<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
______
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
______ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period ended ______ to ______
Commission File No. 0-16096
BORLAND INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2895440
(STATE OR OTHER JURISDICTION OF (I.R.S EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 BORLAND WAY, SCOTTS VALLEY, CALIFORNIA 95066-3249
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 431-1000
(Former name, former address and former fiscal year,
if changed since last report) N/A
---
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO
------ ------
The number of shares of common stock outstanding as of
October 31, 1996 was 31,422,963.
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BORLAND INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1996
and March 31, 1996......................................... 3
Condensed Consolidated Statements of Operations for the three
and six months ended September 30, 1996 and 1995........... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended September 30, 1996 and 1995................... 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
PART II - OTHER INFORMATION
Item 5. Other Matters................................................ 15
Item 6. Exhibit and Reports on Form 8-K.............................. 15
Signatures.............................................................. 16
<PAGE>
PART I - FINANCIAL INFORMATION
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, MARCH 31,
1996 1996
------------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 82,501 $ 74,682
Short-term investments 1,725 15,464
Accounts receivable, net 16,842 34,151
Inventories 1,221 1,599
Other 7,256 7,321
--------- --------
Total current assets 109,545 133,217
Property and equipment, net 110,088 114,612
Other non-current assets 7,575 7,758
--------- --------
Total assets $ 227,208 $255,587
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,034 $ 21,151
Accrued expenses 20,027 18,728
Short-term restructuring 1,770 2,684
Income taxes payable 13,926 9,244
Other 14,986 17,647
--------- --------
Total current liabilities 63,743 69,454
Long-term debt and other 13,969 14,555
--------- --------
Total liabilities 77,712 84,009
--------- --------
Stockholders' equity:
Common stock; $.01 par value; 100,000
shares authorized; 31,419 and
31,168 issued and outstanding 314 312
Additional paid-in capital 281,368 279,083
Accumulated deficit (135,962) (112,015)
Cumulative translation adjustment 3,776 4,198
--------- --------
Total stockholders' equity 149,496 171,578
--------- --------
$ 227,208 $255,587
========= ========
See accompanying notes
<PAGE>
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Net revenues $ 36,407 $51,315 $ 70,944 $105,081
Cost of revenues 5,828 8,227 12,312 16,297
-------- ------- -------- --------
Gross profit 30,579 43,088 58,632 88,784
-------- ------- -------- --------
Selling, general and administrative 28,236 29,385 61,885 62,157
Research and development 13,202 11,372 24,881 21,602
-------- ------- -------- --------
Total operating expenses 41,438 40,757 86,766 83,759
-------- ------- -------- --------
Operating profit (loss) (10,859) 2,331 (28,134) 5,025
Interest income, net and other 1,503 974 3,250 1,786
-------- ------- -------- --------
Income (loss) before income taxes (9,356) 3,305 (24,884) 6,811
Income tax provision (benefit) 463 661 (936) 1,362
-------- ------- -------- --------
Net income (loss) $ (9,819) $ 2,644 $(23,948) $ 5,449
======== ======= ======== ========
Net income (loss) per common and common equivalent share $(.31) $.08 $(.76) $.18
======== ======= ======== ========
Weighted average number of common and common equivalent
shares outstanding 31,329 31,656 31,381 30,801
======== ======= ======== ========
</TABLE>
See accompanying notes
<PAGE>
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS, UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net income (loss) $(23,948) $ 5,449
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,968 8,744
Changes in assets and liabilities:
Accounts receivable 17,108 (2,782)
Inventories 378 5,907
Accounts payable, accrued expenses and
short-term restructuring (7,495) (20,659)
Income taxes payable 4,682 935
Other (3,134) (6,395)
------- -------
Cash used by operating activities (5,441) (8,801)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (2,381) (1,036)
Sale of fixed assets and assets held for sale 35 3,896
Net change in short-term investments 13,739 (3,520)
------- -------
Cash provided (used) by investing activities 11,393 (660)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 2,266 22,085
Repayment of capital lease obligations and other
debt activity (58) (671)
------- -------
Cash provided by financing activities 2,208 21,414
------- -------
Effect of exchange rate changes on cash (341) 18
------- -------
Net change in cash and cash equivalents 7,819 11,971
Beginning cash and cash equivalents 74,682 68,193
------- -------
Ending cash and cash equivalents $ 82,501 $ 80,164
======= =======
See accompanying notes
<PAGE>
BORLAND INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the entire fiscal year, which ends on March 31, 1997.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
of Borland International, Inc. for the year ended March 31, 1996 included in the
Registrant's Form 10-K.
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2. EARNINGS (LOSS) PER SHARE
Net income (loss) per common and common equivalent share for the three
and six months ended September 30, 1996 and 1995 was determined using the
modified treasury stock method.
NOTE 3. RESTRUCTURING CHARGES
In response to the significant losses from operations in the three and
six months ended September 30, 1996, the Company implemented a worldwide
restructuring and realignment of its corporate structure on October 16, 1996
which will result in a 15% reduction in workforce. The Company did not include
any costs related to the October 16, 1996 action in the results for the three or
six months ended September 30, 1996. The related restructuring costs will be
included in the third quarter of fiscal 1997.
Subsequent to March 31, 1996, there have been no changes to the
Company's estimate of the total cost of restructurings occurring prior to
fiscal 1997. During the six months ended September 30, 1996, the restructuring
reserves decreased by $1.4 million primarily due to cash payments related to
noncancellable rent costs of excess facilities. There were no non-cash charges
during the quarter.
NOTE 4. INCOME TAXES
Income tax expense for the quarter ended September 30, 1996 was
approximately $.5 million. Such tax expense results principally from non-U.S.
withholding taxes, which are assessed without regard to the profitability of the
applicable operation.
For the six months ended September 30, 1996 the Company recorded an
income tax benefit of approximately $.9 million. The benefit reflects a federal
income tax refund of approximately $2.1 million resulting from a settlement
reached with the U.S. Internal Revenue Service. The settlement resolved
differences regarding certain disputed deductions related to the tax years
ending in 1986 - 1991 for its former subsidiary Ashton Tate
<PAGE>
Corporation. Excluding the settlement benefit, the Company would have incurred
an income tax expense of approximately $1.2 million for the six months ended
September 30, 1996.
NOTE 5. OPEN ENVIRONMENT CORPORATION MERGER
On May 11, 1996, the Company entered into a definitive merger
agreement with Open Environment Corporation (OEC) which provides for the
acquisition of OEC by Borland. Completion of the transaction is expected to
occur November 18, 1996 and is subject to, among other requirements, approval of
OEC's shareholders and the receipt of all required governmental approvals.
Under the terms of the agreement, which was amended on July 31, 1996,
OEC stockholder's will receive 0.66 shares of Borland common stock for each
share of OEC common stock held by them. Based on the 7,538,249 shares of OEC
Common Stock outstanding as of September 30, 1996, the number of shares of
Borland Common Stock to be issued pursuant to the merger is approximately
4,975,000 or approximately 16% of the total number of shares of Borland Common
Stock outstanding as of that date. In addition, Borland is assuming options for
the purchase of approximately 1,190,216 shares of OEC Common Stock which will
be converted to options to purchase approximately 786,000 shares of Borland
Common Stock upon completion of the merger. It is anticipated that the
transaction will be accounted for as a pooling of interests.
OEC develops, markets and supports software that enables companies to
create applications for distributed, client/server computing systems. OEC's
three-tiered client/server software architecture allows customers to develop,
deploy and manage software applications which access information on an
enterprise-wide basis. OEC's product line includes Entera, an independent
framework for building, managing and deploying scaleable, client/server
applications, and OLEnterprise, an open, distributed object environment based on
Microsoft's OLE.
If this transaction is consummated, the financial position and results
of operations of the Company and OEC will be combined in fiscal 1997 retroactive
to April 1, 1996 and the fiscal year of OEC will be conformed to the Company's
fiscal year. In addition, all prior periods presented will be restated to give
effect to the merger. The Company's fiscal 1996 financial statements will be
combined with OEC's financial statements for the year ended December 31, 1995.
OEC's operating results for the period January 1, 1996 to March 31, 1996 will be
reflected as an adjustment to the combined Company's retained earnings on April
1, 1996.
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion and analysis is designed to be read in conjunction
with the Management's Discussion and Analysis set forth in the Company's Form
10-K for the fiscal year ended March 31, 1996. Historical results and
percentage relationships should not be taken as necessarily indicative of the
operating results for any future period.
This Current Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. Actual future results may differ
materially. Readers are referred to the documents filed by the Company with the
Securities and Exchange Commission, specifically the most recent reports on Form
10-K and 8-K and its Registration Statement on Form S-4 relating to the pending
acquisition of Open Environment Corporation, which identify important risk
factors that could cause actual results to differ from those contained in the
forward-looking statements.
In addition to an analysis of recent and historical financial results,
the Form 10-K includes an analysis of certain risks of the Company's business,
including risks which are inherent to software development as well as specific
risks relating to the competitive environment in which the Company operates.
Although the Company has sought to identify the most significant risks to its
business, the Company cannot predict whether, or to what extent any of such
risks may be realized nor can there be any assurance that the Company has
identified all possible issues which the Company might face. In particular, the
Company has recently experienced substantial changes in its operations and
competitive environment and has suffered a significant loss from operations in
the three and six months ended September 30, 1996. In response to these losses,
the Company implemented a worldwide restructuring and
<PAGE>
realignment of its corporate structure on October 16, 1996 which will result in
a 15% reduction in workforce. The Company did not include any costs related to
the October 16, 1996 action in the results for the three or six months ended
September 30, 1996. The related restructuring costs will be included in the
third quarter of fiscal 1997.
Among the other risk factors and uncertainties facing the Company,
include those related to: the challenges and opportunities presented by the
Company's recent focus on software development tools, including tools for the
client/server and Internet/intranet market, the merger with Open Environment
Corporation (OEC), the market acceptance of Windows 95/NT and the emergence of
the Internet as a potentially important new computing paradigm. Investors
should carefully read the Company's filings with the Securities and Exchange
Commission, together with this 10-Q, and consider all trends and uncertainties
concerning the Company's business before making an investment decision with
respect to the Company's stock.
In recent months, the Company has experienced significant changes in
management and other key personnel. In particular, Borland has announced the
resignation of its President and Chief Executive Officer, its Senior Vice
President for Research and Development and its Chief Financial Officer. To
date, the Company has replaced the Chief Financial Officer and it has appointed
an Acting President and Chief Executive Officer. In certain cases, management
and other personnel have been lured away by competitors who have offered very
substantial sign-on bonuses and compensation packages which would be very
difficult for the Company to match. There can be no assurances that the Company
will not be subject to further losses of management and other key personnel. In
addition, the Company may be required to substantially increase the
compensation, stock options or other benefits offered to employees in order to
attract or retain management and key personnel. The loss of management and
other key personnel, and the delays which may be experienced in recruiting new
management and other personnel as well as the additional costs which may be
incurred in retaining or attracting personnel, may have a material adverse
affect on the Company and its operating results. In particular, the disruptions
inherent in such a situation are particularly problematic for a company which
has experienced the types of problems which the Company has recently faced.
Although the Company realized operating profits in each of the four
quarters ended March 31, 1996, the Company experienced a substantial operating
loss for the three and six months ended September 30, 1996 as well as operating
losses for the four prior fiscal years ended March 31, 1995. The Company
expects to continue to experience operating losses at least through the quarter
ending March 31, 1997. Among other matters, the Company's ability to regain
profitability will be substantially dependent upon its ability to successfully
complete and introduce new products, to successfully integrate OEC and to
successfully implement cost saving measures associated with the October 16, 1996
restructuring. There can be no assurance that the Company will be able to
successfully accomplish the foregoing or to regain profitability in future
periods.
<PAGE>
The following table sets forth the unaudited consolidated results of
operations as a percentage of net revenues for the three and six months ended
September 30, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ----------------
1996 1995 1996 1995
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 16.0 16.0 17.4 15.5
Gross margin . 84.0 84.0 82.6 84.5
Selling, general and administrative 77.6 57.3 87.2 59.2
Research and development 36.3 22.2 35.1 20.6
Total operating expenses 113.9 79.5 122.3 79.8
Operating profit (loss) (29.9) 4.5 (39.7) 4.7
Interest income, net and other 4.1 1.9 4.6 1.7
Income (loss) before income taxes (25.8) 6.4 (35.1) 6.4
Income tax provision (benefit) 1.3 1.3 (1.3) 1.3
Net income (loss) (27.1)% 5.1% (33.8)% 5.1%
</TABLE>
NET REVENUES
The Company is engaged in the single business segment of designing,
producing and marketing computer software, primarily programming language and
database management tools. The Company provides such software development tools,
including tools for the client/server and Internet/intranet market, along with
add-on products and services, to the software developer community. The Company
has several product lines which run primarily on personal computers running
under Windows and Windows 95/NT operating systems.
The Company distributes its products domestically and internationally
through independent distributors, dealers, ISVs and VARs and also by direct
marketing and sales to corporate, governmental, educational and end-user
customers. The Company offers certain return privileges to some of its
customers, and also offers its distributors certain limited product exchange
privileges and rebates. The Company recognizes revenue upon shipment subject to
allowances for estimated future returns, exchanges and rebates.
Net revenues of $36.4 million for the quarter ended September 30,
1996 increased from $34.5 million in the quarter ended June 30, 1996. Net
revenues in the September quarter were favorably affected by the introduction of
the Company's products for the Delphi product line, repricing and repackaging
of the Delphi 2.0 desktop version, as well as the introduction of IntraBuilder,
the Company's first product principally developed for the Internet. While the
September quarter revenue was adversely affected by the seasonal slowness in
Europe, this decrease was offset by the new product introductions as well as an
improvement in performance of sales in the U.S. compared to the previous
quarter.
Net revenues for the three and six months ended September 30, 1996
were $36.4 million and $70.9 million, respectively, as compared to $51.3
million and $105.1 million , respectively for the same period of fiscal 1996.
This decrease in revenues is mainly attributable to the unit volume declines in
the desktop database products and an overall increasingly competitive
marketplace. This decrease was partially offset by growth in revenues from the
Company's client/server products which is consistent with the Company's
strategy.
The Company's non-U.S. net revenues represented approximately 59% and
51% of total net revenues in the second fiscal quarter ended September 30, 1996
and 1995, respectively. The percentage of non-U.S. net revenues was lower in the
three months ended September 30, 1995, which was primarily due to the inclusion
of prior year U.S. revenue of a
<PAGE>
large non-recurring InterBase contract. Similar to trends occurring in the U.S.,
non-U.S. net revenues experienced a decline in desktop revenues which was offset
by increases in client/server revenues.
The Company anticipates that as the Windows 95/NT operating systems
continues to be adopted, the Company will continue to experience a decline in
Windows 3.1 versions for its products. The extent to which such decline will be
offset by revenues from the release of the Windows 95/NT versions of the Company
products is uncertain and subject to a number of risks. For example, due in part
to slower than expected migration to Windows 95/NT since its introduction in the
third quarter of fiscal 1996, revenues arising from the release of Windows 95/NT
applications, including Paradox 7.0 for Windows 95/NT and Delphi 2.0, have been
lower than anticipated. If revenues from such Windows 3.1 products decline
materially or at a more rapid rate than the Company currently anticipates, the
Company's business, operating results and financial condition would be
materially and adversely affected.
In light of the expected migration of customers to the Windows 95/NT
operating environment and an expected increase in revenues from client/server
products, it is uncertain whether the Company's historical product life cycle
will continue. Among other matters, the Company believes that a share in the
Windows market does not or will not automatically result in market share in the
Windows 95/NT market. As a result, the Company cannot predict the rate at which
owners of its current products are likely to upgrade to its products for a
different operating system. Also, to the extent that there are any
incompatibilities between the Company's products and Windows 95/NT, there could
be an adverse effect on the sale of the Company's products. In addition, the
Company has, in the past, experienced declining sales of certain of its products
in anticipation of the release of new products. Furthermore, the Company cannot
determine whether the increasing price competition in the industry, the timing
of competitors' product releases or other factors will have an adverse effect
upon the product upgrade revenue which has historically been a significant
component of the Company's revenue. Finally, a greater portion of the Company's
revenues are being derived from client/server sales which are characterized by
long sales cycles and increased transaction values. As a result, such revenues
may be subject to increased variability over time.
The Company expects that a significant portion of its remaining fiscal
1997 revenues will come from new products and new versions of existing products,
including the release of products on the Windows 95/NT operating system, as well
as the release of client server developer tools and products for
Internet/intranet-related development. There can be no assurances that sales of
such new products and versions will meet the Company's expectations due to
various factors. For example, the Company may introduce certain of such
products later to market than expected or later to market than competitors'
introductions, or competitors may introduce competitive products at lower
prices. In addition, overall questions regarding the acceptance of new products
or the acceptance of the Windows 95/NT operating systems, the Internet as a new
computing paradigm or Sun Microsystems Inc.'s Java programming language, may
adversely affect such sales.
The Company's acquisition of OEC is consistent with its strategy to
focus on software developers and the opportunities associated with the
client/server, multi-tier market. The Company's relatively recent entry into
this market is subject to a number of risks, including that the Company has
historically not competed in this market, that the market itself is new and
evolving, that the Company must make choices regarding the operating systems to
focus upon, and that there are several very large and well entrenched businesses
as well as a number of smaller, very successful companies already competing in
this market. There can be no assurances that the sales of these client/server,
multi-tier products will meet the Company's expectations due to various factors
including the ongoing transition of and investment in resources for this
segment by the Company, the Company's credibility in this arena, and a
competitive environment in which many of the Company's competitors have greater
financial resources which may be leveraged to gain market share.
From time to time the Company makes announcements to its customers
with respect to the time frames within which the Company expects to ship new
products. For example, the Company has announced its goal to introduce a Java
development tool, code name Latte in the first half of the 1997 calendar year.
Such announcements are for the purpose of providing its customers with a general
idea of the expected availability of products for planning purposes based only
upon estimates and are not a prediction by the Company of the exact availability
of such products. In the past, certain of the Company's products shipped later,
and in some cases substantially later, than the time frame within
<PAGE>
which the Company originally anticipated that the products would be available.
Due to the inherent uncertainties of software development, it is likely that
such situations will occur from time to time in the future as well. Moreover,
the loss of key employees may increase the risk of delays in product
availability from time frames originally anticipated. Consequently,
announcements regarding the Company's expectations of when products may ship
should not be considered a prediction by the Company that the products will ship
in any particular fiscal quarter or otherwise be relied upon by investors as a
basis for predicting the Company's results for any future period.
The market for computer software products continues to evolve rapidly.
Although the introduction of Windows 95/NT captured substantial attention during
most of 1995, by the latter part of 1995, much of the attention of the software
industry had shifted to the Internet and the Java programming language as well
as increasing attention on Windows NT. The Company has made announcements
regarding research and development projects responsive to these developments,
such as the Company's Java development tool, code name Latte and has released
its database solution for the WEB, named IntraBuilder. However, the Company
does not anticipate any material revenues from any such products until at least
the first half of the 1997 calendar year. Moreover, the Company is unable to
predict the impact of such developments on the markets for the Company's
existing products.
GROSS MARGINS
Gross margins were at 84.0% of net revenues in the quarters ended
September 30, 1996 and 1995. Gross margins were 82.6% and 84.5% for the six
months ended September 30, 1996 and 1995, respectively. The lower margins in
the six months ended September 30, 1996 was due primarily to substantially lower
U.S. revenues in the quarter ended June 30, 1996 which resulted in lower overall
net revenues, consequently the fixed components of cost of revenues being spread
across a lower revenue base.
Gross margins can be affected by various factors, including price
changes, changes in the composition of sales by product or distribution channel,
sales volumes, special product promotions and return privileges, all of which
may be subject to other factors, including the timing of product releases,
actions taken by competitors, or other factors beyond the Company's control. In
particular, the Company's gross margins can be strongly affected in particular
periods by aggressive pricing strategies and return privileges employed in
connection with new product introductions and upgrades. The microcomputer
software industry continues to experience substantial price competition. The
extent to which price competition may require the Company to lower prices with
the result of lower margins remains uncertain.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $28.2 million and
$29.4 million for the quarters ended September 30, 1996 and 1995, and were
77.6% and 57.3% of net revenues for such periods, respectively. Although
selling, general and administrative expenses remained relatively flat on a
dollar basis year over year, these costs as a percentage of revenues increased
substantially due to the decline in U.S. net revenues.
Although certain selling, general and administrative expenses can be
managed or controlled on a medium term basis, a substantial portion of such
expenses are essentially fixed on a quarter to quarter basis. As a result, when
the Company suffers adverse effects to its net revenues or margins because of
delays in new product introductions, price competition or other competitive
factors, in the short term the Company generally is unable to take actions to
substantially reduce expenses. As previously stated, the Company announced on
October 16, 1996 a worldwide company restructuring to align these costs with
expected future revenues.
The Company incurs substantial expenses in connection with the
introduction of new products and generally a significant portion of such costs
are incurred prior to the release of the new products. As a result, in addition
to the general risks associated with the ultimate success of the Company's new
products, results for any quarter may be materially and adversely affected to
the extent significant expenses are incurred, but significant revenues from the
new product are not recognized until the following quarter.
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses were $13.2 million and $11.4 million
in the quarters ended September 30, 1996 and 1995, and were 36.3% and 22.2% of
net revenues for such periods, respectively. The increase in research and
development expenses is principally due to efforts associated with the
development of future Internet/intranet-specific tools such as IntraBuilder and
a visual development tool for Java, code named Latte.
The Company's focus on providing products to the software developer
community is subject to a number of uncertainties including, but not limited to,
the Company's ability to make timely product introductions, the market's
acceptance of the Windows 95/NT operating platform, the increasing importance of
Internet technologies, and competitive responses to the Company's strategic
actions. The Company believes that it is necessary to continue to invest in
research and development efforts to remain competitive. Because of the inherent
uncertainties of software development projects, there can be no assurance that
the Company's research and development efforts will result in successful product
introductions or increased revenue.
RESTRUCTURINGS
Subsequent to March 31, 1996, there have been no changes to the
Company's estimate of the total cost of restructurings occurring prior to
fiscal 1997. During the three and six months ended September 30, 1996, the
restructuring reserves decreased by $.8 million and $1.4 million, respectively,
primarily due to cash payments related to noncancellable rent costs of excess
facilities. There were no non-cash charges during the quarter.
The Company expects to record a restructure charge in the quarter
ended December 31, 1996 as a result of the restructuring announced on October
16, 1996.
INTEREST INCOME, NET AND OTHER
Interest income, net and other was $3.2 million and $1.8 million for
the six months ended September 30, 1996 and 1995, and were 4.6% and 1.7% of net
revenues for such periods, respectively. The increase is primarily due to an
increase in interest income of $1.4 million related to a tax settlement with
the U.S. Internal Revenue Service.
INCOME TAXES
Income tax expense for the quarter ended September 30, 1996 was
approximately $.5 million. Such tax expense results principally from non-U.S.
withholding taxes, which are assessed without regard to the profitability of the
applicable operation.
For the six months ended September 30, 1996 the Company recorded an
income tax benefit of approximately $.9 million. The benefit reflects a federal
income tax refund of approximately $2.1 million resulting from a settlement
reached with the U.S. Internal Revenue Service. The settlement resolved
differences regarding certain disputed deductions related to the tax years
ending in 1986 -1991 for its former subsidiary Ashton Tate Corporation.
Excluding the settlement benefit, the Company would have incurred an income tax
expense of approximately $1.2 million for the six months ended September 30,
1996.
LITIGATION
<PAGE>
The Company is subject to a lawsuit, Kaplan et al v. Kahn et al,
originally brought in the United States District Court for the Northern District
of California in January, 1993, which alleges certain securities law violations
by the Company and certain of its officers and directors. The lawsuit, as
amended, purports to represent a class of investors who purchased or otherwise
acquired the Company's Common Stock between March 5, 1991 and December 9, 1992.
As of February 29, 1996 the parties entered into a stipulation to settle this
matter. This stipulation has been submitted to the Court for approval.
Although the Company expects the settlement will be approved, the Company cannot
predict at this time when or if the Court will approve such settlement. If the
settlement is approved, there will not be any material adverse effect on the
Company's financial condition or results of operations. In particular, the
Company has already recorded a charge reserving in full for the amount of the
agreed settlement to be paid by the Company. Further as such amount has been
deposited in an escrow account pending the approval of the settlement,
settlement on the terms agreed will not affect the Company's liquidity.
On February 28, 1995, the Company and certain of its officers and
directors were named as defendants in a lawsuit, Crook et al v. Kahn et al filed
in the U. S. District Court for the Northern District of California. The
complaint alleges certain violations of the federal securities laws and purports
to be brought as a class action on behalf of all persons other than the
defendants, who purchased or otherwise acquired the Common Stock of the Company
between September 6, 1994 and October 19, 1994. As of February 29, 1996 the
parties entered into a stipulation to settle this matter. This stipulation has
been submitted to the Court for approval. Although the Company expects the
settlement will be approved, the Company cannot predict at this time when or if
the Court will approve such settlement. If the settlement is approved, there
will not be any material adverse effect on the Company's financial condition or
results of operations. In particular, the Company has already recorded a charge
reserving in full for the amount of the agreed settlement to be paid by the
Company. Further as such amount has been deposited in an escrow account pending
the approval of the settlement, settlement on the terms agreed will not affect
the Company's liquidity.
The Company is involved in various other legal actions arising in the
normal course of business. The Company believes that the probability is remote
that the financial consequence of judgments, if any, arising from these actions
would have a materially adverse impact on its financial condition or results of
operations. However, due to the inherent uncertainties of litigation, the
outcome of any of these actions could be unfavorable and the Company may choose
to make payments, or enter into other arrangements, to settle such actions or
may be required to pay damages or other expenses. Such an outcome in certain of
these matters could have a material adverse effect on the Company's financial
condition or results of operations.
The computer industry has been subject to a substantial amount of
intra-industry litigation in recent years regarding, among other matters, the
extent of patent, copyright and intellectual property protection available for
software products. Such actions can require the expenditure of substantial
management time and financial resources and can adversely affect the financial
performance of the companies involved. There can be no assurance that the
Company will not be a party to other such litigation in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $84.2 million
at September 30, 1996 a decrease of $5.9 million from a balance of $90.1 million
at March 31, 1996. Working capital decreased from $63.8 million as of March 31,
1996 to $45.8 million as of September 30, 1996.
Net cash used by the Company for operating activities in the six
months ended September 30, 1996 was $5.4 million and was primarily comprised of
the Company's net loss of $23.9 million offset by a $17.1 million reduction in
the accounts receivable balance related to significant cash collections.
Additionally, $7.5 million was used to pay down accounts payable, accrued
expenses and short-term restructuring that originated in the quarter ended March
31, 1996, when spending levels were generally higher than in the subsequent
quarter. Net cash provided by investing activities of $11.4 million consisted
primarily of $13.7 million from the net maturity of short-term investments, less
$2.4 million of equipment purchases. Financing activities provided net cash of
$2.2 million, primarily from exercises of employee stock options.
<PAGE>
The Company believes that its existing cash balances and funds
expected to be provided by operations will be sufficient to finance its working
capital requirements at least through the next twelve months.
RECENT EVENTS
On May 11, 1996, the Company entered into a definitive merger
agreement with Open Environment Corporation (OEC) which provides for the
acquisition of OEC by Borland. Completion of the transaction is expected to
occur November 18, 1996 and is subject to, among other requirements, approval of
OEC's shareholders and the receipt of all required governmental approvals.
Under the terms of the agreement, which was amended on July 31, 1996,
OEC stockholder's will receive 0.66 shares of Borland common stock for each
share of OEC common stock held by them. Based on the 7,538,249 shares of OEC
Common Stock outstanding as of September 30, 1996, the number of shares of
Borland Common Stock to be issued pursuant to the merger is approximately
4,975,000 or approximately 16% of the total number of shares of Borland Common
Stock outstanding as of that date. In addition, Borland is assuming options for
the purchase of approximately 1,190,216 shares of OEC Common Stock which will
be converted to options to purchase approximately 786,000 shares of Borland
Common Stock upon completion of the merger. It is anticipated that the
transaction will be accounted for as a pooling of interests.
OEC develops, markets and supports software that enables companies to
create applications for distributed, client/server computing systems. OEC's
three-tiered client/server software architecture allows customers to develop,
deploy and manage software applications which access information on an
enterprise-wide basis. OEC's product line includes Entera, an independent
framework for building, managing and deploying scaleable, client/server
applications, and OLEnterprise, an open, distributed object environment based on
Microsoft's OLE.
If this transaction is consummated, the financial position and results
of operations of the Company and OEC will be combined in fiscal 1997 retroactive
to April 1, 1996 and the fiscal year of OEC will be conformed to the Company's
fiscal year. In addition, all prior periods presented will be restated to give
effect to the merger. The Company's fiscal 1996 financial statements will be
combined with OEC's financial statements for the year ended December 31, 1995.
OEC's operating results for the period January 1, 1996 to March 31, 1996 will be
reflected as an adjustment to the combined Company's retained earnings on April
1, 1996.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER MATTERS
On November 8, 1996, Philippe Kahn resigned from the Board of
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27 -- Financial Data Schedule.
(B) REPORTS ON FORM 8-K
On October 24, 1996, the Company filed a Report on Form 8-K reporting
under Item 5 thereof, the Company's third quarter restructuring and the
additional Paradox license rights to Corel Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
BORLAND INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: November 12, 1996
/s/ PAUL W. EMERY II
----------------------------
PAUL W. EMERY II
Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10Q OF BORLAND
INTERNATIONAL, INC. THE QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 82,501
<SECURITIES> 1,725
<RECEIVABLES> 16,842
<ALLOWANCES> 0
<INVENTORY> 1,221
<CURRENT-ASSETS> 109,545
<PP&E> 110,088
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<TOTAL-ASSETS> 227,208
<CURRENT-LIABILITIES> 63,743
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0
<COMMON> 281,368
<OTHER-SE> (132,186)
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<SALES> 70,944
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<CGS> 12,312
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<OTHER-EXPENSES> 86,766
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<INTEREST-EXPENSE> (3,250)
<INCOME-PRETAX> (24,884)
<INCOME-TAX> (936)
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