UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended Commission File Number SEPTEMBER 30, 1996 0-21010 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 CENTURA SOFTWARE CORPORATION (FORMERLY GUPTA CORPORATION) (Exact name of registrant as specified in its charter) CALIFORNIA 94-2874178 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1060 Marsh Road Menlo Park, California 94025 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 321-9500 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 at least the past 90 days. Yes X No ------ ------ As of September 30, 1996, there were 12,632,875 shares of the Registrant's common stock outstanding. CENTURA SOFTWARE CORPORATION FORM 10-Q For the Quarter Ended September 30, 1996 INDEX Page Facing sheet 1 Index 2 Part I. Financial Statements and Supplementary Data Item 1. a) Condensed consolidated balance sheets at September 30, 3 1996 and December 31, 1995 b) Condensed consolidated statements of operations for the 4 three months and nine months ended September 30, 1996 and September 30, 1995 c) Condensed consolidated statements of cash flows for the 5 nine months ended September 30, 1996 and September 30, 1995 d) Notes to condensed consolidated financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition 7 and Results of Operations Part II Other Information 13 Signature 15 -2- ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 30, DECEMBER 31 1996 1995 ------------- ------------ ASSETS (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 8,104 $ 9,865 Short-term investments 3,366 9,557 Accounts receivable, less allowances of $3,054 in 1996 and $3,475 in 1995 9,269 12,174 Inventories 53 218 Other current assets 3,196 2,999 ------- ------- Total current assets 23,988 34,813 Property and equipment, at cost, less accumulated depreciation 4,288 5,881 Capitalized software, at cost, net of accumulated amortization 3,244 2,980 Long-term investments 1,337 2,354 Other assets 2,201 2,076 ------- ------- Total assets $35,058 $48,104 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilites: Current portion of capital lease obligations $ 369 $ 397 Accounts payable 5,660 6,152 Accrued compensation and related expenses 2,117 3,168 Other accrued liabilities 3,194 7,572 Accrued litigation expenses 12,306 14,328 Deferred revenue 22,201 28,800 ------- ------- Total current liabilities 45,847 60,417 Long-term debt, less current portion 10,085 10,330 Other long-term liabilities 1,966 1,414 ------- ------- Total liabilities $57,898 $72,161 ------- ------- ------- ------- SHAREHOLDERS EQUITY (DEFICIT) Common stock, $.01 par value: Authorized: 60,000 shares Issued and outstanding: 12,632 shares in 1996 and 12,382 shares in 1995 58,025 57,577 Cumulative translation adjustment (222) (150) Accumulated deficit (80,643) (81,484) ------- ------- Total shareholders' equity (deficit) (22,840) (24,057) ------- ------- Total liabilities and shareholders' equity (deficit) $35,058 $48,104 ------- ------- ------- ------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -3- CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (IN THOUSANDS, Three Months Ended Sept 30, Nine Months Ended Sept 30, EXCEPT PER SHARE DATA) -------------------------- -------------------------- 1996 1995 1996 1995 ------- ------- ------- ------- Net revenues: Product $10,414 $13,053 $33,002 $39,784 Service 4,196 3,875 12,647 12,100 ------- ------- ------- ------- Net revenues 14,610 16,928 45,649 51,884 ------- ------- ------- ------- Cost of revenues: Product 1,047 1,822 3,546 5,700 Service 2,323 2,621 6,780 8,014 ------- ------- ------- ------- Cost of revenues 3,370 4,443 10,326 13,714 ------- ------- ------- ------- Gross profit 11,240 12,485 35,323 38,170 ------- ------- ------- ------- Operating expenses: Sales and marketing 6,697 10,998 20,984 32,934 Research and development 2,813 2,819 8,370 8,828 General and administrative 1,480 1,764 4,608 6,137 ------- ------- ------- ------- Total operating expenses 10,990 15,581 33,962 47,899 ------- ------- ------- ------- Operating Income (Loss) 250 (3,096) 1,361 (9,729) Other income (expense): Interest income 141 -- 335 695 Interest expense (210) -- (397) -- Foreign currency gain (loss) (1) 71 (182) -- ------- ------- ------- ------- Income (Loss) before income taxes 180 (3,025) 1,117 (9,034) Provision for income taxes 83 402 276 1,029 Net Income (Loss) $97 (3,427) $841 (10,063) ------- ------- ------- ------- ------- ------- ------- ------- Net Income (Loss) per share $0.01 $(0.28) $0.07 $(0.83) ------- ------- ------- ------- ------- ------- ------- ------- Weighted average common shares and equivalents 12,760 12,260 12,720 12,184 ------- ------- ------- ------- ------- ------- ------- ------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -4- CENTURA SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED Nine Months Ended September 30, (IN THOUSANDS) 1996 1995 ------ ------ Cash flows from operating activities: Net Income (Loss) $ 841 $(10,063) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 2,255 2,852 Amortization of and adjustments to capitalized software development costs 1,162 1,612 Provision for doubtful accounts (220) 19 Provision for sales returns and allowances (200) (1,099) Changes in assets and liabilities: Accounts receivable 3,326 1,984 Inventories 165 89 Prepaid expenses and other current assets (197) (1,738) Accounts payable and accrued liabilities (7,944) (2,386) Deferred revenue (6,600) 3,729 Other liabilities 552 808 ------- ------- Net cash used in operating activities (6,860) (4,193) ------- ------- Cash flows from investing activities: Maturities of investments 7,207 7,369 Capitalization of software costs (1,426) (2,300) Other assets (125) (1,130) Additions to property and equipment (662) (2,286) -------- -------- Net cash provided by investing activities 4,994 1,653 -------- -------- Cash flows from financing activities: Repayment of note payable (243) - Proceeds from notes payable - 9,396 Repayment of capital lease obligations (28) (938) Proceeds from issuance of common stock, net 448 1,004 -------- -------- Net cash provided by financing activities 177 9,462 -------- -------- Effect of exchange rate changes on cash and cash equivalents (72) 11 -------- -------- Net increase (decrease) in cash and cash equivalents (1,761) 6,932 Cash and cash equivalents at beginning of period 9,865 7,031 -------- Cash and cash equivalents at end of period $ 8,104 $ 13,963 -------- -------- -------- -------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CENTURA SOFTWARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES METHOD OF PREPARATION. The condensed consolidated balance sheets as of September 30, 1996 and the condensed consolidated statements of operations and cash flows for the periods ended September 30, 1996 and 1995 have been prepared by the Company, without audit. The financial statements for the period ended September 30, 1995 have been restated (see Notes to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). In the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations, and cash flows have been made for all periods presented. The financial data should be reviewed in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The results of operations for the interim period ended September 30, 1996 are not necessarily indicative of the operating results for the full year. The December 31, 1995 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. COMPUTATION OF NET INCOME (LOSS) PER SHARE. Net income (loss) per share is computed using the weighted average number of common and common equivalent shares outstanding. Common equivalent shares (using the modified treasury stock method) have been included in the computation when dilutive. Convertible debentures which are not common stock equivalents are also not included in a fully diluted calculation of earnings (loss) per share because their effect is antidilutive. 2. LITIGATION On May 2, 1994, a lawsuit was filed against the Company and certain of its officers and directors, by a holder of the Company's common stock, on his own behalf and purportedly on behalf of a class of others similarly situated. The lawsuit was subsequently amended, and alleged that the Company made false and misleading statements and failed to disclose material information relating to existing business conditions and the Company's prospects and that officers and directors violated the insider trading laws. The plaintiff was seeking damages of an unstated amount. The Company has reached a binding settlement agreement with plaintiffs' counsel in this lawsuit, and gained court approval on September 30, 1996. Under the terms of the agreement, the Company will provide $3 million and 1,875,000 shares to a fund to be distributed among the members of the plaintiff class. The Company also agreed to supplement this payment with up to 625,000 additional shares in the event the value of its common stock is less than $6.00 per share at certain dates in the future. The Company's directors and officers' liability insurer will pay approximately $2 million of the cash contribution to the settlement fund. The 1995 financial statements include $15.3 million in litigation expense for the agreement and associated legal expenses. As of September 30, 1996, to the best of the Company's knowledge there were no other pending actions, potential actions, claims or proceedings against the Company that were likely to result in potential damages that would have a material adverse impact on the Company's financial statements. As noted in the "Risk Factors" in Item 2 below, the Company exists in a volatile legal and regulatory environment and it is not possible to anticipate or estimate the potential adverse impact of unknown claims or liabilities against the Company, its officers and directors, and as such no estimate is made in the Company's financial statements for such unknown claims or liabilities. ITEM 2. CENTURA SOFTWARE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. With the exception of historical information contained herein, the matters discussed in this Form 10-Q involve risk and uncertainties, including quarterly fluctuations in operating results, timely availability and market acceptance of new products and upgrades, the impact of competitive products and pricing, and other risk factors as detailed below. Results for future quarters could differ materially from those expressed in any forward looking statements made by or on behalf of the company. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I--Item 1 of this Quarterly Report, and the audited consolidated financial statements, and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. RESULTS OF OPERATIONS: NET REVENUES. During 1995, the Company restated revenues on certain product licensing arrangements for fiscal years 1995, 1994, and 1993, excluding the fourth quarter of 1995. For these contracts the Company has deferred recognition of revenues until the customer indicates that it has sublicensed or distributed the product. The restatement resulted in an increase of operating revenues of $1.2 million in the third quarter of 1995. Net revenues decreased 13% to $14.6 million for the third quarter of 1996 from $16.9 million for the third quarter of 1995. For the first nine months of 1996 net revenue decreased 12% to $45.6 million from $51.8 million for the first nine months of 1995. International revenues accounted for approximately 64% of net revenues in the third quarter of 1996 compared to 61% in the third quarter of 1995. International revenues were approximately 61% of net revenues for the first nine months of 1996 and also 1995. Revenue from expired contracts amounted to $0.6 million and $0 in the third quarter of 1996 and 1995, respectively. For the first nine months of 1996 revenue from expired contracts was $1.3 million compared to $0.5 million for the same period in 1995. Product revenues decreased by $2.6 million or 20% to $10.4 million for the third quarter of 1996 compared to the third quarter of 1995. For the first nine months of 1996 product revenues decreased 17% to $33.0 million from $39.7 million for the same period of 1995. Sales of the new Centura product line, introduced in May, accounted for approximately 15% of product revenues in the third quarter of 1996. The remaining third quarter 1996 product revenues were split between database and tools/connectivity software at 64% and 36%, respectively. In the third quarter of 1995, database products and tools/connectivity software accounted for 46% and 54% of product revenues, respectively. For the first nine months of 1996, product revenues from the new Centura line were 15% of the total with the reamining revenues split 59% database and 41% tools/connectivity software, compared to 50% and 50% for the same period of 1995. Channel sales accounted for 55% of net revenues for the third quarter of 1996, compared to 56% for the third quarter of 1995. For the first nine months of 1996 channel sales were 51% compared to 55% for the same period in 1995. Service revenues increased 8% to $4.2 million for the third quarter of 1996 from $3.8 million for the third quarter of 1995. For the first nine months of 1996 service revenues increased to $12.6 million from $12.1 million in the same period of 1995, an increase of 4%. -7- COST OF PRODUCT. Cost of product as a percentage of product revenues was 10% for the third quarter of 1996, and 11% for the first nine months of 1996 compared to 14% and 14% for the same periods of 1995. COST OF SERVICES. Cost of services as a percentage of service revenues was 55% for the third quarter of 1996 and 53% for the first nine months of 1996 compared to 67% and 66% for same periods of 1995. This reduction in percentage reflects the impact of restructuring and other costs reduction efforts completed in the fourth quarter of Fiscal 1995. SALES AND MARKETING EXPENSES. For the third quarter of 1996, the Company spent $6.7 million, or 45% of net revenues, in sales and marketing activities, compared to $11.0 million, or 65% of net revenues, for the third quarter of 1995. In the first nine months of 1996, sales and marketing expenses were $20.9 million or 46% of net revenues compared to $32.9 million or 63% for the same period in 1995. The reduction in sales and marketing expense for the first nine months of 1996 compared to the same period in 1995 reflects the Company's commitment to control spending, while continuing its worldwide marketing efforts. RESEARCH AND DEVELOPMENT EXPENSES. The table below sets forth gross research and development expenses, capitalized software development costs, and net research and development expenses in dollar amounts and as a percentage of net revenues for the periods indicated: (IN THOUSANDS) Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- Dollar Amounts: Gross research and development expenses $2,888 $3,239 $9,796 $10,006 Capitalized software development costs (75) (420) (1,426) (1,178) ------ ------ ------ ------- Net research and development expenses $2,813 $2,819 $8,370 $8,828 As a Percentage of Net Revenues: Gross research and development expenses 20% 19% 21% 19% Net research and development expenses 19% 17% 18% 17% GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased 16% to $1.48 million for the third quarter of 1996 from $1.76 million for the third quarter of 1995. For the first nine months of 1996 these expenses decreased 25% to $4.6 million compared to $6.1 million in the same period of 1995. In 1995, the Company began a program of reducing administrative expenses by staff reductions, deferring MIS projects, and reductions in discretionary spending. The Company is now experiencing the benefits of this program, in reduced general and administrative expenses. Additionally, the Company completed a restructuring announced on January 2, 1996, the costs of which were accrued in the fourth quarter of 1995, which further reduced general and administrative staff. OTHER INCOME (EXPENSE). Other income (expense) is comprised of interest income, interest expense, and gains or losses on foreign currency transactions. For the third quarter of 1996 other income (expense) was $(0.1) million, compared to $0.1 million for the third quarter of 1995. For the first nine months of 1996 other income (expense) was $(0.2) million compared to $0.7 million in the same period of 1995. PROVISION FOR INCOME TAXES. The provision for income taxes was $83,000 in the third quarter of 1996 and $402,000 in the third quarter of 1995. For the first nine months of 1996, income tax provision was $276,000 versus $1,029,000 in the same period of 1995. The provision primarily relates to foreign withholding taxes. Due to the Company's existing NOL position with regard to prior years, no tax provision was made for income in this quarter. -8- LIQUIDITY AND CAPITAL RESOURCES: At September 30, 1996, the Company had a deficit working capital position of $21.8 million. Net cash used in operating activities in the first nine months of 1996 was $6.8 million. Approximately $5.9 million of the $6.8 million was associated with the shareholder lawsuit, restructuring and one time charges expensed during fiscal 1995. For the first nine months of 1996, cash provided by investing activities totaled $5.0 million, which related primarily to the maturities of short-term investments of $7.2 million, which was offset by the capitalization of software development costs of $1.4 million and additions to property and equipment of $0.8 million. RISK FACTORS: This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this Quarterly Report on Form 10-Q. In evaluating the Company's business, prospective investors should carefully consider the following factors in addition to the other information presented in this report. CENTURA PRODUCTS. The Company's strategy, including the change in the Company's name, is centered on the successful delivery and market acceptance of its Centura product line. The initial release of the Centura products occurred in May 1996, with additional products scheduled for delivery throughout 1996 and 1997. The failure to deliver these products as scheduled or their failure to achieve early market acceptance could have a material adverse affect on the Company's business, operating results and financial condition. NEED FOR ADDITIONAL EQUITY FINANCING. Additional equity financing may be necessary to meet NASDAQ minimum net worth requirements. Furthermore, the Company is dependent upon achieving a reasonable operating performance to satisfy its current and future financing needs. During 1995, the Company completed a private debt placement with Computer Associates International of approximately $10 million dollars. If the Company needs further financing, there can be no assurance that it will be available on reasonable terms or at all. Any additional equity financing will result in dilution to the Company's stockholders. DEPENDENCE ON THIRD PARTY ORGANIZATIONS. The Company is increasingly dependent on the efforts of third party "partners" (e.g., consultants, system houses, software developers, etc.) to implement, service and support the Company's products. These third parties increasingly have opportunities to select from a very broad range of products from the Company's competitors, many of whom have greater resources and market acceptance than the Company. In order to succeed, the Company must actively recruit and sustain relationships with these third parties. There can be no assurance that the Company will be successful in recruiting new partners or in sustaining its relationships with its existing partners. DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in large part on the continued service of its key product development, technical, sales, marketing and management personnel and on its ability to continue to attract, motivate and retain highly qualified employees. The Company depends on teams of programmers, and competition for these skilled employees is intense. The loss of services of key technical or management personnel could have a material adverse effect upon the Company's current business, new product development efforts and prospects. Competition for qualified software development, sales and other personnel is intense and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The Company does not have -9- employment or non-competition agreements with any employees, except for Sam Inman, the Company's CEO and President. COMPETITION. The market for client/server system software is intensely competitive and characterized by rapidly changing technology, evolving industry standards, and changing customer requirements. The Company's competitors include providers of sophisticated database software including IBM, Informix Corporation, Ingres, Oracle Corporation and Sybase, Inc. The Company also faces competition from the providers of PC-based software products, including Microsoft Corporation and Borland International. In addition, the Company faces competition from providers of software specifically developed for the PC client/server market, including front-end tools offered by Sybase's Powersoft Division, Microsoft, and Forte, and potentially from vendors of applications development tools based on fourth-generation languages or computer-aided software engineering technologies. Many of the Company's competitors have longer operating histories and greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger installed base, than the Company. Furthermore, these competitors could attempt to increase their presence in this market by acquiring or forming strategic alliances with competitors or bundling existing or new products with other, more established products. The Company's products experienced increased competition in 1995 and the first nine months of 1996, resulting in price reductions and loss of market share. There can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect in the future. NEW PRODUCT RISKS; RAPID TECHNOLOGICAL CHANGE. The market for the Company's software products and services is characterized by dynamic customer demands, rapid technological and marketplace changes, and frequent new product introductions. The Company believes that its future success will depend on its ability to enhance its existing products and introduce new products , through acquiring or internal development , on a timely and cost-effective basis that meet dynamic customer requirements. The Company has experienced delays in introducing new products and enhancements which resulted in loss or delays of product revenues. In addition, programs as complex as the software products offered by the Company may contain undetected errors or bugs when they are first introduced which could adversely affect commercial acceptance of such products. Centura Software's success will also depend on the ability of its products to perform well with existing and future leading, industry-standard application software products intended to be used in connection with RDBMSs. There can be no assurance that the Company will be able to respond effectively to technological changes or product announcements by competitors. Furthermore, the Company may announce new products, capabilities or technologies that have an immediate adverse impact on the Company's existing product offerings. Commercial acceptance of the Company's products and services could be adversely affected by critical or negative statements or reports by industry and financial analysts concerning the Company and its products, or other factors such as the Company's financial performance. DEPENDENCE UPON DISTRIBUTION CHANNELS. The Company increasingly relies on strategic relationships with value-added resellers and distributors for a substantial portion of its sales and revenues. Some of the Company's resellers and distributors also offer competing products. Most of the Company's resellers and distributors are not subject to any minimum purchase requirements, can cease marketing the Company's products at any time, and may from time to time be granted stock exchange or rotation rights. The introduction of new and enhanced products may result in higher product returns and exchanges. Any product returns or exchanges in excess of recorded allowances could have a material adverse effect on the Company's business, operating results and financial condition. The Company also maintains relationships with a number of vertical software "partners" and strategic marketing "partners" for marketing or resale of the Company's products. The loss of one or more resellers, distributors, vertical software partners or other marketing partners, or failure of such parties to renew agreements with the Company on expiration, could have a material adverse effect on the Company. -10- The Company has reduced its resources devoted to North American corporate sales and also decreased its expenditures on corporate and product marketing. The Company expects to rely increasingly on third-party channels for sales of packaged product while focusing its corporate sales efforts on larger opportunities. Failure of the Company to successfully implement, support and manage these sales strategies could have a material adverse effect on the Company. In a number of markets, including rapidly growing client/server markets such as Japan, Korea, China/Hong Kong and Brazil, the Company has entered into quasi-exclusive multi-year agreements with independent companies that have also licensed the use of the Company's name. These organizations are in place to increase the Company's opportunities and penetration in such markets where the rapid adoption of client/server technologies is anticipated. While the Company believes that to date these agreements have increased the Company's penetration in these markets, there can be no certainty that this performance will continue nor that these relationships will remain in place. The Company's future cost of maintaining its business in these markets could increase substantially if these agreements are not renewed. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's revenues and operating results have fluctuated and may vary substantially from period to period. Whilst the Company has reported profits in the first three quarters of 1996, it had net losses of $44.1 million and $31.8 million for fiscal years 1995 and 1994, respectively. There can be no assurance that the restructuring of the Company's business strategies and tactics completed in early 1996 will be successful or that the Company will be able to sustain any such profitability on a quarterly basis. The product licensing arrangements which are subject to sell through revenue recognition will make estimation of revenues dependent on customer reporting. Thus, estimation of operating results prior to the end of a quarter becomes extremely uncertain. The Company has operated historically with little or no backlog of traditional boxed product shipments. Centura has experienced a seasonal pattern of product revenue decline between the fourth quarter and the succeeding first quarter, contributing to lower worldwide product revenues and operating results. The Company has generally realized lower European product revenues in the third quarter as compared to the rest of the year. The Company has experienced a pattern of recording a substantial portion of its revenues in the third month of a quarter. As a result, product revenues in any quarter are substantially dependent on orders booked in the last month. Because the Company's operating expenses are based on projected annual and quarterly revenue levels, operating results for a particular period may be adversely affected by delays in or loss of orders. Additional factors have caused and may in the future cause, the Company's revenues and operating results to vary significantly from period to period. These factors include: delays in introduction of products or product enhancements; size and timing of individual orders; software "bugs" or other product quality problems; competition and pricing in the software industry; sales mix among distribution channels; customer order deferrals in anticipation of new products; market acceptance of new products; reduction in demand for existing products and shortening of product life cycles as a result of new product introductions; changes in operating expenses; changes in Company strategy; personnel changes; foreign currency exchange rates; mix of products sold; inventory obsolescence; product returns and rotations; and general economic conditions COMPONENTIZED MARKETS: The advent of so-called componentized software may alter the way in which customers buy software. As specific software functionality can be bundled into smaller units or objects rather than in broad, highly functional products such as the Company's development tools, customers may be less willing to buy such broad, highly functional products. If such a trend continues, there can be no assurance that the Company will be able to repackage and efficiently distribute its products in such componentized packages. The costs and efforts necessary to package and distribute such components are largely unknown. Failure of the Company to introduce componentized products successfully and cost-effectively could have a material adverse affect on the Company's business, operating results and financial condition. MARKET ACCEPTANCE OF PC CLIENT/SERVER SYSTEMS. Substantially all of the Company's revenues have been derived from the licensing of software products for PC client/server systems, and licenses of -11- such products are expected to continue to account for substantially all of the Company's revenues for the foreseeable future. With the increasing focus on enterprise-wide systems, some customers may opt for solutions that favor mainframe or mini-computer solutions. Accordingly, companies may abandon use of PC client/server systems and such decisions could be critical to the Company's future success. INTERNATIONAL SALES AND OPERATIONS. The Company expects that international revenues, particularly in new and emerging markets, will continue to account for a significant percentage of its total revenues. Certain risks are inherent in international operations, including foreign currency fluctuations and losses, governmental controls, export license requirements, restrictions on the export of critical technology, political and economic instability, trade restrictions, changes in tariffs and taxes, difficulties in staffing and managing international operations, and possibility of difficulty in accounts receivable collection. There can be no assurance that these or other factors will not have a material adverse effect on the Company's future international sales and operations. LEGAL PROCEEDINGS: The Company operates in a complicated and volatile industry in which disputes, litigation, regulatory proceedings and other actions are a necessary risk of doing business. There can be no assurance that the Company will not participate in such legal proceedings and that the costs and charges will not have a material adverse impact on the Company's future success. POSSIBLE VOLATILITY OF STOCK PRICE. The market for the Company's stock is highly volatile. The trading price of the Company's common stock fluctuated widely in 1995 and the first nine months of 1996 and may continue to be subject to wide fluctuations in response to quarterly variation in operating and financial results and announcements of new products or customer contracts by the Company or its competitors. Any shortfall in revenue or earnings from levels expected by securities analysts or others could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of, or be able to confirm, revenue or earnings shortfalls until late in the fiscal quarter or following the end of the quarter, which could result in an even more immediate and adverse effect on the trading of the Company's common stock. Finally, the Company participates in a highly dynamic industry, which often results in significant volatility of the Company's common stock price. -12- PART II: OTHER INFORMATION CENTURA SOFTWARE CORPORATION ITEM 1. LEGAL PROCEEDINGS On May 2, 1994, a lawsuit was filed against the Company and certain of its officers and directors, by a holder of the Company's common stock, on his own behalf and purportedly on behalf of a class of others similarly situated. The lawsuit was subsequently amended, and alleged that the Company made false and misleading statements and failed to disclose material information relating to existing business conditions and the Company's prospects and that officers and directors violated the insider trading laws. The plaintiff was seeking damages of an unstated amount. The Company has reached a binding settlement agreement with plaintiff counsel in this lawsuit, and obtained court approval on September 30, 1996. Under the terms of the agreement, the Company will provide $3 million and 1,875,000 shares to a fund to be distributed among the members of the plaintiff class. The Company also agreed to supplement this payment with up to 625,000 additional shares in the event the value of its common stock is less than $6.00 per share at certain dates in the future. $2 million of the cash contribution to the settlement fund will be paid by the Company's directors and officers' liability insurer. As a result of the settlement, shares outstanding will increase by approximately 15% based on the settlement price. The 1995 financial statements include $15.3 million in litigation expense for the agreement and associated legal expenses. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS IN SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held it's Annual Meeting of shareholders on September 24, 1996. There were present at the meeting , in person or represented by proxy, the holders of 11,437,046 shares of Common Stock, which represented approximately 90.5% of the outstanding shares of Common Stock. The matters voted on at the meeting and the votes cast were as follows : 1. All Management's nominees for directors were elected as listed below : Name of Nominee Votes Cast --------------- ---------- Umang P. Gupta. . . . . . . . . . . . . . . For 10,765,867 Withheld 671,179 Samuel M. Inman . . . . . . . . . . . . . . For 11,211,511 Withheld 225,495 -13- D. Bruce Scott. . . . . . . . . . . . . . . For 10,797,677 Withheld 639,369 William O. Grabe. . . . . . . . . . . . . . For 11,214,521 Withheld 222,525 Max D. Hopper . . . . . . . . . . . . . . . For 11,217,579 Withheld 219,467 Anthony Sun . . . . . . . . . . . . . . . . For 11,211,901 Withheld 225,145 2. The approval of an amendment to the Company's 1995 Stock Option Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 1,000,000 shares to an aggregate of 2,000,000 shares. There were 5,269,505 shares of Common Stock voting in favor, 970,093 shares of Common Stock voting against, 1,109,097 shares of Common Stock abstaining and 4,088,351 non-votes. 3. The approval of an amendment to the Company's 1992 Employee Stock Option Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 100,000 shares to an aggregate of 400,000 shares. There were 6,967,770 shares of Common Stock voting in favor, 480,193 shares of Common Stock voting against , 18,804 shares of Common Stock abstaining and 3,970,279 non-votes. 4. The approval of the adoption of the 1996 Directors' Stock Option Plan and the reservation of 500,000 shares of Common Stock for issuance thereunder. There were 6,379,669 shares of Common Stock voting in favor, 923,538 shares of Common Stock voting against , 45,518 shares of Common Stock abstaining and 4,088,321 non-votes. 5. The approval of an amendment to the Company's Amended and Restated Articles of Incorporation to change the name of the company to Centura Software Corporation. There were 11,358,401 shares of Common Stock voting in favor, 50,902 shares of Common Stock voting against, 18,018 shares of Common Stock abstaining and 9,725 non-votes. 6. The ratification of the appointment of Price Waterhouse LLP as the Company's independent public accountants for the fiscal year ending December 31, 1996. There were 11,383,871 shares of Common Stock voting in favor, 40,157 shares of Common Stock voting against, 13,018 shares of Common Stock abstaining and 0 non-votes. ITEM 5. OTHER INFORMATION None -14- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (numbered in accordance with Item 601 of Regulation S-K) Exhibit Number Description -------- --------------------------------------------------------- 3(i) Articles of Incorporation of Registrant , as amended on September 24, 1996. 3(ii) Bylaws of Registrant, as amended on September 24, 1996. 10.4 1992 Employee Stock Purchase Plan , as amended on September 24, 1996. 10.14 1995 Stock Option Plan , as amended on September 24, 1996. 10.19 1996 Directors' Stock Option Plan and forms of agreement thereunder. 10.20 Stipulation of Settlement dated July 19, 1996 in re the Registrant's Securities Litigation between Plaintiff's Settlement Counsel and the Registrant's Counsel , including exhibits thereto , and related Final Judgment and Order of Dismissal dated September 30,1996. (b) Reports on Form 8-K The Company filed a Form 8-K, reporting the engagement of the accounting firm of Price Waterhouse, LLP, as independent accountants to audit the Company's financial statements for years ended December 31, 1993, 1994 and 1995, dated January 8, 1996 ("Form 8-K"). The Company also reported that Arthur Andersen LLP had withdrawn its reports dated January 14, 1994, and January 23, 1995, issued with respect to the Company's December 31, 1993, and December 31, 1994, financial statements. The Company filed a Form 8-K on April 17, 1996, announcing that its annual report on Form 10-K would be delayed due to the fact that the Company's audit for the periods ended December 31, 1993, 1994 and 1995, by Price Waterhouse LLP was not yet complete. The Company filed a Form 8-K on June 18, 1996, announcing that its annual report on Form 10-K would be further delayed due to the fact that the Company's audit for the periods ended December 31, 1993, 1994 and 1995 by Price Waterhouse LLP was not yet complete. -15- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTURA SOFTWARE CORPORATION /s/ Richard A. Gelhaus --------------------------------------------- Senior Vice President and Chief Financial Officer (Duly Authorized and Principal Financial and Accounting Officer) Date: November 13, 1996 -16-