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EXHIBIT 99.1
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HARBINGER CORPORATION
RISK FACTORS
Integration of Recent Acquisitions. The Company has completed a
number of acquisitions since January 1, 1996, including the acquisitions of
SupplyTech and HNS. SupplyTech and HNS have historically reported significant
operating losses. The Company's acquisitions present a number of risks,
including reversal of the historical operating losses of SupplyTech and HNS,
the integration of the SupplyTech software products into the Company's current
suite of products, the integration of the sales force of SupplyTech into the
Company's existing sales operations, the coordination of customer support
services, the integration of international operations with the Company's
international affiliates, the development and commercialization of HNS's
internet related products and the integration of those products with the
Company's existing products, and the diversion of management's attention from
other business concerns. Several of the newly acquired products address the
same markets as, and may therefore be competitive with, existing Company
products. There can be no assurance that the Company can successfully
assimilate its operations and integrate its software products with these
recently acquired operations, software products and technologies, or that the
Company will be successful in repositioning its products on a timely basis to
achieve market acceptance. Any delay in such integration could have a material
adverse effect on the Company.
Factors Affecting Operating Results; Potential Fluctuations in
Quarterly Results. The Company's quarterly operating results have in the past
and may in the future vary or decrease significantly depending on factors such
as revenue from software sales, the timing of new product and service
announcements, changes in pricing policies by the Company and its competitors,
market acceptance of new and enhanced versions of the Company's products, the
size and timing of significant orders, changes in operating expenses, changes
in Company strategy, personnel changes, government regulation, the introduction
of alternative technologies, the effect of acquisitions and general economic
factors. The Company has limited or no control over many of these factors.
The Company has experienced losses in the past, and at December 31, 1996, after
giving effect to the restatement of the financial statements of the Company to
reflect the acquisition of SupplyTech, which was accounted for under the
"pooling of interests" method of accounting, the Company had an accumulated
deficit of approximately $20 million. The Company operates with virtually no
network services or software product order backlog because its network services
are purchased on demand and its software products typically are shipped shortly
after orders are received. As a result, revenues in any quarter are
substantially dependent on the quantity of purchases of services requested and
product orders received in that quarter. Quarterly revenues also are difficult
to forecast because the market for electronic commerce and EDI software
products is rapidly evolving and the Company's revenues in any period are
significantly affected by the announcements and product offerings of the
Company's competitors as well as alternative technologies. The Company's IVAS
product is more complex and expensive compared to its other electronic commerce
and Internet products introduced to date, and will generally involve
significant investment decisions by prospective customers. Accordingly, the
Company expects that in selling its IVAS product it will encounter risks
typical of companies that rely on large accounts, 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. The Company's expense levels are based,
in part, on its expectations as to future revenues. If revenue levels are
below expectations, the Company may be unable or unwilling to reduce expenses
proportionately and operating results are likely to be adversely affected. As
a result, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Due to all of the foregoing factors, it is
likely that in some future quarter or quarters the Company's operating results
will be below the expectations of public market analysts and investors. In
such event, the price of the Company's Common Stock will likely be adversely
affected.
The Company recognizes revenues from software license fees upon
shipment, net of estimated returns. Customers using the Company's PC products
are permitted to return products after delivery for a specified period,
generally 60 days. The Company generally has experienced returns of
approximately 20% of the PC product sales, and the Company records revenues
after a deduction for estimated returns. Any material increase in the
Company's return experience could have an adverse effect on its operating
results.
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Non-Recurring Charges; Expected Loss in 1997 First Quarter, and Year
Ended December 31, 1997. In January 1997, the Company completed the merger
with SupplyTech, accounted for as a pooling of interests, and expects a $7.0
million first quarter 1997 charge related to merger related expenses.
Additionally, the Company anticipates that it will incur integration costs
related to the merger of $2.5 to $3.5 million during 1997. In January 1997,
the Company completed the purchase of the $3,000,000 Convertible Subordinated
Debenture of HNS ("BST Debenture") from BellSouth Telecommunications and the
remaining equity in HNS from other shareholders for an aggregate of
approximately $7.2 million in consideration. The Company anticipates that it
will incur integration costs related to these transactions of $1.5 million to
$2.5 million during the first quarter of 1997. Additionally, the Company
anticipates that it will incur costs related to $2.4 million loss on
extinguishment of the Debenture and a $2.7 million charge for in-process
product development related to the acquisition of the minority interest of HNS.
These charges will be recorded in the first quarter of 1997. As a result of
these charges, the Company expects to incur a net loss for the first quarter of
1997 and for the year ending December 31, 1997.
Intense Competition. The electronic commerce, EDI and network
services and products businesses are intensely competitive and the Company has
many competitors with substantially greater financial, marketing, personnel and
technological resources than the Company. Other companies offer products and
services that may be considered by customers to be acceptable alternatives to
the Company's products and services. Certain companies also operate private
computer networks for transacting business with their trading partners. It is
expected that other companies may develop and implement similar
computer-to-computer networks, some of which may be ''public'' networks such as
the Company's and others may be ''private,'' providing services only to a
specific group of trading partners, thereby reducing the Company's ability to
increase sales of its network services. In addition, several companies offer
PC-based, UNIX, midrange and mainframe and Internet computer software products
which compete with the Company's software products. Advanced operating systems
and applications software from Microsoft and other vendors also may offer
electronic commerce functions that limit the Company's ability to sell its
software products. The Company believes that the continuing acceptance of
electronic commerce and EDI will attract new competitors, including software
applications and operating systems companies that may bundle electronic
commerce solutions with their programs, and alternative technologies that may
be more sophisticated and cost effective than the Company's products and
services. Competitive companies may offer certain electronic commerce products
or services, such as communications software or network transactional services,
at no charge or a deeply discounted charge, in order to obtain the sale of
other products or services. Since the Company's agreements with its network
subscribers are terminable upon 30 days' notice, the Company does not have the
contractual right to prevent its customers from changing to a competing
network. Competitors that offer products and/or services that compete with
various of the Company's products and services include, among others, Advantis
Systems, Inc. (a joint venture between Sears, Roebuck & Co. and IBM); AT&T;
Computer Associates International, Inc.; EDS; General Electric Information
Systems; Premenos Technology Corp.; QuickResponse Services, Inc.; Sterling
Commerce, 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.
Emergence of EC Over the Internet. The Internet provides a potential
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 the Company. In addition to the Company's Internet related
products and services, several existing competitors of the Company have
introduced their own Internet electronic commerce products and services.
Moreover, new competitors, which may include telephone companies and media
companies, are likely to increase the provision of business-to-business data
transmission services using the Internet. There is no assurance that the
Company's TrustedLink Guardian end user software and IVAS which enable
electronic commerce over the Internet will be accepted in the Internet market
or can be competitive with other products based on evolving technologies. If
the Internet becomes an accepted method of electronic commerce, the Company
could also lose network customers from its VAN which would reduce recurring
revenue from network services and have a material adverse effect on the
Company.
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The use of the Company's Internet electronic commerce products and
services will depend in large part upon the continued development of the
infrastructure for providing Internet access and services. Use of the Internet
for business-to-business electronic commerce services raises numerous issues
that, to the knowledge of the Company, have yet to be satisfactorily resolved.
Such issues include reliability, data security and data integrity, timely
transmission, and product and service pricing. Because global commerce and
online exchange of information on the Internet is new and evolving, it is
difficult to predict with any assurance whether the Internet will prove to be a
viable commercial marketplace. The Internet has experienced, and is expected
to continue to experience, substantial growth in the number of users and the
amount of traffic. There can be no assurance that the Internet will continue
to be able to support the demands placed on it by this continued growth. In
addition, the Internet could lose its viability due to delays in the adoption
of new standards and protocols to handle increased levels of Internet activity,
or due to increased governmental regulation. There can be no assurance that
the infrastructure or complementary services necessary to make the Internet a
viable commercial marketplace will be developed, or, if developed, that the
Internet will become a viable commercial marketplace for products and services
such as those offered by the Company. If the necessary infrastructure or
complementary services or facilities are not developed, or if the Internet does
not become a viable commercial marketplace, the Company's business, operating
results or financial condition will be materially adversely affected.
Risks of Potential Future Acquisitions. The Company's growth has been
significantly enhanced through acquisitions of other businesses, products and
licenses. Following the Offering, the Company will have significant cash
resources, which may be used for acquisitions. There can be no assurance that
the Company will be able to identify suitable acquisition candidates available
for sale at reasonable prices, consummate any acquisition or successfully
integrate any acquired business into the Company's operations. Operational and
software integration problems may arise if the Company undertakes future
acquisitions of complementary products, technologies or businesses. Future
acquisitions may also result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, the write-off of in-process
product development and capitalized product costs, and the amortization of
expenses related to goodwill and other intangible assets, all of which could
have a material adverse effect on the Company. Acquisitions involve numerous
additional risks, including difficulties in the assimilation of the operations,
products and personnel of the acquired company, differing company cultures, the
diversion of management's attention from other business concerns, risks of
entering markets in which the Company has little or no direct prior experience,
and the potential loss of key employees of the acquired company. Customer
satisfaction or performance problems at a single acquired firm could have a
material adverse impact on the reputation of the Company as a whole. The
Company expects to finance any future acquisitions with the proceeds of this
Offering as well as with possible debt financing, the issuance of equity
securities (common or preferred stock) or a combination of the foregoing.
There can be no assurance that the Company will be able to arrange adequate
financing on acceptable terms.
Dependence on New Products; Industry Standards. The electronic
commerce industry is characterized by rapid technological change, frequent new
product and service introductions and evolving industry standards. The
Company's future success will depend in significant part on its ability to
anticipate industry standards, continue to apply advances in electronic
commerce product and service technologies, enhance existing products and
services and introduce and acquire new products and services on a timely basis
to keep pace with technological developments. There can be no assurance that
the Company will be successful in developing, acquiring or marketing new or
enhanced products or services that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that
could delay or prevent the successful development, acquisition or marketing of
such products or services or that its new or enhanced products and services
will adequately meet the requirements of the marketplace and achieve market
acceptance. In the past, the Company has experienced delays in the commencement
of commercial shipments of new products and enhancements, resulting in delays
or losses of product revenues. Such delays or failure in the introduction of
new or enhanced products or services, or the failure of such products or
services to achieve market acceptance, could have a material adverse effect on
the business, results of operations and financial condition of the Company.
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Ability to Manage Growth. The Company has recently experienced
significant growth in revenue, operations and personnel as it has made
strategic acquisitions, added subscribers to the Harbinger VAN and IVAS and
increased the number of licensees of its software products. This growth could
continue to place a significant strain on the Company's management and
operations, including its sales, marketing, customer support, research and
development, finance and administrative operations. Maintaining profitability
during a period of expansion will depend, among other things, on the Company's
ability to successfully expand its products, services and markets and to manage
its operations and acquisitions effectively. Difficulties in managing
continued growth, including difficulties in obtaining and retaining talented
management and product development personnel, especially following an
acquisition, could have a material adverse effect on the Company.
Investment in International Subsidiaries; International Growth and
Operations. The Company believes that its continued growth and profitability
will require expansion of its international operations through NTEX in the
Netherlands and INOVIS in Germany as well as the international operations of
SupplyTech in the United Kingdom, Italy, Australia and Mexico (the
"International Subsidiaries"). This expansion will require financial resources
and significant management attention, particularly by certain members of the
management of the Company. The Company's ability to successfully expand its
services business internationally will also depend upon its ability to attract
and retain both talented and qualified managerial, technical and sales
personnel and electronic commerce services customers outside the United States
and its ability to continue to effectively manage its domestic operations while
focusing on international expansion. Each of the International Subsidiaries has
experienced significant operating losses to date. To the extent that the
International Subsidiaries are unable to penetrate international markets in a
timely and profitable manner, the Company's growth, if any, in international
sales will be limited, and the Company could be materially adversely affected.
Moreover, the Company's ability to successfully implement its international
strategy may require installation and operation of a value-added network and
implementation of its IVAS software in other countries, as well as additional
improvements to its infrastructure and management information systems,
including its international customer support systems. In addition, there can
be no assurance that the Company will be able to maintain or increase
international market demand for the Company's products or services.
International operations are subject to certain inherent risks,
including unexpected changes in regulatory requirements and tariffs, longer
payment cycles, increased difficulties in collecting accounts receivable and
potentially adverse tax consequences. To the extent international sales are
denominated in foreign currencies, gains and losses on the conversion to U.S.
dollars of accounts receivable and accounts payable arising from international
operations may contribute to fluctuations in the Company's results of
operations. The Company has not entered into any hedging or other arrangements
for the purpose of guarding against the risk of currency fluctuation. In
addition, sales in Europe and certain other parts of the world typically are
adversely affected in the third calendar quarter of each year because many
customers reduce their business activities in the summer months.
Dependence on Key Management and Personnel; Ability to Attract and
Retain Qualified Personnel. The Company's success is largely dependent upon
its executive officers and key sales and technical personnel, the loss of one
or more of whom could have a material adverse effect on the Company. The
future success of the Company will depend in large part upon its ability to
attract and retain talented and qualified personnel. In particular, the
Company believes that it will be important for the Company to hire experienced
product development and sales personnel. Competition in the recruitment of
highly-qualified personnel in the computer software and electronic commerce
industries is intense. The inability of the Company to locate and retain such
personnel may have a material adverse effect on the Company. No assurance can
be given that the Company can retain its key employees or that it can attract
qualified personnel in the future. The Company currently carries key-person
life insurance policies on the lives of Messrs. Howle, Leach and Hart.
Dependence Upon Major Customer. The Company has an agreement with
System Software Associates, Inc. ("SSA") for the distribution and marketing of
certain software products of the Company. SSA is to pay the Company royalties
representing a percentage of annual net fees generated by SSA from the sale of
software licensed from the Company. For the years ended December 31, 1995 and
1996, revenues from SSA represented approximately 7% and 14%, respectively of
the Company's total revenues for such periods. SSA had minimum royalty
obligations of $1.4 million in 1995 and $5.7 million in 1996, which accounted
for the revenues received by the Company. There is no minimum royalty
obligation after 1996, and the Company expects that revenues from
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SSA may decline in 1997 and subsequent years. In the event that SSA ceases to
perform under its agreement with the Company or fails to generate product sales
consistent with 1996 royalty levels, or the agreement with SSA is terminated,
the Company may be adversely affected.
Risks of Product Development. Software products as complex as those
offered by the Company may contain undetected errors or failures when first
introduced or when new versions are released. If software errors are
discovered after introduction, the Company could experience delays or lost
revenues during the period required to correct these errors. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, additional and unexpected expenses to fund further product
development or to add programming personnel to complete a development project,
and loss of revenue because of the inability to sell the new product on a
timely basis, any one or more of which could have a material adverse effect on
the Company.
Dependence on Data Centers. The network service operations of the
Company are dependent upon the ability to protect computer equipment and the
information stored in the Company's data centers against damage that may be
caused by fire, power loss, telecommunication failures, unauthorized intrusion,
computer viruses and disabling devices and other similar events.
Notwithstanding precautions the Company has taken, there can be no assurance
that a fire or other natural disaster, including national, regional or local
telecommunications outages, would not result in a prolonged outage of the
Company's network services. In the event of a disaster, and depending on the
nature of the disaster, it may take from several hours to several days before
the Company's off-site computer system can become operational for all of the
Company's customers, and use of the alternative off-site computer would result
in substantial additional cost to the Company. In the event that an outage of
the Company's network extends for more than several hours, the Company will
experience a reduction in revenues by reason of such outage. In the event that
such outage extends for one or more days, the Company could potentially lose
many of its customers which may have a material adverse effect on the Company.
Dependence upon Certain Licenses. The Company relies on certain
technology that it licenses from third parties and other products that are
integrated with internally developed software and used in the Company's
products to perform key functions or to add important features. There can be no
assurance that the Company 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 the
Company's products and services until equivalent technology, if available, is
identified, licensed and integrated, which could have a material adverse effect
on the Company's business, operating results and financial condition.
Limited Protection of Proprietary Technology; Risks of Infringement.
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 patent for an electronic document interchange test facility
and a patent application pending for an EDI communication system. 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 the Company's competitors will not independently develop similar
technology. In distributing many of its products, the Company relies primarily
on ''shrink wrap'' licenses that are not signed by licensees and, therefore,
may be unenforceable under the laws of certain jurisdictions. In addition, the
Company has licensed it products to users and distributors in other countries,
and the laws of some foreign countries do not protect the Company's proprietary
rights to as great an extent as the laws of the United States. 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,
and the Company has agreed to indemnify many of its customers against such
claims. 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
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delays or require the Company to enter into royalty or licensing agreements and
indemnify its customers against resulting liability, if any. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all, which could have a material adverse effect on the
Company.
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 which 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 ("Act")
amended the federal telecommunications laws by lifting restrictions on regional
telephone companies and others competing with the Company and imposed certain
restrictions regarding obscene and indecent content communicated to minors over
the Internet or through interactive computer services. The Act lifted
restrictions on regional telephone companies providing transport between
defined geographic boundaries associated with the provision of its own
information services. This enables regional telephone companies to more
readily compete with the Company by packaging information service offerings
with other services. Additionally, the Act imposes fines and other criminal
liability on any entity that knowingly uses a telecommunications device or
interactive computer service to send obscene or indecent material to minors or
permits any telecommunications facility under such entity's control to be used
for such a purpose. The Act provides a defense for persons providing access or
a connection, such as the Company, so long as the access or connection provider
is not involved in the creation of content. Litigation has been filed in U.S.
federal court challenging the constitutionality of certain provisions of the
Act. A temporary restraining order has been issued by a federal court
enjoining the U.S. Attorney General from enforcing the Act's "indecency"
prohibition. This case is currently on appeal to the U.S. Supreme Court. The
ability and likelihood of state regulators and/or the FCC, or the governments
of foreign countries, to impose regulations on the Internet is unclear. At
present the Internet is treated by the FCC as an unregulated enhanced service,
but the FCC is currently considering whether to regulate certain aspects of the
Internet. 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.
Anti-Takeover Provisions. The 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 the Company's shareholders.
The rights of the holders of 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 the Company has no present intention to
issue additional shares of preferred stock, such issuance, while providing
desired flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. In addition, the Company's Amended and Restated Articles of
Incorporation and Bylaws contain provisions that may discourage proposals or
bids to acquire the Company. This could limit the price that certain investors
might be willing to pay in the future for shares of Common Stock. The
Company's Amended and Restated Articles of Incorporation provide for a
classified Board of Directors with three-year, staggered terms for its members.
The classification of the Board of Directors could have the effect of making it
more difficult for a third party to acquire control of the Company.
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