-----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, Et8FxeUUnqcW2K/2tj+48v0KBbkIo4dp6IkdjWeFAOPhOsPWXY1/3T/FnTKOL6w8 jlSrfZhHYkBP8tQA2vbGTg== 0000950144-99-003636.txt : 19990402 0000950144-99-003636.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003636 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 000-26298 FILM NUMBER: 99580132 BUSINESS ADDRESS: STREET 1: 1277 LENOX PK BLVD CITY: ATLANTA STATE: GA ZIP: 30319 BUSINESS PHONE: 4048414334 10-K405 1 HARBINGER CORPORATION 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------------------------- FORM 10-K ---------------------------------- FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ COMMISSION FILE NUMBER: 0-26298 HARBINGER CORPORATION (Exact Name of Registrant Specified in Its Charter) GEORGIA 58-1817306 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1277 LENOX PARK BOULEVARD 30319 ATLANTA, GEORGIA (Zip Code) (Address of Principal Executive Office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 467-3000 --------------------------------- Securities registered pursuant to Section 12(b) of the Act: None --------------------------------- Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ Common Stock, par value $.0001 per share The Nasdaq National Market
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the average of the closing bid and ask quotations for the Common Stock on March 17, 1999 as reported by The Nasdaq Stock Market, was approximately $217,023,517. The shares of Common Stock held by each officer and director and by each person known to the Registrant who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 17, 1999, Registrant had outstanding approximately 40,371,410 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998 are incorporated by reference in Parts II and IV of this Form 10-K to the extent stated herein. The Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 30, 1999 is incorporated by reference in Part III of this Form 10-K to the extent stated herein. 2 EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, CERTAIN MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF HARBINGER CORPORATION AND MEMBERS OF ITS MANAGEMENT AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS INCLUDE "OUR OPERATING RESULTS COULD FLUCTUATE, CAUSING OUR STOCK PRICE TO FALL", "IF WE CANNOT INTEGRATE ACQUIRED COMPANIES IN OUR BUSINESS, OUR PROFITABILITY MAY BE ADVERSELY EFFECTED", AND "WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST OTHER COMPANIES." THESE AND ADDITIONAL IMPORTANT FACTORS TO BE CONSIDERED ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS REPORT, THE TERMS OF WHICH ARE INCORPORATED BY REFERENCE HEREIN. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS. PART I ITEM 1. BUSINESS Harbinger Corporation ("Harbinger" or the "Company") is a leading worldwide provider of business-to-business electronic commerce ("E-Commerce") products and services and offers comprehensive, customizable standards-based electronic commerce solutions. The Company develops, markets and supports software products and provides communication and consulting services that help businesses automate the cycle of transactions for the exchange of goods and services. The Company's core competency is building and managing trading communities for its customers who electronically communicate with each other. The Company believes that development of trading communities requires the assistance of an intermediary. Intermediaries help businesses identify their trading partners, determine a common means for exchanging electronic transactions, and over time maintain that relationship and the changes in electronic transaction formats. The Company develops and supports standards-based E-Commerce software products that enable trading communities to engage in E-Commerce with one another. This software is designed and compatible for use with the most commonly used computer platforms and operating systems, and provides secure and reliable transmission of E-Commerce data between businesses. Harbinger provides E-Commerce professional services for the implementation of its software, including the integration of the software (and resulting E-Commerce data) with the customer's business systems. Professional services also include E-Commerce outsourcing services for customers that require E-Commerce operations to be performed by a third party either on-site or remotely, on the Company's or their network and business systems. Harbinger additionally offers E-Commerce network communications with a complement of value-added information services to support the transmission of E-Commerce data between businesses. Network communications can be made using Internet Protocol ("IP"), the underpinning the Internet, Intranets, Extranets, Web sites and e-mail, or over standard telephone lines and non-IP protocols, such as X.400, X.25 and Bisync. The Company's E-Commerce products and services are deployed in many combinations to suit the 3 individual needs of its customers, resulting in a comprehensive E-Commerce solution for each customer, thus maximizing the number and value of their E-Commerce trading relationships with other businesses. As of March 31, 1999, the Company's customers included leading U.S. and multi-national corporations and government agencies, including the following: 3M Companies Eli Lilly Sears Abbott Labs Environmental Protection Agency Shell Allied Signal Exxon Southern Company Ameritech Federal Express Southwestern Bell Amoco Ford Sports Authority AT&T General Motors Sprint Baxter Healthcare Georgia Power Swisscom Bell Atlantic Hewlett-Packard Telstra Bell Canada Honda Tennessee Valley Authority Bellcore IBM Texaco BellSouth Internal Revenue Service Texas Instruments Caterpillar John Deere The Limited Chevron Johnson & Johnson Timberland Chrysler Johnson Controls Toys R Us Compaq Computer Kmart TRW Dell Computer Lucent Technologies United Parcel Service Detroit Edison MCI United Technologies Digital Equipment Corp. Mobil Upjohn Duke Power Northern Telecom US Dept, of Transportation DuPont Northrop Grumman US Dept. of Defense Dutch PTT Post Pacific Gas & Electric US Postal Service Eastman Chemical Reebok International Wal-Mart
In February 1999, the Company announced three strategic initiatives in connection with an acceleration of its goal to have more customers conducting IP-based business-to-business E-Commerce than any other company in the industry. The first initiative is harbinger.net, which the Company believes is the world's first IP-based transaction portal for application-to-application E-Commerce, and includes transaction, customer care and E-Commerce content services open to all industry professionals. The second initiative, Harbinger Labs, creates a strategic products and services incubator for the Company and is focused on maintaining a leadership position in the next generation of mission-critical, business-to-business E-Commerce technologies. Finally, the Company is actively working with its customer community to migrate them from legacy systems to IP connectivity and the harbinger.net portal. E-COMMERCE Business-to-business E-Commerce involves the automation of business processes and transactions through the use of computers and telecommunications to exchange and electronically process commercial information and transactions between businesses. In the 1980s, the predominant technology for business-to-business E-Commerce was electronic data interchange ("EDI"), which facilitated the computer-to-computer exchange of standards-based business documents between trading partners. The documents, typically purchase orders, confirmations, shipping notices and invoices, were communicated between businesses over private service networks, known as value-added networks ("VANs"), which provided security, auditability and delivery for transactions. In the 1990s, IP has become more prominent in the business-to-business E-Commerce market and has greatly expanded the opportunity for software functionality, types of electronic transactions and the data communications of such transactions between businesses. As a result, EDI is now a subset of the more pervasive E-Commerce market, an industry that has grown to include electronic catalogs, web storefronts, information portals, and the like. The advantages of E-Commerce typically include one-time data entry, reduced clerical workload and the elimination of paper records, rapid, accurate and secure exchange of business data, and reduced operating and inventory carrying costs. EDI, for example, facilitates uniform communications with 4 different trading partners in different industries, including customers, suppliers, common carriers, banks or other financial institutions. EDI is a cornerstone of E-Commerce and has historically been the source of the majority of the Company's revenue. The Company expects IP-based revenue to increase as a percentage of its total revenue. Nevertheless, many business-to-business E-Commerce transactions, including those generated by new IP-based applications, follow a common transaction flow originally established using EDI. Transaction Flow. In a typical E-Commerce transaction, a trading partner (the "sending partner") first creates with its computer, either manually or electronically, the business data used for the completion of a particular set of transactions (EDI standards would refer to these as a transaction set). Transaction sets include requests for quotes, purchase orders, invoices, shipping notices, and other related documents and messages. Second, a translation software program on the sending partner's computer converts the document or transaction set into an acceptable data format. The most frequently used data formats remain those associated with EDI, ANSI X12 in the United States and UN/EDIFACT in the rest of the world. Third, this information is electronically transmitted through telecommunications links from the sending partner's computer to the central server of the trusted third party that serves as the intermediary for many trading partners. Telecommunications could be point-to-point between trading partners, but the predominant model remains through intermediaries for reasons of security, auditing and ease of delivery. Intermediaries receive documents for subsequent delivery to the intended trading partner (the "receiving partner"). Trading Communities. Groups of companies that regularly trade with each other generate significant repetitive business transactions. These existing trading communities are prospects for implementation of E-Commerce. The early market expansion of EDI has been possible through the establishment of repetitive transactions using ANSI X12 and UN/EDIFACT formats. Additionally, there are now subsets of these standards used in specific industries such as automotive, banking, chemical, financial, grocery, healthcare, petroleum, retail and utilities. The adoption of these standard formats as an accepted means of transmitting business documents and data has occurred, in part, because many trade organizations or groups and many large companies within a trading community increasingly recommend or require their member organizations or trading partners to adopt such formats as the primary method of communicating business documents. Current E-Commerce transactions include these standard and subset formats. The market is also seeing new, standard formats such as extensible markup language ("XML") and open buying over the internet ("OBI"), which like EDI in the 1980s must first achieve market acceptance. Hubs and Spokes. Large companies within a trading community often are described as "hubs" and their trading partners as "spokes." A hub company and its trading partners communicate through electronic networks. These can be Internet or Extranet, third party networks and, for a few larger businesses, private networks owned and operated by the hub company. Hub companies often initially justify E-Commerce programs with direct cost savings from reduced administrative handling costs and elimination of data entry errors in the documents that they send and receive from trading partners. Advanced E-Commerce implementations by a hub company may be more strategic in nature, being utilized as enabling technologies for business processes such as supply chain management and just-in-time manufacturing, and efficient consumer response and vendor managed inventory in retailing. For these reasons, a hub company often adopts as a stated business objective that all of its trading partners use E-Commerce as the principal means of communicating business documents. Spoke companies, in turn, often expand the trading community by also requesting or requiring their other trading partners to communicate through E-Commerce. This expansion results in the establishment of distinct trading communities comprising potential software customers and network subscribers for E-Commerce services. According to Forrester Research, business-to-business Internet E-Commerce transactions will grow more than 30-fold over the next five years, reaching $1.3 trillion by 2003 in the United States. Furthermore, management estimates that of the 3 million U.S. companies with five or more employees, approximately 150,000-170,000 have elected to date to make use of E-Commerce. Although many of these businesses are members of existing trading communities, the Company believes that the majority of the members of these trading communities use E-Commerce solutions to communicate with only a small 5 percentage of their trading partners. Acceptance of E-Commerce and expansion within trading communities will depend on various factors, such as the extent of automation in the industry, the degree to which hub companies require electronic trading from their trading partners, the level of computer sophistication of businesses in the trading community, the frequency of transactions among trading partners in the community and the economic benefits derived from the trading community by implementing electronic trading, which historically have accrued principally to the larger members of the community. To date, E-Commerce, and in particular EDI, has achieved only limited penetration in small companies because current E-Commerce solutions have not provided significant added value to justify the associated cost. THE INTERNET AND INTERNET PROTOCOL The Internet is a collection of interconnected public and private networks that allows any computer on the network to communicate with any other computer on the network through IP. IP is the common denominator for the Internet as well as for corporate Intranets, Extranets, Web sites and e-mail. Although the Internet affords a lower cost, more robust and widely available medium for E-Commerce telecommunications, there are significant actual and perceived concerns relating to the use of the Internet for commercial transactions. These concerns include the absence of security, inability to confirm message integrity, vulnerability of messages to interception and fabrication, lack of user support, service or centralized "help desk" support, and difficulties in obtaining reliable assurance of receipt of messages sent or the authenticity of messages received. These difficulties inherent in the Internet are magnified if the Internet is used to execute commercial, mission-critical transactions. To solve the current problems with using the Internet and other IP networks for conducting business-to-business electronic transactions and communications, the Company offers a series of products and services. Harbinger Express is an E-Commerce Extranet product using a Web browser and industry standard security, secure sockets layer ("SSL"), for the secure transmission of transactions. Harbinger Templar is an E-Commerce e-mail product using patented and industry standard encryption technologies for the transmission of transactions. The Company also offers harbinger.net, an E-Commerce Portal, providing IP and non-IP telecommunications and value-added information services between trading partners, as well as an E-Commerce information service accessible to all businesses. THE HARBINGER SOLUTION The Harbinger solution to address E-Commerce is based on the following six components that are designed to build and maintain trading partner relationships and generate recurring revenue. The Company believes these components differentiate it from competitors in the market. - - Network. The Company offers harbinger.net, an E-Commerce portal, providing IP and non-IP telecommunications and value-added information services between trading partners, as well as an E-Commerce information service accessible to all businesses. The portal hosts E-Commerce services and traffic for customers and others who visit the site. Trading services include on-line customer care, subscription-based vertical market trading communities, electronic storefronts, an EC resource center, a commerce directory, and various interconnections to numerous private networks and VANs. - - Software. The Company offers a fully-scalable range of E-Commerce software solutions for trading communities, including IP and non-IP communications software, EDI translation and mapping software, content and data management software, and Web site creation and management software. - - Professional Services. The Company offers a full complement of E-Commerce professional services for the implementation and integration of its software. Professional services also include complete outsourcing programs for the on-site or remote management of a customer's E-Commerce operations and systems. The Company also provides Internet applications development for hubs seeking a customized E-Commerce solution. 6 - - Mass Deployment Services. The Company provides mass deployment services to trading community leaders to permit them to plan, manage and deploy E-Commerce solutions to their trading partners through the use of trading partner conferences and direct marketing services. - - Trading Relationship Management Services. The Company provides a range of trading relationship management services, including installation assistance, trading partner certification and rules, and services such as customization, training and consulting to facilitate the customer experience. - - Vertical Market Expertise. The Company has developed vertical market expertise in selected industries such as aerospace, automotive, electronics, financial services, food and beverage, government, healthcare, heavy manufacturing, petroleum/chemicals, retail and utilities. STRATEGY The Company's objective is to be a leading worldwide provider of IP-based, business-to-business E-Commerce solutions to businesses of all sizes. To accomplish this objective, the Company offers a full spectrum of products and services, which enable customers to transact business over IP networks. The Company's focus is on building and managing the trading partner communities and relationships for its customers on a worldwide basis. The Company strives to generate recurring revenue by extending the solution it offers to its current customers while adding new customers, thus increasing market awareness and acceptance for the Company and revenue-related traffic to harbinger.net. Provide a Comprehensive Range of Integrated Products and Services. The products and services offered by the Company include IP-enabled, E-Commerce software for use on the full range of commonly used computers and operating systems, along with industry-standard applications (e.g., Web browsers) where required. Harbinger designs its products and services to include significant ease-of-use features while providing a high degree of maintainability and supportability across the customer and product lifecycles. The software supports standard formats and transactions for E-Commerce, including EDI, and is designed to be adaptable to newly emerging formats such as XML and OBI. While certain software is designed for installation by the customer, more sophisticated E-Commerce applications often require implementation assistance provided by Harbinger's professional services group. Such instances typically include specific customer requirements for data mapping and translation, as well as integration of the resulting data with the customer's business systems, including popular enterprise resource planning ("ERP") systems. Finally, the software is compatible with the Company's E-Commerce portal, harbinger.net, and seeks to drive recurring revenue through E-Commerce transaction volume. Focus on Building and Managing Trading Communities. Harbinger seeks to establish new and larger trading communities by (i) developing marketing and technical competence within specific industries by understanding the needs of major trade organizations or hub companies in the industry, and the trading customs and practices of their trading partners, (ii) working closely with trading partners to define software and information processing requirements, (iii) developing trading community solutions that meet the needs of trading partners in these markets, and (iv) providing a wide array of value-added, high-quality services to facilitate the adoption and implementation of E-Commerce solutions across these industries. Penetrate International Markets. The Company intends to aggressively pursue international E-Commerce opportunities in Europe, the Middle East and Africa. The Company has a direct presence in the United Kingdom, Germany, France, Italy and The Netherlands. Indirect channels through distributors in countries where Harbinger does not have a direct presence complement the Company's direct sales, marketing and support for this region. The Company maintains a direct presence in Mexico, and through a network of resellers, the Company sells into other worldwide markets, pursuing indirect channels of distribution and support for its products and services in the region. 7 Achieve and Maintain Operational Excellence. Harbinger's value-proposition is based on a business model of operational excellence. This business model enables the Company to pursue sustainable competitive advantage in its ability to deliver products and services to its customers at the lowest possible cost, with the highest degree of quality and efficiency, backed by expert customer care. Pursue Strategic Acquisitions and Alliances. The Company intends to enter new vertical markets, penetrate additional geographic markets and expand its E-Commerce product and service offerings. The Company will continue to seek to acquire complementary technologies and businesses opportunistically, when appropriate and supportable. The Company has in the past completed acquisitions to address other E-Commerce opportunities on the Internet, enter new vertical markets, acquire complementary technologies and further penetrate international markets. The Company also actively seeks strategic alliances with leading professional services companies, software application developers and computer system suppliers to resell, distribute and co-market the Company's E-Commerce software products and services. PRODUCTS AND SERVICES The Company offers a comprehensive range of E-Commerce products and services for entire trading communities. The Company's offerings are divided into three categories: E-Commerce software, telecommunications and services. The following chart summarizes these categories and provides the functions and computer operating systems (where applicable) for the offerings.
NAME DESCRIPTION - ------------------------------------------- -------------------------------------------------------------------------------- E-COMMERCE NETWORK SERVICES harbinger.net E-Commerce Portal for IP and non-IP transactions, IP connectivity and hosting, and access to E-Commerce industry content and information Harbinger INP Software and Web hosting service permitting rapid development of an E-Commerce Web site with capabilities for promoting and selling products and services via the Internet
COMPUTER OPERATING NAME FUNCTION SYSTEMS ----------------------------------------- ---------------------------------------------------- ------------------------- E-COMMERCE SOFTWARE Harbinger Knowbility Software and services to manage electronic Windows NT catalog content and enterprise data Harbinger Express Software allowing users to send and receive Windows 95, Windows Windows 95, Windows 98, E-Commerce 98, Windows NT transactions using only a Web browser Windows NT or an optional thick client desktop application Harbinger Templar Data encryption and communications software Windows 95, Windows 98, for transmitting E-Commerce documents over Windows NT, UNIX the IP networks Harbinger IVAS Advanced IP gateway technology for managing Windows NT, UNIX and operating an IP service network
8
COMPUTER OPERATING NAME FUNCTION SYSTEMS ----------------------------------------- ---------------------------------------------------- ------------------------- Harbinger TrustedLink E-Commerce and EDI translation, mapping, Windows 95, Windows 98, communications and document management Windows NT, UNIX, AS/400, MVS Harbinger Prime Factors Encryption for multiple platforms and applications, including ANSI X12.58 and X12.42 standards, generalized file security, ANSI X9.9 and ATM sharing credit and debit networks
NAME DESCRIPTION - ------------------------------------------- -------------------------------------------------------------------------------- E-COMMERCE SERVICES Trading Partner Complete marketing programs to build and manage trading partner communities Implementation Program including information seminars, support materials, telemarketing, creation and distribution of standard formats. Trading Partner Certification Installation, testing and confirmation of E-Commerce software and communications with trading partners. Professional Services Application integration, project management, installation services, onsite education and training for Harbinger E-Commerce software products. Outsourcing Onsite or remote operation, administration and support of customer E-Commerce systems and resources. Customer Support Telephone hotline, support documentation, network transmission support, electronic software updates.
E-COMMERCE NETWORK SERVICES harbinger.net. harbinger(R)net is an IP-based portal for application-to-application E-Commerce. harbinger.net will serve as a clearinghouse for E-Commerce information and as a gateway for E-Commerce transactions, noting that these transactions will increasingly flow through real-time, universal and persistently connected networks. Harbinger believes that its network is one of the largest business-to-business E-Commerce networks in the United States as measured by the number of billable subscribers. To manage and facilitate these types of connections, harbinger.net provides a set of features and functions that cover a broad range of services. The harbinger.net portal supports real-time transactions, open network and application interfaces, self-serve customer care facilities and E-Commerce content for industry professionals. harbinger.net is a single-address portal that provides a means for E-Commerce professionals to obtain information, find links to relevant destinations, and conduct Web catalog transactions. harbinger.net also serves as an access point for application to application transactions. The features, services and capabilities of harbinger.net fall into three general categories: Transaction Services; Customer Services, and Content Services. Portal Transaction Services - Transport Services - harbinger.net provides several mechanisms enabling businesses, trading communities, ISPs, system integrators, hosting services and others to transmit and receive E-Commerce transactions. - Connectivity - harbinger.net provides connectivity, data communications protocols and transport applications to move transactions through the portal and on to their destination. The primary protocol suite is oriented around IP technologies, including HTTP, SMTP, and FTP. Although 9 many services of harbinger.net require IP technologies, other protocols and transports are available, including: Async, Bisync, SNA, X.400 and OFTP. - Mailboxing Services - for trading partners who are not immediately accessible (i.e., do not have persistent connection to the network or the connection is down). Unconnected trading partners can access their mailboxes at a later time to pickup their transactions. - Interconnections - interconnections to other networks to ensure that transactions are able to flow through the portal and reach their final destination, such as public VANs (Harbinger, Sterling, GEIS, IBM, etc.), Private VANs, and X.400 Networks. - Security - several security and encryption mechanisms are supported for harbinger.net transactions, including SSL and S/MIME. - Web E-Commerce (Harbinger Express) - harbinger.net provides a Web transaction portal supporting all levels of browser-side applications. - Translation and Mapping Service - This service allows businesses to send transactions through the portal in any format and rely on harbinger.net to ensure that the transactions are transformed into the appropriate data format required by trading partners. - Archiving and Restoral - a standard feature of harbinger.net is the storage and archiving of transactions. - Value-Added Processing - transactions traversing harbinger.net can be momentarily diverted for value-added processing. Some examples of value-added processing are: translation from one E-Commerce standard to another; reformatting; standards compliance checking; event triggers based on various criteria; carbon copy to duplicate and forward transactions to additional mailboxes; and redirection of transactions. - Catalog Content Management - harbinger.net will enable the aggregation and rationalization of catalog content for business-to-business E-Commerce. Tools and services will be provided to allow businesses to submit, review and modify catalog content and then control the release of that content to the in-house catalogs of the user's customers. These services are facilitated via harbinger.net through the use of browser utilities and FTP technologies. - Marketplaces and Storefronts - businesses may provide and host their product catalog content for a storefront or general marketplace using harbinger.net. - Communities of Interest ("COINs") - harbinger.net hosts and serves as an intermediary for E-Commerce COINs. It also serves as a navigation portal (link) for COINs that have E-Commerce functionality. Portal Customer Services - Internet Customer Support System - browser submission, review and modification of trouble tickets, and a direct link into the harbinger.net call support system. - Network Inspector - harbinger.net's document tracking system which includes a flexible, powerful browser interface to enable tracing of every transaction or document, with exact times and checkpoints for each stage of processing and transport. - Harbinger.net also provides the following customer services: Customer Alarm/Alert Notification, Transaction Recovery, Restoral, Retransmission, Error Viewing and Correction, Billing Review, Registration, and Electronic Software Distribution. Portal Content Services - E-Commerce Content - harbinger.net also serves as a portal for information and resources associated with E-Commerce. E-Commerce at harbinger.net includes: E-Commerce standards (ANSI X,12, UN/EDIFACT, XML, OBI, eCo, ANX, EDI-INT, e.g.), news and events associated with e-business, links to associations, organizations, standards bodies, consortiums, vendors, system integrators, consultants, forums and discussion groups, case studies, and an E-Commerce glossary. - Commerce Directory Services - the commerce directory component of harbinger.net is an open directory of businesses trading electronically. 10 - my.harbinger - E-Commerce managers and specialists can personalize their access and use of harbinger.net to ensure that the content and transactions that are most relevant to their business needs are immediately available to them. - Trading Rules Repository - harbinger.net serves as a leading repository of trading rules associated with individual businesses and E-Commerce data standards, including emerging data standards such as XML. Harbinger INP. Harbinger INP allows a user to establish an instant presence on the Internet through the creation of a web site for the business user. Users create their web site by entering information in an interview format. The user can then preview their site using the embedded Microsoft Internet Explorer software and publish the site on the harbinger.net web hosting service. Harbinger INP includes an electronic catalog and purchase order system for conducting commerce over the Internet. E-COMMERCE SOFTWARE Harbinger Knowbility. Harbinger Knowbility is an MRO procurement catalog content management service offering that aggregates supplier data specific to a purchaser company so that only appropriate suppliers are presented to the company. This technology is also used to rationalize an enterprise company's material master information for their ERP systems. Electronic catalog technology has been applied in both supply chain management initiatives for production goods and services, and maintenance, repair and operating supplies for non-production goods and services. Harbinger provides its solution in the form of an easy-to-use, web-based application that allows users to search and source data from electronic vendor catalogs and from their own internal inventory. Harbinger Express. Harbinger Express enables the large hub companies to trade easily with small spoke trading partners who have been reluctant to implement full-scale EDI. Harbinger Express is typically marketed to larger companies who seek the benefits of traditional EDI, but often have hundreds or thousands of smaller trading partners who are unable or unwilling to invest in the infrastructure required to support EDI. Harbinger Express allows small and mid-size businesses to perform E-Commerce using a Web browser or optionally a Windows client application. Harbinger Express is available as a service hosted by Harbinger on harbinger.net, or as a software license. When purchased as a software license, the Harbinger Express server software resides on a server at the hub location and the Windows client software is installed at a spoke trading partner. For less complex business requirements, the spoke trading partner can use a Web browser. Custom forms are created analogous to the forms promulgated by the various EDI standards bodies to meet the needs of the hub when trading with the spokes in its trading community. Harbinger Express translates EDI documents into a hypertext markup language ("HTML") form that can be accessed by the trading partner via the Internet. Harbinger Express users can also initiate EDI documents simply by filling out a browser-based HTML form at the Harbinger Express Web site. For more complex business requirements, the spoke trading partner can use the Windows client application, which supports offline document processing and application integration. Harbinger Templar. Harbinger Templar is an open, standards-based solution for enabling secure transmission of digitally designed electronic documents, including EDI documents, over the Internet and other IP networks. Harbinger Templar supplies security for message transmissions by utilizing public key cryptography techniques licensed from RSA Data Security, Inc. and by implementing security and confidentiality features at the software application level. Templar generates a digital signature for each outbound message that verifies the identity of the sender and automatically detects any alteration of the message upon receipt. Templar automatically tracks message traffic and message integrity and authenticity and provides user-configurable management reports. Templar also maintains transmission records for audit trails. The Company also markets an exportable version of Templar in order to allow export of Templar in compliance with current U.S. export control laws and regulations applicable to encryption technology. Harbinger Templar is available for both UNIX and Windows systems and integrates with the Company's EDI translators. Harbinger Internet Value-Added Server ("IVAS"). Harbinger IVAS enables a network services provider to offer a robust, reliable, manageable and sophisticated EC/EDI service network. Harbinger 11 IVAS consists of modules that allow subscribers to conduct electronic business with their trading partners. Harbinger IVAS provides intermediation, archiving, standards compliance monitoring and third-party services using IP. Harbinger IVAS permits participants in a trading community to select the desired communications transport mechanism for individual documents of a typical EDI transaction. Harbinger TrustedLink. The Harbinger TrustedLink family permits fast receipt and transmission of EDI documents and supports a comprehensive range of EDI standards across all major computing platforms, including MVS mainframe, OS/400, UNIX, Windows NT Server, Windows NT Workstation, Windows 98 and Windows 95. The product family facilitates the creation and control of business documents, such as order forms and invoices, and provides data linking and messaging functions that act as a gateway to update a trading partner's accounting system. Additional functionality includes mapping, translation, communication and trading partner management tools and the utilization of standard EDI formats. The OS/400 version of Harbinger TrustedLink is the leading EDI software product for the mid-range computer market, operating on the IBM AS/400 computer. The AS/400 is the leading mid-range platform installed worldwide for use as either the main computer for a small or mid-size business or as a departmental or dedicated processor in a larger business. The Windows NT Workstation, Windows 98 and Windows 95 versions of Harbinger TrustedLink are designed for small to mid-sized companies. The products perform the critical tasks to create, format and electronically transmit and receive business documents and data between trading partners. The products convert a customer's documents and data into EDI format, translate the document to a standard form for use with the designated trading partner, transmit the information to harbinger.net, the Internet, or other third party networks and convert EDI documents and data received from their trading partners into a format that can be interpreted by the user's personal computer. Other products for the Windows NT Workstation, Windows 98 and Windows 95 platforms include STFORMS, which enables the user to customize the format of EDI documents, and STBAR, which allows the entry of data via bar code scanning. Additionally, STMAP mapping integration software allows users to download EDI data seamlessly from an integrated application and to move data electronically between business programs and EDI applications. Harbinger develops custom software templates, known as forms overlays, to conform to guidelines and parameters identified by the hubs and spokes within trading communities. For example, Harbinger can customize its software to utilize only a specified subset of the ANSI X.12 or EDIFACT standard that the hub companies have defined for the trading relationship. In this way, each trading partner is assured that only the expected data elements are sent and received. The Company distributes these customized forms overlays to help hub companies expand the acceptance of EDI among trading partners. Harbinger maintains an extensive library of forms overlays. Harbinger Prime Factors. Harbinger Prime Factors enables banks and other businesses to secure financial and other information transmitted over internal and external networks. Customers include money center banks, large corporations and government agencies interested in securing data transmitted internally and externally. Prime Factors products include Descrypt +, Descrypt/EDI +, Psypher/EDI +, Fdesmac +, PIN Management System and can operate on computer platforms ranging from PCs to UNIX and AS/400, DEC and Tandem machines to MVS mainframes. E-COMMERCE SERVICES Mass Deployment, Trading Partner Implementation and Certification. Harbinger offers mass deployment services to trade organizations or hub companies within selected industries to establish and promote the growth of trading communities. Initially, the Company develops marketing and technical competence within an industry by learning the trading customs and practices of their trading partners. The Company then defines the software and computer system requirements for the promotion of electronic commerce in the trading community. These definitions are used to develop standard and customized software products to meet the needs of trading partners within their own markets. These products are complemented by an array of services to facilitate the adoption and implementation of EDI and other electronic commerce services throughout that industry. Harbinger offers several programs to assist its hub 12 customers in maximizing the use of EDI and electronic commerce among its trading partners. These programs communicate the advantages of EDI and electronic commerce to potential trading partners of a major hub, regardless of size, and include information seminars, support materials and the trading partner certification program. This program assists trading partners in installing, testing and confirming EDI capabilities with hub companies using the Harbinger networks. Professional Services. Harbinger technical consultants work with trading communities to create the functional specifications to develop computer programs necessary to integrate EDI with other software applications. This process, known as "mapping," requires the identification of internal data file and record formats along with the creation of functional specifications to integrate EDI with trading partner applications. Harbinger also provides software-programming services to trading communities to create the application interface programs necessary to translate data into and out of EDI standards. In addition, Harbinger offers training classes for various stages of EDI implementation by trading partners. These classes provide instruction on the use of the Company software products operating either alone or together with other application software. The classes explain the basics of EDI and its integration with other application software and provide basic information for creating application interface programs to connect trading partners. Outsourcing. Harbinger provides a full complement of E-Commerce outsourcing services to trading communities. Harbinger can provide complete outsourcing of E-Commerce or EDI operations for the hub company of a trading community complete with onsite personnel. The Company also offers remote management of a customer's EDI translator where complete outsourcing is not desired, and Internet applications development for trading hubs desiring customized EC solutions. To ease implementation of EC by businesses reluctant to implement full scale EDI; Harbinger also provides service bureau-type translation and mapping of raw trading information to standard EDI formats and distribution to trading partners. Customer Services. Harbinger provides extensive customer service and support to trading partners on the use and operation of its software products and the business processes associated with electronic commerce. The Company's support of EDI communication standards enables its customer support personnel to perform file transfers to analyze problems on a customer's computer system and to transmit software or EDI standard updates to a customer where necessary. The Company's principal marketing strategy focuses on establishing electronic trading communities and expanding the number of trading partners using Harbinger software and the harbinger.net portal. The Company targets trading communities composed of trading partners in common industries or markets conducting recurring business transactions. To achieve this objective, the Company has developed a sales and distribution function that includes direct and indirect channels to promote the implementation of E-Commerce within these trading communities through hub and spoke programs, particularly within selected vertical markets. Within its direct selling operations, the Company utilizes a three-tiered marketing program. SALES AND MARKETING Direct. The Company has direct selling operations based in North America, Europe and Mexico. The Company's direct sales organization seeks to license software and sell network and professional services to businesses of all sizes that address the needs and requirements of those businesses E-Commerce objectives. In addition to utilizing Harbinger software and services for their E-Commerce transactions, hub companies also seek to increase the number of trading partners conducting E-Commerce. Harbinger's direct sales organization executes a three-step marketing program to develop and promote the hub companies E-Commerce initiative with their existing or prospective trading partners, referred to as "spokes". First, the Company identifies hub companies that either seek to formulate or expand an E-Commerce program. The Company representatives meet with the hub company and discuss the procedure for enabling the hub company and/or establishing E-Commerce relationships with trading partners. Second, the Company contacts the hub company's trading partners through seminars and by telemarketing, informing these parties of the hub company's E-Commerce requirements and implementation procedures. 13 The Company schedules and conducts half-day information seminars with potential trading partners of a hub company highlighting the benefits of E-Commerce, explaining the hub company's E-Commerce initiative, and demonstrating the Company's products and services. Hub company representatives generally attend these seminars to present their E-Commerce recommendations and requirements. Third, Harbinger uses telemarketing, direct mail and advertising activities that are targeted at potential trading partners of the hub company. As of March 1, 1999, the Company employed approximately 300 sales and marketing personnel. The Company's compensation strategies are designed to reward sales personnel based upon sales to new customers and the sale of additional products and services to existing customers. Indirect. Harbinger seeks to complement its direct selling operations through referral partners and distributors, and relies on distributors in the South American and Asia-Pacific theaters. Through various alliance programs, the Company has established relationships with referral partners, distributors, application software developers, systems integrators and value-added resellers of computer products. The Company's objective is to integrate Harbinger's products with those of its business partners and to promote distribution of Harbinger software along with products and services sold by its Marketing Partners. The Company fosters relationships with software vendors that bundle or imbed the Company's products with their own products, or which resell the Company's products in particular trading communities. Distributors typically sublicense the Company's software to end-user customers and pay the Company a royalty, while co-marketers typically forward leads to the Company in exchange for a percentage referral fee if the sale is completed. The Company has relationships with partners such as AT&T, Ariba, Baan, Booz-Allen & Hamilton, Checkfree, Computer Associates, Concur, Control Data Systems, PriceWaterhouseCoopers, CyberCash, Daly & Wolcott, Data General, Deloitte & Touche, Digital, Entrust Technologies, Ernst & Young, Hewlett-Packard, IBM, Intentia, JBA, JD Edwards, MAPICS, Maxware, Microsoft, Netscape/AOL, Oracle, Peachtree Software, PeopleSoft, SAP, Sprint, Sun, Sybase, Unisys and UUNET Technologies for distribution of its products worldwide. PRODUCT DEVELOPMENT The Company continues to assess the needs of trading partners in various trading communities and to develop software programs and network services, which facilitate electronic commerce transactions over the harbinger.net portal, or directly over standard telephone lines. The Company's product development efforts currently are focused on providing a full range of electronic commerce solutions to Harbinger customers. In addition, the Company has incorporated into its products certain software licensed to it by other software developers, where appropriate, to reduce product development time. The Company is in various stages of development for other software applications, including electronic messaging, bar code integration to facilitate the shipping and receiving of goods, an enhanced mapping product to allow users to customize their E-Commerce data to existing software applications, catalog-based solutions, and foreign translations of the Company's software products for distribution in international markets. COMPETITION The E-Commerce services and computer software markets are highly competitive. Numerous companies supply electronic commerce network services, and several competitors target specific vertical markets such as the pharmaceutical, agri-business, retail and transportation industries. Additional competitors provide software designed to facilitate electronic commerce and EDI communications. Several of the Company's most significant competitors provide network services and related software products and services. Other competitors provide PC-based computer programs and network services specifically targeted to facilitate electronic banking transactions. These competitors include banks and financial institutions that operate privately owned computer networks that link directly to their commercial customers. The Company believes that many of its competitors have significantly greater financial and personnel resources than the Company. The market for Internet software and services is emerging and highly competitive, ranging from small companies with limited resources to large companies with substantially greater financial, technical 14 and marketing resources than the Company. The Company believes that existing competitors are likely to expand the range of their electronic commerce services to include Internet access, and that new competitors, which may include telephone companies and media companies, are likely to increasingly offer services which utilize the Internet to provide business-to-business data transmission services. Additionally, several competitive network service providers allow their subscribers access to the Internet, and several major software and telecommunications companies have Internet access services. If the Internet becomes an accepted method of electronic commerce, the Company could lose network customers that would reduce recurring revenue from network services and have a material adverse effect on the Company. Competitors that offer products and/or services that compete with various of the Company's products and services include, among others, IBM; AT&T; Computer Associates International, Inc.; EDS; General Electric Information Systems; QuickResponse Services, 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. The Company believes that the principal competitive factors in the commercial electronic commerce industry include responsiveness to customer needs, efficiency in the delivery of solutions, ease of product use, quality of service, price and value. The Company believes it competes favorably with regard to these factors. INTELLECTUAL PROPERTY RIGHTS In accordance with industry practice, the Company relies primarily on a combination of copyright, patent and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials principally under trade secret and copyright laws, which afford only limited protection. The Company presently has one U.S. patent for an electronic document interchange test facility, one U.S. patent for technology utilized in the Company's EDI/Open product and U.S. patent applications pending for an EDI communication system and for technology utilized in the Company's Templar product. In addition, the Company has applied for foreign patents relating to technology utilized in the Company's EDI/Open product and foreign patents relating to technology utilized in the Company's Templar product. The Company owns a number of registered and unregistered trademarks. In addition, the Company uses the trademark EDI/400 in connection with its principal EDI product pursuant to a license agreement with IBM that IBM may terminate on 60 days' prior written notice. The Company has not received any indication from IBM that it intends to terminate the agreement. The Company routinely enters into non-disclosure and confidentiality agreements with employees, vendors, contractors, consultants and customers. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that competitors will not independently develop similar technology. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured, licensed or distributed may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. The Company believes that, due to the rapid pace of innovation within the electronic commerce, EDI and related software industries, factors such as the technological and creative skills of its personnel are more important in establishing and maintaining a leadership position within the industry than are the various legal protections of its technology. The Company does not believe that any of its products infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. From time to time, the Company has received notices which allege, directly or indirectly, that the Company's products or other intellectual property rights infringe the rights of others. The Company generally has been able to address these allegations without material cost to the Company. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in electronic commerce grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing 15 agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect on the Company. In its distribution agreements and certain of its customer or other agreements, the Company agrees to indemnify certain parties, which may include customers of parties with which the Company has contracted, for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights or certain other intellectual property rights of third parties. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. In the event of an adverse ruling in such litigation, the Company might be required to pay money damages, to discontinue the use and sale of infringing products, to expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company's business and operations results would be materially adversely affected. Third Party Technology. The Company incorporates in its products certain software licensed to it by other software developers. These include the public key cryptography software licensed by RSA Data Security, Inc. to Premenos which is used in connection with Templar as well as certain database software used in the Templar and EDI/Open products and certain graphical interface software used in EDI products and Templar. Premenos licensed the public key encryption technology pursuant to a license agreement with RSA (the "RSA License"), which was transferred to Harbinger in connection with the acquisition of Premenos. The RSA License grants to the Company the non-exclusive, non-transferable, non-assignable limited license to incorporate certain functionality within RSA's public key encryption technology into a Premenos product solely to create a Bundled Product, as defined in the RSA License, to reproduce and sublicense the Bundled Product, and to use or authorize end-users to use the Bundled Product in conjunction 16 with a service bureau or internal network or to provide electronic communications, messaging and similar services to third parties. A Bundled Product is defined as a Company product which represents a significant functional and value enhancement to the RSA technology designed to facilitate the secure exchange of electronic information such as EDI documents over open networks. The RSA License contains a number of restrictions regarding sublicensing of the Bundled Product to act as a certification authority, as well as other restrictions regarding end-user use, territory and distribution channels. The Company is prohibited from selling the Bundled Product or any product with comparable functionality which does not incorporate the RSA encryption technology, except in certain circumstances, in which event the Company is required to pay the otherwise applicable royalty fee to RSA. The Company also incorporates database software licensed from Sybase, Inc. into its Templar and certain versions of its EDI/Open products, and incorporates graphical software licensed from third parties into the EDI products and Templar. Although the Company seeks and generally receives assurances from third-party software vendors as to such third party's intellectual property rights and the non-infringement by such software of other parties' rights, Harbinger's right to use such software could be impaired by third party claims. In addition, certain agreements pursuant to which the Company uses such software may be terminated in accordance with their terms in certain circumstances. If the Company were deprived of the right to use software incorporated in its products for any reason, there could be serious disruption to its business. YEAR 2000 COMPLIANCE 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. 17 5. Manages the leap year occurring in the year 2000, following the quad-centennial rule. As of December 31, 1998 Company management estimates that approximately 95% of its product readiness testing has been completed. While most 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 the first quarter of 1999. 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 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 $100,000 to $200,000 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 18 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. 19 EMPLOYEES As of March 9, 1999, the Company had approximately 975 full-time employees. Approximately 195 are technical personnel engaged in maintaining or developing the Company's products or performing related services, approximately 351 are marketing and sales personnel, approximately 330 are customer support and operations personnel, and approximately 99 are involved in administration and finance. EXECUTIVE OFFICERS The current executive officers of the Company and their ages as of March 9, 1999, are as follows:
NAME AGE POSITION ------------------------------- -------------- -------------------------------------------------- C. Tycho Howle 49 Chairman of the Board of Directors and Chief Executive Officer James M. Travers 47 President and Chief Operating Officer Joel G. Katz 34 Chief Financial Officer and Secretary Dave Bursiek 61 Executive Vice President and General Manager, Customer Solutions and Enhancements Division Daniel L. Manack 40 Senior Vice President and General Manager, EC Solutions Division Willem van Nieuwenhuyzen 51 General Manager, Europe, Middle East and Africa
Mr. Howle, age 49, has been Chairman of the Board of Directors of the Company and its predecessors since 1983, and served as Chief Executive Officer since September 1998 and from 1983 until March 1997. Mr. Travers, age 47, currently serves as a Class I director. He has served as President and Chief Operating Officer of the Company since October 1998. He served as President and General Manager of the Company's Software Division from June 1997 until October 1998, and from January 1994 until June 1997, he served as President of Harbinger Enterprise Solutions Division. In this latter capacity, Mr. Travers managed the business operations acquired from Texas Instruments, Inc. ("TI"). From 1978 through 1994, Mr. Travers served in various managerial positions with TI, including Vice President for North American Field Operations and most recently as Director of Business Development for TI's Worldwide Applications Software Business and General Manager of TI's EDI business unit from June 1992 through December 1994. Mr. Katz has served as Chief Financial Officer and Secretary of the Company since January 1997. He served as Vice President, Finance and Secretary from January 1995 to January 1997 and Senior Director, Finance of the Company from February 1994 to January 1995. He joined Harbinger in 1990 as Controller and became Director of Finance in December 1991. Mr. Bursiek, age 61, has served as Executive Vice President and General Manager of the Customer Solutions and Enhancements Division since February 1999. From January 1997 through February 1999, he served as Senior Vice President of Sales, with responsibility for mass deployment sales. From December 1996 until January 1997, he served as the Executive Vice President of Sales of Supply Tech, Inc., which was acquired by the Company in January 1997. From 1995 until December 1996, he was a management consultant with Optimum Associates, a consulting firm. In 1994, he served as Chief Executive Officer of Sapiens International, a software and consulting firm. 20 Mr. Manack, age 41, has served as Senior Vice President and General Manager, EC Solutions Division since February 1999. From February 1998 to February 1999, he served as Vice President and General Manager - Professional Services & Outsourcing Practice and from January 1997 to February 1998 he served as Vice President of Professional Services and Outsourcing. From September 1994 until December 1996, he was a principal with the Information Services unit of Unisys Corporation and from June 1980 until August 1994, he was a Business Manager with Texas Instruments. Mr. van Nieuwenhuyzen, age 51, has served as General Manager, Europe, Middle East and Africa since October 1997 and was appointed an officer of Harbinger in November 1997. From September 1995 to October 1997 he served as Manager of Global Accounts, Europe, Middle East and Africa, of Hewlett-Packard EMEA SA, and from May 1991 to September 1995, as Director of Computer Systems Organization of Hewlett-Packard Netherlands BV. GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS Government Regulatory and Industrial Policy Risks. The Company's network services are transmitted to its customers over dedicated and public telephone lines. These transmissions are governed by regulatory policies establishing charges and terms for communications. Changes in the legislative and regulatory environment relating to online services, EDI or the Internet access industry, including regulatory or legislative changes that directly or indirectly affect telecommunication costs or increase the likelihood of competition from regional telephone companies or others, could have an adverse effect on the Company's business. The Telecommunications Act of 1996 (the "Act") amended the federal telecommunications laws by relaxing restrictions on regional telephone companies and others competing with the Company. The Act set in motion certain events that will lead to the elimination of restrictions on regional telephone companies providing transport between defined geographic boundaries associated with the provision of its own information services. This will enable regional telephone companies to more readily compete with the Company by packaging information service offerings with other services and providing them on a wider geographic scale. While some provisions of the Act have been held by the U.S. Supreme Court to be unconstitutional, there can be no assurance that future legislative or regulatory efforts to limit use of the Internet in a manner harmful to the Company will not be successful. The Clinton Administration has announced an initiative to establish a framework for global electronic commerce. 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 the Company. The Company cannot predict the impact, if any, that the Act and future court opinions, legislation, regulations or regulatory changes in the United States or other countries may have on its business. Management believes that the Company is in compliance with all material applicable regulations. The Harbinger IVAS product and the Harbinger Templar product both incorporate encryption technology which is subject to U.S. export control regulations. Although both products are currently exportable under licenses granted by the Commerce Department, government regulation in this area is subject to frequent change and there can be no assurance that these products will remain exportable. ITEM 2. PROPERTIES. The Company occupies approximately 145,476 square feet of office space in Atlanta, Georgia under a lease expiring in 2008, plus options to extend the lease term. This location serves as the Company's headquarters and data center. The Company also has offices in Michigan, Texas, California, South Carolina, Oregon, Pennsylvania, Canada and Oklahoma, occupying approximately 39,800; 24,000; 73,615; 21,789; 2,100; 215; 4,182 and 3,491 square feet, respectively. In addition, the Company also has offices in The Netherlands, Germany, the United Kingdom, France, Italy and Mexico occupying approximately 17,108; 14,546; 7,600; 2,390; 2,228 and 1,529 square feet, respectively. The Company's offices are generally located in suburban office park environments. ITEM 3. LEGAL PROCEEDINGS. 21 The Company is not a party to any material legal proceedings. From time to time, the Company is involved in various routine legal proceedings incidental to the conduct of its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the last quarter of the year ended December 31, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Harbinger's Common Stock is traded on the Nasdaq National Market under the symbol "HRBC". The price per share reflected in the table below represents the range of low and high closing sale prices for the Company's Common Stock as reported by The Nasdaq Stock Market for the quarters indicated:
QUARTER ENDED HIGH PRICE LOW PRICE ------------------------------ -------------------- --------------------- March 31, 1997 $27 1/8 $14 1/8 June 30, 1997 $21 5/8 $12 1/8 September 30, 1997 $26 1/8 $17 3/8 December 31, 1997 $28 5/16 $13 March 31, 1998 $25 3/16 $16 1/2 June 30, 1998 $27 $21 September 30, 1998 $22 13/16 $6 1/8 December 31, 1998 $ 9 5/16 $4 1/16
The closing sale price of the Company's Common Stock as reported by The Nasdaq Stock Market on March 17, 1999 was $7.13. The number of shareholders of record of the Company's Common Stock as of March 17, 1999, was approximately 260. The Company has never paid cash dividends on its capital stock. The Company currently intends to retain any earnings for use in the business and does not anticipate paying any cash dividends in the foreseeable future. The Company declared a 3-for-2 stock split in the form of a stock dividend which was paid on May 15, 1998 to shareholders of record as of May 1, 1998. On March 31, 1998, the Company issued 194,497 shares of Common Stock to the interest holders of EDI Works! LLC ("EDI Works!") in exchange for all of the outstanding interest in EDI Works! (the "EDI Works! Acquisition"). The shares of common stock issued in the EDI Works! Acquisition were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, in reliance, in part, upon the representations and warranties set forth in the EDI Works! Acquisition agreement. 22 ITEM 6. SELECTED FINANCIAL DATA. The information set forth under the section entitled "Selected Financial Data" on page 1 of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference and filed herewith as part of Exhibit 13.1. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information set forth under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1998 Annual Report to Shareholders is incorporated herein by reference and filed herewith as a part of Exhibit 13.1. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The quarterly results of operations set forth in the Company's 1998 Annual Report to Shareholders and the following financial statements, related notes thereto and report of independent auditors set forth in the Company's 1998 Annual Report to Shareholders are incorporated herein by reference and filed herewith as a part of Exhibit 13.1. Consolidated Balance Sheets as of December 31, 1998 and 1997. Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Comprehensive Loss for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. Independent Auditors' Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Certain information required by this item is incorporated by reference from the information contained in the Company's Proxy Statement for the Annual Meeting of Shareholders expected to be filed with the Commission on March 31, 1999 under the captions "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference from the information contained in the Company's Proxy Statement for the Annual Meeting of Shareholders expected to be filed with the Commission on March 31, 1999 under the caption "Executive Compensation." 23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference from the information contained in the Company's Proxy Statement for the Annual Meeting of Shareholders expected to be filed with the Commission on March 31, 1999 under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference from the information contained in the Company's Proxy Statement for the Annual Meeting of Shareholders expected to be filed with the Commission on March 31, 1999 under the caption "Certain Transactions." 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements The financial statements of Harbinger Corporation and report of independent auditors as set forth under Item 8 of this report on Form 10-K are incorporated herein by reference. 2. Financial Statement Schedules (i) The following Financial Statement Schedule of Harbinger Corporation for the Years Ended December 31, 1996, 1997 and 1998 is filed as a part of this Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements, and related notes thereto, of Harbinger Corporation. HARBINGER CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Amount Balance at Charged to Recorded Charged to Balance at Beginning of Costs and Due to Other End of Description Period Expenses Acquisitions Accounts Deductions Period - ----------------------------------------- ------------ ---------- ------------ ---------- ---------- ---------- Allowance for returns and doubtful Accounts (in thousands): 1996 ........................... $ 941 640 325 2,392 (B) (1,873) (A) $ 2,425 1997 ........................... $ 2,425 1,561 -- 3,148 (B) (4,344) (A) $ 2,790 1998 ........................... $ 2,790 6,428 -- 3,588 (B) (3,728) (A) $ 9,078 Allowance for net deferred tax assets (in Thousands): 1996 ........................... $ -- 1,494 3,304 -- -- $ 4,798 1997 ........................... $ 4,798 13,509 4,364 -- -- $22,671 1998 ........................... $22,671 5,171 -- -- -- $27,842
- -------------- (A) Deductions represent write-offs of doubtful accounts and sales returns charged against the allowance. (B) Deductions from revenues for sales returns and allowances. 25 INDEPENDENT AUDITORS' REPORT The Board of Directors Harbinger Corporation: Under date of February 5, 1999, we reported on the consolidated balance sheets of Harbinger Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998 as contained in the Harbinger Corporation 1998 Annual Report to shareholders. We did not audit the 1996 financial statements of Premenos Technology Corp. and subsidiaries, which statements reflect total revenues constituting 38% of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Premenos Technology Corp. and subsidiaries for 1996 is based solely on the report of the other auditors. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule for each of the years in the three-year period ended December 31, 1998 listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, based on our audits and the report of the other auditors with respect to 1996, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP --------------------------- KPMG LLP Atlanta, Georgia February 5, 1999 Schedules not listed above have been omitted because they are not applicable or the information required to be set forth herein is included in the Financial Statements or notes thereto. 26 (ii) The following Reports of Independent Public Accountants with respect to the Company's statements of operations, shareholders' equity and cash flows for the year ended December 31, 1996 is filed as a part of this Report on Form 10-K and should be read in conjunction with the Financial Statements, and related notes thereto, of Harbinger Corporation. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Premenos Technology Corp.: We have audited the consolidated balance sheet of Premenos Technology Corp. and subsidiaries (the Company) as of December 31, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period then ended. We have also audited the Company's financial statement schedule of Valuation and Qualifying Accounts included in the Company's 1996 Form 10-K. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Premenos Technology Corp. and subsidiaries as of December 31, 1996, and the consolidated results of their operations and their cash flows for each of the two years in the period then ended in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule, referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. ------------------------------- COOPERS & LYBRAND L.L.P. San Francisco, California January 31, 1997, except for Paragraph 3 of Note 16 as to which the date is March 16, 1997 27 (b) Reports on Form 8-K. The Company filed the following reports on Form 8-K during the quarter ended December 31, 1998. (i) Report on Form 8-K filed October 1, 1998 with respect to the Company's announcement of its refined strategy, organizational re-structuring and preliminary third quarter results pursuant to Item 5 of Form 8-K and a certain exhibit relating to the same pursuant to Item 7(c) of Form 8-K. (ii) Report on Form 8-K filed October 2, 1998 with respect to the Company's announcement of a stock repurchase program pursuant to Item 5 of Form 8-K and a certain exhibit relating to the same pursuant to Item 7(c) of Form 8-K. (c) Exhibits. The following exhibits are filed as part of, or are incorporated by reference into, this report on Form 10-K:
EXHIBIT NUMBER DESCRIPTION --------------- ----------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22, 1995). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 4.1 Provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of the Company defining rights of the holders of the Common Stock (incorporated by reference to Exhibits 3.1 through 3.4 to the Company's Registration Statement on Form S-1 (File No. 33-93804) declared effective on August 22, 1995). 4.2 Specimen Stock Certificate (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File 33-93804)). 4.3 Form of Registration Rights Agreement effective March 29, 1996 between each of the Harbinger N.V. Shareholders and the Company (incorporated by reference to Exhibit 2(a) to the Company's Current Report on Form 8-K dated May 3, 1996). 4.4 Form of Warrant issued to former Harbinger N.V. Shareholders on July 18, 1996 (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 4.5 Form of Warrant issued to former INOVIS Shareholders on April 19, 1996 (incorporated by reference to Exhibit 2(a) to the Company's Current Report on Form 8-K dated July 1, 1996).
28 4.6 Registration Rights Agreement between the Company, Carol G. Croom, Charles E. Webber, Nine-Min Cheng, Judy A. Bailey and Krish R. Sampat, dated as of March 31, 1998 (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.1 Employment Agreement between the Company and Mr. James M. Travers effective as of February 1, 1995 with Letter from the Company to Mr Travers dated December 27, 1994 (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22, 1995). 10.2 Employment Agreement between the Company and Mr. C. Tycho Howle effective as of July 1, 1997 (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-3 (File No. 33-31191). 10.3 Employment Agreement between the Company and Mr. Joel G. Katz effective as of March 7, 1994 (incorporated by reference to Exhibit 10.26 to the Company's Registration Statement on Form S-1 (File No. 33-93804) declared effective August 22, 1995). 10.4 Employment Agreement between the Company and Mr. David T. Leach effective as of July 1, 1997 (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-3 (File No. 33-31191). 10.5 Employment Agreement between the Company and Mr. Willem van Nieuwenhuyzen effective August 1, 1997 (incorporated by reference to Exhibit 99A to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.6 Amended and Restated 1993 Stock Option Plan for Nonemployee Directors effective as of August 11, 1993 (incorporated by reference to Exhibit 10.33 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22,1995). 10.7 First Amendment to Harbinger Corporation Amended and Restated 1989 Stock Option Plan (incorporated by reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.8 Third Amendment to Amended and Restated 1993 Stock Option Plan for Nonemployee Directors (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.9 Lease between the Company and 1277 Lenox Park Boulevard, LLC for office located at 1277 Lenox Park Boulevard, Atlanta, Georgia dated October 10, 1997 (incorporated by reference to Exhibit 99c to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.10 Amended and Restated 1989 Stock Option Plan effective as of April 15, 1992 (incorporated by reference to Exhibit 10.39 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22, 1995).
29 10.11 Form of Indemnification Agreement between the Company and Directors (incorporated by reference to Exhibit 10.43 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22, 1995). 10.12 Harbinger Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.13 First Amendment to the 1996 Harbinger Corporation Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company's Form S-8 Registration Statement (File 333-30219) filed June 27, 1997). 10.14 Second Amendment to the 1996 Harbinger Corporation Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company's Form S-8 Registration Statement (File 333-42959) filed December 22, 1997). 10.15 Amended and Restated Harbinger Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.16 First Amendment to Harbinger Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.17 Form of Amendment to Employment Agreement of James Travers and Joel Katz (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.18 Form of Indemnification Agreement for certain of the Company's Directors and Officers (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.19 Third Amendment to the Harbinger Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.20 Second Amendment to the Amended and Restated Harbinger Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.21 Fourth Amendment to the Harbinger Corporation Amended and Restated 1993 Stock Option Plan for Nonemployee Directors (incorporated by reference to Exhibit 99.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.22 Third Amendment to the Amended and Restated Harbinger Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.23 Employment Agreement between the Company and Dave Bursiek effective December 1, 1996
30 10.24 Form of Employment Agreement between the Company and Dan Manack effective December 4, 1996. 10.25 Amendment No. 1 to Lease between the Company and 1277 Lenox Park Blvd., LLC dated June 5, 1998. 13.1 The following financial information included within the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1998: (i) Selected Financial Data; (ii) Quarterly Results of Operations; (iii) Management's Discussion and Analysis of Financial Condition and Results of Operations; (iv) Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Independent Auditors' Report. 21.1 List of Subsidiaries of Company. 23.1 Consent of KPMG LLP. 23.2 Consent of PricewaterhouseCoopers LLP. 27.1 Financial Data Schedule for the Year Ended December 31, 1998. 27.2 Restated Financial Data Schedule for the Year Ended December 31, 1997. 27.3 Restated Financial Data Schedule for the Year Ended December 31, 1996. 99.1 Safe Harbor Compliance Statement.
31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 30th day of March, 1999. HARBINGER CORPORATION By: /s/ C. Tycho Howle ----------------------------------- C. Tycho Howle Chairman and Chief Executive Officer 32 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ C. Tycho Howle Chief Executive Officer; March 30, 1999 --------------------- Chairman of the Board of C. Tycho Howle Directors (Principal Executive Officer) /s/ David T. Leach Vice Chairman - International; March 30, 1999 --------------------- Director David T. Leach /s/ James M. Travers President; Chief Operating March 30, 1999 --------------------- Officer; Director James M. Travers /s/ Joel G. Katz Chief Financial Officer; March 30, 1999 --------------------- Secretary; (Principal Financial Joel G. Katz Officer; Principal Accounting Officer) /s/ William D. Savoy Director March 30, 1999 --------------------- William D. Savoy /s/ William B. King Director March 30, 1999 --------------------- William B. King /s/ Stuart L. Bell Director March 30, 1999 --------------------- Stuart L. Bell /s/ Benn R. Konsynski Director March 30, 1999 --------------------- Benn R. Konsynski /s/ Ad Nederlof Director March 30, 1999 --------------------- Ad Nederlof /s/ Klaus Neugebauer Director March 30, 1999 --------------------- Klaus Neugebauer /s/ David Hildes Director March 30, 1999 --------------------- David Hildes /s/ John Lowenberg Director March 30, 1999 --------------------- John Lowenberg
33
EXHIBIT NUMBER DESCRIPTION ---------------- ----------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22, 1995). 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 4.1 Provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of the Company defining rights of the holders of the Common Stock (incorporated by reference to Exhibits 3.1 through 3.4 to the Company's Registration Statement on Form S-1 (File No. 33-93804) declared effective on August 22, 1995). 4.2 Specimen Stock Certificate (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File 33-93804)). 4.3 Form of Registration Rights Agreement effective March 29, 1996 between each of the Harbinger N.V. Shareholders and the Company (incorporated by reference to Exhibit 2(a) to the Company's Current Report on Form 8-K dated May 3, 1996). 4.4 Form of Warrant issued to former Harbinger N.V. Shareholders on July 18, 1996 (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 4.5 Form of Warrant issued to former INOVIS Shareholders on April 19, 1996 (incorporated by reference to Exhibit 2(a) to the Company's Current Report on Form 8-K dated July 1, 1996). 4.6 Registration Rights Agreement between the Company, Carol G. Croom, Charles E. Webber, Nine-Min Cheng, Judy A. Bailey and Krish R. Sampat, dated as of March 31, 1998 (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.1 Employment Agreement between the Company and Mr. James M. Travers effective as of February 1, 1995 with Letter from the Company to Mr Travers dated December 27, 1994 (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22, 1995). 10.2 Employment Agreement between the Company and Mr. C. Tycho Howle effective as of July 1, 1997 (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-3 (File No. 33-31191).
34 10.3 Employment Agreement between the Company and Mr. Joel G. Katz effective as of March 7, 1994 (incorporated by reference to Exhibit 10.26 to the Company's Registration Statement on Form S-1 (File No. 33-93804) declared effective August 22, 1995). 10.4 Employment Agreement between the Company and Mr. David T. Leach effective as of July 1, 1997 (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-3 (File No. 33-31191). 10.5 Employment Agreement between the Company and Mr. Willem van Nieuwenhuyzen effective August 1, 1997 (incorporated by reference to Exhibit 99A to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.6 Amended and Restated 1993 Stock Option Plan for Nonemployee Directors effective as of August 11, 1993 (incorporated by reference to Exhibit 10.33 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22,1995). 10.7 First Amendment to Harbinger Corporation Amended and Restated 1989 Stock Option Plan (incorporated by reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.8 Third Amendment to Amended and Restated 1993 Stock Option Plan for Nonemployee Directors (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.9 Lease between the Company and 1277 Lenox Park Boulevard, LLC for office located at 1277 Lenox Park Boulevard, Atlanta, Georgia dated October 10, 1997 (incorporated by reference to Exhibit 99c to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.10 Amended and Restated 1989 Stock Option Plan effective as of April 15, 1992 (incorporated by reference to Exhibit 10.39 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22, 1995). 10.11 Form of Indemnification Agreement between the Company and Directors (incorporated by reference to Exhibit 10.43 to the Company's Registration Statement on Form S-1 (File 33-93804) declared effective on August 22, 1995). 10.12 Harbinger Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.13 First Amendment to the 1996 Harbinger Corporation Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company's Form S-8 Registration Statement (File 333-30219) filed June 27, 1997). 10.14 Second Amendment to the 1996 Harbinger Corporation Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company's Form S-8 Registration Statement (File 333-42959) filed December 22, 1997).
35 10.15 Amended and Restated Harbinger Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.16 First Amendment to Harbinger Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.17 Form of Amendment to Employment Agreement of James Travers and Joel Katz (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.18 Form of Indemnification Agreement for certain of the Company's Directors and Officers (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.19 Third Amendment to the Harbinger Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.20 Second Amendment to the Amended and Restated Harbinger Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.21 Fourth Amendment to the Harbinger Corporation Amended and Restated 1993 Stock Option Plan for Nonemployee Directors (incorporated by reference to Exhibit 99.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.22 Third Amendment to the Amended and Restated Harbinger Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.23 Employment Agreement between the Company and Dave Bursiek effective December 1, 1996. 10.24 Form of Employment Agreement between the Company and Dan Manack effective December 4, 1996. 10.25 Amendment No. 1 to Lease between the Company and 1277 Lenox Park Blvd., LLC dated June 5, 1998. 13.1 The following financial information included within the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1998: (i) Selected Financial Data; (ii) Quarterly Results of Operations; (iii) Management's Discussion and Analysis of Financial Condition and Results of Operations; (iv) Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Independent Auditors' Report. 21.1 List of Subsidiaries of Company.
36 23.1 Consent of KPMG LLP. 23.2 Consent of PricewaterhouseCoopers LLP. 27.1 Financial Data Schedule for the Year Ended December 31, 1998. 27.2 Restated Financial Data Schedule for the Year Ended December 31, 1997. 27.3 Restated Financial Data Schedule for the Year Ended December 31, 1996. 99.1 Safe Harbor Compliance Statement.
EX-10.23 2 EMPLOYMENT AGREEMENT WITH DAVE BURSIEK 1 EXHIBIT 10.23 EMPLOYMENT AGREEMENT 1. PARTIES; EFFECTIVE DATE. This Employment Agreement ("Agreement") is between Supply Tech, Inc., a Michigan corporation with offices at 1000 Campus Drive, Ann Arbor, Michigan 48104 (the "Company") and R. David Bursiek of 10215 Governors Drive, Chapel Hill, North Carolina 27514 ("Employee" or "you"). This Agreement is effective as of December 1, 1996 ("Effective Date"). 2. NATURE OF AGREEMENT; "AT-WILL" EMPLOYMENT. (a) The Company is the developer, owner and distributor of certain Electronic Data Interchange computer software and bar coding software, and provides various related products and technological and professional services related to such software (the "Company's Business"). The Company wishes to hire you as an employee. Your job responsibilities are generally described in Exhibit A of this Agreement. Your responsibilities could change as the Company obtains new projects and reassigns responsibilities. These changes may be communicated orally, or in writing. (b) This is not a contract for a specific period of time, and is not a promise of continued employment. You are an employee "at will," which means that the Company can terminate your employment for any reason, with or without "cause," and with or without notice. You, too, have the right to terminate your employment with the Company at any time, with or without cause, and with or without notice to the Company. (c) You agree to devote your full business time and best efforts to the Company while employed by the Company. You shall not be employed by (or retained as a consultant for) any other company providing products or services similar to the Company's Business. While employed by the Company, you shall not engage in any activity that will have an adverse effect upon your ability to perform the obligations under this Agreement. 3. COMPENSATION; COMPANY POLICIES. (a) The Company shall compensate you, and shall provide you the employment benefits, set forth in Exhibit A, which may be amended from time to time by the Company. Upon the termination of your employment with the Company, you shall be paid severance pay (if applicable) in accordance with the terms and conditions of Section 8 of this Agreement. (b) The Company may develop additional personnel policies, including policies relating to benefits, terms and conditions of employment, and any terms relating to or affecting the operation of the Company, including rules, procedures and regulations required by U.S. or state governments or their agencies. You agree that compliance with those policies, terms and conditions is a condition of continued employment with the Company. 4. THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS. (a) In the course of your employment with the Company, you may have access to information or materials that are considered trade secret, confidential and/or proprietary by the Company ("Information"). Information permits the development and commercialization of competitive and unique products and services, and is protected by the Company from unauthorized use and disclosure. Information includes, but is not limited to, technical know-how, procedures, technical specifications, designs, software (both object code and source code), results of testing, programmer documentation, protocols, processes, compilations of data, strategic plans, sales and marketing plans, customer information, supplier information, financial information and proposed agreements. Information also includes all written materials identified in writing as "Confidential" or "Proprietary" or such similar proprietary legend, and oral information Company___ 1 Employee___ 2 disclosed in connection with the Information. Information also includes "Proprietary Materials" identified in Section 4(c) below. (b) The Company understands that its current employees may have had access to the trade secrets and proprietary information of third parties (that is, persons or companies other than the Company) during their previous employment. These other trade secrets may be owned by the former employers or by clients with whom those former employers did business. The Company does not permit its employees to disclose, use or incorporate into the Company's products or services, the unlicensed trade secrets or proprietary information of third parties. You acknowledge the foregoing, and represent and warrant that you will not disclose to the Company, or incorporate into the Company Information, any trade secrets or proprietary information of third parties. (c) Information created by you within the scope of your employment belongs to the Company and is not owned by you individually. This Information includes copyrightable works of original authorship (including but not limited to computer programs, compilations of information, generation of data, graphic works, audio-visual materials, technical reports and the like), ideas, inventions (whether patentable or not) know-how, processes, trademarks and other intellectual property, whether proprietary or nonproprietary. You agree that all works of original authorship created during your employment are "works for hire" as that term is used in connection with the U.S. Copyright Act. You agree to disclose promptly to the Company all ideas, inventions, improvements, works of original authorship, know-how, trade secrets, processes and the like, developed or discovered by you in the course of your employment relating to the business of the Company, or to the prospective business of the Company, or which utilizes the Company Information or staff services ("Proprietary Materials"). To the extent that, by operation of law, you retain any intellectual property rights in such Proprietary Materials, you hereby assign to the Company all right, title and interest in all such Proprietary Materials, including copyrights, patents, trade secrets, trademarks and know-how. As used in this Agreement, "Information" includes "Proprietary Materials." (d) You agree to cooperate with the Company, at the Company's expense, in the protection of the Company Information and the securing of the Company's proprietary rights, including signing any documents necessary to secure such rights, whether during or after your employment with the Company. (e) You agree (i) to not use Information for your own benefit, (ii) to not disclose Information to any other company or person without the written permission from a Company officer; (iii) and to return to the Company all Information and Company materials upon termination of your employment. You have no obligation to maintain as confidential any Information that is entirely in the public domain, or is known to you prior to disclosure by the Company as evidenced by written, dated records in your possession, or is received lawfully by you without the breach of any obligation of confidentiality owed to the Company. (f) You may also have access to information that is considered confidential by third parties with whom the Company does business, such as customers, suppliers, OEMs and consultants ("Clients"). Such client information shall be maintained as confidential in accordance with the procedures identified above. 5. NONSOLICITATION AND NONCOMPETE. (a) As used in this Section 5, the term "Restricted Period" means: (1) the number of months for which severance pay is paid to you in accordance with Section 8 of this Agreement in the event that you are terminated by the Company for a reason other than gross negligence or fraud; or (2) in all other cases, 12 months. As used in this Section 5, the Company___ 2 Employee___ 3 term "Indirectly" means as an employee, agent, consultant, advisor, principal, proprietor, owner, partner or shareholder (other than by holding shares listed on a stock exchange that does not exceed 5% of the outstanding shares listed). (b) During the term of your employment and during the Restricted Period thereafter, you agree not to directly or indirectly hire, or solicit for hire, any then-current Company employees, or to contact them for the purpose of inducing them to leave the Company. (c) During the term of your employment and during the Restricted Period thereafter, you agree not to directly or indirectly: (i) contact any then-current Company customers for the purpose of inducing them to leave the Company or to discourage them from doing business with the Company; or (ii) within the geographic area to which you were assigned to work by the Company during the immediately preceding year, compete with the Company or engage in an business which is competitive with the Company's Business, without the express prior written approval of the Company. 6. ENFORCEMENT OF AGREEMENT; INJUNCTIVE RELIEF; ATTORNEYS' FEES AND EXPENSES. You acknowledge that violation of this Agreement will cause irreparable damage to the Company, entitling it to injunctive relief and possible money damages. If you violate this Agreement, in addition to all other remedies available to the Company at law, in equity, and under contract, you agree that you are obligated to pay all the Company's costs of enforcement of this Agreement, including attorneys' fees and expenses. The parties agree that any litigation over this Agreement shall be in a court of competent jurisdiction in Washtenaw County, Michigan, or the Eastern District of Michigan, Southern Division, and the parties hereby consent to personal jurisdiction and venue in such courts. 7. DRUG/ALCOHOL POLICY. While on company time or in the representation of the Company, it is understood that there will be no use of illegal mind-altering drugs or chemicals. It is also understood that upon arrival to work that there will be no traces of mind-altering drugs or chemicals in the employee's body. This includes amount of blood alcohol that is beyond legal driving limits. As alcohol is not considerate an illegal drug, it is understood that its mind-altering effects can reduce employees judgment and is not to be consumed during normal business hours. It is understood that if alcohol is being served at an event in which the Company has not been hired to provide services for, an employee may consume alcohol, but must not exceed the legal blood level for driving. Failure to comply with the above may result in termination of employment. 8. SEVERANCE PAY. (a) As used in this Section 8, the term "Base Salary" means only the base salary paid to you and does not include bonus, benefits, expenses, or options, if any. (b) Upon the termination by the Company of your employment with the Company for any reason other than for gross negligence or fraud, you shall be paid severance pay in accordance with the following terms and conditions. (i) If your employment with the Company is terminated during the first year of your employment, you shall be paid a severance pay equal to 6 months of your Base Salary as of the date of termination; (ii) If your employment with the Company is terminated during the second year of your employment, you shall be paid a severance pay equal to 9 months of your Base Salary as of the date of termination; or Company___ 3 Employee___ 4 (iii) If your employment with the Company is terminated at any time after the second year of your employment, you shall be paid a severance pay equal to 12 months of your Base Salary as of the date of termination. 9. GENERAL. (a) This Agreement shall be construed in accordance with the laws of the state of Michigan, and shall inure to the benefit and be binding upon the parties and their heirs, representatives, successors and assigns. (b) The terms of this Agreement are deemed to be severable, with the effect that if any of the provisions of this Agreement shall be held to be invalid or enforceable by any court of competent jurisdiction, such provision shall be deemed revised so as to reflect the intent of the parties expressed therein and such revisions or determinations of invalidity or unenforceability shall not affect any other provision of this Agreement. (c) This Agreement contains the entire understanding of you and the Company with respect to the subject matter of employment; and the status of employment at will cannot be amended except by a written agreement between the parties. You represent that you have not been given any oral or written promises relating to employment that are not contained in this Agreement, including in any of the Exhibits, which are made a part of this Agreement. THE PARTIES HAVE READ THE FOREGOING AGREEMENT, UNDERSTAND ITS TERMS AND AGREE TO BE BOUND BY THEM. SUPPLY TECH, INC. EMPLOYEE By: ------------------------------------ ------------------------------ Ted C. Annis R. David Bursiek Its: Chief Executive Officer Company___ 4 Employee___ EX-10.24 3 EMPLOYMENT AGREEMENT WITH DAN MANACK 1 EXHIBIT 10.24 EMPLOYMENT AND CONFIDENTIALITY AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as of the 4th day of December, 1996, by and between HARBINGER CORPORATION ("HC"), including its wholly owned affiliates and Daniel L. Manack ("Employee"), an individual. For and in consideration of the mutual covenants described below, the parties hereto agree as follows: 1. EMPLOYMENT. HC agrees to employ or continue to employ Employee, and Employee agrees to accept and continue such employment, upon the following terms and conditions. 2. DUTIES. (a) Employee shall assume the responsibilities and perform the Duties specified in EXHIBIT A ("Duties"). Such Duties may be revised from time to time at the sole discretion of HC. Employee agrees to devote his or her full time and energy to the furtherance of the business of HC and shall not during the term hereof work or perform services in any advisory or other capacity for any individual, firm, company, or corporation other than for HC without HC's prior written consent. This Agreement may be supplemented from time to time by rules and regulations of employment issued by HC, including, without limitation, such rules and regulations described in the HC employee handbook, and Employee agrees to adhere to these rules and regulations. (b) If Employee desires to perform any services during the term hereof for anyone other than HC, whether or not Employee is compensated, then Employee agrees to contact an officer of HC to discuss this matter. HC will review the request and advise Employee of HC's approval or disapproval of the proposed outside work, in HC's sole discretion. In making its decision, HC may consider such factors as whether the outside work may be harmful to the business of HC or interfere with Employee's ability to satisfactorily discharge his or her Duties, whether the outside work is based directly or indirectly on a business practice of HC or idea that was conceived by Employee while on HC's payroll, or whether such outside work could result in a violation of any covenants of Employee in this Agreement. In this case, HC will notify Employee of HC's approval or disapproval of such request to perform outside work within a reasonable period of time after HC is notified by Employee of the request to perform such services. Unless HC grants such approval in writing, Employee agrees to refrain from such outside work. 3. COMPENSATION. HC shall pay as compensation for all the services to be rendered the salary and additional compensation, if any, described in EXHIBIT B (the "Employee Compensation") and as the Employee Compensation may be determined by HC in its sole discretion from time to time. HC's obligation to pay Employee any Employee Compensation shall cease upon termination of Employee's employment with HC. Employee's annual salary shall be prorated on a daily basis for the years in which Employee commences and terminates his or her employment relationship with HC. 4. TERM AND TERMINATION. This Agreement shall be effective upon execution by the parties and shall remain in full force and effect for an indefinite period of time. The parties agree that Employee's term of employment may be terminated at any time, for any reason or for no reason, for cause or not for cause, with or without notice, by HC or Employee. Upon termination of employment for any reason, Employee shall return immediately to HC all documents, property, and other records of HC, and all copies thereof, within Employee's possession, custody or control, including but not limited to any materials containing any Trade Secrets or Confidential Information (as defined below) or any portion thereof. 5. OWNERSHIP. (a) For purposes of this Agreement, "Work Product" shall mean the data, materials, documentation, computer programs, inventions (whether or not patentable), and all works of authorship, including all worldwide rights therein under patent, copyright, trade secret, confidential information, or other property right, created or developed in whole or in part by Employee, whether prior to the date of this Agreement or in the future, either (i) while retained by HC and that have been or will be paid for by HC, or (ii) while employed by HC (whether developed during work hours or not). All Work Product shall be considered work made for hire by the Employee and owned by HC. If any of the Work Product may not, by operation of law, be considered work made for hire by Employee for HC, or if ownership of all right, title, and interest of the intellectual property rights therein shall not otherwise vest exclusively in HC, Employee hereby assigns to HC, and upon the future creation thereof automatically assigns to HC, without further consideration, the ownership of all Work Product. HC shall have the right to obtain and hold in its own name copyrights, patents, registrations, and any other protection available in the Work Product. Employee agrees to perform, during or after Employee's employment, such further acts as may be necessary or desirable to transfer, perfect, and defend HC's ownership of the Work Product that are reasonably requested by HC. (b) Employee agrees that during the term of employment, any money or other remuneration received by Employee for services rendered to a customer or potential customer of HC shall be the property of HC. 2 6. TRADE SECRETS AND CONFIDENTIAL INFORMATION. (a) HC may disclose to Employee certain Trade Secrets and Confidential Information (defined below). Employee acknowledges and agrees that the Trade Secrets and Confidential Information are the sole and exclusive property of HC (or a third party providing such information to HC) and that HC or such third party owns all worldwide rights therein under patent, copyright, trade secret, confidential information, or other property right. Employee acknowledges and agrees that the disclosure of the Trade Secrets and Confidential Information to Employee does not confer upon Employee any license, interest or rights of any kind in or to the Trade Secrets or Confidential Information. Employee may use the Trade Secrets and Confidential Information solely for the benefit of HC while Employee is employed or retained by HC. Except in the performance of services for HC, Employee will hold in confidence and not reproduce, distribute, transmit, reverse engineer, decompile, disassemble, or transfer, directly or indirectly, in any form, by any means, or for any purpose, the Trade Secrets or the Confidential Information or any portion thereof. Employee agrees to return to HC, upon request by HC, the Trade Secrets and Confidential Information and all materials relating thereto. (b) Employee's obligations under this Agreement with regard to the Trade Secrets shall remain in effect for as long as such information shall remain a trade secret under applicable law. Employee acknowledges that its obligations with regard to the Confidential Information shall remain in effect while Employee is employed or retained by HC and for three (3) years thereafter. As used herein, "Trade Secrets" means information of HC, its licensors, suppliers, customers, or prospective licensors or customers, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers, which (a) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. As used herein, "Confidential Information" means information, other than Trade Secrets, that is of value to its owner and is treated as confidential, including, but not limited to, future business plans, licensing strategies, advertising campaigns, information regarding executives and employees, and the terms and conditions of this Agreement. 7. CUSTOMER NON-SOLICITATION. Employee agrees that for a period of eighteen (18) months immediately following termination of Employee's employment with HC for any reason, including, without limitation, voluntary resignation from employment by Employee ("Non-Solicitation Period"), Employee shall not, on Employee's own behalf or on behalf of any person, firm, partnership, association, corporation or business organization, entity or enterprise, solicit, contact, call upon, communicate with or attempt to communicate with any customer or prospect of HC, or any representative of any customer or prospect of HC, with a view to sale or providing of any deliverable or service competitive or potentially competitive with any deliverable or service sold or provided or under development by HC during the time of two (2) years immediately preceding cessation of Employee's employment with HC, provided that the restrictions set forth in this paragraph shall apply only to customers or prospects of HC, or representatives of customers or prospects of HC, with which Employee had contact during such two (2) year period. The actions prohibited by this paragraph shall not be engaged in by Employee directly or indirectly, whether as manager, salesperson, agent, technical support, sales, or service representative, or otherwise. 8. EMPLOYEE NON-SOLICITATION. Employee agrees that Employee shall not call upon, solicit, recruit, or assist others in calling upon, recruiting or soliciting any person who is or was an employee of HC within the Non-Solicitation Period, for the purpose of having such person work in any other corporation, association, entity, or business engaged in providing any of the following: (i) development and operation of computer networks (the "Hosts") to facilitate electronic data interchange and electronic commerce ("EDI") transactions and cash management services; (ii) development, marketing, distribution, and licensing of personal computer, workstation and networking software to facilitate EDI and transaction processing and other communications with the Hosts; (iii) development, marketing, distribution, and licensing of software products for operation on personal computers and workstations relating to the performance of cash management services, including balance and transaction reporting, transfers, stop payments, account reconciliation, check writing, financial record keeping, messaging, and information services; and (iv) consulting, training, and implementation of the products and services described in (i), (ii) and (iii) above (collectively the "Company Business"). 9. NONCOMPETITION. Employee agrees that, without the prior written consent of HC, Employee shall not, so long as Employee is employed hereunder and for a period of one (1) year thereafter within the area described in EXHIBIT C (the "Territory"), directly or indirectly perform the Duties on behalf of any person, firm, corporation, or other entity in the Company Business, if the Company is also then still engaged in the Company Business. 10. WARRANTIES OF EMPLOYEE. (a) Employee warrants to HC that (i) Employee is not presently under any contract or agreement with any party that will prevent Employee from performing 3 the Duties assigned by HC, and (ii) Employee is not in breach of any agreement with respect to any trade secrets or confidential information owned by any other party. (b) Employee agrees to indemnify and hold harmless HC, any affiliated corporation, and their respective shareholders, directors, officers, agents, and employees, from and against any and all liability, including payment of attorneys' fees, arising directly or indirectly from a violation of Section 10(a). 11. EQUITABLE RELIEF. The parties to this Agreement acknowledge that a breach by Employee of any of the terms or conditions of this Agreement will result in irrevocable harm to HC and that the remedies at law for such breach may not adequately compensate HC for damages suffered. Accordingly, Employee agrees that in the event of such breach, HC shall be entitled to injunctive relief or such other equitable remedy as a court of competent jurisdiction may provide. Nothing contained herein will be construed to limit HC's right to any remedies at law, including the recovery of damages for breach of this Agreement. 12. SEVERABILITY. If any provision or part of any provision of this Agreement is held invalid or unenforceable by a court of competent jurisdiction, such holding shall not affect the enforceability of any other provisions or parts thereof, and all other provisions and parts thereof shall continue in full force and effect. 13. MISCELLANEOUS. This Agreement shall not be amended or modified except by a writing executed by both parties. This Agreement shall be binding upon and inure to the benefit of HC and its successors and assigns. Due to the personal nature of this Agreement, Employee shall not have the right to assign Employee's rights or obligations under this Agreement without the prior written consent of HC. This Agreement shall be governed by the laws of the States of Georgia, Michigan, Texas, and California without regard to its rules governing conflicts of law. This Agreement and the attached Exhibits represent the entire understanding of the parties concerning the subject matter hereof and supersede all prior communications, agreements and understandings, whether oral or written, relating to the subject matter hereof. All communications required or otherwise provided under this Agreement shall be in writing and shall be deemed given when delivered to the address provided below such party's signature (as may be amended by notice from time to time), by hand, by courier or express mail, or by registered or certified United States mail, return receipt requested, postage prepaid. The exhibits attached hereto are incorporated herein by this reference. IN WITNESS WHEREOF, the parties hereto have executed this Agreement and affixed their hands and seals effective as of the date first above written. HARBINGER CORPORATION By: ----------------------------------------------------------------------------- Title: Michael Lieb, Director of Human Resources Date: --------------------------------------------------------------------------- 1055 Lenox Park Boulevard Atlanta, Georgia 30319 EMPLOYEE: Daniel L. Manack - -------------------------------------------------------------------------------- Signature Date: --------------------------------------------------------------------------- Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EX-10.25 4 AMENDMENT NO. 1 TO LEASE 1 EXHIBIT 10.25 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (herein called this "First Amendment"), made and entered into this 5th day of June, 1998, by and between 1277 LENOX PARK BOULEVARD, LLC, a Georgia limited liability company (herein called "Lessor"), having an office at c/o Lenox Park Associates, Suite 100, 1055 Lenox Park Boulevard, Atlanta, Georgia 30319, and HARBINGER CORPORATION, a Georgia corporation (herein called "Lessee") having an office at Suite 340, 1055 Lenox Park Boulevard, Atlanta, Georgia 30319; W I TN E S S E T H: That, WHEREAS, by virtue of that certain Lease dated October 10, 1997 by and between Lessor and Lessee (herein called the "Lease"), Lessor leased to Lessee certain space in the Building (as defined in the Lease); WHEREAS, the Lease contained an option to expand the Premises (as defined in the Lease) to include the fourth (4th) floor of the Building; WHEREAS, Lessor and Lessee desire to further amend the Lease, among other things, to exercise the expansion option and include the fourth (4th) floor of the Building in the Premises, all as hereinafter provided; NOW, THEREFORE, for and in consideration of the premises, TEN DOLLARS, ($10.00) paid by Lessee to Lessor and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto have agreed, and do hereby agree, as follows: 1. Definitions. All capitalized terms shall have the meaning given to them in the Lease, unless otherwise defined in this First Amendment. 2. Amendments. The Lease has been and hereby is amended as follows: 2.1 Option to Expand. Section 43.1 has been and is hereby amended to delete Section 43.1 in its entirety and place in lieu thereof the following new Section 43.1: 43.1 Lessee has the option to lease and expand the "Premises" under this Lease (the "Expansion Option") to include within its definition up to all of the fourth (4th) floor (as may be leased by Lessee, called the "Expansion Space"), and all of the terms and conditions of this Lease shall apply with full force and effect to the expanded Premises after such expansion except as provided for in this Section 43. To exercise the Expansion Option, Lessee shall deliver written notice to Lessor on or before the Commencement Date which notice shall specify the space to be a part of the expansion. After such exercise and no later 2 than ninety (90) days after the Commencement Date, Lessee shall deliver to Lessor approved plans for the construction of improvements to the Expansion Space (the "Expansion Space Plans"), which Expansion Space Plans shall be of the same or better quality and detail as the Premises Plans. The Lessor's approval of the Expansion Plans shall not be unreasonably withheld, conditioned or delayed. The commencement date for the Expansion Space (the "Expansion Space Commencement Date") shall be the later of (i) the date that is six (6) months after the Commencement Date, or (ii) if Lessee has timely delivered the approved Expansion Space Plans, ten (10) days after substantial completion of the tenant improvements in the Expansion Space, with Lessee's obligation to pay Annual Base Rental, Base Rent, Annual Step Rental, Amounts Due, and Proportionate Share of Common Operating Expenses for such Expansion Space beginning on such Expansion Space Commencement Date, with Annual Base Rental, Base Rent, Annual Step Rental, Amounts Due, and Proportionate Share of Common Operating Expenses paid to Lessor at the rates provided for in the Lease. For the avoidance of doubt, if Lessee fails to deliver timely the approved Expansion Space Plans, the Expansion Space Commencement Date will occur no later than the date that is six (6) months after the Commencement Date, even if the Expansion Space is not ready for occupancy on that date. If Lessee elects to lease less than the entire fourth (4th) floor, then Lessor shall have the right to approve the location of the space that Lessee shall lease pursuant to this Section 43 on the fourth (4th) floor. Lessor's approval right shall not be unreasonably withheld, conditioned or delayed. Should Lessee request any changes to the approved Expansion Space Plans and such requested change increases the cost of construction or causes a delay the completion of the Expansion Space Construction, then Lessee shall be responsible to pay such increased costs and will be responsible for the rent as of the date that the Expansion Space Commencement Date would have occurred but for the delay, as the case may be, even if Lessee is not yet occupying the Expansion Space. Lessor shall cause the Expansion Space Improvements (hereinafter defined) to be constructed and completed substantially in accordance with the approved Expansion Space Plans. Lessor shall cause the Expansion Space Improvements to be completed within the later of 90 days after delivery of Expansion Space Plans or six (6) months after the Commencement Date. For purposes of this paragraph 43.1, the term "substantial completion" shall have the same definition as such term has in paragraph 10.1. Upon the substantial completion of the Expansion Space Improvements, Lessor shall notify Lessee of such completion, and the parties hereto within three (3) days after such notice shall perform a walk-through inspection of the Expansion Space Improvements. During such inspection the parties shall prepare -2- 3 a punch-list of defective or incomplete items, if any, which items Lessor shall correct within thirty (30) days after the date of such inspection. All references contained in Section 43.1 shall refer to the references as redefined by this First Amendment. 2.2 Exercise of Option to Expand. In accordance with the new Section 43.1 above, by its execution of this First Amendment Lessee has exercised and hereby exercises its Expansion Option for the entire fourth (4th) floor of the Building, being approximately 22,958 rentable square feet. Lessor and Lessee acknowledge and agree that upon the Expansion Space Commencement Date the fourth (4th) floor shall be included as a part of the "Premises", and the Expansion Space Improvements shall be included as a part of the "Premises Improvements." 2.3 Security. By their execution of this First Amendment Lessor and Lessee acknowledge that Lessee has substituted and/or replaced the Letter of Credit with a replacement letter of credit in the face amount of $3,473,000.00 in accordance with Section 43. The Lease has been and is hereby amended by deleting Exhibit "F" of the Lease in its entirety and by substituting in lieu thereof Exhibit "F" to this First Amendment. 2.4 General Contractor. The general contractor (the "General Contractor") for the build out of the Expansion Space in accordance with the Expansion Space Plans shall be selected in the following manner: 2.4.1 After such exercise and no later than sixty (60) days after the Commencement Date, Lessee shall deliver to Lessor two (2) names of qualified general contractors and Lessor shall deliver to Lessee one (1) name of a qualified general contractor. 2.4.2 After Lessor's receipt of the Expansion Space Plans, as approved by Lessor, the Lessor shall solicit bids from each contractor, which bids shall set forth the price, terms, conditions and time schedule that such contractor would require if chosen to construct the Expansion Space in accordance with the Expansion Space Plans. Such bids must be received within fourteen (14) days after the date hereof to be considered. 2.4.3 Lessor and Lessee shall, within ten (10) business days after the receipt of such bids, mutually agree on a General Contractor. All other factors being equal, Lessor and Lessee will choose the contractor that submits the lowest bid. If a discrepancy between Lessor and Lessee remains in the selection of a contractor, then Lessee's selection of a contractor shall prevail. -3- 4 2.4.4 Notwithstanding the foregoing of this Section 2.4 to the extent that this Section 2.4 conflicts with any provision in the Lease for the selection of a General Contractor, then this Section 2.4 shall control. 3. Ratification. Both Lessor and Lessee acknowledge and confirm that the Lease, as amended hereby, is in full force and effect. This Lease, as amended hereby, inures to the benefit of and is binding upon the parties hereto and their respective successors and assigns. This First Amendment shall be governed by and construed under the laws of the State of Georgia. 4. Brokerage. Lessor and Lessee covenant, warrant and represent to each other that no broker except TPA Realty Services, Inc. (herein called "TPA"), which represents Lessor, and Davidson Associates, Inc. (herein called "Broker"), which represents Lessee, was instrumental in consummating this First Amendment and that Lessor and Lessee have had no conversations or negotiations with any brokers except for TPA and Broker concerning Lessee's leasing of the Expansion Space. Lessor and Lessee agree to indemnify and hold harmless the other against and from any claims for any brokerage commissions and all costs, expenses, and liabilities, including, without limitation, attorneys' fees and expenses, arising out of any conversations or negotiations had by the indemnifying party with any broker other than TPA and Broker. Lessee shall be solely responsible for paying all commissions and other compensation due Broker in connection with this Lease and Lessor shall be solely responsible for paying all commissions and other compensation due TPA in connection with this First Amendment. 5. Counterparts. This First Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of such counterparts shall constitute one agreement. To facilitate execution and delivery of this First Amendment, the parties may execute and exchange counterparts of the signature pages by telefax. The signature of any party to any counterpart may be appended to any other counterpart. -4- 5 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written. LESSOR: 1277 LENOX PARK BOULEVARD, LLC, a Georgia limited liability company BY: Techpole, Inc., a Georgia corporation, its manager By: /s/ Richard R. O'Brien -------------------------------------- Richard R. O'Brien President [SEAL] LESSEE: HARBINGER CORPORATION, a Georgia corporation By: /s/ James Davis -------------------------------------- Name: Title: [CORPORATE SEAL] 6 EXHIBIT "F" (LETTER OF CREDIT SCHEDULE) INITIAL BALANCE: $3,473,000.00 ---------------
REDUCTION DATE: BALANCE: -------------- ------- August 1, 1998 $2,944,460.00 November 1, 1998 $2,415,920.00 February 1, 1999 $1,749,632.00 May 1, 1999 $1,083,344.00 August 1, 1999 $ 442,521.00
EX-13.1 5 SELECTED FINANCIAL DATA 1 EXHIBIT 13.1 SELECTED FINANCIAL DATA STATEMENT OF OPERATIONS DATA:
(In thousands, except per share data) Years Ended December 31, - --------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- --------- -------- -------- -------- Revenues....................................... $135,151 $ 118,221 $ 89,245 $ 60,077 $ 45,454 Direct costs................................... 39,436 30,510 23,112 14,994 10,558 -------- --------- -------- -------- -------- Gross margin................................... $ 95,715 $ 87,711 $ 66,133 $ 45,083 $ 34,896 ======== ========= ======== ======== ======== Operating income (loss)........................ $(12,652) $ (22,705) $(10,667) $ 1,314 $ 505 ======== ========= ======== ======== ======== Net loss applicable to common shareholders........................... $(14,712) $ (39,047) $(16,091) $ (444) $ (273) ======== ========= ======== ======== ======== Diluted net loss per share of common stock........................... $ (0.35) $ (1.02) $ (0.46) $ (0.02) $ (0.01) ======== ========= ======== ======== ======== Weighted average number of common shares outstanding.............. 41,557 38,162 35,080 28,573 24,112 ======== ========= ======== ======== ======== - ----------------------------------------------- Pooled Basis of Accounting for Acquisitions.... Operating income (excluding special charges)*.. $ 20,138 $ 17,850 $ 2,808 $ 2,474 $ 4,822 ======== ========= ======== ======== ======== Net income applicable to common shareholders**......................... $ 15,396 $ 13,435 $ 3,366 $ 1,608 $ 2,524 ======== ========= ======== ======== ======== Diluted net income per common share**.......... $ 0.36 $ 0.33 $ 0.09 $ 0.05 $ 0.10 ======== ========= ======== ======== ========
BALANCE SHEET DATA:
(In thousands) At December 31, - --------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- --------- -------- -------- -------- Working capital............................... $ 79,303 $ 94,307 $ 60,392 $ 73,167 $ 4,550 ======== ========= ======== ======== ======== Total assets.................................. $178,369 $ 183,559 $131,199 $125,867 $ 34,751 ======== ========= ======== ======== ======== Long-term obligations, redeemable preferred stock and puttable common stock....... -- $ 1,608 $ 7,116 $ 803 ======== ========= ======== ======== ======== Shareholders' equity.......................... $120,019 $ 130,018 $ 94,118 $ 93,196 $ 10,052 ======== ========= ======== ======== ========
* Excludes $27.0 million, $40.6 million, $13.5 million, $1.2 million and $4.3 million charges for 1998, 1997, 1996, 1995 and 1994, respectively, for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other one-time charges. Excludes $5.8 million in net general and administrative charges for 1998, principally related to a provision for doubtful accounts. ** Excludes all charges per note * above. In addition, excludes $313,000, $7.2 million, and $954,000 equity in losses of joint ventures for 1997, 1996, and 1995 respectively. Excludes operating losses of all discontinued operations and net losses on disposals of discontinued operations totaling $6.2 million and $14.4 million in 1998 and 1997, respectively. Also excludes extraordinary loss on debt extinguishment of $2.4 million in 1997. The resulting adjusted net income applicable to common shareholders is tax effected at 39%. 2 SELECTED FINANCIAL DATA (CONTINUED) Supplemental Information STATEMENT OF OPERATIONS DATA AS ORIGINALLY REPORTED (EXCLUDING ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING):
(In thousands) Years Ended December 31, - ------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 -------- ------- ------- ------- ------- Revenues............................... $135,151 $90,415 $38,236 $19,846 $11,208 ======== ======= ======= ======= ======= Operating income*...................... $ 20,138 $18,791 $ 7,619 $ 2,807 $ 1,919 ======== ======= ======= ======= ======= Net income applicable to common shareholders**................. $ 15,396 $12,647 $ 4,672 $ 1,363 $ 809 ======== ======= ======= ======= ======= Diluted net income per common share**.. $ 0.36 $ 0.31 $ 0.18 $ 0.07 $ 0.05 ======== ======= ======= ======= =======
* The results of operations of Premenos, a pooling-of-interests, are excluded from all periods prior to the merger in 4Q97. The results of operations of STI, a pooling-of-interests, are excluded from all periods prior to the merger in 1Q97. Excludes $27.0 million, $40.6 million, $8.8 million and $4.3 million of pre-tax charges for 1998, 1997, 1996 and 1994, respectively, for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other one-time charges. Excludes $5.8 million in net general and administrative charges for 1998, principally related to a provision for doubtful accounts. ** Excludes all charges per note * above. The results of operations of Premenos, a pooling-of-interests, are excluded from all periods prior to the merger in 4Q97. The results of operations of STI, a pooling-of- interests, are excluded from all periods prior to the merger in 1Q97. In addition, excludes $7.0 million and $954,000 for 1996 and 1995, respectively, of equity in loss of HNS. Also excludes $2.4 million loss on extinguishment of debt in 1997. Excludes operating losses of all discontinued operations and net losses on disposals of discontinued operations totaling $6.2 million and $14.4 million in 1998 and 1997. The resulting net income applicable to common shareholders is tax effected at 39%. 3 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data) THREE MONTHS ENDED - -------------------------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 ------- ------- -------- ------- Revenues.................................................. $30,052 $33,178 $ 35,420 $36,501 ======= ======= ======== ======= Gross margin.............................................. $21,910 $23,885 $ 24,846 $25,074 ======= ======= ======== ======= Operating income (loss)................................... $(2,296) $ 1,339 $(16,755) $ 5,060 ======= ======= ======== ======= Net income (loss) applicable to common shareholders....... $(1,338) $ 1,960 $(23,444) $ 8,110 ======= ======= ======== ======= Net income (loss) per share of common stock............... $ (0.03) $ 0.04 $ (0.56) $ 0.19 ======= ======= ======== ======= Weighted average number of common shares outstanding................................ 41,046 44,480 42,163 41,772 ======= ======= ======== ======= Net income applicable to common shareholders (excluding charges listed separately below)*................. $ 4,418 $ 4,696 $ 2,980 $ 3,302 ======= ======= ======== ======= Net income per common share (excluding charges listed separately below)*................................ $ 0.10 $ 0.11 $ 0.07 $ 0.08 ======= ======= ======== =======
(In thousands, except per share data) THREE MONTHS ENDED - ----------------------------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 --------- ------- -------- -------- Revenues.................................................. $ 24,320 $28,418 $ 29,153 $ 36,330 ========= ======= ======== ======== Gross margin.............................................. $ 17,638 $21,052 $ 21,683 $ 27,338 ========= ======= ======== ======== Operating income (loss)................................... $ (14,911) $ 3,767 $ 912 $(12,473) ========= ======= ======== ======== Net income (loss) applicable to common shareholders....... $ (16,353) $ 2,724 $ (8,970) $(16,448) ========= ======= ======== ======== Net income (loss) per share of common stock............... $ (0.45) $ 0.07 $ (0.23) $ (0.40) ========= ======= ======== ======== Weighted average number of common shares outstanding................................ 36,250 38,987 38,930 40,749 ========= ======= ======== ======== -------- Net income applicable to common shareholders (excluding charges listed separately below)**................ $ 1,254 $ 2,745 $ 3,706 $ 5,730 ========= ======= ======== ======== Net income per common share (excluding charges listed separately below)**............................... $ 0.03 $ 0.07 $ 0.09 $ 0.13 ========= ======= ======== ========
* Excludes pre-tax charge of $8.0 million for the quarter ended March 31, 1998, $5.0 million for the quarter ended June 30, 1998 and $14.0 million for the quarter ended September 30, 1998 for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other charges. Also excludes $6.5 million in general and administrative charges and $700,000 in recovery related to allowance for doubtful accounts for the quarters ended September 30 and December 31, 1998, respectively. Also excludes losses on discontinued operations of TrustedLink Procurement ("TLP") of $217,000 for the quarter ended March 31, 1998, $637,000 for the quarter ended June 30, 1998 and $938,000 for the quarter ended September 30, 1998. Also excludes a $6.4 million loss on the disposal of TLP in the quarter ended September 30, 1998 and income of $2.0 million on the disposal of TrustedLink Banker "(Banker") division for the quarter ended December 31, 1998. The resulting adjusted net income applicable to common shareholders is tax affected at 39%. ** Excludes pre-tax charge of $16.2 million for quarter ended March 31, 1997, $3.8 million for the quarter ended September 30, 1997 and $20.5 million for at the quarter ended December 31, 1997 for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other charges. Also excludes a $2.4 million charge for quarter ended March 31, 1997 for extraordinary loss on debt extinguishment and a $4.0 million charge for quarter ended December 31, 1997 for loss on disposal of Banker, including provision for operating losses during phase-out period. Also excludes results of discontinued operations of Banker and TLP of $47,000 income for the quarter ended March 31, 1997, $12,000 loss for the quarter ended June 30, 1997, $10.5 million loss for the quarter ended September 30, 1997 and $49,000 income for the quarter ended December 31, 1997. The resulting adjusted net income applicable to common shareholders is tax affected at 39%. 4 OVERVIEW ABOUT THE COMPANY Harbinger Corporation (the "Company") generates revenues from various sources, including for services and license fees and royalties 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. As a result of acquisitions in the last three years, the Company incurred acquisition and integration related, restructuring and other charges ("Charges") during 1996, 1997 and 1998 of $13.4 million, $40.6 million and $27.0 million, respectively. The costs related to acquisitions and integration include activities such as cross training, planning, product integration and marketing ("Integration Activities"). Due to Integration Activities in the years ended December 31, 1998 and 1997, certain internal expense allocations ("Integration Activity Costs") included within the Charges in the consolidated statements 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. On September 30, 1998 the Company implemented a restructuring plan that included the termination of approximately 10% of its personnel, the announcement of the phase-out of certain non-strategic software products and the realignment of its internal organizational structure, including the roles of certain senior management. The costs related to restructuring include asset and intangible asset write-downs, termination benefits to former employees and estimates for lease termination costs and liabilities associated with phased-out products. A portion of Charges includes management estimates. Actual costs could differ from such estimates. 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 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. On September 30, 1998 the Company announced its intention to divest its TrustedLink Procurement business (see Note 12 to the accompanying audited 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 audited consolidated statements of operations. 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. As of December 31, 1998 the Company had repurchased 1,562,000 shares of common stock at an aggregate cost of $7.4 million. 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 year ended December 5 31, 1998. In connection with the EDI Works! acquisition, the Company incurred Charges of $805,000 in the consolidated statement of operations for the year ended December 31, 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. PRIOR ACQUISITIONS The company completed 13 acquisitions in 1997 and 1996, through a combination of cash outlays totaling $23.9 million, the issuance of 13,186,000 shares of the Company's common stock and the issuance of 606,000 stock options and warrants. One acquisition was accounted for by the Company prior to the January 1, 1997 acquisition date using the equity method of accounting, which reflected losses in the Company's 1996 statements of operations. Two of the 1997 acquisitions were accounted for using the pooling-of-interests method of accounting and the Company's financial position and results of operations were retroactively restated for all periods prior to the respective acquisition dates. The acquisitions completed during 1997 and 1996 are fully described in Note 2 to the Company's accompanying consolidated financial statements. RESULTS OF OPERATIONS The following table presents, for the periods indicated, the percentage relationship of consolidated statements of operations data items to total revenues.
Percentage of Total Revenues --------------------------------- Years Ended December 31, --------------------------------- 1998 1997 1996 ----- ----- ----- Revenues: Services ..................................................................... 65.2% 53.6% 51.8% Software ..................................................................... 34.8 46.4 48.2 ----- ----- ----- Total revenues .......................................................... 100.0 100.0 100.0 ----- ----- ----- Direct costs: Services ..................................................................... 26.1 19.2 18.3 Software ..................................................................... 3.1 6.6 7.6 ----- ----- ----- Total direct costs ...................................................... 29.2 25.8 25.9 ----- ----- ----- Gross margin ............................................................ 70.8 74.2 74.1 ----- ----- ----- Operating costs: Selling and marketing ........................................................ 23.3 22.6 28.0 General and administrative ................................................... 22.9 17.6 19.4 Depreciation and amortization ................................................ 6.0 6.0 5.3 Product development .......................................................... 8.0 12.9 18.3 Charge for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other charges ................................... 20.0 34.3 15.1 ----- ----- ----- Total operating costs ............................................ 80.2 93.4 86.1 ----- ----- ----- Operating loss ............................................. (9.4) (19.2) (12.0) ----- ----- ----- Interest income, net ............................................................. (3.6) (3.3) (3.2) Equity in losses of joint ventures ............................................... -- 0.3 8.1 ----- ----- ----- Loss from continuing operations before income taxes ..................................... (5.8) (16.2) (16.9) Income tax expense ............................................................... 0.5 2.6 1.1 ----- ----- -----
6
Loss from continuing operations ................................................. (6.3) (18.8) (18.0) ----- ----- ----- Loss from operations of TrustedLink Procurement business and TrustedLink Banker division .................................................................. (1.3) (8.8) -- Loss on disposal of TrustedLink Procurement business and TrustedLink Banker division, including provisions for operating losses during phase-out periods (3.3) (3.4) -- ----- ----- ----- Loss before extraordinary item .................................................. (10.9) (31.0) (18.0) Extraordinary loss on debt extinguishment ........................................................... -- (2.0) -- Preferred stock dividends ........................................................................... -- -- -- ----- ----- ----- Net loss applicable to common shareholders ................................................................. (10.9)% (33.0)% (18.0)% ===== ===== =====
Revenues. Total revenues increased from $89.2 million in 1996 to $118.2 million in 1997 and to $135.2 million in 1998. Revenues for services increased from $46.2 million in 1996 to $63.4 million in 1997 and to $88.1 million in 1998. These increases, partly attributable to acquisitions made in the last three years, reflect growth in subscription fees, professional services and maintenance. Subscription fees increased each year as a result of increased subscribers to the Company's VAN and IVAS plus increases in the average transaction volume per customer each year. Software revenues increased from $43.0 million in 1996 to $54.8 million in 1997 and to $47.1 million in 1998. The decrease in 1998 compared to 1997 was primarily attributable to decreased royalty revenues from resellers. The increase in 1997 as compared to 1996 was primarily the result of increases in domestic PC and enterprise software sales, sales from the Company's European subsidiaries, software sales from 1997 acquisitions and increases in revenues derived through the Company's network of international distributors. Direct Costs. Direct costs for services increased from $16.3 million in 1996 to $22.7 million in 1997 and to $35.2 million in 1998. As a percentage of services revenues these costs were 35.4% in 1996, 35.8% in 1997 and 40.0% in 1998. The increase in direct costs as a percentage of services revenues in 1998 compared to 1997 is primarily attributable to the mix of services revenue, which in 1998 included a larger percentage of professional services. The Company increased its emphasis on professional services in response to the market need for more integrated solutions. The increase in direct costs in 1998 was partially offset by the impact of Integration Activity Costs. The increase as a percentage of services revenues in 1997 compared to 1996 primarily reflects the higher mix of lower-margin professional services revenues at the Company's European subsidiaries, which were acquired in March 1996. Direct software costs increased from $6.8 million in 1996 to $7.8 million in 1997 and decreased to $4.2 million in 1998. Direct software costs as a percentage of software revenues were 15.7% in 1996, 14.2% in 1997 and 8.9% in 1998. The decrease in direct software costs as a percentage of software revenues in 1998 compared to 1997 reflects the effects of a decrease in software amortization as a result of writing off capitalized and purchased software development in connection with certain business combinations in 1997 and a decrease in royalty and other fees paid by the Company to third parties. The decrease in direct software costs as a percentage of software revenues in 1997 compared to 1996 primarily reflects the effect of higher-margin royalty revenues from certain distributors, licensing of higher-margin software products and decreases in software amortization as a result of write-offs of software development in connection with a business combination. Selling and Marketing. Selling and marketing expenses increased from $25.0 million in 1996 to $26.7 million in 1997 and to $31.5 million in 1998. As a percentage of revenues these expenses were 28.0% in 1996, 22.6% in 1997 and 23.3% in 1998. The slight increase in selling and marketing expenses as a percentage of revenues in 1998 compared to 1997 reflects an increase in sales and marketing personnel and related selling costs and a decrease in Integration Activity Costs. The decrease in selling and marketing expenses as a percentage of revenues in 1997 compared to 1996 principally reflects the effect of increased services revenues, efficiencies associated with other costs to support increased sales activity and the effect of Integration Activity Costs. General and Administrative. General and administrative expenses increased from $17.3 million in 1996 to $20.8 million in 1997 and to $30.9 million in 1998. As a percentage of revenues these expenses 7 were 19.4% in 1996, 17.6% in 1997 and 22.9% in 1998. The increase in general and administrative expenses in 1998 compared to 1997 is primarily due to an increase of $6.3 million to the Company's allowance for doubtful accounts in 1998. Of this increase, approximately $5.8 million relates primarily to management's concern regarding the financial condition of a reseller and certain other customer accounts. Management intends to continue to pursue collections of these accounts, but has established the reserve based on management's estimate of collectibility for these accounts. Actual results could differ from this estimate. Excluding the impact of this increase to the allowance for doubtful accounts, general and administrative expenses would have increased to $25.1 million or 18.6% of revenues for 1998. The increase in adjusted general and administrative expenses as a percentage of revenues in 1998 compared to 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 a decrease in Integration Activity Costs between periods. The decrease in general and administrative expenses as a percentage of revenues in 1997 as compared to 1996 reflects efficiencies associated with expanding the Company's operations, the effect of increases in software and services revenues and the effect of Integration Activity Costs. Depreciation and Amortization. Depreciation and amortization increased from $4.7 million in 1996 to $7.1 million in 1997 and to $8.1 million in 1998. As a percentage of revenues these expenses increased from 5.3% in 1996 to 6.0% in 1997 and 1998. The increase in depreciation and amortization expense in both years is a result of additions to fixed assets and increased intangible assets acquired through business combinations during the last three years. Product Development. Total expenditures for product development, including capitalized software development costs, decreased from $21.1 million in 1996 to $20.3 million in 1997 and to $14.4 million in 1998. Total expenses for product development decreased from $16.3 million in 1996 to $15.3 million in 1997 to $10.8 million in 1998. As a percentage of revenues total product development expenses decreased from 18.3% in 1996 to 12.9% in 1997 and to 8.0% in 1998. The decrease in product development expenses in 1998 compared to 1997 is primarily attributable to efficiencies gained in consolidating development resources of acquired companies, offset by the impact of Integration Activity Costs. The decrease in 1997 compared to 1996 is due to increased synergies realized from an early 1997 acquisition and the effect of Integration Activity Costs. The Company capitalized software development costs of $4.8 million, $5.0 million and $3.6 million in 1996, 1997 and 1998, respectively, which represented 22.7%, 24.7% and 24.8% of total expenditures for product development in these respective periods. The decrease in the amounts capitalized in 1998 compared to 1997 reflects a decrease in development activities associated with products that have reached technological feasibility. The increase in the amounts capitalized in 1997 compared to 1996 reflects the Company incurring greater product development costs in 1997 on products that had reached technological feasibility. Amortization of capitalized software development costs included in direct costs of software totaled $3.4 million, $3.7 million and $1.6 million in 1996, 1997 and 1998, respectively. Charge for Purchased In-Process Product Development, Write-Off of Software Development Costs, Restructuring, Acquisition Related and Other Charges. The Company incurred Charges of $13.5 million in 1996, $40.6 million in 1997 and $27.0 million in 1998 as a result of 15 acquisitions and two restructurings in the last three years. For 1998 and 1997, approximately $4.1 million and $7.8 million, respectively, in Charges were Integration Activity Costs which 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. (See Note 11 to the accompanying audited consolidated financial statements.) Equity in Losses of Joint Ventures. Of the Company's $7.2 million equity in losses of joint ventures recognized in 1996, $7.0 million was attributable to Harbinger NET Services, LLC, ("HNS") which was subsequently acquired by the Company on January 1, 1997. (See Note 2 to the accompanying audited consolidated financial statements.) Income Taxes. The Company recorded income tax expense of $996,000, $3.1 million and $705,000 in 1996, 1997 and 1998. Taxable income of $7.4 million will be required in future years to realize the Company's net deferred income tax assets at December 31, 1998 of $2.8 million, net of a 8 valuation allowance of $27.8 million. Future decreases of $3.3 million in the total valuation allowance of $27.8 million at December 31, 1998 relate to foreign net operating loss carryforwards and will reduce the intangibles associated with those acquisitions as those net operating loss carryforwards are realized. Discontinued Operations. The Company discontinued its TrustedLink Procurement business ("TLP") on September 30, 1998 and its TrustedLink Banker division ("Banker") on December 31, 1997, both of which had been generating lower than desired profitability and growth and which management deemed to be no longer strategic to the Company. The results of TLP and Banker for all years presented are reported in the accompanying reclassified audited consolidated statements of operations under "Loss from operations of TrustedLink Procurement business and TrustedLink Banker division." Reclassified losses for the TLP business were $10.3 million and $1.8 million for 1997 and 1998, respectively. Reclassified losses for Banker were $30,000 and $121,000 for 1996 and 1997, respectively. For Banker the Company provided for an estimated anticipated loss of $4.0 million related to the discontinuance of the division, including an estimated $2.3 million for operating losses during the phase-out period. As of December 31, 1998 the disposal of Banker was substantially complete and $2.0 million in anticipated losses not incurred was recorded as a reduction to "Loss on disposal of TrustedLink Banker" on the statements of operations in 1998. For TLP the Company provided for an estimated anticipated loss on the disposal of the business of $6.4 million, including $2.9 million for operating losses during the phase-out period. Actual results differing from this estimate could impact the Company's results favorably or negatively in future periods. Operating losses incurred from October 1, 1998 to December 31, 1998 were $670,000. Loss on Extinguishment of Debt. The Company recorded a loss of $2.4 million on debt extinguishment in the first quarter of 1997 related to acquiring HNS. Net Loss and Loss Per Share. The Company realized net losses applicable to common shareholders of $16.1 million or $0.46 per share in 1996, $39.0 million or $1.02 per share in 1997 and $14.7 million or $0.35 per share in 1998. Net income for 1998, adjusted to exclude Charges, a specific $5.8 million net charge to general and administrative expenses and discontinued operations, net of the effect of income taxes at 39%, would have been $15.4 million or $0.36 per share. Net income for 1998, excluding all aforementioned charges except the specific $5.8 million net charge to general and administrative expenses, would have been $11.9 million, or $0.27 per share. Net income for 1997, adjusted to exclude Charges, an extraordinary loss on debt extinguishment and discontinued operations, net of the effect of income taxes at 39%, would have been $13.4 million or $0.33 per share. Net income for 1996, adjusted to exclude Charges and equity in losses of joint ventures, net of the effect of income taxes at 39%, would have been $3.4 million or $0.09 per share. LIQUIDITY AND CAPITAL RESOURCES Working capital decreased from $94.3 million at December 31, 1997 to $79.3 million at December 31, 1998, primarily as a result of repurchases of the Company's common stock, capital expenditures and an acquisition, offset by positive cash flows. Cash and short-term investments totaled $102.1 million or 55.6% of total assets at December 31, 1997 and $92.3 million or 51.8% of total assets at December 31, 1998. Since its inception the Company has financed its operations through a combination of private and public equity and debt financing, various credit facilities with a bank and cash flows from operations. Net cash provided by operating activities was $11.9 million in 1996, $1.6 million in 1997 and $6.2 million in 1998. Net cash used in investing activities was $1.3 million in 1996, $30.1 million in 1997 and $46.8 million in 1998. The increase in net cash used in investing activities in 1998 compared to 1997 was a result of increases in short-term investments and purchases of property and equipment, offset by decreases in cash expended to acquire companies and decreases in capitalized software development costs in 1998. The increase in net cash used by investing activities for 1997 compared to 1996 was primarily a result of an increase in short-term investments in 1996. Net cash provided by financing activities was $570,000 in 1996, $59.1 million in 1997 and $3.7 million in 1998. The decrease in net cash provided by financing activities in 1998 compared to 1997 was a result of repurchases of the Company's common stock in 1998 and a secondary offering of common stock in 1997, offset by the impact of increased cash 9 provided in 1998 from the exercise of stock options and purchases of shares through the employee stock purchase plan. The increase in net cash provided by financing activities in 1997 compared to 1996 was primarily attributable to the Company's secondary offering of common stock in 1997. During 1998 the Company paid all its remaining current portions of long-term debt and as of December 31, 1998 the Company had no material borrowings outstanding. Due to its strong cash and short-term investment position the Company converted its $10 million line of credit to an uncommitted facility in 1998. Therefore, the Company is not subject to restrictive covenants or commitment fees. The Company has commitments for operating leases on its office space totaling $45.4 million through 2008. In conjunction with one lease the Company was required to provide a standby letter of credit, which was $1.7 million at December 31, 1998. 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 uncommitted 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 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 year, including the effects of the Company's common stock repurchase program, liquidation of liabilities incurred due to Charges and discontinued operations and anticipated outlays for the Company's ongoing effort to enhance and consolidate its information technology infrastructure. The Company's Board of Directors has approved a stock repurchase program authorizing the repurchase of up to 10% of the Company's outstanding common stock. There is a possibility that the Board may increase the authorized level of repurchases. The Company does not believe that inflation has had a material impact on its business. However, there can be no assurance that the Company's business will not be affected by inflation in the future. YEAR 2000 COMPLIANCE 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 the Company 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. 10 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 December 31, 1998 Company management estimates that approximately 95% of its product readiness testing has been completed. While most 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 the first quarter of 1999. 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 has implemented a Web site on the Internet that includes 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 non-core 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 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' Web sites 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 $100,000 to $200,000 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 11 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 the Company's 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, 1999, 11 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 an adverse effect on the Company. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company has not entered into any transactions using derivative financial instruments or derivative commodity instruments and believes its exposure to interest rate risk, foreign currency exchange rate risk and other relevant market risks is not material. 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 Exhibit 99.1 to this Form 10-K. Investors are cautioned that any forward looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward looking statements. The Company undertakes no obligation to update or revise forward looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. 12 HARBINGER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------- ASSETS 1998 1997 --------- --------- Current assets: Cash and cash equivalents ......................................................... $ 33,059 $ 69,811 Short-term investments ............................................................ 59,248 32,333 Accounts receivable, less allowances for returns and doubtful accounts of $5,464 and $2,790 in 1998 and 1997, respectively .............................................................. 35,891 35,017 Royalties receivable, less allowance for doubtful accounts of $3,614 in 1998 ................................................ 1,730 5,364 Deferred income taxes ............................................................. 2,103 1,892 Other current assets .............................................................. 5,622 3,431 --------- --------- Total current assets ............................................. 137,653 147,848 --------- --------- Property and equipment, less accumulated depreciation and amortization ................................................................... 23,150 18,167 Intangible assets, less accumulated amortization ............................................ 16,803 16,464 Deferred income taxes ....................................................................... 698 909 Other non-current assets .................................................................... 65 171 --------- --------- $ 178,369 $ 183,559 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................................................... $ 5,566 $ 8,734 Accrued expenses ................................................................... 31,571 25,835 Deferred revenues .................................................................. 21,213 18,349 Current portion of long-term debt .................................................. -- 623 --------- --------- Total current liabilities ........................................ 58,350 53,541 --------- --------- Commitments and contingencies Zero coupon redeemable preferred stock, no par value; 2,000,000 shares authorized, issued and outstanding ........................................ -- -- Shareholders' equity: Preferred stock, no par value; 18,000,000 shares authorized; none issued and outstanding .............................................. -- -- Common stock, $0.0001 par value; 100,000,000 shares authorized; 42,313,031 and 40,827,856 shares issued as of December 31, 1998 and 1997, respectively ............................ 4 4 Additional paid-in capital ......................................................... 201,615 189,841 Accumulated deficit ................................................................ (73,528) (58,945) Accumulated other comprehensive loss ............................................... (622) (882) Treasury stock, 1,562,100 shares as of December 31, 1998 ........................... (7,450) -- --------- --------- Total shareholders' equity ....................................... 120,019 130,018 --------- --------- $ 178,369 $ 183,559 ========= =========
See accompanying notes to consolidated financial statements. 13 HARBINGER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 -------- -------- -------- Revenues: Services .............................................................. $ 88,067 $ 63,417 $ 46,225 Software .............................................................. 47,084 54,804 43,020 -------- -------- -------- Total revenues ........................................ 135,151 118,221 89,245 -------- -------- -------- Direct costs: Services .............................................................. 35,233 22,710 16,346 Software .............................................................. 4,203 7,800 6,766 -------- -------- -------- Total direct costs .................................... 39,436 30,510 23,112 -------- -------- -------- Gross margin ............................... 95,715 87,711 66,133 -------- -------- -------- Operating costs: Selling and marketing ................................................. 31,545 26,723 25,032 General and administrative ............................................ 30,876 20,775 17,293 Depreciation and amortization ......................................... 8,101 7,096 4,695 Product development ................................................... 10,818 15,267 16,305 Charge for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other charges ............................................ 27,027 40,555 13,475 -------- -------- -------- Total operating costs ............................... 108,367 110,416 76,800 -------- -------- -------- Operating loss ............................. (12,652) (22,705) (10,667) Interest income, net ........................................................... (4,830) (3,914) (2,838) Equity in losses of joint ventures ............................................. -- 313 7,204 Minority interest (income) loss ................................................ -- (2) 4 -------- -------- -------- Loss from continuing operations before income taxes ...................... (7,822) (19,102) (15,037) Income tax expense ............................................................. 705 3,093 996 -------- -------- -------- Loss from continuing operations ............ (8,527) (22,195) (16,033) Discontinued operations: Loss from operations of TrustedLink Procurement business and TrustedLink Banker division .............................. (1,793) (10,433) (30) Loss on disposal of TrustedLink Procurement business in 1998, including provision of $2.9 million for operating losses during phase-out period, and TrustedLink Banker division in 1997, including provision for operating losses during phase-out period of $2.3 million ............................. (4,392) (4,000) -- -------- -------- -------- Loss before extraordinary item ............. (14,712) (36,628) (16,063) Extraordinary loss on debt extinguishment ...................................... -- (2,419) -- -------- -------- -------- Net loss ................................... (14,712) (39,047) (16,063) Preferred stock dividends ...................................................... -- -- (28) -------- -------- -------- Net loss applicable to common shareholders . $(14,712) $(39,047) $(16,091) ======== ======== ========
See accompanying notes to consolidated financial statements. 14 HARBINGER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ------- ------- ------- Basic and diluted net loss per common share: Loss from continuing operations ........... $ (0.20) $ (0.58) $ (0.46) Loss from discontinued operations ......... (0.04) (0.27) -- Loss on disposal of discontinued operations (0.11) (0.11) -- Extraordinary loss on debt extinguishment . -- (0.06) -- Preferred stock dividends ................. -- -- -- ------- ------- ------- Net loss per common share ........... $ (0.35) $ (1.02) $ (0.46) ======= ======= ======= Weighted average number of common shares outstanding 41,557 38,162 35,080 ======= ======= =======
See accompanying notes to consolidated financial statements. 15 HARBINGER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- Net loss applicable to common shareholders ... $(14,712) $(39,047) $(16,091) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ... 260 (744) (138) -------- -------- -------- Comprehensive Loss ............. $(14,452) $(39,791) $(16,229) ======== ======== ========
See accompanying notes to consolidated financial statements. 16 HARBINGER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
PREFERRED STOCK, SERIES C COMMON STOCK ------------------------- ------------------- ADDITIONAL DEFERRED PAID-IN COMPEN- Shares Amount SHARES AMOUNT CAPITAL SATION ------ ------ ------ ------ ------- ------ BALANCE, DECEMBER 31, 1995 .................... 250,000 $ 2,485 32,519,854 $ 3 $ 94,343 $(137) Exercise of stock options and warrants and issuance of stock under employee stock purchase plan ............................ -- -- 1,052,413 -- 2,545 -- Tax benefits from stock plans ................. -- -- -- -- 2,854 -- Conversion of preferred stock, Series C to common stock ............................. (250,000) (2,489) 316,557 -- 2,489 -- Issuance of common stock and options and warrants to acquire common stock in connection with acquisitions ............ -- -- 671,617 -- 6,750 -- Reclassification of putable common stock to common stock as a result of forfeiture of put right ................................ -- -- 1,237,500 -- 4,675 -- Other transactions ............................ -- 4 8,655 -- 190 137 Preferred stock dividends ..................... -- -- -- -- -- -- Foreign currency translation adjustment ....... -- -- -- -- -- -- Net loss ...................................... -- -- -- -- -- -- -------- ------- ---------- --- -------- ----- BALANCE, DECEMBER 31, 1996 .................... -- -- 35,806,596 3 113,846 -- Exercise of stock options and warrants and issuance of stock under employee stock purchase plan ............................ -- -- 1,039,749 -- 5,098 -- Tax benefits from stock plans ................. -- -- -- -- 498 -- Issuance of stock and stock options to purchase a debenture and acquire minority interest of subsidiary ............................ -- -- 363,432 -- 6,416 -- Issuance of common stock and vesting of contingent option in connection with acquisitions ............................. -- -- 513,079 -- 3,958 -- Issuance of stock in secondary offering, net . -- -- 3,105,000 1 60,025 -- Other transactions ............................ -- -- -- -- -- -- Foreign currency translation adjustment ....... -- -- -- -- -- -- Net loss ...................................... -- -- -- -- -- -- -------- ------- ---------- --- -------- ----- BALANCE, DECEMBER 31, 1997 .................... -- -- 40,827,856 4 189,841 -- Exercise of stock options and warrants and issuance of stock under employee stock purchase plan ............................ -- -- 1,289,178 -- 11,803 -- Shares purchased .............................. -- -- -- -- -- -- Immaterial pooling-of-interests ............... -- -- 194,497 -- -- -- Foreign currency translation adjustment ....... -- -- -- -- -- -- Other transactions ............................ -- -- 1,500 -- (29) -- Net loss ...................................... -- -- -- -- -- -- -------- ------- ---------- --- -------- ----- BALANCE, DECEMBER 31, 1998 .................... -- $ -- 42,313,031 $ 4 $201,615 $ -- ======== ======= ========== === ======== ===== ACCUMU- LATED OTHER TREASURY STOCK COMPRE- ---------------------- ACCUMU- HENSIVE TOTAL LATED INCOME/ SHAREHOLDERS' DEFICIT (LOSS) SHARES AMOUNT EQUITY ------- ------ ------ ------ ------ BALANCE, DECEMBER 31, 1995 .................... $ (3,498) $ -- -- $ -- $ 93,196 Exercise of stock options and warrants and issuance of stock under employee stock purchase plan ............................ -- -- -- -- 2,545 Tax benefits from stock plans ................. -- -- -- -- 2,854 Conversion of preferred stock, Series C to common stock ............................. -- -- -- -- -- Issuance of common stock and options and warrants to acquire common stock in connection with acquisitions ............ -- -- -- -- 6,750 Reclassification of putable common stock to common stock as a result of forfeiture of put right ................................ -- -- -- -- 4,675 Other transactions ............................ (4) -- -- -- 327 Preferred stock dividends ..................... (28) -- -- -- (28) Foreign currency translation adjustment ....... -- (138) -- -- (138) Net loss ...................................... (16,063) -- -- -- (16,063) -------- ----- ---------- ------- -------- BALANCE, DECEMBER 31, 1996 .................... (19,593) (138) -- -- 94,118 Exercise of stock options and warrants and issuance of stock under employee stock purchase plan ............................ -- -- -- -- 5,098 Tax benefits from stock plans ................. -- -- -- -- 498 Issuance of stock and stock options to purchase a debenture and acquire minority interest of subsidiary ............................ -- -- -- -- 6,416 Issuance of common stock and vesting of contingent option in connection with acquisitions ............................. (296) -- -- -- 3,662 Issuance of stock in secondary offering, net . -- -- -- -- 60,026 Other transactions ............................ (9) -- -- -- (9) Foreign currency translation adjustment ....... -- (744) -- -- (744) Net loss ...................................... (39,047) -- -- -- (39,047) -------- ----- ---------- ------- -------- BALANCE, DECEMBER 31, 1997 .................... (58,945) (882) -- -- 130,018 Exercise of stock options and warrants and issuance of stock under employee stock purchase plan ............................ -- -- -- -- 11,803 Shares purchased .............................. -- -- (1,562,100) (7,450) (7,450) Immaterial pooling-of-interests ............... 129 -- -- -- 129 Foreign currency translation adjustment ....... -- 260 -- -- 260 Other transactions ............................ -- -- -- -- (29) Net loss ...................................... (14,712) -- -- -- (14,712) -------- ----- ---------- ------- -------- BALANCE, DECEMBER 31, 1998 .................... $(73,528) $(622) (1,562,100) $(7,450) $120,019 ======== ===== ========== ======= ========
See accompanying notes to consolidated financial statements. 17 HARBINGER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net loss .......................................................... $(14,712) $(39,047) $(16,063) Adjustments to reconcile net loss to net cash provided by operating activities: Allowance for doubtful accounts ......................... 6,288 365 1,384 Charge for purchased in-process product development, write-off of software development costs, acquisition related and other non-cash charges ................. 3,981 26,761 13,005 Loss on disposal of discontinued operations ............. 5,737 4,000 -- Loss on debt extinguishment ............................. -- 2,419 -- Depreciation and amortization ........................... 10,847 10,917 8,180 Loss on sale of property and equipment .................. -- 389 54 Discount amortization on investments .................... (153) 88 (723) Equity in losses of joint ventures ...................... -- 302 7,204 Noncash compensation charges ............................ -- -- 40 Minority interest and other ............................. -- (287) 8 Deferred income taxes ................................... -- 1,110 1,354 (Increase) decrease in: Accounts receivable ................................ (3,723) (13,336) (6,621) Royalties receivable ............................... 20 (4,027) 1,890 Other assets ....................................... (2,256) 1,410 (2,488) Increase (decrease) in: Accounts payable and accrued expenses .............. (2,724) 9,300 2,144 Deferred revenues .................................. 2,864 1,260 2,510 -------- -------- -------- Net cash provided by operating activities ..... 6,169 1,624 11,878 -------- -------- -------- Cash flows from investing activities: Short-term investments ............................................ (26,762) (2,577) 22,601 Purchases of property and equipment ............................... (12,887) (8,576) (9,666) Additions to software development costs ........................... (3,572) (5,014) (4,798) Investment in acquisitions ........................................ (3,547) (13,924) (9,524) Proceeds from disposal of property and equipment .................. -- 7 57 -------- -------- -------- Net cash used in investing activities ......... (46,768) (30,084) (1,330) -------- -------- --------
See accompanying notes to consolidated financial statements. 18 HARBINGER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- Cash flows from financing activities: Dividends paid on preferred stock ................................ -- -- (28) Exercise of stock options and warrants and issuance of stock under employee stock purchase plan .................... 11,803 5,098 2,545 Principal payments under notes payable and long-term debt ........ (623) (2,968) (3,547) Proceeds from issuance of common stock ........................... -- 60,026 -- Purchases of common stock ........................................ (7,450) -- -- Repayments under credit agreement ................................ -- (1,550) -- Decrease in restricted cash ...................................... -- -- 50 Increase in note payable to bank, net ............................ -- -- 1,550 Purchase of HNS subordinated debenture ........................... -- (1,500) -- -------- -------- -------- Net cash provided by financing activities ......... 3,730 59,106 570 -------- -------- -------- Net increase (decrease) in cash and cash equivalents .................. (36,869) 30,646 11,118 Cash and cash equivalents at beginning of year ........................ 69,811 35,697 24,258 Effect of exchange rates on cash held in foreign currencies ....................................................... 65 (76) (53) Cash received from acquisitions ....................................... 52 3,544 374 -------- -------- -------- Cash and cash equivalents at end of year .............................. $ 33,059 $ 69,811 $ 35,697 ======== ======== ======== Supplemental disclosures: Cash paid for interest ........................................... $ 50 $ 90 $ 407 ======== ======== ======== Cash paid for income taxes ....................................... $ 991 $ -- $ 152 ======== ======== ======== Supplemental disclosures of noncash investing and financing activities: Purchase of HNS subordinated debenture in exchange for common stock ............................................ $ -- $ 4,200 $ -- ======== ======== ======== Acquisition of HNS minority interest in exchange for issuance of options ..................................... $ -- $ 2,216 $ -- ======== ======== ======== Long-term debt assumed in acquisition of a business .................................................... $ -- $ -- $ 670 ======== ======== ======== Acquisition of minority interest in exchange for common stock ................................................ $ -- $ 392 $ -- ======== ======== ======== Acquisition of businesses in exchange for assumption of liabilities and issuance of common stock, options and warrants to acquire common stock ............................ $ -- $ 454 $ 13,143 ======== ======== ========
See accompanying notes to consolidated financial statements. 19 HARBINGER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND PRESENTATION Harbinger Corporation and subsidiaries (the "Company") develops, markets and supports software products and provides computer communications network and consulting services to enable businesses to engage in E-Commerce. The Company's products and services are used by customers in targeted industries, including the petroleum, chemicals, utilities, electronics, distribution, aerospace, automotive, communications, transportation, textile/apparel and healthcare industries both in the United States and certain international markets including Europe, South America and Asia. The consolidated financial statements of the Company include the accounts of Harbinger Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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. Actual results could differ from those estimates. REVENUE RECOGNITION The company adopted Statement of Position 97-2, Software Revenue Recognition, on January 1, 1998. The implementation of this statement did not have a material impact on the Company's results of operations. Services Revenues derived from services include subscription fees, maintenance and implementation fees and consulting, outsourcing and training fees. Subscription fees include both fixed and usage based fees for use of the Company's Value Added Network ("VAN") and Internet Value Added Server ("IVAS") and are recognized over the service period and as transactions are processed. Maintenance and implementation fees are generally billed annually in advance, include fixed fees for customer support and product updates and are recognized ratably over the service period. Consulting, outsourcing and training fees are billed under both time and materials and fixed fee arrangements and are recognized as services are performed. Software Revenues derived from software license fees are recognized upon shipment, net of estimated returns. Royalty revenues derived through distribution agreements with third parties 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. Deferred Revenues Deferred revenues represent payments received from customers or billings invoiced to customers for software and services billed in advance of revenue recognition. DIRECT COSTS Direct costs for services include telecommunications charges, the costs of personnel to conduct network operations and customer support, consulting and other personnel related-expenses. Direct costs for software include duplication, packaging and amortization of purchased technology and software development costs, and royalties paid to third-party distributors. 20 CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash, cash equivalents and short-term investments are stated at cost, which approximates fair value, and consist primarily of money market funds and U.S. Treasury bills. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments maturing between three and twelve months from the date of purchase are classified as short-term investments. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designations quarterly. As of December 31, 1998 debt securities were classified as held-to-maturity as the Company intended to hold, and had the ability to hold, these securities to maturity. Held-to-maturity securities are stated at amortized cost, which approximates fair market value. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and other short-term obligations of the U.S. Government. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, generally three to 10 years. Leasehold improvements are amortized straight line over the shorter of the lease or estimated useful life of the asset. INVESTMENTS IN JOINT VENTURES The Company's 91% investment in Harbinger Net Services, LLC ("HNS") through December 31, 1996 (see Note 2), its 20% investment in Harbinger N.V. ("HNV") through March 31, 1996 (see Note 2) and its investment in other joint ventures are accounted for using the equity method of accounting. The Company applied the equity method of accounting for its investment in HNS because of a shareholders' agreement among all HNS shareholders which provided for all significant operating and management decisions for HNS to be vested in the HNS Board of Managers through December 31, 1996. The HNS Board of Managers was not controlled by the Company (see Note 2). INTANGIBLE ASSETS Purchased Technology, Goodwill and Other Intangible Assets Purchased technology, goodwill and other intangible assets are amortized on a straight-line basis over the expected periods to be benefited, generally five to 10 years. The Company evaluates the recoverability of these intangible assets at each period end using the undiscounted estimated future net operating cash flows expected to be derived from such assets. If such evaluation indicates a potential impairment, the Company uses the fair value to determine the amount of these intangible assets that should be written off. Software Development Costs The Company capitalizes certain software development costs in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. Costs incurred internally to create a computer software product or to develop an enhancement to an existing product are charged to expense when incurred as research and development until technological feasibility has been established for the product or enhancement. Thereafter, all software production costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers. Software development costs are amortized on a product-by-product basis at the greater of the amounts computed using (a) the ratio of current gross revenues for a product or enhancement to the total current and anticipated future gross revenues for that product or enhancement, or (b) the straight-line method over the 21 remaining estimated economic life of the product or enhancement, not to exceed five years. The Company evaluates the net realizable value of its software development costs at each period end using undiscounted estimated future net operating cash flows expected to be derived from the respective software product or enhancement. If such evaluation indicates that the unamortized software development costs exceed the net realizable value, the Company writes off the amount by which the unamortized software development costs exceed net realizable value. INCOME TAXES The Company accounts for income taxes using the asset and liability method of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). Under SFAS No. 109, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. During 1997 the Company acquired SupplyTech, Inc. and SupplyTech, International, LLC (collectively, "STI") (see Note 2). Effective January 1, 1995 SupplyTech, Inc. elected to be taxed as an S corporation under the Internal Revenue Code. The acquisition of SupplyTech, Inc. by the Company terminated the S corporation status under the Internal Revenue Code. Accordingly, SupplyTech, Inc. was taxed as a regular corporation in 1997. SupplyTech International, LLC was incorporated under the laws of the state of Michigan as a limited liability corporation ("LLC"). As an LLC, SupplyTech International, LLC has elected to be taxed as a partnership under the Internal Revenue Code. In 1997 SupplyTech International, LLC's income is included in the Company's consolidated income subject to regular corporate tax. As a result of these elections, STI has been taxed in a manner similar to a partnership for 1996 and has not provided for any federal or state income taxes as the results of operations are passed through to, and the related income taxes become the individual responsibility of, STI's shareholders. The pro forma income tax expense for 1996 reflects the income tax expense that would have been reported if STI had been a C corporation and subject to SFAS No. 109 during these periods. RECLASSIFICATIONS Certain reclassifications have been made to the 1997 and 1996 consolidated financial statements to conform with the 1998 presentation. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company uses financial instruments in the normal course of its business. The carrying values of cash equivalents, short-term investments, accounts and royalties receivable, accounts payable, accrued expenses and deferred revenues approximate fair value due to the short-term maturities of these assets and liabilities. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's international operations are translated into U.S. dollars at current exchange rates while the related statements of operations are translated at average exchange rates during each reporting period. Net exchange gains or losses resulting from the translation of assets and liabilities are recorded as cumulative foreign currency translation adjustments and reported in the consolidated statements of comprehensive loss. STOCK COMPENSATION PLANS The Company applies the intrinsic-value-based method of accounting for its nonvariable stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting 22 for Stock Issued to Employees ("APB Opinion No. 25"), and related interpretations. As such, compensation expense would generally be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. 2. ACQUISITIONS 1998 ACQUISITIONS EDI WORKS! LLC ("EDI WORKS!") 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, with the accumulated earnings of EDI Works! of $129,000 being added directly to the Company's accumulated deficit on the date of acquisition. The results of operations of EDI Works! are included in the Company's consolidated statement of operations for the year ended December 31, 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 incurred in the consolidated statement of operations for the year ended December 31, 1998. MACTEC, INC. ("MACTEC") 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. 1997 ACQUISITIONS STI On January 3, 1997 the Company acquired STI for 3,600,000 unregistered shares of the Company's common stock in transactions accounted for using the pooling-of-interests method of accounting. In connection with the STI acquisition, the Company incurred a charge of $12.4 million for acquisition related expenses, asset write downs and integration costs incurred (including a $3.2 million charge for the vesting of a contingent option which became exercisable upon the closing of the merger) (see Note 11). The Company recorded a net deferred income tax asset during the first quarter of 1997 of $1.8 million relating to the STI acquisition and provided a valuation allowance against such net deferred income tax asset to reduce it to zero. Premenos Technology Corp. ("Premenos") On December 19, 1997 the Company acquired Premenos, a Delaware corporation based in Concord, California. In connection with the transaction, which was accounted for using the pooling-of-interests method of accounting, the Company issued 8,037,982 shares of its common stock in exchange for all of the shares of Premenos common stock. All Premenos options and warrants were converted into the Company's options and warrants in accordance with the conversion ratio. In connection with the Premenos acquisition, the Company incurred charges for acquisition related expenses, asset write downs and integration costs of $13.7 million in 1998 and $15.3 million in 1997, (see Note 11). The financial position and results of operations of the Company have been restated for all periods prior to the mergers to give retroactive effect to the STI and Premenos acquisitions. 23 Total revenues and net loss for the individual companies as previously reported are as follows (in thousands):
Years Ended December 31, ------------------------ 1997 1996 -------- -------- Total revenues: Harbinger Corporation ........... $ 77,414 $ 38,236 STI ............................. -- 17,538 Premenos ........................ 40,807 33,471 -------- -------- $118,221 $ 89,245 ======== ======== Net income (loss) applicable to common shareholders: Harbinger Corporation ........... $(42,832) $ (8,277) STI ............................. -- (4,818) Premenos ........................ 3,785 (2,996) -------- -------- $(39,047) $(16,091) ======== ========
Effective January 3, 1997 the operations of Harbinger Corporation and STI were combined. On September 30, 1998 the Company discontinued its TrustedLink Procurement ("TLP") business and on December 31, 1997 the Company discontinued its TrustLink Banker ("Banker") division. The revenues of Harbinger Corporation reported above have been restated accordingly (see Note 12). HNS On January 1, 1997 because of the expiration of restrictions on the Company's ability to appoint a majority of the HNS Board of Managers, the Company exercised its rights as majority shareholder of HNS by appointing a majority of the members of the HNS Board of Managers. As a result, effective January 1, 1997 the Company began accounting for its investment in HNS by consolidating the statements of financial position and results of operations of HNS with those of the Company. Prior to the January 1, 1997 acquisition date the Company accounted for its investment in HNS using the equity method of accounting, which resulted in a $7.0 million loss reported in "Equity in losses of joint ventures" in the statements of operations for the year ended December 31, 1996. Also on January 1, 1997 the Company entered into a debenture purchase agreement with the holder of the debenture whereby the Company acquired the debenture in exchange for $1.5 million in cash and 363,432 shares of the Company's common stock valued at $4.2 million. The Company recorded an extraordinary loss on debt extinguishment of $2.4 million in the first quarter of 1997 related to this transaction. Immediately after this transaction, the Company acquired the minority interest in HNS, consisting of 585,335 shares of HNS common stock and stock options to acquire 564,727 shares of HNS common stock at exercise prices ranging from $0.70 per share to $1.65 per share, by exchanging cash of $1.6 million and stock options to acquire 532,975 shares of the Company's common stock at exercise prices ranging from $10.14 per share to $11.02 per share which were valued at $2.2 million. Including transaction and other costs of $350,000, the Company paid $4.1 million for the acquisition of the HNS minority interest which was accounted for using the purchase method of accounting, with $2.7 million of the purchase price allocated to in-process product development and charged to the consolidated statement of operations on January 1, 1997, and $1.4 million allocated to goodwill and purchased technology. The Company also incurred acquisition related expenses and asset write-downs related to this acquisition of $2.0 million in 1997 (see Note 11). The Company recorded a net deferred income tax asset of approximately $840,000 as a result of this acquisition and provided a valuation allowance against such net deferred income tax asset to reduce it to zero. 24 Smart Solutions for Electronic Commerce, Inc. ("Smart Solutions") Effective May 1, 1997, the Company acquired all of the common stock of Smart Solutions, a Michigan corporation based in Traverse City, Michigan, for $677,000, consisting of 29,635 unregistered shares of the Company's common stock valued at $454,000 and the assumption of $223,000 in liabilities. The Company recorded the acquisition using the purchase method of accounting with $100,000 of the purchase price allocated to purchased technology, $71,000 allocated to tangible assets and $506,000 allocated to goodwill. Acquion, Inc. ("Acquion") Effective August 22, 1997, the Company acquired all of the common stock of Acquion, a California corporation based in Greenville, South Carolina, for approximately $13.6 million, consisting of $12.0 million in cash and the assumption of approximately $1.6 million in liabilities including transaction costs. The Company recorded the acquisition using the purchase method of accounting with $10.9 million of the purchase price allocated to in-process product development and charged to the consolidated statement of operations in 1997, $641,000 allocated to purchased technology and $2.0 million allocated to goodwill. The Company also incurred acquisition related expenses and asset write downs of $2.5 million during 1997 related to this acquisition (see Note 11). The Company recorded a net deferred income tax asset of approximately $4.1 million as a result of this acquisition and provided a valuation allowance against such net deferred income tax asset to reduce it to zero. TLP, a separate business within Acquion, was discontinued by the Company on September 30, 1998 (see Note 12). Atlas Products International, Limited ("Atlas") Effective October 23, 1997, the Company acquired Atlas, a company organized under the laws of England, based in Manchester, United Kingdom, for 467,098 unregistered shares of the Company's common stock in a transaction accounted for using the pooling-of-interests method of accounting. In connection with the acquisition, the Company incurred charges for acquisition related expenses, asset write downs and integration costs incurred of $1.4 million in 1998 and $2.0 million in 1997, respectively (see Note 11). The Atlas business combination was not material, and therefore was accounted for as an immaterial pooling, with Atlas' accumulated deficit of $296,000 being credited directly to the Company's accumulated deficit on the date of acquisition. 1996 ACQUISITIONS NTEX Holding, B.V. ("NTEX") Effective March 31, 1996 the Company acquired all of the common stock of NTEX, a Dutch corporation based in Rotterdam, The Netherlands, for $8.0 million, consisting of $3.2 million in cash, 161,670 shares of the Company's common stock valued at $1.2 million, warrants to acquire 28,125 shares of the Company's common stock at $7.55 per share valued at $100,500 and the assumption of $3.5 million in liabilities including transaction costs. The Company recorded the acquisition using the purchase method of accounting with $4.4 million of the purchase price allocated to in-process product development and charged to the consolidated statement of operations on March 31, 1996, $204,000 allocated to purchased technology, $621,000 allocated to tangible assets and $2.8 million allocated to goodwill. INOVIS GmbH & Co. ("INOVIS") Effective March 31, 1996 the Company acquired all of the common stock of INOVIS, a German corporation based in Karlsruhe, Germany, for $6.1 million, consisting of $1.4 million in cash, 315,414 shares of the Company's common stock valued at $2.4 million, warrants to acquire 45,000 shares of the Company's common stock at $6.78 per share valued at $104,000, a note payable of $557,000 and the assumption of $1.7 million in liabilities including transaction costs. The Company recorded the acquisition using the purchase method of accounting with $3.4 million of the purchase price allocated to in-process product development and charged to the consolidated statement of operations in 1996, $600,000 allocated to purchased technology, $1.0 million allocated to tangible assets and $1.1 million allocated to goodwill. 25 HNV Effective March 31, 1996 the Company acquired the remaining outstanding common stock of HNV, a Dutch corporation based in Hoofddorp, The Netherlands, for $1.2 million, consisting of 87,097 shares of the Company's common stock valued at $668,000 and the assumption of $554,000 in liabilities including transaction costs. The Company recorded the acquisition using the purchase method of accounting, with $300,000 of the purchase price allocated to in-process product development and charged to the consolidated statement of operations in 1996, $518,000 allocated to tangible assets and $447,000 allocated to goodwill and other intangibles. Don Valley Technology Corporation ("Don Valley") Effective May 14, 1996 the Company acquired all the common stock of Don Valley, a Canadian corporation based in Toronto, Canada, for $2.5 million, consisting of $1.1 million in cash, 38,917 shares of the Company's common stock valued at $1.1 million and the assumption of $300,000 in liabilities including transaction costs. The Company recorded the acquisition using the purchase method of accounting with $2.0 million of the purchase price allocated to in-process product development and charged to the consolidated statement of operations in 1996, a net liability of $37,000 allocated to tangible assets and $545,000 allocated to goodwill and other intangibles. Prime Factors, Inc. ("Prime Factors") Effective July 19, 1996 the Company acquired all the common stock of Prime Factors, an Oregon corporation based in Eugene, Oregon, for $4.1 million, consisting of $3.0 million in cash, 31,677 shares of the Company's common stock valued at $749,000 and the assumption of $351,000 in liabilities including transaction costs. The Company recorded the acquisition using the purchase method of accounting with $2.5 million of the purchase price allocated to in-process product development and charged to the consolidated statement of operations in 1996, $1.2 million allocated to purchased technology and $411,000 allocated to tangible assets. Comtech Management Systems, Inc. ("Comtech") Effective August 1, 1996 the Company acquired all of the common stock of Comtech, a Texas corporation based in Amarillo, Texas, for $500,000, consisting of 36,841 shares of the Company's common stock valued at $422,000 and the assumption of $75,000 in liabilities. The Company recorded the acquisition using the purchase method of accounting with $114,000 of the purchase price allocated to tangible assets, $100,000 allocated to purchased technology and $283,000 allocated to goodwill. EDI Integration Services Limited ("EISL") Effective October 15, 1996 the Company acquired all of the common stock of EISL, a company based in Hampshire, United Kingdom, for $804,000 consisting of $134,000 in cash and the assumption of a $670,000 note payable. The Company recorded the acquisition using the purchase method of accounting with $250,000 allocated to purchased technology, $548,000 allocated to goodwill and $6,000 allocated to tangible assets. PRO FORMA FINANCIAL INFORMATION The results of operations of the acquired companies have been included in the Company's consolidated statements of operations beginning on the following dates: EDI Works!: March 31, 1998; MACTEC: July 9, 1998; HNS: January 1, 1997; Smart Solutions: May 1, 1997; Acquion: August 22, 1997; Atlas: October 1, 1997; NTEX, INOVIS and HNV: March 31, 1996; Don Valley: May 14, 1996; Prime Factors: July 19, 1996; Comtech: August 1, 1996; EISL: October 15, 1996. 26 Unaudited pro forma results of operations of the Company for 1998, 1997 and 1996 would not be materially different as a result of the acquisitions of EDI Works! and MACTEC and are therefore not presented for 1998 or reflected in 1997 and 1996 below. The unaudited pro forma results of operations of the Company for 1997 and 1996 as if the acquisitions described above had been effected on January 1, 1997 and 1996, respectively, and retroactively adjusted for the impact of the 1998 discontinued operations of TLP and the 1997 discontinued operations of Banker are summarized as follows (in thousands, except per share data):
Years Ended December 31, ------------------------ 1997 1996 -------- ------- Revenues .............................. $120,363 $97,074 ======== ======= Net loss applicable to common shareholders ................... $(26,173) $(11,505) ======== ======= Net loss per share applicable to common shareholders ................... $ (0.68) $ (0.32) ======== ======= Weighted average number of common shares outstanding ............. 38,524 35,772 ======== =======
The unaudited pro forma results do not reflect the charges for purchased in-process product development. The unaudited pro forma results do not necessarily represent results which would have occurred if the acquisitions had taken place on the dates indicated nor are they necessarily indicative of the results of future operations. 3. PURCHASED TECHNOLOGY AND DISTRIBUTION AGREEMENT System Software Associates, Inc. ("SSA") On July 21, 1995 the Company entered into a distribution agreement and purchased certain software products from SSA in exchange for the issuance of 1,237,500 shares of the Company's common stock valued at $4.7 million at the date of issuance and the issuance of 4,000,000 shares of the Company's zero coupon redeemable preferred stock (see Note 9). The Company also provided SSA with an option to put the 1,237,500 shares of common stock issued back to the Company for cash on January 31, 1997 exercisable only if the market value of the common stock on that date was less than $4.00 per share. In September 1996 the Company registered the 1,237,500 shares of putable common stock. SSA sold all of the shares during 1996. After 1996 the Company no longer considered SSA to be a related party. The terms of the distribution agreement provide for SSA to pay the Company royalties through December 2000 based upon future software and service revenues that SSA derives from the sale of the Company's products, including certain minimum royalties of $5.7 million for 1996. The Company recognizes revenue from this arrangement based upon sales made by SSA to end-users. The Company allocated the consideration associated with these transactions of $4.8 million (including transaction costs of $122,000) as follows: $2.3 million to purchased technology and $2.5 million to the distribution agreement based upon the estimated fair values of the purchased technology and distribution agreement at the date of the exchange. During 1997 the purchased technology was written down due to the acquisition of other replacement technology that was licensed to SSA. The Company had a net provision of $3.6 million in its allowance for doubtful accounts related to royalty receivables due from SSA at December 31, 1998. Also in 1998 the intangible asset associated with the distribution agreement was written off based upon estimated future net cash flows from the arrangement (see Note 11). 27 General Electric Information Services, Inc. ("GEIS") On December 31, 1995 the Company entered into an alliance agreement with GEIS and an agreement to purchase certain software products from GEIS. The total purchase price was $2.5 million, consisting of $300,000 in cash and the assumption of a note payable to GEIS in the amount of $2.2 million. The Company recorded the purchase of the technology and the alliance agreement based upon fair value with $1.2 million of the purchase price allocated to in-process product development and charged to the consolidated statement of operations in 1995, $375,000 allocated to purchased technology, $950,000 allocated to the alliance agreement and $15,000 allocated to tangible assets. During 1997 the purchased technology was written down due to the acquisition of other replacement technology that will be licensed to GEIS and the distribution agreement was written down based upon future expectations of net cash flows from the arrangement (see Note 11). Certain terms of the alliance agreement include the referral of customers to the Company by GEIS, the performance of certain software maintenance services by GEIS and a $1.2 million guaranteed payment by GEIS to the Company for the two-year period ended December 31, 1997, relating to software maintenance revenues to be paid by GEIS to the Company. GEIS' subsequent sales to end-users exceeded the $1.2 million guaranteed payment each year. 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1998 and 1997 (in thousands):
1998 1997 ------- ------- Computer and communications equipment .............. $34,632 $26,115 Furniture, fixtures and leasehold improvements ........... 10,210 7,486 Other ........................... 438 187 ------- ------- 45,280 33,788 Less accumulated depreciation ... (22,130) (15,621) ------- ------- $23,150 $18,167 ======= =======
5. INTANGIBLE ASSETS Intangible assets consist of the following at December 31, 1998 and 1997 (in thousands):
1998 1997 ------- ------- Purchased technology (Note 11) ............. $ 1,521 $ 2,523 Goodwill, GEIS alliance and SSA distribution agreements (Notes 3 and 11) ............ 12,130 9,514 Software development costs (Note 11) ....... 9,041 10,473 ------- ------- 22,692 22,510 Less accumulated amortization .............. (5,889) (6,046) ------- ------- $16,803 $16,464 ======= =======
6. ACCRUED EXPENSES Accrued expenses consist of the following at December 31, 1998 and 1997 (in thousands): 28
1998 1997 ------ ------ Accrued salaries and wages ............ $ 9,522 $ 8,011 State income, property, sales and other taxes .................. 3,870 3,227 Accrued severance, lease exit costs and other (Note 11) 6,129 3,689 Accrued discontinued operations costs (Note 12) .............. 6,518 3,685 Accrued integration costs incurred (Note 11) ................... 1,358 3,940 Other accrued expenses ................ 4,174 3,283 ------- ------- $31,571 $25,835 ======= =======
7. INCOME TAXES The provision for income tax expense (benefit) includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities and any increase or decrease in the valuation allowance for deferred income tax assets. During 1997 the Company acquired STI (see Note 2). Effective January 1, 1995 SupplyTech, Inc. elected to be taxed as an S corporation under the Internal Revenue Code. The acquisition of SupplyTech, Inc. by the Company terminated the S corporation status under the Internal Revenue Code. Accordingly, SupplyTech, Inc. was taxed as a regular corporation in 1997. SupplyTech International, LLC was incorporated under the laws of the state of Michigan as a limited liability corporation ("LLC"). As an LLC, SupplyTech International, LLC has elected to be taxed as a partnership under the Internal Revenue Code. In 1997, SupplyTech International, LLC's income is included in the Company's consolidated income subject to regular corporate tax. As a result of these elections, STI has been taxed in a manner similar to a partnership for 1996 and has not provided for any federal or state income taxes as the results of operations are passed through to, and the related income taxes become the individual responsibility of, STI's shareholders. Upon termination of SupplyTech, Inc.'s S corporation status in 1997, the net deferred income tax asset of $1.8 million was fully provided for by a valuation allowance. The pro forma income tax expense for 1996 reflects the income tax expense that would have been reported if STI had been a C corporation and subject to SFAS No. 109 during this period. Income (loss) from continuing operations before income taxes for the years ended December 31, 1998, 1997 and 1996 consists of the following (in thousands):
1998 1997 1996 -------- -------- -------- U.S. operations ..................... $ (5,835) $(21,063) $ (6,583) Foreign operations .................. (1,987) 1,961 (8,454) -------- -------- -------- Total loss from continuing operations before income taxes $ (7,822) $(19,102) $(15,037) ======== ======== ========
Income tax expense (benefit) from continuing operations for the years ended December 31, 1998, 1997 and 1996 is summarized as follows (in thousands):
1998 1997 1996 ------ ------ ------ Current: Federal ............... $ 442 $ 581 $ (330) Foreign ............... (124) 1,187 10 State ................. 387 215 (38) ------ ------ ------ Total current 705 1,983 (358) ------ ------ ------
29
1998 1997 1996 ------ ------ ------ Deferred: Federal ............... -- 981 1,064 Foreign ............... -- -- 167 State ................. -- 129 123 ------ ------ ------ Total deferred -- 1,110 1,354 ------ ------ ------ Total income tax expense ..... $ 705 $3,093 $ 996 ====== ====== ======
The Company's income taxes currently payable for federal and state purposes have been reduced by the tax benefit derived from stock option transactions. The benefit, which totaled $498,000 and $2.9 million for the years ended December 31, 1997 and 1996, respectively, has been credited directly to stockholders' equity. There is no income tax expense or benefit for discontinued operations of TLP (from operations) in 1998. There was no income tax expense for discontinued operations of Banker (from operations) in 1997 or 1996. There was no income tax expense or benefit relating to loss on disposal of TLP or Banker or extraordinary loss on debt extinguishment. Pro forma income tax expense (benefit) from continuing operations for the year ended December 31, 1996 is summarized as follows (in thousands):
1996 ------- Current: Federal ............... $ (330) Foreign ............... 10 State ................. (38) ------- Total current (358) ------- Deferred: Federal ............... 1,064 Foreign ............... 167 State ................. 123 ------- Total deferred 1,354 ------- Pro forma income tax expense . $ 996 =======
Income tax expense (benefit) differs from the amounts computed by applying the federal statutory income tax rate of 34% to income (loss) from continuing operations before income taxes as a result of the following (in thousands):
1998 1997 1996 ------- -------- ------- Computed "expected" income tax expense (benefit) ........ $(2,660) $ (6,495) $(5,113) Increase (decrease) in income tax expense (benefit) resulting from: State income taxes, net of federal income tax benefit ................................... 255 227 56 Tax-exempt income ................................ (168) (157) (130) Loss from STI .................................... -- -- 1,630 Change in tax status of STI ...................... -- (1,798) -- Nondeductible charge for purchased in-process product development and other costs ....... 488 1,431 3,134 Increase (decrease) in the valuation allowance for deferred income tax assets ................ 2,758 10,003 1,494 Other ............................................ 32 (118) (75) ------- -------- ------- $ 705 $ 3,093 $ 996 ======= ======== =======
30 Pro forma income tax expense (benefit) differs from the amounts computed by applying the federal statutory income tax rate of 34% to income (loss) from continuing operations before income taxes as a result of the following (in thousands):
1996 ------- Computed "expected" income tax expense (benefit) ... $(5,113) Increase (decrease) in income tax expense (benefit) resulting from: State income taxes, net of federal income tax benefit .............................. 56 Tax-exempt income ........................... (130) Nondeductible charge for purchased in-process product development and other costs .. 3,134 Increase in the valuation allowance for deferred income tax assets ........... 2,819 Other ....................................... 230 ------- $ 996 =======
The significant components of deferred income tax expense (benefit) from continuing operations for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands):
1998 1997 1996 ------- -------- ------ Deferred income tax benefit ....... $(2,759) $(12,399) $ (140) Increase in the valuation allowance for deferred income tax assets 2,759 13,509 1,494 ------- -------- ------ $ -- $ 1,110 $1,354 ======= ======== ======
The significant components of pro forma deferred income tax expense (benefit) from continuing operations for the year ended December 31, 1996 is summarized as follows (in thousands):
1996 ------- Deferred income tax expense ......... $(1,465) Increase in the valuation allowance for deferred income tax assets 2,819 ------- $ 1,354 =======
The income tax effects of the temporary differences that give rise to the Company's deferred income tax assets and liabilities as of December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ------- ------- Deferred income tax assets: Net operating loss carryforwards ............ $ 4,269 $ 5,544 Deferred revenue ............................ -- 1,486 Intangible assets ........................... 7,446 7,924 Accrued expenses ............................ 16,639 9,484
31
1998 1997 ------- ------- Discontinued operations ..................... 3,241 829 Research tax credit ......................... 2,082 2,082 Other ....................................... 790 790 ------- ------- Gross deferred income tax assets ..... 34,467 28,139 Valuation allowance ................................ (27,842) (22,671) ------- Deferred income tax assets, net of the valuation allowance ..................................... 6,625 5,468 Deferred income tax liabilities - principally due to software development costs .................... (3,824) (2,667) ------- ------- Net deferred income tax assets ....... 2,801 2,801 Less current deferred income tax assets ............ 2,103 1,892 ------- ------- Noncurrent deferred income tax assets .............. $ 698 $ 909 ======= =======
In 1998 there was no change in net deferred income tax assets. The decrease in net deferred income tax assets for the years ended December 31, 1997 and 1996 was $1.1 million and $1.4 million, respectively. During 1998, the net increase in the valuation allowance was $5.2 million. A valuation allowance is established to reduce the deferred income tax assets to the level at which it is "more likely than not" that the tax benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss and tax credit carryforwards depends on having sufficient taxable income within the carryback and carryforward periods. Sources of taxable income that may allow for the realization of tax benefits include: (a) taxable income in the current year or prior years that is available through carryback, (b) future taxable income that will result from the reversal of existing taxable temporary differences, and (c) future taxable income generated by future operations. The Company continually reviews the adequacy of the valuation allowance and recognizes these benefits as reassessment indicates that it is more likely than not that the benefits will be realized. As a result of the 1997 acquisition of the minority interest in HNS (see Note 2), the Company acquired certain intangible assets for which it provided a valuation allowance of $840,000 on the related deferred taxes. The Company also acquired certain intangible assets in the Acquion acquisition (see Note 2) for which it provided a valuation allowance of approximately $4.1 million on the related deferred taxes. The Company acquired net operating losses and research tax credit carryforwards in the Premenos acquisition (see Note 2) of approximately $1.3 million and $1.7 million, respectively. The utilization of these net operating loss and research tax credit carryforwards is restricted based on the ability of Premenos, as a separate company, to generate taxable income. During 1996 the Company acquired foreign net operating loss carryforwards in the NTEX and HNV acquisitions (see Note 2) of approximately $6.5 million and $3.1 million, respectively. The Company established a valuation allowance relating to the carryforwards of $2.4 million and $1.1 million, respectively, which is included in the valuation allowance at December 31, 1996. If the benefit from these net operating loss carryforwards is realized, the Company will reduce the related valuation allowance and will reduce goodwill recorded in connection with these transactions. For the year ended December 31, 1996 the Company realized a portion of these foreign net operating loss carryforwards and recognized deferred foreign income tax expense of $93,000 and $74,000 relating to the reduction in the valuation allowance for these carryforwards and reduced goodwill associated with these acquisitions by a like amount. At December 31, 1998 the Company has domestic and foreign net operating loss carryforwards and research tax credit carryforwards of approximately $22.2 million, $11.8 million and $2.1 million, respectively. The domestic net operating loss carryforwards expire at various dates through the year 2020 unless utilized, the foreign net operating loss carryforwards do not expire and the research tax credit carryforwards expire beginning in 2007 through 2012. The Company's domestic net operating loss carryforwards at December 31, 1998 include $22.2 million in income tax deductions related to stock options excluded from the table of deferred income tax assets above, which will be reflected as a credit to additional paid-in capital when realized. 32 8. LONG-TERM DEBT The Company had no debt outstanding at December 31, 1998. The Company's current portion of long-term debt at December 31, 1997 of $623,000 was paid off during 1998. 9. REDEEMABLE PREFERRED STOCK In 1995 the Company issued 4,000,000 shares of zero coupon redeemable preferred stock to SSA (see Note 3). The zero coupon redeemable preferred stock issued has no voting or dividend rights, vests at a rate of 1,000,000 shares per year only if SSA attains certain royalty targets for the years 1997 through 2000, and contains mandatory redemption provisions of $0.67 per share payable in cash or the Company's common stock, at the option of the holder, thirty days after the end of each year. The Company will accrete the zero coupon redeemable preferred stock to its redemption price as it becomes probable that it will be earned through a charge to direct costs of software in the period earned. The royalty targets for 1998 and 1997 were not met and 2,000,000 of the shares of the zero coupon redeemable preferred stock have been forfeited. 10. SHARHEOLDERS' EQUITY PREFERRED STOCK The Board of Directors is authorized, subject to certain limitations prescribed by law, without further shareholder approval, to issue from time to time up to an aggregate of 20,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions on the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. At December 31, 1998 there were 2,000,000 shares of zero coupon redeemable preferred stock issued and outstanding (see Note 9). COMMON STOCK On April 24, 1998 the Board of Directors declared a three-for-two stock split in the form of a stock dividend on the Company's common stock paid on May 15, 1998 to shareholders of record on May 1, 1998. All share, per share and shareholders' equity amounts included in the Company's consolidated financial statements have been retroactively restated to reflect the split for all periods presented. WARRANTS The Company issued warrants in December 1997 related to the acquisition of Premenos. The warrants enable the holders to acquire 26,199 shares of the Company's common stock at $5.63 per share, representing the exchange ratio agreed to in the merger agreement. As of December 31, 1998 all warrants were outstanding. The Company issued warrants in July 1996 to two related parties in connection with certain performance criteria related to the HNV acquisition. The warrants enable the holders to acquire 112,500 shares of the Company's common stock at $12.33 per share, representing the fair value of the common stock at the date of issuance. During 1998, 84,375 warrants were exercised and 28,125 warrants were canceled, leaving no warrants outstanding at December 31, 1998. The Company issued warrants in April 1996 related to the acquisition of NTEX and INOVIS. The warrants enable the holders to acquire 73,125 shares of the Company's common stock at a range of $7.55 to $7.61 per share, representing the fair value of the common stock at the date of issuance. There are 45,000 warrants outstanding as of December 31, 1998, all at an exercise price of $7.61. 33 STOCK COMPENSATION PLANS As of December 31, 1998 the Company has five stock-based compensation plans, of which four are related to stock options and one is related to stock purchases, more fully described below. Stock Options The Company's 1989 Stock Option Plan (the "1989 Plan") and 1996 Stock Option Plan (the "1996 Plan") and together combined (the "Plans") provide for the grant of options to officers, directors, consultants and key employees. The 1996 Plan was amended in 1998 to add 1,050,000 options available for grant. The maximum number of shares of stock that may be issued under the 1996 Plan may not exceed the sum of 8,737,500 options plus an amount equal to the number of all shares that are either not subject to options granted under the 1989 Plan or were subject to options granted thereunder that expire without exercise to officers, directors, consultants and key employees. There were 2,075,055 options available for grant at December 31, 1998. Options granted under the terms of the 1996 Plan generally vest ratably over four years and are granted with an exercise price no less than the fair market value of the common stock on the grant date. Options granted prior to July 1994 vest ratably over three years and options granted since July 1994 vest ratably over four years. All options granted expire seven years from the date of grant. At December 31, 1998 there were options outstanding to purchase 6,902,026 shares of the Company's common stock, of which options to purchase 1,699,767 shares were exercisable. In 1998 the Board of Directors authorized a repricing of certain unexercised employee stock options held by employees other than certain senior executive officers. The number of shares repriced to $6.91 was approximately 2.6 million. The four-year vesting period for all repriced shares began in October 1998. In 1993 the Board of Directors authorized the creation of a stock option plan for nonemployee members of the Company's Board of Directors (the "Nonemployee Directors Plan"). The Nonemployee Directors Plan was amended in 1998 to add 187,500 options, for a total of 525,000 shares of common stock reserved for issuance under the Nonemployee Directors Plan at an option price no less than the fair market value of the common stock on the option grant date. Options expire seven years from the date of grant. The options granted under the Nonemployee Directors Plan vest ratably in the year of grant based on attendance at regularly scheduled board meetings. Options which have not vested in the year of grant expire and become available for grant under the Nonemployee Directors Plan. At December 31, 1998 there were options outstanding and exercisable to purchase 249,749 shares of the Company's common stock and there were 177,939 options available for grant under the Nonemployee Directors Plan. In addition to outstanding options granted under the Company's Plans and Nonemployee Directors Plan, the Company has granted options to acquire 157,500 shares of common stock to certain existing and former nonemployee directors for past services. As of December 31, 1998, 120,000 of these options were outstanding and exercisable. At December 31, 1998 the Company has five stock-based compensation plans which are described herein. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plan. The compensation cost that would have been charged against income for its plans was $13.5 million $9.2 million and $3.5 million for 1998, 1997 and 1996, respectively, had compensation cost for the Company's five stock-based compensation plans been determined consistent with SFAS No. 123. The Company's net loss and loss per share would have been the pro forma amounts indicated below (in thousands, except per share data):
1998 1997 1996 ------------- -------------- ------------- Net loss applicable to As reported $ (14,712) $ (39,047) $ (16,091) common shareholders Pro forma $ (28,254) $ (48,221) $ (19,592) Basic and diluted loss As reported $ (0.35) $ (1.02) $ (0.46) per common share Pro forma $ (0.68) $ (1.26) $ (0.56)
34 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: 1998: dividend yield of 0.5%; expected volatility of 82.6%; risk-free interest rate of 5.3%, and expected lives of five years for all of the Plan options; 1997: dividend yield of 0.5%; expected volatility of 67.3%; risk-free interest rate of 5.7%; and expected lives of five years for all of the Plan options; 1996: dividend yield of 0.5%; expected volatility of 57.8%; risk-free interest rates of 5.9%; and expected lives of five years for all of the Plan options. A summary of the status of the Company's stock option plans as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below:
1998 1997 1996 ------------------------ ------------------------ ----------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Fixed Options (000s) Price (000s) Price (000s) Price - ---------------------------------------- ---------- ------------ ------- ---------- ----------------------- Outstanding at beginning of year ....... 7,267 $10.73 4,567 $ 7.51 3,537 $ 3.12 Granted ................................ 5,185 12.55 4,497 13.99 2,365 11.92 Exercised .............................. (1,118) 8.79 (858) 3.61 (979) 1.91 Forfeited/canceled ..................... (4,044) 16.70 (939) 17.19 (356) 8.54 Outstanding at end of year ............. 7,290 8.90 7,267 10.73 4,567 7.51 Options exercisable at end of year ..... 2,070 1,875 1,510 Weighted average fair value of options granted during the year .... $ 6.72 $ 6.03 $ 4.98
The following table summarizes information about nonvariable stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------ -------------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/98 Life (Years) Price at 12/31/98 Price ----------------------- ------------ ------------ ------ --------------- -------- $0.01 - $2.83 879,435 1.96 $2.32 762,846 $ 2.24 $2.84 - $6.89 236,004 3.61 $4.92 142,386 $ 5.25 $6.91 - $6.91 2,780,561 6.81 $6.91 -- -- $7.61 - $7.78 1,047,480 4.94 $7.75 318,316 $ 7.77 $8.71 - $11.61 1,156,033 5.88 $11.10 452,445 $10.95 $11.78 - $16.75 541,850 6.18 $13.41 292,511 $13.56 $18.17 - $35.00 648,412 6.27 $21.94 101,021 $24.27 --------- --------- $ 0.01 - $35.00 7,289,775 5.61 $ 8.90 2,069,525 $ 7.88 ========= =========
Employee Stock Purchase Plan The Company offers employees the right to purchase shares of the Company's common stock at 85% of the market price, as defined, pursuant to the Employee Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan, full-time employees, except persons owning 5% or more of the Company's common stock, are eligible to participate after six months of employment. Employees may contribute up to 15% of their annual salary toward the Purchase Plan up to a maximum of $15,000 per year. A maximum of 487,500 shares of common stock are reserved for issuance under the Purchase Plan. During the years ended December 31, 1998, 1997 and 1996 shares issued under the Purchase Plan were 89,247, 160,813 and 40,170, respectively. A portion of shares issued in 1997 and 1996 disclosed above were authorized under 35 existing purchase plans of acquired companies and are excluded from the calculation of shares available to issue under the Purchase Plan. Under SFAS No. 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 1998: dividend yield of 0.5%; expected volatility of 82.6%; and risk-free interest rate of 5.2%; for 1997: dividend yield of 0.5%; expected volatility of 67.3% and risk-free interest rate of 5.7%; for 1996: dividend yield of 0.5%; expected volatility of 57.8%; and risk-free interest rate of 5.9%. The expected life of the employees' purchase rights was three months for all years. The weighted average fair value of those purchase rights granted in 1998, 1997 and 1996 was $7.11, $5.95 and $5.62, respectively. The impact of the Purchase Plan on the Company's pro forma net loss and loss per share presentation required per SFAS 123 has been included in Stock Options above. 11. CHARGE FOR PURCHASED IN-PROCESS PRODUCT DEVELOPMENT, WRITE-OFF OF SOFTWARE DEVELOPMENT COSTS, RESTRUCTURING, ACQUISITION RELATED AND OTHER CHARGES In connection with acquisitions made in 1998, 1997 and 1996 and restructurings in 1998 and 1997, the Company incurred charges for purchased in-process product development, write-off of software development costs, restructuring, acquisition related and other charges ("Charges"). A summary of the components, as adjusted for discontinued TLP, are as follows (in thousands):
1998 1997 1996 ---------- ---------- ---------- In-process product development.............................. $ -- $ 2,853 $ 12,649 Integration costs........................................... 13,154 14,319 826 Transaction charges......................................... 638 9,515 -- Lease termination........................................... 2,335 -- -- Intangible asset write-downs................................ 3,963 8,431 -- Asset write-downs........................................... 396 1,599 -- Severance costs............................................. 4,281 3,838 -- Other costs to exit activities.............................. 2,260 -- -- -------- -------- -------- $ 27,027 $ 40,555 $ 13,475 ======== =======- ========
Integration costs associated with business combinations include costs incurred for such activities as cross training, planning, product integration and marketing. For 1998 and 1997 approximately $4.1 million and $7.8 million of integration costs, respectively, included certain internal expense allocations which may recur in other expense categories in the future. Charges for in-process product development are recorded as a result of acquiring research and development efforts through business combinations that, at the date of acquisition, have not yet generated commercializable products and have no alternative future use. The valuations for such purchased in-process product developments are made with the assistance of third-party experts based on fair value. Intangible asset write-downs consist primarily of capitalized software and goodwill that have become impaired as a result of product phase-outs. Certain Charges involve management estimates, as follows: lease termination costs and other costs to exit activities, which include anticipated liabilities and obligations associated with phasing out products. Actual results could vary from these estimates. 12. DISCONTINUED OPERATIONS In the third quarter of 1998 the Board of Directors approved the discontinuance of TLP, expected to be sold or liquidated within 12 months. Revenues from TLP were $2.9 million and $2.5 million for the years ended December 31, 1998 and 1997, respectively. The results of operations for TLP for all years presented are reported in the accompanying reclassified statements of operations under discontinued operations. The Company also provided for an estimated anticipated loss on the disposal of TLP of $6.4 36 million during 1998. The balance at December 31, 1998 was $5.1 million. The anticipated loss on the disposal of TLP contains certain management estimates, included but not limited to sales proceeds, lease exist costs and length of operations beyond the measurement date. Actual results could vary from such estimates. No income tax benefit was recognized in 1998 or 1997 due to the Company's net operating loss carryforwards. The operating loss incurred for TLP from the measurement date to December 31, 1998 was $670,000. The assets and liabilities of TLP are included in the Company's consolidated balance sheets as of December 31, 1998 and 1997 and are summarized as follows (in thousands):
1998 1997 ----------- ---------- Accounts receivable........................... $ 454 $ 762 Other current assets.......................... 106 61 Property and equipment, net................... 766 633 Intangible assets, net........................ 2,454 2,669 Deferred revenue.............................. (45) (760) Current liabilities........................... (281) (1,367) ------- ------- $ 3,454 $ 1,998 ======= =======
In the fourth quarter of 1997 the Board of Directors approved the discontinuance of Banker. Revenues from Banker were $4.0 million and $3.5 million for the years ended December 31, 1997 and 1996, respectively. The results of operations for Banker for all years presented are reported in the accompanying reclassified statements of operations under discontinued operations. In the fourth quarter of 1997, the Company provided for an anticipated loss of $4.0 million related to the phase out of Banker operations. No income tax expense or benefit was recognized in 1997 or 1996 due to the Company's net operating loss carryforwards. As of December 31, 1998 the disposal of Banker was substantially complete and $2.0 million in estimated losses not incurred was recorded as a reduction to "Loss on disposal of TrustedLink Banker" on the statements of operations in 1998. The operating loss of Banker during 1998 was $280,000. The assets and liabilities of Banker included in the Company's consolidated balance sheets were immaterial at December 31, 1998 and consisted of $1.8 million in current liabilities and $500,000 in accounts receivable, equipment and other current assets at December 31, 1997. 13. OTHER RELATED PARTY TRANSACTIONS The Company received $284,000, $465,000 and $600,000 in 1998, 1997 and 1996, respectively, in revenue from an affiliated company that is partially owned by an employee of one of the Company's foreign subsidiaries. This same affiliated company also billed the Company $189,000, $63,000 and $350,000 in 1998, 1997 and 1996, respectively, for services that the affiliated company provided to the Company. The Company has a note receivable of $50,000 from an executive officer with an annual interest rate of 9%, renewable at the end of each year. Prior to the acquisition, one of Premenos' directors was a partner of a law firm which provided various legal services to Premenos. In 1996, such legal services included representation related to the acquisition of subsidiaries. Two other directors of Premenos also provided training and consulting services to the Company from time to time. Amounts incurred for all such services in 1997 and 1996 were $493,000 and $879,000, respectively. In 1996 the Company had related party revenues totaling $6.9 million from HNS and SSA (see Note 3). 37 14. SEGMENT INFORMATION, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS SEGMENT INFORMATION The Company operates in a single industry segment: the development, marketing and supporting of software products and the providing of network and consulting services to enable businesses to engage in E-Commerce. The Company managed its business along geographical lines, thus resulting in three reportable segments: North America, Europe and Asia Pacific and Latin America. The accounting policies of each segment are the same as those described in the summary of significant accounting policies. Revenues are attributed to a reportable segment based on the location of the customer. Management evaluates the performance of each segment on the basis of operating income, excluding integration and restructuring charges and certain net general and administrative charges. Intersegment royalties are calculated based upon revenues, as defined, derived from the sales of certain software products at agreed upon percentages between the segments. The measurement of long-term assets is not a significant factor in management's evaluation of the results of the reportable segments. At December 31, 1998 the Company was in the process of implementing a new organizational structure and anticipates that its reportable segments may be different in 1999. A summary of the Company's reportable segments as of and for the years ended December 31, 1998, 1997 and 1996 is presented below (in thousands):
Latin America and North Asia America Europe Pacific Total ------------------ ------------------ ------------- ----------------- Revenues: 1998 $115,800 $ 20,285 $ 2,950 $139,035 1997 $ 98,816 $ 17,676 $ 3,272 $119,764 1996 $ 78,796 $ 10,787 $ 358 $ 89,941 Intersegment royalties: 1998 $ 3,884 $ -- $ -- $ 3,884 1997 $ 1,543 $ -- $ -- $ 1,543 1996 $ 696 $ -- $ -- $ 696 Operating income: (as defined) 1998 $ 18,747 $ 754 $ 637 $ 20,138 1997 $ 16,071 $ 1,300 $ 479 $ 17,850 1996 $ 2,433 $ 370 $ 5 $ 2,808
Revenues 1998 1997 1996 - -------- --------- --------- -------- Total gross revenues for reportable segments $ 139,035 $ 119,764 $ 89,941 Elimination of intersegment royalties (3,884) (1,543) (696) --------- --------- -------- Total consolidated revenues $ 135,151 $ 118,221 $ 89,245 ========= ========= ======== Operating income, (as defined) 1998 1997 1996 - ------------------------------ --------- --------- -------- Total operating income for reportable segments $ 20,138 $ 17,850 $ 2,808 Charges for integration and restructuring (27,027) (40,555) (13,475) Certain net general and administrative costs (5,763) -- -- --------- --------- -------- Total consolidated operating loss $ (12,652) $ (22,705) $(10,667) ========= ========= ========
GEOGRAPHIC INFORMATION Revenues attributed to the United States, the Company's country of domicile, are substantially the same as revenues reported for the reportable segment of North America (above) for all years. Revenues 38 derived from customers in foreign countries did not exceed 10% in any one country of the Company's consolidated revenues in 1998, 1997 or 1996. The Company's long-lived assets, excluding net intangible and deferred tax assets, for the years ended December 31, 1998, 1997 and 1996 were as follows (in thousands):
1998 1997 1996 --------- --------- -------- United States $ 21,203 $ 16,215 $ 14,057 Foreign countries 1,947 1,952 869 --------- --------- -------- $ 23,150 $ 18,167 $ 14,926 ========= ========= ========
MAJOR CUSTOMERS No single customer comprised greater than 10% of the Company's consolidated revenues in 1998, 1997 or 1996. 15. COMMITMENTS 401(K) PROFIT SHARING PLAN During 1998 the Company consolidated its three separate 401(k) savings and retirement plans into one plan for all its domestic employees. In general, all domestic employees are eligible to participate in the plan after one month of employment and may contribute up to 15% of their annual salary up to the maximum allowed by the Internal Revenue Code. Under the consolidated plan, the Company matches employee contributions at 50% to a maximum of 4% of their annual contribution subject to a $2,200 limit per employee. Prior to consolidating the plans the Company's matching contributions in 1997 and 1996 varied from a range of discretionary to 50% of employees' contributions. Total Company contributions for its 401(k) plans totaled $736,000, $454,000 and $194,000 for the years ended December 31, 1998, 1997 and 1996, respectively. CREDIT FACILITY During 1998 the Company converted its $10.0 million committed line of credit to an uncommitted credit facility. There are no restrictive covenants or commitment fees associated with the uncommitted facility. No amounts were outstanding at December 31, 1998 and 1997. LEASES The Company leases office facilities, automobiles, fixtures and equipment under operating leases which extend through 2005. Rent expense under all operating leases was approximately $5.5 million, $4.3 million and $3.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998 the Company is obligated under these agreements to make the following lease payments (in thousands):
Operating Leases ---------------- 1999.............................................. $ 7,216 2000.............................................. 6,818 2001.............................................. 6,542 2002.............................................. 5,720 2003.............................................. 4,947 Thereafter........................................ 14,152 ------- Total minimum lease payments...................... $45,395 =======
39 In conjunction with one building lease, the Company was required to provide a standby letter of credit, which was $1.7 million at December 31, 1998. CONTINGENCIES The Company is involved in claims and other legal actions arising out of the ordinary course of business. While the ultimate results and outcome cannot be determined, management does not expect that they will have a material adverse effect on the Company's results of operations or financial position. 40 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Harbinger Corporation: We have audited the accompanying consolidated balance sheets of Harbinger Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive loss, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 1996 financial statements of Premenos Technology Corp. and subsidiaries, which statements reflect total revenues constituting 38% of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Premenos Technology Corp. and subsidiaries for 1996, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors with respect to 1996, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harbinger Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ KPMG LLP Atlanta, Georgia February 5, 1999 EX-21.1 6 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 HARBINGER CORPORATION LIST OF SUBSIDIARIES Harbinger NV Harbinger GmbH Harbinger Holdings BV Harbinger Computer Centrum, BV Harbinger Data Communications, BV Harbinger de Mexico, S de R.L. de C.V. Harbinger International s.r.l. Harbinger Corporation Acquion, Inc. Harbinger Corporation (Delaware) Harbinger Holdings, Inc. Harbinger SA (France) Harbinger Canada Corp. Prime Factors, Inc. Harbinger U.K. EX-23.1 7 CONSENT OF KPMG 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Harbinger Corporation: We consent to incorporation by reference in the Registration Statements (No. 333-61893), (No. 333-30219), (No. 333-96774), (No. 333-42959) and (No. 333-03247) on Form S-8 of Harbinger Corporation of our reports dated February 5, 1999, relating to the consolidated balance sheets of Harbinger Corporation as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, and the related financial statement schedule, which reports appear in the 1998 Annual Report on Form 10-K of Harbinger Corporation. Our reports dated February 5, 1999, which included reference to other auditors with respect to 1996, as they related to the 1996 financial statements of Premenos Technology Corp. and subsidiaries, which are included in the consolidated financial statements of Harbinger Corporation, are based solely on the report of the other auditors as it relates to the amounts included for Premenos Technology Corp. and subsidiaries for 1996. /s/ KPMG LLP Atlanta, Georgia March 26, 1999 EX-23.2 8 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in the 1998 Annual Report on Form 10-K of Harbinger Corporation and to the incorporation by reference in the registration statements of Harbinger Corporation on Form S-8 (File Nos. 333-61893, 333-96774, 333-03247, 333-30219 and 333-42959) of our report dated January 31, 1997, except for Paragraph 3 of Note 16 as to which the date is March 16, 1997, on our audit of the consolidated financial statements and financial statement schedule of Premenos Technology Corp. and subsidiaries as of December 31, 1996, and for the year then ended, which report is included in the Premenos Technology Corp. 1996 Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP San Francisco, California March 30, 1999 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF HARBINGER CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 33,059 59,248 41,355 5,464 0 137,653 45,280 22,130 178,369 58,350 0 0 0 4 120,015 178,369 47,084 135,151 4,203 39,436 108,367 0 64 (7,822) 705 (8,527) (6,185) 0 0 (14,712) (0.35) (0.35)
EX-27.2 10 RESTATED FINANCIAL DATA SCHEDULE FOR 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED CONSOLIDATED FINANCIAL STATEMENTS OF HARBINGER CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 69,811 32,333 37,807 2,790 0 147,848 33,788 15,621 183,559 53,541 0 0 0 4 130,014 183,559 54,804 118,221 7,800 30,510 110,416 0 132 (19,102) 3,093 (22,195) (14,433) (2,419) 0 (39,047) (1.02) (1.02)
EX-27.3 11 RESTATED FINANCIAL DATA SCHEDULE FOR 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE RESTATED CONSOLIDATED FINANCIAL STATEMENTS OF HARBINGER CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 35,697 29,844 22,418 2,425 0 95,640 25,706 10,780 131,199 35,248 0 0 0 3 94,115 131,199 43,020 89,245 6,766 23,112 76,800 0 224 (15,037) 996 (16,033) (30) 0 0 (16,091) (0.46) (0.46)
EX-99.1 12 SAFE HARBOR COMPLIANCE STATEMENT 1 EXHIBIT 99.1 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS In passing the Private Securities Litigation Reform Act of 1995, or the Reform Act, Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with these statements. We intend to qualify both our written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which these expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, the investment community is urged not to place undue reliance on our written or oral forward-looking statements. We do not undertake any obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements to reflect future developments. In addition, we do not undertake any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. This Statement supersedes the Safe Harbor Statement filed as Exhibit 99.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. We provide the following risk factor disclosure in connection with our continuing effort to qualify our written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to our management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: OUR OPERATING RESULTS COULD FLUCTUATE, CAUSING OUR STOCK PRICE TO FALL. Although we have been able to grow our revenue and operating income (before special charges) in the past, we cannot assure that we will be able to continue to grow our revenue and operating income at historical levels or that fluctuations in revenue or operating income growth will not occur in future periods. The following factors could impact the future rate of growth in revenue or operating income: - 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; and - our success in developing electronic commerce products and services acceptable to the market. In addition, if our quarterly revenue or operating results fall below the expectations of investors or public market analysts, the price of our common stock could fall substantially. Our quarterly operating results have in the past and may in the future vary or decrease significantly depending on factors over which we have limited or no control, such as: - revenue from software sales; - the timing of new product and service announcements; - changes in pricing policies by us and our competitors; - market acceptance of new and enhanced versions of our products; - conversion of customers to Year 2000 ready solutions; - the size and timing of significant orders; - changes in operating expenses, strategy or personnel; - government regulation; 2 - the introduction of alternative technologies; and - the effect of acquisitions. We are currently upgrading our enterprise resource planning systems. Our management believes that the successful installation and implementation of these systems are prerequisites to our success. Any significant delay in the installation or failure in the implementation of one or more of these systems could have a material adverse effect on our business and financial results. We have experienced losses in the past, and at September 30, 1998, we had an accumulated deficit of approximately $81.8 million. We operate with virtually no software product order backlog because our software products typically are shipped shortly after orders are received. As a result, revenues in any quarter are substantially dependent on the quantity of purchases of services requested and product orders received in that quarter. Quarterly revenues also are difficult to forecast because the market for electronic commerce is rapidly evolving, and our revenues in any period may be significantly affected by the announcements and product offerings of our competitors as well as alternative technologies. Our IVAS product is more complex and expensive compared to our other electronic commerce and Internet products introduced to date, and will generally involve significant investment decisions by prospective customers. Accordingly, we expect that in selling our IVAS product, we will encounter risks typical of companies that rely on large dollar purchase decisions, including the reluctance of purchasers to commit to major investments in new products and protracted sales cycles, both of which add to the difficulty of predicting future revenues and may result in quarterly fluctuations. Our expense levels are based, in part, on our expectations as to future revenues. If revenue levels are below expectations, we may be unable or unwilling to reduce expenses proportionately and operating results are likely to be adversely affected. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Due to all of the foregoing factors, it is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts and investors. IF WE CANNOT INTEGRATE ACQUIRED COMPANIES WITH OUR BUSINESS, OUR PROFITABILITY MAY BE ADVERSELY AFFECTED. We have completed a number of acquisitions in the past two fiscal years and may complete additional acquisitions of complementary businesses in the future. Our most recent acquisitions include the Materials Management Division of MACTEC, Inc.; EDIWorks! L.L.C.; Premenos Technology Corp., or Premenos; Atlas Products International, Limited and its affiliate; Acquion, Inc., or Acquion; SupplyTech, Inc. and its affiliated entities, or SupplyTech; and the minority interests of Harbinger NET Services, LLC, or HNS. Our completed acquisitions present a number of risks and challenges, including: - the integration of the software products of the acquired companies into our current suite of products; - the integration of the sales forces of acquired companies into our existing sales operations; - the coordination of customer support services; - the conversion of acquired companies into a uniform infrastructure; - the integration of international operations of acquired companies with our international affiliates; and - the diversion of our management's attention from other business concerns. We cannot assure that we can successfully assimilate our operations and integrate our software products with recently-acquired operations, software products and technologies or that we will be successful in repositioning our products on a timely basis to achieve market acceptance. Any adverse developments associated with our integration efforts could have a material adverse effect on our business and financial results. We cannot ensure that we will be able to continue to identify suitable acquisition candidates available for sale at reasonable prices, consummate any acquisition or successfully integrate any acquired business into our operations. Operational and software integration problems may arise if we undertake future acquisitions of complementary products, technologies or businesses. Future acquisitions may also result in: - potentially dilutive issuances of equity securities; - the incurrence of additional debt; - the write-off of in-process product development and capitalized product costs; 2 3 - integration costs; and - the amortization of expenses related to goodwill and other intangible assets. Future acquisitions may involve numerous additional risks, including difficulties in the assimilation of the operations, products and personnel of the acquired company, differing company cultures, the diversion of management's attention from other business concerns, risks of entering markets in which we have little or no direct prior experience and the potential loss of key employees of the acquired company. The occurrence of any of these risks could materially affect our business and financial results. Although we have cash resources of approximately $75 million at March 26, 1999, to the extent we desire to finance a future acquisition, we cannot assure that we will be able to secure financing for such a transaction on reasonable terms or at all. See "We must successfully manage our growth." WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST OTHER COMPANIES. The electronic commerce, network services and products businesses are intensely competitive, and we have many competitors with substantially greater financial, marketing, personnel and technological resources than we have. We may not be able to compete successfully against current and future competitors, and competitive pressures faced by us could hurt our business and financial results. Other companies offer products and services that may be considered by customers to be acceptable alternatives to our products and services. Certain companies also operate private computer networks for transacting business with their trading partners, and we expect other companies to offer products and services competitive with our Templar, Express and IVAS products and services. We expect that other companies may develop and implement similar computer-to-computer networks, some of which may be "public" networks such as ours and others may be "private," providing services only to a specific group of trading partners, thereby reducing our ability to increase sales of our network services. In addition, several companies offer PC-based, midrange NT and UNIX, and mainframe and Internet computer software products which compete with our software products. Advanced operating systems and applications software from Microsoft and other vendors also may offer electronic commerce functions that limit our ability to sell our software products. We believe that the continuing acceptance of electronic commerce will attract new competitors, including software applications, operating systems and systems integration companies that may bundle electronic commerce solutions with their offerings, and alternative technologies that may be more sophisticated and cost effective than our products and services. Competitive companies may offer certain electronic commerce products or services, such as communications software, network transactional services or consulting, at no charge or a deeply discounted charge, in order to obtain the sale of other products or services. Since our agreements with our network subscribers generally are terminable upon 30 days' notice, we do not have the contractual right to prevent our customers from changing to a competing network. See "We must continue to advance our technology and comply with industry requirements to remain competitive." Companies that currently offer products and/or services that compete with various of our 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. THERE ARE MANY RISKS ASSOCIATED WITH THE EMERGENCE OF ELECTRONIC COMMERCE OVER THE INTERNET. The Internet provides an alternative means of providing electronic commerce to business trading partners. The market for Internet software and services is both emerging and highly competitive, ranging from small companies with limited resources to large companies with substantially greater financial, technical and marketing resources than ours. In addition to our Internet-related products and services, several of our existing competitors have introduced their own Internet electronic commerce products and services. Moreover, new competitors, which may include telephone companies and media companies, are likely to increase the provision of business-to-business data transmission services using the Internet. We cannot assure that the Internet will become an accepted method of 3 4 electronic commerce. We cannot assure that Templar end user software and IVAS products, which enable electronic commerce over the Internet, will be accepted in the Internet market or will be competitive with other products based on evolving technologies. If the Internet becomes an accepted method of electronic commerce, we could lose network customers from our VAN, which would reduce recurring revenue from network services and have a material adverse effect on our business and financial condition. Even if customers choose our Internet solutions, the revenue gained from the sale of these solutions may not offset the loss of revenue from the sale of our traditional EDI solutions. The use of our Internet electronic commerce products and services will depend in large part upon the continued development of the infrastructure for providing Internet access and services. Use of the Internet for business-to-business electronic commerce services raises numerous issues that greatly impact the development of this market. These issues include reliability, data security and data integrity, timely transmission, and pricing of products and services. Because global commerce and online exchange of information on the Internet is new and evolving, it is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace. The Internet has experienced, and is expected to continue to experience, substantial growth in the number of users and the amount of traffic. We cannot assure that the Internet will continue to be able to support the demands placed on it by this continued growth. In addition, the Internet could lose its viability due to delays in the adoption of new standards and protocols to handle increased levels of Internet activity, or due to increased governmental regulation or the imposition of fees or taxes for its use. We cannot assure that the infrastructure or complementary services necessary to make the Internet a viable commercial marketplace will be developed, or, if developed, that the Internet will become a viable commercial marketplace for products and services such as those offered by us. If the necessary infrastructure or complementary services or facilities are not developed, or if the Internet does not become a viable commercial marketplace, our business and financial results will be materially adversely affected. WE MUST SUCCESSFULLY MANAGE OUR GROWTH. We have recently experienced significant growth in revenue, operations and personnel as we have made strategic acquisitions, added subscribers to our Value Added Network, or VAN, and Internet Value Added Server, or IVAS, and increased the number of licensees of our software products. This growth could continue to place a significant strain on our management and operations, including our sales, marketing, customer support, research and development, finance and administrative operations. Achieving and maintaining profitability during a period of expansion will depend, among other things, on our ability to successfully expand our products, services and markets and to manage our operations and acquisitions effectively. Difficulties in managing growth, including difficulties in obtaining and retaining talented management and product development personnel, especially following an acquisition, could have a material adverse effect on our business and financial results. We recognize revenues for software license fees upon shipment, net of estimated returns. Customers using our PC products are permitted to return products after delivery for a specified period, generally 30 days. We generally have experienced returns of approximately 10% to 20% of the PC product license fees, and we record revenues after a deduction for estimated returns. Any material increase in our return experience could have an adverse effect on our business and financial results. WE HAVE EXPERIENCED CHARGES THAT RESULTED IN NET LOSSES FOR THE FIRST AND THIRD QUARTERS OF 1998. In the first and third quarters of 1998, we 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, we reported a net loss for each of the first and third quarters of 1998 and have reported 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 that may recur in the future and may result in an increase in some expense categories in our results of operations in future periods. 4 5 WE MUST CONTINUE TO ADVANCE OUR TECHNOLOGY AND COMPLY WITH INDUSTRY REQUIREMENTS TO REMAIN COMPETITIVE. The electronic commerce industry is characterized by rapid technological change, frequent new product and service introductions and evolving industry standards. Our future success will depend in significant part on our ability to anticipate industry standards, to continue to apply advances in electronic commerce product and service technologies, to enhance existing products and services, and to introduce and acquire new products and services on a timely basis to keep pace with technological developments. We cannot assure that we will be successful in timely developing, acquiring or marketing new or enhanced products or services that respond to technological change and evolving industry standards, and that meet the requirements of the marketplace and achieve market acceptance. In the past, we have experienced delays in the commencement of commercial shipments of new products and enhancements, resulting in delays or losses of product revenues. These delays or failure in the introduction of new or enhanced products or services, or the failure of such products or services to achieve market acceptance, could have a material adverse effect our business and financial results. THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. We believe that our continued growth and profitability will require expansion of our international operations through our international subsidiaries, in the United Kingdom, The Netherlands, Germany, Italy, France and Mexico. This expansion will require financial resources and significant management attention. Our ability to successfully expand our business internationally will also depend upon our ability to attract and retain both talented and qualified managerial, technical and sales personnel and electronic commerce services customers outside the United States and our ability to continue to effectively manage our domestic operations while focusing on international expansion. Certain of our international subsidiaries have experienced operating losses in their recent histories and some have experienced significant operating losses in their recent histories. Any inability of our international subsidiaries to penetrate international markets in a timely and profitable manner could have a material adverse affect on our business and financial results. During 1998, our growth in revenue has been adversely affected by management issues associated with our European operations and general softness in demand in the European markets. Moreover, our ability to successfully implement our international strategy may require installation and operation of a value-added network and implementation of our IVAS software in additional countries, as well as additional improvements to our infrastructure and management information systems, including our international customer support systems. In addition, we cannot assure that we will be able to maintain or increase international market demand for our 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 our results of operations. We have not entered into any hedging or other arrangements for the purpose of guarding against the risk of currency fluctuation. In addition, sales in Europe and certain other parts of the world typically are adversely affected in the third calendar quarter of each year because many customers reduce their business activities in the summer months. THE INABILITY TO ATTRACT AND MAINTAIN MANAGEMENT AND OTHER PERSONNEL MAY ADVERSELY AFFECT US. Our success is largely dependent upon our executive officers and key sales and technical personnel, the loss of one or more of whom could have a material adverse effect on our business and financial results. Our future success will depend in large part upon our ability to attract and retain talented and qualified personnel. In particular, we believe that it will be important for us to hire experienced product development and sales personnel. Competition in the recruitment of highly-qualified personnel in the computer software and electronic commerce industries is intense. Our inability of to locate and retain such personnel may have a material adverse effect on our business and financial results. We cannot assure that we can retain our key employees or that we can attract 5 6 qualified personnel in the future. We currently carry key-person life insurance policies on the lives of Messrs. Howle and Travers. YEAR 2000 AND EURO CONVERSION RISKS MAY ADVERSELY AFFECT US. It is possible that our currently-installed computer systems, software products or other business systems, or those of our 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 2000 and thereafter without error or interruptions. The latest versions of our products released or to be released are believed to be Year 2000 ready, but we are still in the process of confirming this. We are also in the process of determining the extent to which our earlier software products as implemented in our installed customer base are Year 2000 ready, as well as the impact of any non-readiness on us and our customers. We currently anticipate 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 that are Year 2000 ready. Additional efforts are being made to modify or replace other non-ready software, systems and equipment used by us internally, including third party software, before the end of 1999. Further, we are aware of the risk that third parties, including vendors and our customers, will not adequately address the Year 2000 problem and the resultant potential adverse impact on our business and financial results. However, we cannot assure that we will identify all such year 2000 problems in our computer systems or those of our vendors in advance of their occurrence or that we will be able to successfully remedy any problems that are discovered. We believe 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 our business or financial results, although we can make no assurance to that effect. Regardless of whether our products are Year 2000 ready, we cannot assure that customers will not assert Year 2000 related claims against us. We believe 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 us. 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 customers, to reevaluate their current software needs, and as a result switch to other systems or suppliers. In addition, our failure to identify and remedy Year 2000 problems could put us 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 our business and financial results. Effective January 1, 1999, eleven of the 15 member countries of the European Union adopted a single European currency, the euro, as their common legal currency. Like many companies that operate in Europe, various aspects of our business will be affected by the conversion to the euro. We are currently finalizing our evaluation of the effect of the conversion on our products and systems. The failure to adequately address the euro conversion issues could affect our ability to offer software and services in the affected countries, as well as our ability to operate internal systems. While we believe that we can successfully remediate all related issues, we cannot assure that we will do so in a timely manner. The failure to do so could have a material adverse effect on our business and financial results. WE ARE DEPENDENT UPON OUR ALLIANCE PARTNERS. We have various agreements with alliance partners for the distribution and marketing of certain of our software products. These alliance partners pay us royalties representing a percentage of fees generated from the sale of software licensed from us. For the year ended December 31, 1996, revenues from one of these alliance partners 6 7 were approximately $5.7 million, which equaled the contractual minimum royalty during 1996. There is no minimum royalty obligation after 1996, and we have experienced and believe that revenues from this alliance partner will decline in the future. WE MAY BE CONFRONTED WITH DEFECTS IN OUR SOFTWARE. Software products as complex as those offered by us may contain undetected errors or failures when first introduced or when new versions are released. If software errors are discovered after introduction, we could experience delays or lost revenues during the period required to correct these errors. We cannot assure that, despite testing by us and by current and potential customers, errors will not be found in new products or releases after commencement of commercial shipments. These errors could result in loss of or delay in market acceptance, additional and unexpected expenses to fund further product development or to add programming personnel to complete a development project, and loss of revenue because of the inability to sell the new product on a timely basis, any one or more of which could have a material adverse effect on our business and financial results. WE ARE DEPENDENT ON OUR DATA CENTERS, WHICH COULD BE DESTROYED OR DAMAGED. Our network service operations are dependent upon the ability to protect computer equipment and the information stored in our data centers against damage that may be caused by fire, power loss, telecommunication or Internet failures, unauthorized intrusion, computer viruses and disabling devices and other similar events. Notwithstanding precautions we have taken, we cannot assure that a fire or other natural disaster, including national, regional or local telecommunications outages, would not result in a prolonged outage of our network services. In the event of a disaster, and depending on the nature of the disaster, it may take from several minutes to several days before our off-site computer system can become operational for all of our customers, and use of the alternative off-site computer would result in substantial additional cost to us. In the event that an outage of our network extends for more than several hours, we will experience a reduction in revenues by reason of such outage. In the event that such outage extends for one or more days, we could potentially lose many of our customers, which would have a material adverse effect on our business and financial results. WE ARE DEPENDENT ON CERTAIN LICENSE ARRANGEMENTS WITH THIRD PARTIES. We rely on certain technology that we license from third parties and other products that are integrated with internally developed software and used in our products to perform key functions or to add important features. We cannot assure that we will be successful in negotiating third-party technology licenses on suitable terms or that such licenses will not be terminated in the future. Moreover, any delay or product problems experienced by such third party suppliers could result in delays in introduction of our products and services until equivalent technology, if available, is identified, licensed and integrated, which could have a material adverse effect on our business and financial results. OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT US. We rely primarily on a combination of copyright, patent and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We seek to protect our software, documentation and other written materials principally under trade secret and copyright laws, which afford only limited protection. We presently have one patent for an electronic document interchange test facility and a patent application pending for an EDI communication system. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. We cannot assure that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. In distributing many of our products, we rely primarily on "shrink wrap" licenses and increasingly on "click wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, we have licensed our products to users and distributors in other countries, and the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States. We do not believe that any of our products infringe the proprietary rights of third parties. We cannot assure, however, that third parties will not claim infringement by us 7 8 with respect to current or future products, and we have agreed to indemnify many of our customers for the full cost of such claims. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in electronic commerce grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements and indemnify our customers against resulting liability, if any. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect on our business and financial results. WE MAY BE SUBJECT TO CHANGING GOVERNMENTAL REGULATIONS. Our network services are transmitted to our customers over dedicated and public telephone lines. These lines are governed by Federal and state regulations establishing the rates, terms and conditions for their use. Changes in the legislative and regulatory environment relating to 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 our business and financial results. The Telecommunications Act of 1996, or the Act, amended the federal telecommunications laws by lifting restrictions on regional telephone companies and others competing with us and imposed certain restrictions regarding obscene and indecent content communicated to minors over the Internet or through interactive computer services. The Act set in motion certain events that will lead to the elimination of restrictions on regional telephone companies providing transport between defined geographic boundaries associated with the provision of their own information services. This will enable regional telephone companies to more readily compete with us by packaging information service offerings with other services and providing them on a wider geographic scale. While provisions of the Act prohibiting the use of a telecommunications device or interactive computer service to send or display indecent material to minors have been held by the U.S. Supreme Court to be unconstitutional, we cannot assure that future legislative or regulatory efforts to limit use of the Internet in a manner harmful to us will not be successful. The Clinton administration has announced an initiative to establish a framework for global electronic commerce. Also, some countries such as Germany have adopted laws regulating aspects of the Internet, and there are a number of bills currently being considered in the United States at the federal and state levels involving encryption and digital signatures, all of which may impact our business. We cannot predict the impact, if any, that the Act and future court opinions, legislation, regulations or regulatory changes in the United States or other countries may have on our business. Our management believes that we are in compliance with all material applicable regulations. Our Templar product incorporates encryption technology that is subject to U.S. export control regulations. Although both products are currently exportable under licenses granted by the Commerce Department, government regulation in this area is subject to frequent change and we cannot assure that these products will remain exportable. OUR CHARTER AND BYLAWS MAY INHIBIT A TAKEOVER OF OUR BUSINESS. Our Board of Directors has authority to issue up to 20,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of the preferred stock without further vote or action by our shareholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. While we have no present intention to issue additional shares of preferred stock, such issuance, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, our charter and bylaws contain provisions that may discourage proposals or bids to acquire us. This could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Our charter provides for a classified board of directors with three-year, staggered terms for its members. The classification of the our Board could have the effect of making it more difficult for a third party to acquire control of us. 8 -----END PRIVACY-ENHANCED MESSAGE-----