6. Exhibits......................................................................... SIGNATURES................................................................................
3 ITEM 1. FINANCIAL STATEMENTS HARBINGER CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31, 1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents ................................................ $ 52,156 $ 69,811 Short-term investments ................................................... 48,410 32,333 Accounts receivable, less allowances for returns and doubtful accounts of $9,724 at September 30, 1998 and $2,790 at December 31, 1997 ............................................ 35,763 40,381 Deferred income taxes .................................................... 1,903 1,892 Other current assets ..................................................... 5,494 3,431 --------- --------- Total current assets ................................................. 143,726 147,848 --------- --------- Property and equipment, less accumulated depreciation and amortization ......................................................... 21,619 18,167 Intangible assets, less accumulated amortization ............................ 16,857 16,464 Deferred income taxes ....................................................... 909 909 Other non-current assets .................................................... 197 171 --------- --------- $ 183,308 $ 183,559 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ......................................................... $ 4,554 $ 8,734 Accrued expenses ......................................................... 39,173 25,835 Deferred revenues ........................................................ 20,296 18,349 Current portion of long-term debt ........................................ -- 623 --------- --------- Total current liabilities ............................................ 64,023 53,541 --------- --------- Commitments and contingencies Redeemable preferred stock: Zero Coupon, $1.00 redemption value; 4,000,000 Shares issued and outstanding at September 30, 1998 and December 31, 1997 ................ -- -- Shareholders' equity: Common stock, $0.0001 par value; 100,000,000 shares Authorized, 42,245,457 shares and 40,827,856 shares issued and outstanding at September 30, 1998 and December 31, 1997 ............ 4 4 Additional paid-in capital ............................................... 201,381 189,841 Accumulated deficit ...................................................... (81,767) (58,945) Accumulated other comprehensive loss ..................................... (333) (882) --------- --------- Total shareholders' equity ........................................... 119,285 130,018 --------- --------- $ 183,308 $ 183,559 ========= =========
See accompanying notes to consolidated financial statements 4 HARBINGER CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Services ................................................ $ 22,137 $ 16,242 $ 63,878 $ 46,087 Software ................................................ 13,283 12,911 34,772 35,803 -------- -------- -------- -------- Total revenues ........................................ 35,420 29,153 98,650 81,890 -------- -------- -------- -------- Direct costs: Services ................................................ 9,262 5,712 24,799 15,754 Software ................................................ 1,312 1,758 3,210 5,763 -------- -------- -------- -------- Total direct costs .................................... 10,574 7,470 28,009 21,517 -------- -------- -------- -------- Gross margin ....................................... 24,846 21,683 70,641 60,374 -------- -------- -------- -------- Operating costs: Selling and marketing ................................... 9,106 6,361 23,250 18,837 General and administrative .............................. 13,639 5,147 24,480 15,225 Depreciation and amortization ........................... 2,036 1,678 5,831 4,891 Product development ..................................... 2,843 3,736 7,765 11,568 Charge for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other one-time charges ........ 13,978 3,850 27,027 20,086 -------- -------- -------- -------- Total operating costs .............................. 41,602 20,772 88,353 70,607 -------- -------- -------- -------- Operating income (loss) ............................ (16,756) 911 (17,712) (10,233) Interest income, net ........................................ (1,202) (1,207) (3,780) (2,632) Equity in losses of joint ventures .......................... -- 125 -- 301 Minority interest income .................................... -- -- -- (2) -------- -------- -------- -------- Income (loss) from continuing operations before income taxes .......................................... (15,554) 1,993 (13,932) (7,900) Income tax expense .......................................... 560 446 705 1,799 -------- -------- -------- -------- Income (loss) from continuing operations ................ (16,114) 1,547 (14,637) (9,699) Discontinued operations: Loss from operations of TrustedLink Procurement and TrustedLink Banker .................................... (938) (10,517) (1,793) (10,482) Loss on disposal of TrustedLink Procurement, including provision of $2.9 million for operating losses during phase-out period ...................................... (6,392) -- (6,392) -- -------- -------- -------- -------- Loss before extraordinary item ..................... (23,444) (8,970) (22,822) (20,181) Extraordinary loss on debt extinguishment ................... -- -- -- (2,419) -------- -------- -------- -------- Net loss applicable to common shareholders ......... $(23,444) $ (8,970) $(22,822) $(22,600) ======== ======== ======== ======== Basic and diluted loss per common share: Income (loss) from continuing operations ................ $ (0.39) $ 0.04 $ (0.36) $ (0.27) Loss from discontinued operations ....................... (0.02) (0.27) (0.04) (0.28) Loss on disposal of discontinued operations ............. (0.15) -- (0.15) -- Extraordinary loss on debt extinguishment ............... -- -- -- (0.06) -------- -------- -------- -------- Net loss per common share ............................. $ (0.56) $ (0.23) $ (0.55) $ (0.61) ======== ======== ======== ======== Weighted average number of common shares outstanding ........ 42,163 38,930 41,691 37,285 ======== ======== ======== ========
See accompanying notes to consolidated financial statements 5 HARBINGER CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) (IN THOUSANDS)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ -------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net loss applicable to common shareholders ... $(23,444) $ (8,970) $(22,822) $(22,600) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments . 1,040 (95) 549 (293) -------- -------- -------- -------- Comprehensive loss ..................... $(22,404) $ (9,065) $(22,273) $(22,893) ======== ======== ======== ========
See accompanying notes to consolidated financial statements 6 HARBINGER CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine Months Ended September 30, -------------------- 1998 1997 ---- ---- Cash flows provided by operating activities ................................ $ 2,924 $ 4,788 -------- -------- Cash flows from investing activities: Short-term investments ................................................. (15,965) (4,386) Purchases of property and equipment .................................... (9,279) (6,830) Additions to software development costs ................................ (2,837) (3,771) Investment in acquisitions ............................................. (3,547) (13,924) -------- -------- Net cash used in investing activities ................................ (31,628) (28,911) -------- -------- Cash flows from financing activities: Exercise of stock options and warrants and issuance of stock under employee stock purchase plan ......................................... 11,540 3,486 Principal payments under notes payable, long-term debt and capital lease obligations .......................................................... (623) (2,151) Proceeds from issuance of common stock ................................. -- 60,026 Repayments under credit agreement ...................................... -- (1,847) Purchase of subordinated debenture ..................................... -- (1,500) -------- -------- Net cash provided by financing activities ............................ 10,917 58,014 -------- -------- Net increase (decrease) in cash and cash equivalents ....................... (17,787) 33,890 Cash and cash equivalents at beginning of period ........................... 69,811 35,697 Effect of exchange rates on cash held in foreign currencies ................ 80 (66) Cash received from acquisitions ............................................ 52 3,322 -------- -------- Cash and cash equivalents at end of period ................................. $ 52,156 $ 72,843 ======== ======== Supplemental disclosures: Cash paid for interest ................................................. $ 50 $ 66 ======== ======== Cash paid for income taxes ............................................. $ 530 $ -- ======== ======== Supplemental disclosures of noncash investing and financing activities: Purchase of subordinated debenture in exchange for common stock ..................................................... $ -- $ 4,200 ======== ======== Acquisition of minority interest in exchange for issuance of options .................................................. $ -- $ 2,216 ======== ======== Acquisition of businesses in exchange for assumption of liabilities and issuance of common stock ............................. $ -- $ 454 ======== ========
See accompanying notes to consolidated financial statements 7 HARBINGER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial information included herein is unaudited; however, the information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations, and cash flows for the interim periods. Operating results for the three months and nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in Harbinger Corporation's ("Harbinger" or the "Company") Form 10-K for the year ended December 31, 1997 and the Company's current reports on Form 8-K dated February 24, 1998 and May 26, 1998. All share, per share and shareholders' equity amounts in the unaudited consolidated financial statements have been retroactively restated to reflect a three-for-two stock split in the form of a stock dividend paid on May 15, 1998 (see Note 5). Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Such estimates include charges for in-process product development, write-off of software development costs, restructuring, acquisition related and other one-time charges; loss on discontinued operations and allowance for doubtful accounts. Actual results could differ from management estimates. REVENUE RECOGNITION On January 1, 1998, the Company adopted Statement of Position 97-2, Software Revenue Recognition, issued by the Accounting Standards Executive Committee in October 1997, effective for financial statements for fiscal years beginning after December 15, 1997. The implementation of this statement did not have a material impact on the Company's unaudited consolidated financial statements for the three-month and nine-month periods ended September 30, 1998. COMPREHENSIVE INCOME On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, issued by the Financial Accounting Standards Board ("FASB") in June 1997, effective for fiscal years beginning after December 15, 1997. Comprehensive income includes all changes in equity during a period except those resulting in investments by owners and distributions to owners. OTHER The Company continues to evaluate the requirements of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, issued by the FASB in June 1997, effective for fiscal years beginning after December 15, 1997. The provisions of this standard do not apply to interim periods in the year of adoption. The Accounting Standards Executive Committee has issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, effective for fiscal years beginning after December 15, 1998. The Company adopted this standard on January 1, 1998. The implementation of this statement did not have a material impact on the Company's unaudited consolidated financial statements for the three-month and nine-month periods ended September 30, 1998. 8 HARBINGER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 2. ACQUISITION Effective March 31, 1998, the Company acquired EDI Works! LLC ("EDI Works!"), a Texas limited liability company, for 194,497 shares of the Company's common stock in a transaction accounted for using the pooling-of-interests method of accounting with a per-share value of $23.14. The EDI Works! business combination is not material, and therefore has been accounted for as an immaterial pooling, with EDI Works! retained earnings of $130,000 at December 31, 1997 being credited directly to the Company's accumulated deficit effective January 1, 1998. The results of operations of EDI Works! are included in the Company's consolidated statement of operations for the nine months ended September 30, 1998. In connection with the EDI Works! acquisition, the Company incurred a charge of $805,000 for acquisition-related expenses, asset write downs and integration costs in the consolidated statement of operations for the nine months ended September 30, 1998. Effective July 9, 1998, the Company acquired substantially all of the assets of the Materials Management Division of MACTEC, Inc., located in Tulsa, Oklahoma, for approximately $3.5 million in cash, subject to certain post-closing adjustments. The Company recorded the acquisition using the purchase method of accounting, with approximately $3.5 million recorded to goodwill to be amortized ratably over 10 years. 3. CHARGE FOR PURCHASED IN-PROCESS PRODUCT DEVELOPMENT, WRITE-OFF OF SOFTWARE DEVELOPMENT COSTS, RESTRUCTURING, ACQUISITION RELATED AND OTHER ONE-TIME CHARGES In connection with the acquisitions made in 1998 and 1997 and a restructuring of the Company effective September 30, 1998, the Company incurred charges for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other one-time charges ("one-time charges"). A summary of the components is as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- In-process product development .... $ -- $ 138 $ -- $ 2,853 Integration costs and non recurring one-time charges ............... 2,894 2,792 13,919 8,785 Lease termination and other ....... 4,490 -- 4,490 -- Transaction charges ............... -- -- 638 4,904 Intangible asset write downs ...... -- 107 -- 2,429 Asset write downs ................. 4,193 183 4,459 485 Other restructuring charges ....... 2,401 630 3,521 630 ======= ======= ======= ======= $13,978 $ 3,850 $27,027 $20,086 ======= ======= ======= =======
Approximately $372,000 of the costs and expenses incurred in the three months ended September 30, 1998 and $4.1 million for the nine months ended September 30, 1998 in connection with these charges included certain internal expense allocations which may recur in other expense categories in the future, potentially resulting in an increase in such expense categories as a percentage of total revenues. 9 HARBINGER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 4. DISCONTINUED OPERATIONS In the third quarter of 1998 the Board of Directors approved the discontinuance of the Company's TrustedLink Procurement ("TLP") business effective September 30, 1998. The Company is reviewing its alternatives and expects to divest this business within 12 months. The results of operations for the TLP business for all periods are reported in the accompanying statements of operations under "Discontinued operations". For the three-month and nine-month periods ended September 30, 1997, "Discontinued operations" also include operating results of the TrustedLink Banker division ("Banker"), which was discontinued in the fourth quarter of 1997. Banker's income for the three-month and nine-month periods ended September 30, 1997 was $137,000 and $173,000, respectively. Revenues for the TLP business for the nine-month periods ended September 30, 1998 and 1997 were $2.7 million and $1.1 million, respectively, and for the three-month periods ended September 30, 1998 and 1997 were $596,000 and $1.1 million, respectively. Revenues for Banker for the nine-month and three-month periods ended September 30, 1997 were $3.0 million and $1.1 million, respectively. In the third quarter of 1998 the Company provided for an estimated anticipated loss of $6.4 million related to the disposal of the TLP business. No income tax expense or benefit was recognized in 1998 or 1997 due to the Company's net operating loss carryforwards. The remaining assets and liabilities of the TLP business, excluding cash and certain liabilities, are included in the Company's consolidated balance sheet at September 30, 1998 and are summarized as follows (in thousands):
September 30, 1998 ---- Accounts receivable, net .. $ 943 Other current assets ...... 78 Property and equipment, net 766 Intangible assets, net .... 2,454 Current liabilities ....... (822) ------- Net assets ............ $ 3,419 =======
5. SHAREHOLDERS' EQUITY On March 31, 1998, the Company issued 194,497 shares of the Company's common stock as consideration related to the Company's acquisition of EDI Works! (See Note 2). On May 15, 1998, the Company paid a stock split in the form of a stock dividend on the Company's common stock to shareholders of record on May 1, 1998 as a result of a three-for-two stock split declared by the Board of Directors on April 24, 1998. All share, per share and shareholders' equity amounts included in the Company's consolidated financial statements have been restated to reflect the split for all periods presented. 6. COMMITMENTS During 1998 the Company entered into lease agreements for office space committing the Company to approximately $29 million in total payments through mid-year 2008, with an average annual commitment of $3.3 million over the next five years. 10 HARBINGER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 7. SUBSEQUENT EVENTS On October 1, 1998, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to 10% of the Company's outstanding common stock over the next 12 months. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes, the Company's Form 10-K for the year ended December 31, 1997 and the Company's current reports on Form 8-K dated February 24, 1998 and May 26, 1998 and the Company's Safe Harbor Compliance Statement filed herewith as Exhibit 99.1. OVERVIEW Harbinger Corporation (the "Company") generates revenues from various sources, including revenues for services and license fees for software. Revenues for services principally include subscription fees for transactions on the Company's Value Added Network ("VAN") and Internet Value Added Server ("IVAS"), software maintenance and implementation charges and professional service fees for consulting and training services. Subscription fees are based on a combination of monthly access charges and transaction-based usage charges and are recognized based on actual charges incurred each month. Software maintenance and implementation revenues represent recurring charges to customers and are deferred and recognized ratably over the service period. Revenues for professional services are based on actual services rendered and are recognized as services are performed. License fees for software are generally recognized upon shipment, net of estimated returns. Software revenues also include royalty revenues under distribution agreements with third parties which are recognized either on shipment of software to a distributor or upon sales to end users by a distributor depending on the terms of the distribution agreement. In 1998 the Company adopted Statement of Position 97-2, Software Revenue Recognition, issued by the Accounting Standards Executive Committee. The implementation of this statement did not have a material impact on the Company's consolidated financial statements for the period ended September 30, 1998. During the nine months ended September 30, 1998, the Company incurred acquisition and integration related and other one-time charges of $15.9 million related to acquisitions made since September 30, 1997. These costs related to business combinations include activities such as cross training, planning, product integration and marketing ("Integration Activities"). Due to Integration Activities in the nine months ended September 30, 1998 and 1997, certain internal expense allocations ("Integration Activity Costs") included in the "Charge for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other one-time charges" on the consolidated statement of operations may recur in other expense categories in the future and may result in an increase in some expense categories as a percentage of total revenues. During the third quarter of 1998 the Company implemented a restructuring plan that included the termination of approximately 10% of its personnel, the announcement of the discontinuance of certain non-strategic software products and realigning its internal organizational structure, including certain senior management. In connection with this plan the Company recorded a one-time restructuring charge of $11.1 million. The costs related to restructuring include estimates for asset write downs, termination benefits to former employees and lease termination costs. Total restructuring, acquisition and integration and other one-time charges ("one-time charges") for the nine months ended September 30, 1998 and 1997 were $27.0 million and $20.1 million, respectively. One-time charges include management estimates. Actual costs could differ from such estimates. During the third quarter of 1998, the Company also announced its intention to divest its TrustedLink Procurement business (see Note 4 to the accompanying unaudited consolidated financial statements) during the next 12 months. The results of operations for this business have been reclassified to discontinued operations for all periods in the accompanying unaudited consolidated financial statements. 12 1998 ACQUISITIONS Effective March 31, 1998, the Company acquired EDI Works! LLC ("EDI Works!"), a Texas limited liability company, for 194,497 shares of the Company's common stock in a transaction accounted for using the pooling-of-interests method of accounting. The EDI Works! business combination is not material, and therefore has been accounted for as an immaterial pooling. The results of operations of EDI Works! are included in the Company's consolidated statement of operations for the nine months ended September 30, 1998. In connection with the EDI Works! acquisition, the Company incurred a charge of $47,000 for acquisition related expenses, asset write downs and integration costs in the consolidated statement of operations for the three months ended September 30, 1998 and $805,000 for the nine months ended September 30, 1998. Effective July 9, 1998, the Company acquired substantially all of the assets of the Materials Management Division of MACTEC, Inc., located in Tulsa, Oklahoma, for approximately $3.5 million in cash, subject to certain post-closing adjustments. The Company recorded the acquisition using the purchase method of accounting, with approximately $3.5 million recorded to goodwill to be amortized ratably over ten years. RESULTS OF OPERATIONS REVENUES Total revenues increased 20% from $81.9 million in the nine months ended September 30, 1997 to $98.6 million in the same period in 1998. Revenues for services increased 39% from $46.1 million in the nine months ended September 30, 1997 to $63.9 million in the same period in 1998. This increase is attributable to growth in transaction fees, increased professional services, increased maintenance revenues and revenues from companies acquired since September 1997. Software revenue decreased 3% from $35.8 million in the nine months ended September 30, 1997 to $34.8 million in the same period in 1998. The overall decrease in software revenue for the nine months ended September 30, 1998 compared to the same period in 1997 reflects offsetting effects of modest declines in the Company's PC and UNIX product lines, decreased royalty revenues and increases in license fees from the NT product line. Total revenues increased 21% from $29.2 million in the three months ended September 30, 1997 to $35.4 million in the same period in 1998. Revenues for services increased 36% from $16.2 million in the three months ended September 30, 1997 to $22.1 million in the same period in 1998. This increase is attributable to growth in transaction fees, increased professional services, increased maintenance revenues and revenues from companies acquired since September 1997. Software revenue increased 3% from $12.9 million in the three months ended September 30, 1997 to $13.3 million in the same period in 1998. The net increase is a result of decreases in software license fees from the Company's UNIX product lines and decreases in royalty revenue offset by $1.1 million of software shipped and license fees recognized in the third quarter of 1998 for orders placed in the second quarter of 1998 that the Company did not ship. DIRECT COSTS Direct costs for services increased from $15.8 million, or 34.3% of services revenues, in the nine months ended September 30, 1997, to $24.8 million, or 38.8% of services revenues, in the nine months ended September 30, 1998. The increase in direct costs for services as a percentage of services revenues is primarily attributable to growth in the Company's professional services practice, which has lower margins than other components of the Company's service revenues. The increase in direct costs was partially offset by the impact of Integration Activity Costs. Direct costs for software decreased from $5.8 million, or 16.1% of software revenues, in the nine months ended September 30, 1997, to $3.2 million, or 9.2% of software revenues, in the nine months ended September 30, 1998. The decrease in direct software costs as a percentage of software revenues from the first nine months of 1997 compared to the comparable period of 1998 primarily reflects the effects of a decrease in software amortization in 13 1998 as a result of writing off capitalized and purchased software development in connection with certain business combinations in 1997. Direct costs for services increased from $5.7 million, or 35.2% of services revenue, in the three months ended September 30, 1997, to $9.3 million, or 41.8% of services revenue, in the three months ended September 30, 1998. The increase in direct costs for services as a percentage of services revenues is primarily attributable to growth in the Company's professional services practice, which has lower margins than other components of the Company's service revenues. Direct costs for software decreased from $1.8 million, or 13.6% of software revenues, in the three months ended September 30, 1997, to $1.3 million, or 9.9% of software revenues, in the three months ended September 30, 1998, primarily as a result of a decrease in software amortization in 1998 as a result of writing off capitalized and purchased software development in connection with certain business combinations in 1997. SELLING AND MARKETING Selling and marketing expenses increased 23% from $18.8 million, or 23.0% of revenues, in the nine months ended September 30, 1997 to $23.2 million, or 23.6% of revenues, in the nine months ended September 30, 1998. For the third quarters, selling and marketing expenses increased 43% from $6.4 million, or 21.8% of revenues, in the three months ended September 30, 1997, to $9.1 million, or 25.7% of revenues, in the three months ended September 30, 1998. For both the nine-month and three-month period comparisons, the increase in expenses is primarily due to increases in sales and marketing personnel and related selling costs. For the quarters, selling and marketing expenses as a percentage of revenues increased from the third quarter of 1997 compared to the third quarter of 1998 due to increases in sales and marketing personnel and related selling costs and a decrease in Integration Activity Costs. GENERAL AND ADMINISTRATIVE General and administrative expenses increased 61% from $15.2 million in the nine months ended September 30, 1997 to $24.5 million in the nine months ended September 30, 1998. As a percentage of revenues, these expenses increased from 18.6% of revenues in the nine months ended September 30, 1997 to 24.8% of revenues in the nine months ended September 30, 1998. For the third quarters, general and administrative expenses increased 165% from $5.1 million in the three months ended September 30, 1997 to $13.6 million in the three months ended September 30, 1998. As a percentage of revenues, these expenses increased from 17.7% of revenues in the three months ended September 30, 1997 to 38.5% of revenues in the three months ended September 30, 1998. For both the nine-month and three-month period comparisons, the increase in general and administrative expenses is primarily due to a $6.5 million provision in the third quarter of 1998 in the Company's allowance for doubtful accounts. This increase relates primarily to management's concern regarding the recent financial condition of a reseller. Management intends to continue to pursue collections of these accounts, but has reserved based on management's estimate of collectibility, for these accounts. Actual results could differ from this estimate. Adjusting for the impact of the specific charge to the allowance for doubtful accounts, general and administrative expenses would have increased 18% to $18.0 million, or 18.2% of revenues, for the nine months ended September 30, 1998 compared to the same period in 1997 and would have increased 39% to $7.1 million, or 20.1% of revenues, for the three months ended September 30, 1998 compared to the third quarter of 1997. The increase in expenses as a percentage of revenues in the nine months ended September 30, 1998 is significantly impacted by increases in expenses in the third quarter of 1998. The increase in the third quarter of 1998 compared to the third quarter of 1997 is attributable to an increase in personnel and associated costs in both the Company's domestic and European operations, an increase in rent for expanded office space, adjustments to compensation related accruals and the effect of Integration Activity Costs between periods. 14 DEPRECIATION AND AMORTIZATION Depreciation and amortization increased 19% from $4.9 million in the nine months ended September 30, 1997 to $5.8 million in the nine months ended September 30, 1998. As a percentage of revenues, these expenses were 6.0% and 5.9% of revenues for the nine-month periods ended September 30, 1997 and 1998, respectively. For the third quarters, depreciation and amortization increased 21% from $1.7 million in the three months ended September 30, 1997 to $2.0 million in the three months ended September 30, 1998. As a percentage of revenues, these expenses were 5.8% and 5.7% for the three months ended September 30, 1997 and September 30, 1998, respectively. The increase in depreciation and amortization for the nine-month and three-month periods of 1998 compared to 1997, respectively, is a result of additions to fixed assets and equipment and reflects certain investments in infrastructure. PRODUCT DEVELOPMENT Total expenditures for product development, including capitalized software development costs, decreased 31% from $15.4 million in the nine months ended September 30, 1997 to $10.6 million in the same period in 1998. The Company capitalized product development costs of $3.8 million and $2.8 million in the nine months ended September 30, 1997 and 1998, respectively, which represented 24.7% and 26.7% of total expenditures for product development in these respective periods. As a percentage of total revenues, product development expenses decreased from $11.6 million, or 14.1% of revenues, in the nine months ended September 30, 1997, to $7.8 million, or 7.8% of revenues, in the nine months ended September 30, 1998. The decrease in total expenditures for product development for the nine months ended September 30, 1998 compared to the same period in 1997 is primarily attributable to efficiencies gained in consolidating development resources of acquired companies in the last 12 months, offset by the impact of Integration Activity Costs. Amortization of capitalized software development costs is charged to direct costs of software revenues and totaled $2.7 million and $1.1 million, in the nine months ended September 30, 1997 and 1998, respectively. Total expenditures for product development, including capitalized software development costs, decreased 28% from $5.1 million in the three months ended September 30, 1997 to $3.6 million in the same period in 1998. The Company capitalized software development costs of $1.3 million and $794,000 in the three months ended September 30, 1997 and 1998, respectively, which represented 26.0% and 21.8% of total expenditures for product development in these respective periods. Product development expenses decreased from $3.8 million, or 12.8% of revenues, in the three months ended September 30, 1997, to $2.8 million, or 8.0% of revenues, in the three months ended September 30, 1998. The decrease in total expenditures for product development for the third quarter of 1998 compared to the third quarter of 1997 is primarily attributable to efficiencies gained in consolidating development resources of acquired companies in the last 12 months, offset by the impact of Integration Activity Costs. The decrease in the percentage of capitalized product development costs as a component of total expenditures for product development in the third quarter of 1998 compared to the third quarter of 1997 is primarily attributable to a decrease in development activities associated with products that have reached technological feasibility. Amortization of capitalized software development costs is charged to direct cost of software revenues and totaled $922,000 and $422,000 in the three months ended September 30, 1997 and 1998, respectively. CHARGE FOR PURCHASED IN-PROCESS PRODUCT DEVELOPMENT, WRITE-OFF OF SOFTWARE DEVELOPMENT COSTS, RESTRUCTURING, ACQUISITION RELATED AND OTHER ONE-TIME CHARGES Total one-time charges increased 35% from $20.1 million for the nine months ended September 30, 1997 to $27.0 million for the comparable period in 1998. Certain charges in 1998 were incurred as a result of continued efforts to integrate the following recent acquisitions: $13.7 million attributable to Premenos Technology Corp. ("Premenos") acquired on December 19, 1997; $1.4 million attributable to Atlas Products International, Limited ("Atlas") acquired on October 23, 1997; and $805,000 attributable to EDI Works! acquired on March 31, 1998. Additionally, the Company recorded $11.1 million in termination benefits to former employees, lease termination costs, asset write downs and other charges attributable to a restructuring effective September 30, 1998. For the nine months ended September 30, 1997 the one-time charges of $20.1 million were attributable to the following acquisitions: 15 $11.9 million to Supply Tech, Inc.; $4.3 million to Harbinger NET Services LLC; and $3.9 million to Acquion, Inc. ("Acquion). (See Note 3 to the accompanying unaudited consolidated financial statements.) Total one-time charges for the quarter ended September 30, 1997 were $3.9 million compared to $14.0 million in the quarter ended September 30, 1998. The charges for the three months ended September 30, 1998 were attributable as follows: $2.7 million to Premenos; $200,000 to Atlas; $47,000 to EDI Works!; and $11.1 million in termination benefits to former employees, lease termination costs, asset write downs and other charges in connection with to a restructuring effective September 30, 1998. The three-month charges for the comparable period in 1997 were all attributable to the acquisition of Acquion. Certain one-time charges were made based on management estimates. Actual results could differ from such estimates. INTEREST INCOME, NET Interest income, net, increased 44% from $2.6 million for the nine months ended September 30, 1997 to $3.8 million for the nine months ended September 30, 1998. On a quarter-to-quarter comparison, interest income, net, was $1.2 million in the third quarters of 1997 and 1998. The increase for the nine months ended September 30, 1998 compared to the comparable period ended September 30, 1997 is a result of higher average balances of cash and cash equivalents and short-term investments in 1998 compared to 1997. INCOME TAXES Income tax expense decreased 61% from $1.8 million for the nine months ended September 30, 1997 to $705,000 for the nine months ended September 30, 1998. For the quarters ended September 30, 1997 and 1998 income tax expense increased from $446,000 to $560,000, respectively. All changes in income tax expense are attributable to the nondeductibility of certain expenses for tax purposes incurred in 1997, particularly acquisition and integration related charges, and current tax liabilities incurred in certain foreign and state jurisdictions. DISCONTINUED OPERATIONS On September 30, 1998, the Company discontinued its TrustedLink Procurement ("TLP") business, which had been generating lower than desired profitability and growth. The Company plans to divest the discontinued business during the next twelve months. The results of operations for this business have been reclassified to discontinued operations for all periods in the accompanying unaudited consolidated financial statements. Reclassified losses for the TLP business were $1.8 million and $10.7 million for the nine-month periods ended September 30, 1998 and 1997, respectively, and were $938,000 and $10.7 million for the three-month periods ended September 30, 1998 and 1997, respectively. In the third quarter of 1998 the Company also provided for an estimated anticipated loss on the disposal of the TLP business of $6.4 million. Actual costs could differ from this estimate. In the fourth quarter of 1997 the Company discontinued its TrustedLink Banker division ("Banker") and the unaudited consolidated financial statements also reflect the impact of reclassifying the Banker results of operations to discontinued operations. Such reclassified income for the three-month and nine-month periods ended September 30, 1997 were $137,000 and $173,000, respectively. NET LOSS AND EARNINGS (LOSS) PER SHARE Net loss applicable to common shareholders increased from $22.6 million, or $0.61 per share, for the nine months ended September 30, 1997 to $22.8 million, or $0.55 per share, for the nine months ended September 30, 1998. Net income, adjusted to exclude one-time charges, a specific $6.5 million charge to general and administrative expenses in the third quarter of 1998, a net loss from discontinued operations and an extraordinary loss on debt extinguishment in 1997, net of the effect of income taxes, would have been $7.7 million, or $0.19 per share, for the nine months ended September 30, 1997, compared to $12.1 million, or $0.28 per share, for the nine 16 months ended September 30, 1998, representing a 57% increase from 1997 to 1998. Net income, excluding all aforementioned charges except the specific $6.5 million charge to general and administrative expenses in the third quarter of 1998, would have been $7.7 million, or $0.19 per share, for the nine months ended September 30, 1997, compared to $8.2 million, or $0.19 per share, for the nine months ended September 30, 1998, representing a 6% increase from 1997 to 1998. Net loss applicable to common shareholders increased from $9.0 million, or $0.23 per share, for the quarter ended September 30, 1997 to $23.4 million, or $0.56 per share, for the quarter ended September 30, 1998. Net income, adjusted to exclude one-time charges, a specific $6.5 million charge to general and administrative expenses in the third quarter of 1998 and a net loss from discontinued operations, net of the effect of income taxes, would have been $3.7 million, or $0.09 per share, for the quarter ended September 30, 1997, compared to $3.0 million, or $0.07 per share, for the quarter ended September 30, 1998, representing a 20% decrease from 1997 to 1998. Net income (loss), excluding all aforementioned charges except the specific $6.5 million charge to general and administrative expenses in the third quarter of 1998, would have been income of $3.7 million, or $0.09 per share, for the three months ended September 30, 1997, compared to a loss of $961,000, or $0.02 per share, for the three months ended September 30, 1998, representing a 126% decrease from 1997 to 1998. Earnings (loss) per share in future periods, for both basic and fully diluted presentations, could be impacted by a potential change in the number of shares of common stock outstanding as a result of the effects of the Company's common stock repurchase program and the Company's repricing of certain unexercised employee stock options held by employees other than certain senior executive officers. Both programs were authorized by the Company's Board of Directors in October 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital decreased $14.6 million from $94.3 million as of December 31, 1997 to $79.7 million as of September 30, 1998. Net cash provided by operating activities decreased 40% from $4.8 million for the nine months ended September 30, 1997 to $2.9 million for the comparable period in 1998, primarily as a result of liquidation of liabilities incurred due to one-time charges associated with acquisitions since September 30, 1997. Net cash used in investing activities increased $2.7 million from $28.9 million for the nine months ended September 30, 1997 to $31.6 million for the nine months ended September 30, 1998 due to an increase in short-term investments over cash and cash equivalents between the periods offset by a decrease in cash outlays for acquisitions of companies. Additionally, the Company continues to acquire fixed assets and equipment in 1998. Net cash provided by financing activities decreased $47.1 million from $58.0 million for the nine months ended September 30, 1997 to $10.9 million for the nine months ended September 30, 1998 primarily resulting from the Company receiving $60.0 million from a secondary stock offering in July 1997. Management expects that the Company will continue to be able to fund its operations, investment needs and capital expenditures through cash flows generated from operations, cash on hand, borrowings under the Company's $10 million credit facility and additional equity and debt capital. Management believes that outside sources for debt and additional equity capital, if needed, will be available to finance expansion projects and any potential future acquisitions. The form of any financing will vary depending upon prevailing market and other conditions and may include short or long term borrowings from financial institutions, or the issuance of additional equity or debt securities. However, there can be no assurances that funds will be available on terms acceptable to the Company. Several factors could have an impact on the Company's cash flows in the upcoming quarters, including the effects of the Company's recent implementation of a common stock repurchase program (see Note 7 to the accompanying unaudited consolidated financial statements), liquidation of liabilities incurred due to a restructuring of the Company and a discontinued operation effective September 30, 1998, and anticipated outlays for the Company's on-going 1998 effort to enhance and consolidate its IT infrastructure. The Company does not believe that inflation has had a material impact on its business. However, there can be no assurance that Harbinger's business will not be affected by inflation in the future. 17 YEAR 2000 READINESS Many currently installed computer systems and software products will not properly process date information in the time period leading up to, including and following the year 2000. These systems and products often store and process the year field of date information as two digit numbers, and misinterpret dates in the year 2000 and beyond as being dates in the year 1900 or subsequent years. This "Year 2000" issue impacts Harbinger both with respect to its customers as a developer and vendor of computer software products and services and internally for its information technology ("IT") and non-IT systems. The Company formed a Year 2000 Steering Committee in July 1998 to formally address the Company's Year 2000 issues, which formalized the Company's Year 2000 assessment program begun in March 1997. The Year 2000 Steering Committee has overseen the Company's Year 2000 Readiness Assessment Program, which includes establishing the Company's standard for Year 2000 Readiness, designing test parameters for its products, IT and non-IT systems, overseeing the Company's remediation program, including establishing priorities for remediation and allocating available resources, overseeing the communication of the status of the Company's efforts to its customers, and establishing contingency plans in the event the Company experiences Year 2000 disruptions. The Company describes its products and services as "Year 2000 Ready" when they have been successfully tested using the procedure proscribed in its Readiness Assessment Program. This procedure defines the criteria used to design tests that seek to determine the Year 2000 readiness of a product. Under the Company's criteria, a software product is Year 2000 Ready if it: 1. Correctly handles date information before, during, and after January 1, 2000, accepting date input, providing date output and performing calculation on dates or portions of dates. 2. Functions accurately and without interruption before, during and after January 1, 2000 without changes in operation associated with the advent of the new century assuming correct configuration. 3. Where appropriate, responds to two-digit date input in a way that resolves the ambiguity as to century in a disclosed, defined and pre-determined manner. 4. Stores and provides output of date information in ways that are unambiguous as to century. 5. Manages the leap year occurring in the year 2000, following the quad-centennial rule. As of September 30, 1998 Company management estimates that approximately 90% of its product readiness testing has been completed. While many of the Company's products are presently Year 2000 Ready, the Company currently estimates that all of its continuing products will be available to customers in a Year 2000 Ready version by the end of 1998. Certain of the Company's customers are currently using legacy versions of the Company's products for which a Year 2000 Ready version will not be developed. The Company has developed migration plans to move such customers to functionally similar Year 2000 Ready products. The Company is also in the process of implementing a website on the Internet that will include a general overview of the Company's Readiness Assessment Program, including a list of products and the applicable Year 2000 Ready version numbers of such products. The Company is presently engaged in a significant upgrade of substantially all of its core IT systems, including those related to sales, customer service, human resources, finance, accounting and other enterprise resource planning functions, as a result of its growth in recent years. The Company believes that the upgraded systems, which it expects to have substantially implemented by mid-year 1999, are all Year 2000 Ready. The Company is reviewing its remaining IT systems for Year 2000 Readiness, and expects to modify, replace or discontinue the use of non-compliant systems before the end of 1999. In addition, the Company is in the process of evaluating its Year 2000 readiness with respect to non-IT systems, including systems embedded in the Company's communications and office facilities. In many cases these facilities have been recently upgraded or are scheduled 18 to be upgraded before year-end 1999 as a result of the Company's growth in recent years. The Company is in the process of distributing surveys to its principal IT and non-IT systems and services vendors soliciting information on their Year 2000 Readiness as part of this review. The Company is also surveying its vendors' websites for additional related information. The majority of the work performed for the Company's Year 2000 Readiness Assessment Program has been completed by the Company's staff. Additionally, the Company engaged outside advisors to evaluate the Readiness Assessment Program and to participate in certain elements of product testing. The total costs for completing the Year 2000 Readiness Assessment Program, including modifications to the Company's software products, is estimated to be between $1 million and $2 million, funded through the Company's internal operating cash flows. This cost does not include the cost for new software, or for modifications to existing software, for the Company's core IT and non-IT systems, as these projects were not accelerated due to the Year 2000 issue. Approximately $200,000 to $300,000 in cost remains to be incurred to complete the Company's Readiness Assessment Program. The Company believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. Potential customers may also choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industry. Conversely, Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for software products. In addition, Year 2000 issues could cause a significant number of companies, including current Company customers, to reevaluate their current software needs, and as a result switch to other systems or suppliers. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. At present the Company has only preliminarily discussed contingency plans in the event that Year 2000 non-compliance issues materialize. The Company expects to formalize its contingency plans prior to year-end 1999. In the case of certain of the Company's value-added network operations, it will be difficult for the Company to seamlessly implement alternative service arrangements due to the nature and complexity of the customer interface. While the Company believes that its Readiness Assessment Program is addressing the risks specific to the Company for the Year 2000 issue, including its operations in markets outside of the United States, it cannot be assured that events will not occur that could have a material adverse impact on its business, operating results and financial condition. Such events include the risk of lawsuits from customers and the inability to process data internally on its IT systems. Further, the Company is aware of the risk that domestic and international third parties, including vendors and customers of the Company, will not adequately address the Year 2000 problem and the resultant potential adverse impact on the Company. Regardless of whether the Company's products are Year 2000 compliant, there can be no assurance that customers will not assert Year 2000 related claims against the Company. EURO CONVERSION Effective January 1, 1998, eleven of the 15 member countries of the European Union are scheduled to adopt a single European currency, the euro, as their common legal currency. Like many companies that operate in Europe, various aspects of the Company's business will be affected by the conversion to the euro. The Company is currently evaluating its products and systems. The failure to adequately address the euro conversion issues could effect the Company's ability to offer software and services in the effected countries, as well as its ability to operate internal systems. While the company believes that it can successfully remediate all related issues, there can be no assurance that it will do so in a timely manner. The failure to do so could have an adverse effect on the Company. 19 FORWARD LOOKING STATEMENTS Other than historical information contained herein, certain statements included in this report may constitute "forward looking" statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 related to the Company that involve risks and uncertainties including, but not limited to, quarterly fluctuations in results, the management of growth, market acceptance of certain products, impact of Year 2000 compliance and other risks. For further information about these and other factors that could affect the Company's future results, please see the Company's most recent Form 10-K including the exhibits attached thereto or incorporated therein filed with the Securities and Exchange Commission. Investors are cautioned that any forward looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward looking statements. The Company undertakes no obligation to update or revise forward looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. RECENT ACCOUNTING PRONOUNCEMENTS In 1998 the Company adopted Statement of Position 97-2, Software Revenue Recognition, issued by the Accounting Standards Executive Committee, and Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, issued by the Financial Accounting Standards Board. The Company adopted Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, issued by the Accounting Standards Executive Committee effective for fiscal years beginning after December 15, 1998, on January 1, 1998. The implementation of these statements did not have a material impact on the Company's accompanying unaudited consolidated financial statements for the three-month and nine-month periods ended September 30, 1998. The Company continues to evaluate the requirements of Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information, which is effective for the year ending December 31, 1998 but does not apply to interim periods in the year of adoption. 20 PART II. OTHER INFORMATION ITEM 6. EXHIBITS (a) Exhibits Exhibit 10.1 Third Amendment to the Harbinger Corporation Amended and Restated Stock Purchase Plan Exhibit 27.1 Financial Data Schedule Exhibit 27.2 Restated Financial Data Schedule Exhibit 99.1 Safe Harbor Compliance Statement 21 S I G N A T U R E S 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. HARBINGER CORPORATION Date: November 13, 1998 /s/ C. Tycho Howle ----------------- --------------------------------------------- C. Tycho Howle Chairman and Chief Executive Officer (Principal Executive Officer) Date: November 13, 1998 /s/ Joel G. Katz ----------------- --------------------------------------------- Joel G. Katz Chief Financial Officer (Principal Financial Officer; Principal Accounting Officer) EX-10.1 2 3RD AMEND-AMENDED & RESTATED STOCK PURCHASE PLAN 1 EXHIBIT 10.1 THIRD AMENDMENT TO THE AMENDED AND RESTATED HARBINGER CORPORATION EMPLOYEE STOCK PURCHASE PLAN THIS THIRD AMENDMENT TO THE AMENDED AND RESTATED HARBINGER CORPORATION EMPLOYEE STOCK PURCHASE PLAN (the "Amendment") is made effective as of September 30, 1998 (the "Effective Date"), by HARBINGER CORPORATION, a corporation organized and doing business under the laws of the State of Georgia (the "Company"). All capitalized terms in this Amendment have the meaning ascribed to such term as in the Harbinger Corporation Employee Stock Purchase Plan (the "Plan"), unless otherwise stated herein. W I T N E S S E T H: WHEREAS, the Plan has been amended on two prior occasions and the Board of Directors desires to again amend the Plan pursuant to the authority set forth in Plan Section 16; NOW THEREFORE, in consideration of the premises and mutual promises contained herein, the Plan is hereby amended as follows: SECTION 2. "Definitions", is hereby amended by substituting the following definition of "PURCHASE PERIOD": "PURCHASE PERIOD means the period beginning 48 hours after the release of operating results for the immediately prior quarter and ending 48 hours after the release of operating results for the then current quarter." IN WITNESS WHEREOF, the Company has caused this THIRD AMENDMENT TO THE AMENDED AND RESTATED HARBINGER CORPORATION EMPLOYEE STOCK PURCHASE PLAN to be executed and effective for the third quarter of the 1998 Plan year. HARBINGER CORPORATION By: /s/ C. Tycho Howle -------------------------------------- C. Tycho Howle, Chairman & CEO ATTEST: By: /s/ Joel G. Katz --------------------------- Joel G. Katz, Secretary EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF HARBINGER CORPORATION FOR THE NINE MONTHS ENDED SEP-30-1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. ALL AMOUNTS HAVE BEEN RETROACTIVELY RESTATED TO REFLECT A THREE-FOR-TWO STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND PAID ON MAY 15, 1998 AND A DISCONTINUED OPERATION EFFECTIVE SEPTEMBER 30, 1998. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 52,156 48,410 38,815 9,724 0 143,726 41,769 20,150 183,308 64,023 0 0 0 4 119,281 183,308 34,772 98,650 3,210 28,009 88,353 0 64 (13,932) 705 (14,637) (8,185) 0 0 (22,822) (0.55) (0.55)
EX-27.2 4 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED CONSOLIDATED FINANCIAL STATEMENTS OF HARBINGER CORPORATION FOR THE NINE MONTHS ENDED SEP-30-1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. ALL AMOUNTS HAVE BEEN RETROACTIVELY RESTATED TO REFLECT THE POOLING WITH PREMENOS TECHNOLOGY CORP., A THREE-FOR-TWO STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND PAID ON MAY 15, 1998 AND TWO DISCONTINUED OPERATIONS AS OF SEPTEMBER 30, 1998. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 72,843 34,470 31,901 2,035 0 144,693 33,994 15,172 186,166 38,886 0 0 0 4 145,749 186,166 35,803 81,890 5,763 21,517 70,607 0 183 (7,900) 1,799 (9,699) (10,482) (2,419) 0 (22,600) (0.61) (0.61)
EX-99.1 5 SAFE HARBOR COMPLIANCE STATEMENT 1 EXHIBIT 99.1 Safe Harbor Compliance Statement In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Harbinger Corporation ("Harbinger" or the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of Harbinger. The Company undertakes no obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements (the "Safe Harbor Statement") to reflect future developments. In addition, Harbinger undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. This Safe Harbor Statement supersedes that certain Safe Harbor Statement filed as Exhibit 99.1 to the Company's Current Report on Form 10-K for the year ended December 31, 1997. Harbinger provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Quarterly Report on Form 10-Q to which this statement is appended as an exhibit and also include the following: Integration of Recent Acquisitions; Future Acquisitions. Harbinger has completed a number of acquisitions since January 1, 1997, including the acquisitions of the Materials Management Division of MACTEC, INC., EDIWorks! L.L.C. , Premenos Technology Corp. ("Premenos"), Atlas Products International, Limited and its affiliate ("Atlas"), Acquion, Inc. ("Acquion"), SupplyTech, Inc. and its affiliated entities (collectively, "SupplyTech"), and the minority interests of Harbinger NET Services, LLC ("HNS"). Premenos, Acquion, SupplyTech and HNS have historically reported significant operating losses. Harbinger's acquisitions present a number of risks and challenges, including the historical operating losses of Premenos, Acquion, SupplyTech and HNS, the integration of the software products of the acquired companies into Harbinger's current suite of products, the integration of the sales forces of acquired companies into Harbinger's existing sales operations, the coordination of customer support services, the conversion of acquired companies to a uniform infrastructure, the integration of international operations of acquired companies with Harbinger's international affiliates, and the diversion of management's attention from other business concerns. In connection with its prior acquisitions, Harbinger has experienced the following effects during the periods subsequent to such acquisitions: integration costs and expenses associated with such acquisition transactions; refinement of the acquired companies business operations to conform to Harbinger's mission and strategy, and the discontinuance of the non-core business operations of the acquired company; and elimination of certain revenue 2 opportunities as a result of product overlap, channel conflict, or other competitive overlap. Management of Harbinger currently anticipates that all or certain of the foregoing factors may impact future operating results of Harbinger as a result of the consummation of the acquisitions of Mactec MMD, EDIWorks and Premenos including, but not limited to, growth in revenue and operating income in future periods. Several of the newly acquired products address the same markets as, and may therefore be competitive with, or redundant with, existing Harbinger products. There can be no assurance that Harbinger can successfully assimilate its operations and integrate its software products with these recently acquired operations, software products and technologies, that Harbinger will be successful in repositioning its products on a timely basis to achieve market acceptance or that the integration efforts associated with recent acquisitions will not have a material adverse effect upon Harbinger's business or results of operations in future periods. Any delay in such integration efforts or adverse developments associated therewith could have a material adverse effect on Harbinger. Harbinger's growth has been significantly enhanced through acquisitions of other businesses, products and licenses. There can be no assurance that in the future Harbinger will be able to identify suitable acquisition candidates available for sale at reasonable prices, consummate any acquisition or successfully integrate any acquired business into Harbinger's operations. Operational and software integration problems may arise if Harbinger undertakes future acquisitions of complementary products, technologies or businesses. Future acquisitions may also result in potentially dilutive issuances of equity securities, the incurrence of additional debt, the write-off of in-process product development and capitalized product costs, integration costs, and the amortization of expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on Harbinger. Acquisitions involve numerous additional risks, including difficulties in the assimilation of the operations, products and personnel of the acquired company, differing company cultures, the diversion of management's attention from other business concerns, risks of entering markets in which Harbinger has little or no direct prior experience, and the potential loss of key employees of the acquired company. Customer satisfaction or performance problems at a single acquired firm could have a material adverse impact on the reputation of Harbinger as a whole. Although Harbinger has cash resources of approximately $100 million, to the extent Harbinger desires to finance a future acquisition, there can be no assurance that Harbinger will be able to secure financing for such a transaction on reasonable terms or at all. See "Ability to Manage Growth." Factors Affecting Operating Results; Potential Fluctuations in Quarterly Results. Although Harbinger has been able to grow its revenue and operating income (before special charges) in the past, there can be no assurance that Harbinger will be able to continue to grow its revenue and operating income at historical levels in the future or that fluctuations in revenue or operating income growth will not occur in future periods. Factors currently known to management that could impact rate of growth in revenue or operating income in future periods include, but are not limited to, the management time and effort currently anticipated in connection with the integration of recently acquired businesses and the implementation of enterprise resource planning systems, the discontinuance of historical or acquired lines of business or products and a slow down in the rate of growth of AS/400 EDI sales. In addition, Harbinger's quarterly operating results have in the past and may in the future vary or decrease significantly depending on factors such as revenue from software sales, the timing of new product and service announcements, changes in pricing policies by Harbinger and its competitors, market acceptance of new and enhanced versions of Harbinger's products, the size and timing of significant orders, changes in operating expenses, changes in Harbinger's strategy, personnel changes, government regulation, the introduction of alternative technologies, the effect of acquisitions and general economic factors. Harbinger has limited or no control over many of these factors. The Company is currently upgrading its enterprise resource planning systems. Management believes that the successful installation and 3 implementation of these systems are prerequisites to the Company's success. Any delay in the installation or failure in the implementation of one or more of these systems could have a material adverse effect on the Company. Harbinger has experienced losses in the past, and at September 30, 1998, Harbinger had an accumulated deficit of approximately $81.8 million. Harbinger operates with virtually no software product order backlog because its software products typically are shipped shortly after orders are received. As a result, revenues in any quarter are substantially dependent on the quantity of purchases of services requested and product orders received in that quarter. Quarterly revenues also are difficult to forecast because the market for electronic commerce and EDI software products is rapidly evolving and Harbinger's revenues in any period may be significantly affected by the announcements and product offerings of Harbinger's competitors as well as alternative technologies. Harbinger's IVAS and electronic catalog products are more complex and expensive compared to Harbinger's other electronic commerce and Internet products introduced to date, and will generally involve significant investment decisions by prospective customers. Accordingly, Harbinger expects that in selling its IVAS and electronic catalog products it will encounter risks typical of companies that rely on large dollar purchase decisions, including the reluctance of purchasers to commit to major investments in new products and protracted sales cycles, both of which add to the difficulty of predicting future revenues and may result in quarterly fluctuations. Harbinger's expense levels are based, in part, on its expectations as to future revenues. If revenue levels are below expectations, Harbinger may be unable or unwilling to reduce expenses proportionately and operating results are likely to be adversely affected. As a result, Harbinger believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Due to all of the foregoing factors, it is likely that in some future quarter or quarters Harbinger's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Harbinger Common Stock will likely be adversely affected in a material manner. Harbinger recognizes revenues for software license fees upon shipment, net of estimated returns. Customers using Harbinger's PC products are permitted to return products after delivery for a specified period, generally 30 days. Harbinger generally has experienced returns of approximately 10% to 20% of the PC product license fees, and Harbinger records revenues after a deduction for estimated returns. Any material increase in Harbinger's return experience could have an adverse effect on its operating results. See "Integration of Recent Acquisitions; Future Acquisitions." Acquisition-Related and Other Charges; Loss in Quarters Ended March 31, 1998 and September 30, 1998 and Loss Expected in Year Ended December 31, 1998. In the first and third quarters of 1998, Harbinger reported approximately $13.0 million in integration related charges and $14.0 million in integration and restructuring related charges, respectively. As a result of these charges, Harbinger reported a net loss for each of the first and third quarters of 1998 and expects to report a net loss for the year ended December 31, 1998. Certain of the costs and expenses incurred in connection with these integration activities and reflected in such charges included internal expense allocations which may recur in other expense categories in the future and may result in an increase in some expense categories in Harbinger's results of operations in future periods. Ability to Manage Growth. Harbinger has recently experienced significant growth in revenue, operations and personnel as it has made strategic acquisitions, added subscribers to the Harbinger VAN and IVAS and increased the number of licensees of its software products. This growth could continue to place a significant strain on Harbinger's management and operations, including its sales, marketing, customer support, research and development, finance and administrative operations. Achieving and maintaining profitability during a period of expansion will depend, among other things, on Harbinger's ability to successfully expand its products, services and markets and to manage its operations and 4 acquisitions effectively. Difficulties in managing growth, including difficulties in obtaining and retaining talented management and product development personnel, especially following an acquisition, could have a material adverse effect on Harbinger. Ability to Respond to Rapid Change. Harbinger's future success will depend significantly on its ability to enhance its current products and develop or acquire and market new products which keep pace with technological developments and evolving industry standards as well as respond to changes in customer needs. The market for electronic commerce and EDI products and services, VAN services and Internet software products and services is characterized by rapidly changing technology, evolving industry standards and customer demands, and frequent new product introductions and enhancements. There can be no assurance that Harbinger will be successful in developing or acquiring product enhancements or new products to address changing technologies and customer requirements adequately, that it will introduce such products on a timely basis, or that any such products or enhancements will be successful in the marketplace. Harbinger's delay or failure to develop or acquire technological improvements or to adapt its products to technological change would have a material adverse effect on Harbinger's business, results of operations and financial condition. The failure of Harbinger's management team to respond effectively to and manage rapidly changing technological and business conditions as well as the growth of its own business, should it occur, could have a material adverse impact on Harbinger's business, results of operations and prospects. Intense Competition. The electronic commerce, EDI and network services and products businesses are intensely competitive, and Harbinger has many competitors with substantially greater financial, marketing, personnel and technological resources than Harbinger. Other companies offer products and services that may be considered by customers to be acceptable alternatives to Harbinger's products and services. Certain companies also operate private computer networks for transacting business with their trading partners, and Harbinger expects other companies to offer products and services competitive with the Templar, Express and IVAS products and services. It is expected that other companies may develop and implement similar computer-to-computer networks, some of which may be "public" networks such as Harbinger's and others may be "private," providing services only to a specific group of trading partners, thereby reducing Harbinger's ability to increase sales of its network services. In addition, several companies offer PC-based, midrange NT and UNIX, and mainframe and Internet computer software products which compete with Harbinger's software products. Advanced operating systems and applications software from Microsoft and other vendors also may offer electronic commerce functions that limit Harbinger's ability to sell its software products. Harbinger believes that the continuing acceptance of electronic commerce and EDI will attract new competitors, including software applications, operating systems and systems integration companies that may bundle electronic commerce solutions with their offerings, and alternative technologies that may be more sophisticated and cost effective than Harbinger's products and services. Competitive companies may offer certain electronic commerce products or services, such as communications software, network transactional services or consulting, at no charge or a deeply discounted charge, in order to obtain the sale of other products or services. Since Harbinger's agreements with its network subscribers generally are terminable upon 30 days' notice, Harbinger does not have the contractual right to prevent its customers from changing to a competing network. See "Dependence on New Products; Industry Standards." Competitors that offer products and/or services that compete with various of Harbinger's products and services include, among others, IBM, Inc., AT&T, Computer Associates International, Inc., EDS, General Electric Information Systems, QRS, Inc., Sterling Commerce, Inc., Aspect Development, Inc., TSI International, Inc., Ariba Technologies, Inc. and a joint venture between British Telecommunications Plc and MCI Communications Corporation; as well as the internal programming staffs of various businesses engaging in electronic commerce. 5 Emergence of Electronic Commerce Over the Internet. The Internet provides an alternative means of providing electronic commerce to business trading partners. The market for Internet software and services is both emerging and highly competitive, ranging from small companies with limited resources to large companies with substantially greater financial, technical and marketing resources than Harbinger. In addition to Harbinger's Internet related products and services, several existing competitors of Harbinger have introduced their own Internet electronic commerce products and services. Moreover, new competitors, which may include telephone companies and media companies, are likely to increase the provision of business-to-business data transmission services using the Internet. There is no assurance that the Internet will become an accepted method of electronic commerce. There is no assurance that TrustedLink Guardian and Templar end user software and IVAS products, which enable electronic commerce over the Internet, will be accepted in the Internet market or can be competitive with other products based on evolving technologies. If the Internet becomes an accepted method of electronic commerce, Harbinger could lose network customers from its VAN which would reduce recurring revenue from network services and have a material adverse effect on Harbinger. Even if customers choose Harbinger's Internet solutions, the revenue gained from the sale of these solutions may not offset the loss of revenue from the sale of Harbinger's traditional EDI solutions. The use of Harbinger's Internet electronic commerce products and services will depend in large part upon the continued development of the infrastructure for providing Internet access and services. Use of the Internet for business-to-business electronic commerce services raises numerous issues that greatly impact the development of this market. These issues include reliability, data security and data integrity, timely transmission, and pricing of products and services. Because global commerce and online exchange of information on the Internet is new and evolving, it is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace. The Internet has experienced, and is expected to continue to experience, substantial growth in the number of users and the amount of traffic. There can be no assurance that the Internet will continue to be able to support the demands placed on it by this continued growth. In addition, the Internet could lose its viability due to delays in the adoption of new standards and protocols to handle increased levels of Internet activity, or due to increased governmental regulation or the imposition of fees or taxes for its use. There can be no assurance that the infrastructure or complementary services necessary to make the Internet a viable commercial marketplace will be developed, or, if developed, that the Internet will become a viable commercial marketplace for products and services such as those offered by Harbinger. If the necessary infrastructure or complementary services or facilities are not developed, or if the Internet does not become a viable commercial marketplace, Harbinger's business, operating results or financial condition will be materially adversely affected. Dependence on New Products; Industry Standards. The electronic commerce industry is characterized by rapid technological change, frequent new product and service introductions and evolving industry standards. Harbinger's future success will depend in significant part on its ability to anticipate industry standards, to continue to apply advances in electronic commerce product and service technologies, to enhance existing products and services, and to introduce and acquire new products and services on a timely basis to keep pace with technological developments. There can be no assurance that Harbinger will be successful in developing, acquiring or marketing new or enhanced products or services that respond to technological change or evolving industry standards, that Harbinger will not experience difficulties that could delay or prevent the successful development, acquisition or marketing of such products or services or that its new or enhanced products and services will adequately meet the requirements of the marketplace and achieve market acceptance. In the past, Harbinger has experienced delays in the commencement of commercial shipments of new products and enhancements, resulting in 6 delays or losses of product revenues. Such delays or failure in the introduction of new or enhanced products or services, or the failure of such products or services to achieve market acceptance, could have a material adverse effect on the business, results of operations and financial condition of Harbinger. Investment in International Subsidiaries; International Growth and Operations. Harbinger believes that its continued growth and profitability will require expansion of its international operations through its international subsidiaries, in the United Kingdom, The Netherlands, Germany, Italy, France and Mexico (collectively, the "International Subsidiaries"). This expansion will require financial resources and significant management attention, particularly by certain members of the management of Harbinger. Harbinger's ability to successfully expand its business internationally will also depend upon its ability to attract and retain both talented and qualified managerial, technical and sales personnel and electronic commerce services customers outside the United States and its ability to continue to effectively manage its domestic operations while focusing on international expansion. Certain of the International Subsidiaries have experienced operating losses in their recent histories and some have experienced significant operating losses in their recent histories. To the extent that the International Subsidiaries are unable to penetrate international markets in a timely and profitable manner, Harbinger's growth, if any, in international sales will be limited, and Harbinger could be materially adversely affected. During 1998, Harbinger's growth in revenue has been adversely affected by management issues associated with its European operations, and general softness in demand in the European markets. Moreover, Harbinger's ability to successfully implement its international strategy may require installation and operation of a value-added network and implementation of its IVAS software in additional countries, as well as additional improvements to its infrastructure and management information systems, including its international customer support systems. In addition, there can be no assurance that Harbinger will be able to maintain or increase international market demand for Harbinger's products or services. International operations are subject to certain inherent risks, including unexpected changes in regulatory requirements and tariffs, longer payment cycles, increased difficulties in collecting accounts receivable and potentially adverse tax consequences. To the extent international sales are denominated in foreign currencies, gains and losses on the conversion to U.S. dollars of revenues, operating expenses, accounts receivable and accounts payable arising from international operations may contribute to fluctuations in Harbinger's results of operations. Harbinger has not entered into any hedging or other arrangements for the purpose of guarding against the risk of currency fluctuation. In addition, sales in Europe and certain other parts of the world typically are adversely affected in the third calendar quarter of each year because many customers reduce their business activities in the summer months. Dependence on Key Management and Personnel; Ability to Attract and Retain Qualified Personnel. Harbinger's success is largely dependent upon its executive officers and key sales and technical personnel, the loss of one or more of whom could have a material adverse effect on Harbinger. The future success of Harbinger will depend in large part upon its ability to attract and retain talented and qualified personnel. In particular, Harbinger believes that it will be important for Harbinger to hire experienced product development and sales personnel. Competition in the recruitment of highly-qualified personnel in the computer software and electronic commerce industries is intense. The inability of Harbinger to locate and retain such personnel may have a material adverse effect on Harbinger. No assurance can be given that Harbinger can retain its key employees or that it can attract qualified personnel in the future. Harbinger currently carries key-person life insurance policies on the lives of Messrs. Howle, Leach, Davis and Travers. 7 Year 2000 Readiness; Euro Conversion. It is possible that the Company's currently installed computer systems, software products or other business systems, or those of the Company's customers, vendors or resellers, working either alone or in conjunction with other software or systems, will not accept input of, store, manipulate and output dates for the years 1999, 2000 or thereafter without error or interruptions. The latest versions of the Company's products released or to be released are believed to be Year 2000 ready, but the Company is still in the process of confirming this. The Company is also in the process of determining the extent to which its earlier software products as implemented in the Company's installed customer base are Year 2000 ready, as well as the impact of any non-readiness on the Company and its customers. The Company currently anticipates that any problems resulting from non-ready products will be addressed through a combination of product modifications as part of planned product enhancements and migration of customers to functionally similar products which are Year 2000 ready. Additional efforts are being made to modify or replace other non-ready software, systems and equipment used by the Company internally, including third party software, before the end of 1999. Further, the Company is aware of the risk that third parties, including vendors and customers of the Company, will not adequately address the Year 2000 problem and the resultant potential adverse impact on the Company. However, there can be no assurance that the Company will identify all such year 2000 problems in its computer systems or those of its vendors in advance of their occurrence or that the Company will be able to successfully remedy any problems that are discovered. The Company believes that the majority of the compliance effort will be absorbed with the product and internal systems enhancements planned for 1998 or 1999, and thus that the Year 2000 problem will not have a material adverse impact on the Company's business, operating results and financial condition, although there can be no assurance to that effect. Regardless of whether the Company's products are Year 2000 ready, there can be no assurance that customers will not assert Year 2000 related claims against the Company. The Company believes that the purchasing patterns of customers and potential customers will be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. Potential customers may also choose to defer purchasing Year 2000 ready products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industry. Conversely, Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for software products. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers, to reevaluate their current software needs, and as a result switch to other systems or suppliers. In addition, failure of the Company to identify and remedy Year 2000 problems could put the Company at a competitive disadvantage relative to companies that have corrected such problems. Any of the foregoing, or combination thereof, could result in a material adverse effect on the Company's business, operating results and financial condition. Effective January 1, 1998, eleven of the 15 member countries of the European Union are scheduled to adopt a single European currency, the euro, as their common legal currency. Like many companies that operate in Europe, various aspects of the Company's business will be affected by the conversion to the euro. The Company is currently evaluating its products and systems. The failure to adequately address the euro conversion issues could affect the Company's ability to offer software and services in the affected countries, as well as its ability to operate internal systems. While the Company believes that it can successfully remediate all related issues, there can be no assurance that it will do so in a timely manner. The failure to do so could have a material adverse effect on the Company. 8 Dependence on Alliance Partners. Harbinger has various agreements with alliance partners for the distribution and marketing of certain software products of Harbinger. These alliance partners pay Harbinger royalties representing a percentage of fees generated from the sale of software licensed from Harbinger. For the years ended December 31, 1995 and 1996, revenues from one of these alliance partners were approximately $1.4 million and $5.7 million, respectively, which equaled the contractual minimum royalty during those years. There is no minimum royalty obligation after 1996, and Harbinger has experienced and believes that revenues from this alliance partner will decline in the future. Further, based on amendments to the arrangement, Harbinger has experienced and believes that the average collection period related to cash flows derived from royalty revenues earned from this alliance partner will lengthen substantially. In addition, in 1997 Premenos was dependent on a distribution partner for approximately 6% of revenues, arising principally from this partner's distribution efforts in Europe and other overseas locations. There can be no assurance that this partner will continue to distribute Premenos or Harbinger products in 1998, or that such distribution efforts, if continued, will achieve the same degree of results. Risks of Product Development. Software products as complex as those offered by Harbinger may contain undetected errors or failures when first introduced or when new versions are released. If software errors are discovered after introduction, Harbinger could experience delays or lost revenues during the period required to correct these errors. There can be no assurance that, despite testing by Harbinger and by current and potential customers, errors will not be found in new products or releases after commencement of commercial shipments, resulting in loss of or delay in market acceptance, additional and unexpected expenses to fund further product development or to add programming personnel to complete a development project, and loss of revenue because of the inability to sell the new product on a timely basis, any one or more of which could have a material adverse effect on Harbinger. Dependence on Data Centers. The network service operations of Harbinger are dependent upon the ability to protect computer equipment and the information stored in Harbinger's data centers against damage that may be caused by fire, power loss, telecommunication or Internet failures, unauthorized intrusion, computer viruses and disabling devices and other similar events. Notwithstanding precautions Harbinger has taken, there can be no assurance that a fire or other natural disaster, including national, regional or local telecommunications outages, would not result in a prolonged outage of Harbinger's network services. In the event of a disaster, and depending on the nature of the disaster, it may take from several hours to several days before Harbinger's off-site computer system can become operational for all of Harbinger's customers, and use of the alternative off-site computer would result in substantial additional cost to Harbinger. In the event that an outage of Harbinger's network extends for more than several hours, Harbinger will experience a reduction in revenues by reason of such outage. In the event that such outage extends for one or more days, Harbinger could potentially lose many of its customers, which may have a material adverse effect on Harbinger. Dependence upon Certain Licenses. Harbinger relies on certain technology that it licenses from third parties and other products that are integrated with internally developed software and used in Harbinger's products to perform key functions or to add important features. There can be no assurance that Harbinger will be successful in negotiating third-party technology licenses on suitable terms or that such licenses will not be terminated in the future. Moreover, any delay or product problems experienced by such third party suppliers could result in delays in introduction of Harbinger's products and services until equivalent technology, if available, is identified, licensed and integrated, which could have a material adverse effect on Harbinger's business, operating results and financial condition. 9 Limited Protection of Proprietary Technology; Risks of Infringement. Harbinger relies primarily on a combination of copyright, patent and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. Harbinger seeks to protect its software, documentation and other written materials principally under trade secret and copyright laws, which afford only limited protection. Harbinger presently has one patent for an electronic document interchange test facility and a patent application pending for an EDI communication system. Despite Harbinger's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of Harbinger's products or to obtain and use information that Harbinger regards as proprietary. There can be no assurance that Harbinger's means of protecting its proprietary rights will be adequate or that Harbinger's competitors will not independently develop similar technology. In distributing many of its products, Harbinger relies primarily on "shrink wrap" licenses and increasingly on "click wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, Harbinger has licensed it products to users and distributors in other countries, and the laws of some foreign countries do not protect Harbinger's proprietary rights to as great an extent as the laws of the United States. Harbinger does not believe that any of its products infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by Harbinger with respect to current or future products, and Harbinger has agreed to indemnify many of its customers for the full cost of such claims. Harbinger expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in electronic commerce grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit could be time-consuming, result in costly litigation, cause product shipment delays or require Harbinger to enter into royalty or licensing agreements and indemnify its customers against resulting liability, if any. Such royalty or licensing agreements, if required, may not be available on terms acceptable to Harbinger or at all, which could have a material adverse effect on Harbinger. Government Regulatory and Industrial Policy Risks. Harbinger's network services are transmitted to its customers over dedicated and public telephone lines. These lines are governed by Federal and state regulations establishing the rates, terms and conditions for their use. Changes in the legislative and regulatory environment relating to on-line services, EDI or the Internet access industry, including regulatory or legislative changes which directly or indirectly affect telecommunication costs, restrict content or increase the likelihood of competition from regional telephone companies or others, could have a material adverse effect on Harbinger's business. The Telecommunications Act of 1996 ("Act") amended the federal telecommunications laws by lifting restrictions on regional telephone companies and others competing with Harbinger and imposed certain restrictions regarding obscene and indecent content communicated to minors over the Internet or through interactive computer services. The Act set in motion certain events that will lead to the elimination of restrictions on regional telephone companies providing transport between defined geographic boundaries associated with the provision of their own information services. This will enable regional telephone companies to more readily compete with Harbinger by packaging information service offerings with other services and providing them on a wider geographic scale. While provisions of the Act prohibiting the use of a telecommunications device or interactive computer service to send or display indecent material to minors have been held by the U.S. Supreme Court to be unconstitutional, there can be no assurance that future legislative or regulatory efforts to limit use of the Internet in a manner harmful to Harbinger will not be successful. The Clinton administration has announced an initiative to establish a framework for global electronic commerce. Also, some countries such as Germany have adopted laws regulating aspects of the Internet, and there are a number of bills currently being considered in the United States at the federal and state levels involving encryption and digital signatures, all of which may impact Harbinger. Harbinger cannot predict the impact, if any, that the Act and future court opinions, legislation, regulations or regulatory changes in the 10 United States or other countries may have on its business. Management believes that Harbinger is in compliance with all material applicable regulations. Harbinger's TrustedLink Guardian product and the Templar product both incorporate encryption technology which is subject to U.S. export control regulations. Although both products are currently exportable under licenses granted by the Commerce Department, government regulation in this area is subject to frequent change and there can be no assurance that these products will remain exportable. Anti-Takeover Provisions. The Harbinger Board of Directors has authority to issue up to 20,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of the preferred stock without further vote or action by Harbinger shareholders. The rights of the holders of Harbinger Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. While Harbinger has no present intention to issue additional shares of preferred stock, such issuance, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of Harbinger. In addition, the Harbinger Charter and the Harbinger Bylaws contain provisions that may discourage proposals or bids to acquire Harbinger. This could limit the price that certain investors might be willing to pay in the future for shares of Harbinger Common Stock. The Harbinger Charter provides for a classified board of directors with three-year, staggered terms for its members. The classification of the Harbinger Board could have the effect of making it more difficult for a third party to acquire control of Harbinger. -----END PRIVACY-ENHANCED MESSAGE-----