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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended MARCH 31, 1997 or
Transition Report Pursuant to Section 13 or 15(d) of the
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Securities Exchange Act of 1934
Commission File No. 0-16096
BORLAND INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2895440
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF 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
Securities registered pursuant to Section 12(b) of the Act: PREFERRED STOCK
PURCHASE RIGHTS
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
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
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 30, 1997 was $252,244,437
The number of shares of the Registrant's common stock outstanding as of May
30, 1997 was 37,023,989.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Definitive proxy statement to be filed with the Securities and Exchange
Commission relating to the Company's 1997 Annual Meeting of Stockholders
(Part III of Form 10-K).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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PART I
This Annual Report on Form 10-K and the documents incorporated herein by
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reference contain forward-looking statements that have been made pursuant to the
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provisions of the Private Securities Litigation Reform Act of 1995. Such
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forward-looking statements are based on current expectations, estimates and
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projections about Borland's industry, management's beliefs, and certain
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assumptions made by Borland's management. Words such as "anticipates",
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"expects", "intends", "plans", "believes", "seeks", "estimates", variations of
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such words and similar expressions are intended to identify such forward-looking
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statements. These statements are not guarantees of future performance and are
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subject to certain risks, uncertainties and assumptions that are difficult to
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predict; therefore, actual results may differ materially from those expressed or
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forecasted in any such forward-looking statements. Such risks and uncertainties
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include those set forth herein under "Investment Considerations" and "Business,
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Management's Discussion and Analysis of Financial Condition and Results of
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Operations and Trends and Uncertainties" set forth in pages 2 through 24 as well
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as those noted in the documents incorporated herein by reference. Unless
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required by law, the Company undertakes no obligation to update publicly any
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forward-looking statements, whether as a result of new information, future
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events or otherwise. However, readers should carefully review the risk factors
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set forth in other reports or documents the Company files from time to time with
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the Securities and Exchange Commission, particularly the Quarterly Reports on
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Form 10-Q and any Current Reports on Form 8-K.
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ITEM 1. BUSINESS
Borland International, Inc. (the "Company" or "Borland") develops, markets
and supports software development tools, intelligent middleware, database
management systems, and application management systems for business enterprises
and independent software developers. The Company has several product lines and
additional complementary products and services that are designed to meet the
needs of software developers and business enterprises developing and using
software in desktop, local area network ("LAN"), client/server and
Internet/intranet environments.
The Company is organized around its major products, a family of interoperable
development tools, that include versions for desktop users, professional
developers and large business enterprises.
Borland's business strategy centers around its Golden Gate product strategy,
which was announced in the second quarter of fiscal year 1997. Golden Gate is a
strategy that encompasses all of the Company's products with the objective of
providing customers with an integrated line of development tools that span from
the desktop to the enterprise and provide a bridge between the Microsoft and
Sun/Netscape Internet standards. The strategy is designed to allow software
developers to scale applications for both centralized and decentralized
information technology ("IT") departments and to integrate legacy computing
systems, new computing systems and emerging Internet/intranet technologies.
The Company markets and distributes its products worldwide primarily through
independent distributors, dealers, value-added resellers ("VARs") and
independent software vendors ("ISVs"). The Company also markets and sells to
corporations, governments, educational institutions and end-user customers
through direct sales and through the Internet.
During fiscal year 1997, the Company took steps to reduce costs and improve
its competitiveness and business processes. These actions included the
recruitment of a new chairman of the board and chief executive officer and a new
executive management team, reduction of the number of employees and
implementation of new marketing, sales and support programs. These restructuring
actions were made with the objective of bringing operations and operating
expenses in line with fiscal year 1997 revenue and revenue forecast for 1998.
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PRODUCTS
The Company develops, markets and supports computer software, primarily
programming and database management tools for building small and large scale
business software system. The Company's family of interoperable tools allow
software developers to create software applications for single desktop
computers, larger networked client/server database systems, corporate intranets,
the Internet and enterprise-wide computing environments.
The Company's product offerings can be divided into four categories:
Programming Tools, Internet/intranet Products, Intelligent Middleware and
Databases.
PROGRAMMING TOOLS
The Company's Windows programming tools include Borland C++, Borland
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C++Builder and Delphi. These tools are based on programming languages that
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enable developers to write software applications that can be read and executed
by a computer running Microsoft Corporation's ("Microsoft") Windows 3.1, Windows
95 or Windows NT operating systems. The Company's language tools are known for
their high performance, ease-of-use and reliability of generated code. These
products are primarily designed for professional software developers.
Borland C++ and Borland C++Builder are the Company's software development
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tools and compilers in the C and C++ computer languages. C is a programming
language often used by professional programmers to write operating systems,
systems software and software application programs. C++ is an enhanced version
of the C language that has object-oriented extensions. The newest addition to
the product line is Borland C++Builder. This product provides software
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developers with the power of the C++ programming language combined with the
ease-of-use of the rapid application development ("RAD") environment which was
pioneered by Borland's Delphi product described below.
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Borland's Delphi product is a high-performance rapid application software
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development tool based on the Pascal computer language. The Delphi product
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combines visual productivity tools and a high-performance compiler so that
software developers can build high-speed desktop and advance database systems in
less time than would be possible with conventional programming tools. There are
four separate versions of Delphi each of which is designed for a separate
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market. Of these, the Delphi Client/Server Suite is an advanced developer tool
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for building large-scale, high-performance enterprise applications that can
access relational database management system ("RDBMS") servers. The Delphi
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product line also includes a client/server edition for the IBM AS/400 hardware
platform.
INTERNET/INTRANET PRODUCTS
The Company has developed new products that facilitate software development
for the emerging Internet and intranet environments. IntraBuilder is a rapid
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application development tool set based on the popular JavaScript language. It
enables software developers to rapidly create and deploy interactive, data-
driven Webserver applications.
The Company is also developing a visual software development tool set for the
Java computer language which was developed by Sun Microsystems for Web-based
computing. The product, called JBuilder is expected to provide a rapid
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application development tool set for high-performance Java-based development.
INTELLIGENT MIDDLEWARE
Through the acquisition of Open Environment Corporation ("OEC") in fiscal year
1997, the Company added Entera and OLEnterprise to its family of development
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tools. These products are described in the computer software industry as
intelligent middleware. These products are designed to allow software developers
to build, manage and deploy large-scale and robust client/server applications in
a multi-tier
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computing environment. Entera provides an enterprise operating environment for
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building flexible integrated information systems. All of the Company's tools,
such as Delphi and Borland C++, can be combined with the Entera middleware
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technology to deliver scaleable multi-tier applications for business
enterprises. This provides customers with a reliable software development
environment that spans from desktop and two-tier client/server computing
environments to multi-tier, enterprise-wide and Internet/intranet computing
environments. OLEnterprise is designed to provide stability and reliability in a
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distributed, computing multi-tier computing environment so that integral
business systems will operate continuously without failing or crashing.
DATABASES
The Company's database management tool, Visual dBASE, is based on the dBASE
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programming language. This product enables users to create, save, retrieve and
manipulate databases, as well as to create both standard and customized reports.
The latest version of Visual dBASE includes a set of utilities that allows dBASE
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developers to create interactive database applications for the Internet and
corporate intranets.
At the beginning of fiscal year 1998 the InterBase product line was
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transferred to a wholly owned subsidiary of the Company, which was organized to
market and sell the InterBase product line. InterBase is a relational database
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management system that operates on personal computers, minicomputers and
workstations. InterBase provides unique solutions for creating new software
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applications or converting existing software applications to take advantage of
expanding Internet/intranet technology.
PRODUCT DEVELOPMENT
The Company is known for consistently providing high-quality and innovative
software tools for customers seeking greater productivity. The Company's
research and development programs are designed to develop new products and
improve existing products so as to maintain and improve the Company's
competitive position in the software development and application management
tools business. The Company's research and development efforts also support its
Golden Gate strategy which is designed to provide software tools that bridge
between client/server and Internet/intranet architectures, decentralized and
centralized IT departments and that provide interoperability between competing
technology standards. In addition to internal development, the Company from time
to time acquires new products and enhancements through acquisitions or licensing
from third parties.
The Company believes that its ability to develop innovative and successful
products depends in large part upon successfully executing product planning
strategies and research and development activities and upon its ability to
attract, hire and retain highly qualified engineers. During fiscal years 1997,
1996 and 1995, the Company incurred $55.2 million, $50.7 million and $63.8
million, respectively, in research and development costs and expenses.
Although the Company believes that its product planning strategy and
development processes will result in the successful development of technology
innovations in the future, due to the inherent uncertainties of software
development, there can be no assurance that the Company will be successful, or
that if successful, such innovations will result in successful products or
increased revenues or profits.
MARKETING AND DISTRIBUTION
The Company's products are sold to a broad customer base, which includes
businesses, educational institutions, government bodies and individual software
developers. The Company distributes its products domestically and
internationally, primarily through distributors, dealers, ISVs and VARs. The
Company also sells through a direct sales force and through the Internet.
Because the Company generally ships products upon receipt of orders, backlog is
neither significant nor an important measure of revenue for any future period.
The Company offers a number of marketing programs to assist its distributors,
retailers and resellers in their sales efforts. These programs include corporate
marketing and advertising and special sales incentives to
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retailers. In addition, the Company permits its distributors to balance their
inventories by periodically returning contractually limited amounts of products
in exchange for other products of the Company. The Company includes an estimate
for returns in its return reserves for the amount of product which may be
exchanged in accordance with this policy.
The Company is investing in communicating with its customers by electronic
means, and the Company has established a presence on the Internet through its
Web-site, Borland Online. Through Borland Online customers may access
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information regarding the Company's products, download trial versions of certain
products and participate in online discussion forums.
PRODUCT SUPPORT
The Company offers free installation support to the purchasers of its
products, including access to the technical support personnel through a special
telephone support line and through national electronic bulletin board services.
End-users also receive further support and information from the Company and
dealers through their local end-user groups. Support requirements have increased
in recent years as product offerings have become more complicated. The Company
has sought to address increasing support requirements in numerous ways,
including making its products easier to install and offering multiple kinds of
support programs, including paid-for support programs.
INTERNATIONAL SALES AND OPERATIONS
International net revenues (including exports from the U.S.) accounted for
approximately 62%, 51% and 45% of net revenues in fiscal years 1997, 1996 and
1995, respectively.
The Company believes that its international diversification not only increases
revenues but also provides stability to its business and reduces the impact on
the Company of adverse economic changes in any single country. The Company's
international business is subject to risks customarily encountered in foreign
operations, including fluctuations in monetary exchange rates, import and export
controls and the economic, political, tax and regulatory laws and policies of
foreign governments. Furthermore, the Company can provide no assurance that its
diversification strategy will be successful.
COMPETITION
The Company is in an extremely competitive industry which has been subject to
continual and rapid change. Certain of the Company's competitors have
substantially greater financial, management, marketing and technical resources
than the Company. In particular, Microsoft is a major competitor in development
tools and applications programs. Other competitors include Computer Associates
Internation, Inc., Forte, Oracle, Sybase and Symantec.
Current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third parties, thereby
increasing the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge in the future. There can be no assurance
that the Company will be able to compete successfully against current and future
competition, and the failure to do so would have a material adverse effect upon
the Company's business, operating results and financial condition.
The Company believes that the principal competitive factors in its industry
are technology, distribution and market capability, pricing, product performance
(including scalability and interoperability) and customer support. To remain
competitive, the Company must continually introduce new technologically
advanced products and update of existing products. As a result of rapid and
continual advances in the technology and the marketplace there can be no
assurance that the Company will be able to deliver such products and updates.
MANUFACTURING
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The Company out-sources its manufacturing support, primarily to a third-party-
vendor. The Company's products are principally sold in CD ROM format together
with user manuals. The Company believes that there are adequate supplies of and
sources for the raw materials for its products and that there are multiple
sources available for CD replication and printing of manuals.
The Company has final quality control tests performed on its products which
the Company believes effectively accomplish its product quality assurance goals.
There can be no assurance that the Company's quality control efforts will always
be completely successful.
PATENTS, COPYRIGHT AND TRADEMARKS
The Company relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other intellectual property
protection methods to protect its proprietary technology. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may copy aspects
of the Company's products or obtain and use information that the Company regards
as proprietary. Policing unauthorized use of the Company's products is
difficult, and the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the United States. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
in the United States or abroad will be adequate.
Although there are no pending material lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights,
there can be no assurance that infringement claims will not be asserted by third
parties in the future. If any such claims are asserted, there can be no
assurance that the Company will be able to obtain licenses of the intellectual
property rights in question on reasonable terms. The Company's involvement in
any patent dispute or other intellectual property dispute or action to protect
trade secrets and proprietary information may have a material adverse effect on
the Company. Adverse determinations in any litigation may subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties and prevent the Company from manufacturing and selling its
products. Any of these situations can have a material adverse effect on the
Company's business, results of operations or financial condition.
EMPLOYEES
As of May 31, 1997, the Company employed approximately 800 employees.
The Company believes that its success is highly dependent upon its ability to
recruit, retain and motivate qualified employees. The Company is subject to
regular, intense and at times extraordinary competition for such employees and
has taken actions that it has determined to be necessary or appropriate to
attract and retain such employees in light of such competition and recruiting
efforts. There can be no assurance, however, that the Company will continue to
be successful in doing so in the future.
None of the Company's U.S. employees are represented by a labor union.
Employees of certain of the Company's subsidiaries may be represented by
worker's councils or other similar organizations as required by local
regulations. The Company believes that its relations with its employees are
good.
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Continuing Operating Losses. The Company experienced substantial operating
losses for each of the four quarters in fiscal 1997 and a net loss of $108
million for the year. The Company also experienced operating losses for the
four fiscal years ended March 31, 1995. 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 implement
restructuring and cost control measures adopted during the quarter ended March
31, 1997 and to stem the loss of management and other key personnel. There can
be no assurance that the Company will be able to successfully accomplish the
foregoing or to regain profitability in future periods.
Restructurings. In response to the significant losses from operations, the
Company implemented restructurings and realignments of its operations in
October 1996 and February 1997. These restructurings resulted in significant
reductions in workforce and other ongoing costs. Given the extent of the
restructurings which the Company has undertaken, there can be no assurance that
the remaining resources are sufficient for the Company to return to revenue
growth or profitability, nor can there be any assurance that the Company will
realize the cost savings which the restructurings have been designed to produce.
Changes in Management and Key Personnel. During fiscal 1997, certain
management and other key personnel were hired away by competitors who offered
very substantial signing bonuses and compensation packages that would have been
very difficult for the Company to match. There can be no assurance that the
Company will not be subject to further losses of management and other key
personnel. In addition, the Company has had and may continue to be required to
substantially increase the compensation, stock options or other benefits offered
to employees in order to attract and retain management and other 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 new personnel,
may have a material adverse affect on the Company, its product launches and its
operating results.
Significant Fluctuations in Quarterly Operating Results and Seasonally. The
Company's quarterly operating results have varied significantly in the past and
the Company expects that such results are likely to vary significantly from time
to time in the future. Such variations result from, among other matters, the
following: the size and timing of significant orders and their fulfillment;
demand for the Company's products; the number, timing and significance of
product enhancements and new product announcements by the Company and its
competitors; changes in pricing policies by the Company or its competitors;
changes in the level of operating expenses; changes in the Company's sales
incentive plans; budgeting cycles of its customers; customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors; product life cycles; product defects and other product quality
problems; personnel changes; seasonal trends and general domestic and
international economic and political conditions. Operating results can also be
adversely impacted by deferrals of customer orders in light of customer
uncertainty regarding the Company's short- and long-term prospects. As an
increasing percentage of the Company's revenues are from client/server products,
the Company expects that an increasing percentage of its revenues will be from
large orders. The timing of such orders and their fulfillment may cause material
fluctuations in the Company's operating results, particularly on a quarterly
basis. In addition, the Company intends to continue to expand its domestic and
international direct sales force. The timing of such expansion and the rate at
which new sales people become productive could also cause material fluctuations
in the Company's quarterly operating results.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. Revenues are also difficult to forecast because the
market for client/server application development software is rapidly evolving,
and the Company's sales cycle for client/server products, from initial
evaluation to purchase and the provision of support services, is lengthy and
varies substantially from customer to customer. Because the Company normally
ships products within a short time after it receives an order, it typically does
not have any material backlog. As a result, to achieve its quarterly revenue
objectives, the Company is dependent upon obtaining orders in any given quarter
for shipment in that quarter. Furthermore, because many customers place orders
toward the end of a quarter, the Company generally recognizes a substantial
portion of its revenues at the end of a quarter. As the Company's expense levels
are based in significant part on the Company's expectations as
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to future revenues and are therefore relatively fixed in the short term, if
revenue levels fall below expectations, net income is likely to be
disproportionately adversely affected. There can be no assurance that the
Company will be able to achieve or maintain profitability on a quarterly or
annual basis in the future. Due to the foregoing factors, it is likely that in
some future quarter 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 would likely be materially adversely affected.
Dependence Upon Key Personnel; Need to Hire Additional Personnel. The success
of the Company depends in large part upon the ability of the Company to recruit
and retain qualified employees, particularly highly skilled engineers. The
competition for such personnel is intense and the Company has recently lost
management and other key personnel. There can be no assurance that the Company
will be successful in retaining or recruiting key personnel. Any failure by the
Company to expand or retain its engineering and other key personnel would
materially adversely affect the Company's business, operating results and
financial condition.
New Business Areas. The Company's revised strategy is to focus on software
developers and the growth of the client/server and Internet market. The
Company's relatively recent entry into this market is subject to a number of
risks, including among others, the Company's inexperience in this market; that
the market itself is new and evolving; that the Company must make choices
regarding the operating systems, database management systems and server software
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 that may be leveraged to gain market share.
Anticipated Decline in Revenue from Desktop Database Products. Most of the
Company's revenues to date have been attributable to its desktop products.
Revenues derived from desktop products accounted for approximately 58% and 73%,
of total revenues for the Company in fiscal 1997 and 1996, respectively.
Revenues derived from the sale of these products, particularly the Company's
desktop database products, have declined over the last three fiscal years. The
decline in revenues has been due to a number of factors, including, among
others, the success of product "suites" offered by competitors which have had an
adverse impact on the sale of individual products; the sale by the Company of
its Quattro Pro and Paradox product lines; and continued competitive pricing
pressures that have resulted in lower average sales prices for desktop products.
While the Company expects such decline to continue, revenues from the sales of
such products currently continue to represent an important portion of the
Company's revenues. Although the Company is continuing to invest in the
development, sales, marketing and support of such products on a limited basis,
there can be no assurance that revenues from such products will not decline
faster than expected. If revenues from such 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 adversely
affected.
New Product Introductions. The Company's future sales will depend
substantially on its ability to continue to successfully design and market new
products and upgrades of current products for existing and new personal computer
platforms and operating environments. 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, the acceptance of the Company's new products, the
acceptance of the Windows 95/NT operating systems, the Internet as a new
computing paradigm and the Java programming language, may adversely affect such
sales.
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, named J-Builder in the second 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
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substantially later, than the time frame within 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. Delays in the shipment of such products
and product enhancements will have a material adverse impact on the Company.
Without the introduction of such new products and product enhancements, the
Company's products may become technologically obsolete, and as a result the
Company's revenues could be materially adversely affected. There can be no
assurance that future development and marketing efforts by the Company will be
successful.
Extreme Volatility of Stock Price. Like the stock of other high technology
companies, the market price of the Company Common Stock has been and may
continue to be extremely volatile. During the past three fiscal years, the
market price of the Company's Common Stock has ranged from a high of $21.25 to a
low of $6.06. Factors such as quarterly fluctuations in the Company's results of
operations, the announcement of technological innovations or the introduction of
new products by the Company or its competitors, and general conditions in the
computer hardware and software industries may have a significant impact on the
market price of the Company's Common Stock.
Extremely Competitive Industry. The software industry is extremely
competitive. The Company competes with a large number of other companies,
including Microsoft Corporation ("Microsoft"), Computer Associates
International, Inc., Oracle Corporation, Sybase Corporation and Symantec.
Certain of its competitors have substantially greater financial, management,
marketing and technical resources than the Company. In recent months competitors
have utilized their greater resources to provide substantial signing bonuses and
other inducements to lure away the Company management and other key personnel.
In addition, Microsoft is the developer of the Windows operating environments.
To the extent that the Company is unable to obtain information regarding
existing and future operating systems from the developer of such systems, the
release of the Company's products for such systems may be delayed. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any one of which could materially
adversely affect the Company's business, operating results and financial
condition. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships, thereby increasing the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors may emerge, or
alliances among current and new competitors may be formed, that may rapidly gain
significant market share. Such competition could materially adversely affect the
Company's ability to sell additional licenses and maintenance and support
renewals on terms favorable to the Company. Further, competitive pressures could
require the Company to reduce the price of its products and related services,
which could materially adversely affect the Company's business, operating
results and financial condition. There can be no assurance that the Company will
be able to compete successfully against current and future competition, and the
failure to do so would have a material adverse effect upon the Company's
business, operating results and financial condition.
Evolving Market. In light of the changing market in which the Company
competes, it is uncertain whether the Company's historical product life cycle
will continue. 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 that
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 that are characterized by long sales cycles and increased transaction
values. As a result, such revenues may be subject to increased variability over
time.
Risks Associated with International Operations and Sales. Revenues derived
from international operations accounted for approximately 62%, 51% and 45% of
total revenues for the Company in fiscal 1997, 1996 and 1995, respectively.
There are certain risks inherent in doing business on an international level,
such as unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
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political instability, fluctuations in currency exchange rates, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world and potentially adverse tax consequences, any of which
could adversely impact the success of the Company's international operations.
There can be no assurance that one or more of such factors will not have a
material adverse effect on the Company's future international operations and,
consequently, on the Company's business, operating results and financial
condition. In addition, the Company's subsidiaries in Europe and Japan operate
in local currencies, and their results are translated monthly into US dollars.
If the value of the US dollar increases relative to foreign currencies, the
Company's results of operations could be materially adversely affected.
Anti-takeover Provisions. the Company's Stockholders' Rights Plan and certain
provisions of the Company's Certificate of Incorporation may discourage or
prevent certain types of transactions involving an actual or potential change in
control of the Company, including transactions in which the stockholders might
otherwise receive a premium for their shares over then current market prices,
and may limit the ability of stockholders to approve transactions that they may
deem to be in their best interests. In addition, the Company Board of Directors
has the authority to fix the rights and preferences of and issue shares of
Preferred Stock without action by the stockholders, which may have the effect of
delaying or preventing a change in control of the Company.
Software Defects and Liability Claims. Software products frequently contain
errors or defects, especially when first introduced or when new versions or
enhancements are released. Although the Company has not experienced any material
adverse effects resulting from any such defects or errors to date, there can be
no assurance that, despite testing by the Company and by current and potential
customers, defects and errors will not be found in current versions, new
versions or enhancements after commencement of commercial shipments, resulting
in the loss of revenues, delay in market acceptance or unexpected re-programming
costs, which could have a material adverse effect upon the Company's business,
operating results and financial condition.
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective as
a result of existing or future federal, state or local laws or ordinances or
unfavorable judicial decisions. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
10
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices and primary research and development
facilities are located at 100 Borland Way, Scotts Valley, California, and
comprise approximately 495,000 square feet of space, approximately half of
which is currently being utilized by the Company. The remainder is available for
lease. The executive offices were constructed in 1993 and are owned by the
Company. The Company owns additional office space located at 1700 and 1800 Green
Hills Road, Scott Valley, California, and these facilities are leased
principally to third parties and are currently listed for sale. Such facilities
comprise approximately 135,000 square feet of space and were constructed in
1988. The Company leases office space in other cities in the United States as
well as locations in Europe, Canada and the Pacific Rim.
ITEM 3. LEGAL PROCEEDINGS
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. This lawsuit 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. The Company is also subject to a second suit. 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 June 6, 1994 and October 19, 1994. As of
February 29, 1996 the parties had entered into a stipulation to settle both
these matters. This stipulation was then submitted to the Court for approval and
monies were deposited in escrow to fund the settlement. The Company recorded a
charge in the full amount of the settlement to be paid by the Company. On May
29, 1997, the Court entered an order declining to approve the present plan of
allocation proposed by counsel for the class representatives, but that order now
has been vacated in order that the parties may submit additional material in
support of the plan for distributing the settlement proceeds. Another hearing on
the plan has been scheduled for August 1, 1997. At this time, there can be no
assurance whether the plan will be approved, either in present or a modified
form, and the Court has established a schedule for completion of discovery and a
pretrial conference in March 1998. If not settled and litigated, in the event of
an adverse decision, such decision could have a material adverse effect on the
Company's financial condition and results of operations.
On January 16, 1996, in the case of Lotus Development Corp. v. Borland
----------------------------------
International, Inc., the U.S. Supreme Court affirmed the judgment of the U.S.
- -------------------
Court of Appeals for the First Circuit that Borland did not infringe the
copyright of Lotus's spreadsheet product, Lotus 1-2-3. The Company has initiated
proceedings in the U.S. District Court in Massachusetts for a determination of
what attorneys fees, if any, Borland may recover. On February 26, 1997, the U.S.
District Court in Massachusetts denied Borland's request for attorneys fees but
indicated the Court might award certain costs to Borland. The Company plans to
appeal the U.S. District Court's denial of attorneys fees.
On December 6, 1996 and December 19, 1996, two lawsuits were filed against the
Company's subsidiary, Open Environment Corporation, and certain former officers
and directors of Open Environment Corporation, alleging violations of federal
securities laws prior to the Company's acquisition of Open Environment
Corporation. The two lawsuits, Zeid vs. Open Environment Corp., et. al. and S &
---------------------------------------- ---
S Associates vs. Open Environment Corp., et. al. were both filed in the United
- -----------------------------------------------
States District Court for the District of Massachusetts. The lawsuits purport
to be class actions brought on behalf of purchasers of OEC common stock from
April 13, 1995 through October 10, 1996. The Company's OEC subsidiary intends
to defend these cases vigorously.
On May 7, 1997, the Company filed a lawsuit against Microsoft Corporation in
the Superior Court of California, County of Santa Clara. The suit alleges that
Microsoft has engaged in unfair competition in violation of California and
common law through, among other things, the concerted targeting and hiring of
numerous Borland employees. The Company seeks an injunction against Microsoft's
unlawful targeting, recruiting and hiring as well as damages, fees and costs.
On June 6, 1997 Microsoft removed the case to U.S. District Court for the
Northern District of California, but otherwise, Microsoft has not formally
responded to the complaint.
11
<PAGE>
In addition, 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 any of
the above 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the last quarter of fiscal year 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information on the Company's stock prices is detailed in the table entitled
"Selected Quarterly Data" located within "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7.
The Company's Common Stock has been traded on the over-the-counter market and
the NASDAQ National Market since December, 1989. As of April 30, 1997 there
were approximately 2,781 stockholders of record of the Company's Common Stock
and 37,023,989 shares outstanding. Because many of such shares are held by
brokers and other institutions on behalf of stockholders, the Company is unable
to estimate the total number of stockholders represented by these record
holders. During fiscal year 1997 the Company terminated its listing on the
London Stock Exchange to reduce administrative costs in light of limited volume.
In addition, the Company has applied to be delisted from the Pacific Stock
Exchange for the same reasons.
The Company paid no dividends during fiscal years 1997, 1996 and 1995. The
Company intends to retain future earnings for use in its business and therefore
does not anticipate paying cash dividends in the foreseeable future.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Company's consolidated financial statements. Historical results should not be
taken as necessarily indicative of the results that may be expected for any
future period. This data should be read in conjunction with the consolidated
financial statements and related notes, which are included herein.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
1997 1996/(a)/ 1995/(a)/ 1994/(a)/ 1993/(b)/
---------- ---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues.................................... $ 151,376 $245,087 $ 272,185 $406,682 $468,100
Cost of revenues................................ 29,450 38,157 59,739 113,270 124,940
--------- -------- --------- -------- --------
Gross profit.................................... 121,926 206,930 212,446 293,412 343,160
Selling, general and administrative............. 143,289 141,744 207,942 267,722 290,860
Research and development........................ 55,173 50,714 63,836 67,332 72,941
Restructuring and merger related charges........ 18,944 679 63,070 14,042 25,000
Other non-recurring charges..................... 17,100 -- -- -- --
Write-down of real estate held for sale......... -- -- -- 8,234 --
--------- -------- --------- -------- --------
Total operating expenses........................ 234,506 193,137 334,848 357,330 388,801
--------- -------- --------- -------- --------
Operating income (loss)......................... (112,580) 13,793 (122,402) (63,918) (45,641)
Interest income, net and other.................. 5,137 4,221 3,562 1,910 3,822
Gain on sale of Quattro Pro..................... -- -- 109,927 -- --
--------- -------- --------- -------- --------
Income (loss) before income taxes............... (107,443) 18,014 (8,913) (62,008) (41,819)
Income tax provision (benefit).................. 517 3,295 2,914 7,061 8,546
--------- -------- --------- -------- --------
Net income (loss)............................... $(107,960) $ 14,719 $ (11,827) $(69,069) $(50,365)
========= ======== ========= ======== ========
Net income (loss) per common
and common equivalent share.................... $ (2.96) $ .40 $ (.37) $ (2.23) $ (1.92)
========= ======== ========= ======== ========
Weighted average number of common and
common equivalent shares outstanding........... 36,512 37,167 32,228 31,042 26,266
1997 1996 1995 1994 1993
------------- ------------- ------------ --------------- -------------
(IN THOUSANDS)
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments
$ 54,360 $107,836 $ 70,597 $ 68,612 $ 75,117
Working capital (deficit)........................ (1,289) 86,628 4,652 (42,116) 45,063
Total assets..................................... 192,702 292,234 254,472 302,392 342,841
Total long term obligations...................... 22,508 14,583 21,101 19,943 23,271
Stockholders' equity............................. 89,876 200,295 121,483 121,346 188,467
</TABLE>
- --------------------------------
/(a)/ Results for the years ended and balances at March 31, 1996, 1995, 1994 and
1993 are restated to reflect the acquisition of OEC which was accounted
for as a pooling of interests.
/(b)/ OEC began operations in 1992 as a division of CTG, there were no shares of
capital stock outstanding in their fiscal year ended December 31, 1992,
which is combined with Borland's fiscal year ended March 31, 1993 for
pooling of interest purposes.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that are subject
to significant risks and uncertainties. There are several important factors that
could cause actual results to differ materially from historical results and
percentages and results anticipated by the forward-looking statements. Such
factors and risks include, but are not limited to, risk that are inherent in
software development and specific risks relating to the competitive environment
in which the Company operates. The Company has sought to identify the most
significant risks to its business, but 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 risks that might arise. Investors should
carefully consider all such risks before making an investment decision with
respect to the Company's stock. In particular, investors should refer to the
Investment Considerations set forth in Item 1 of the Company's Annual Report on
Form 10-K.
The following tables set forth certain data derived from the Consolidated
Statements of Operations expressed as a percentage of net revenues for each of
the fiscal years ended March 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Percentage of net revenues:
Net revenues.................... 100.0% 100.0% 100.0%
Cost of revenues................ 19.5 15.6 21.9
------ ----- -----
Gross margin.................... 80.5 84.4 78.1
Selling, general and
administrative................. 94.7 57.8 76.4
Research and development........ 36.4 20.7 23.5
Restructuring and merger
related charges................ 12.5 0.3 23.2
Other non-recurring charges..... 11.3 -- --
------ ----- -----
Total operating expenses 154.9 78.8 123.1
------ ----- -----
Operating income (loss)......... (74.4) 5.6 (45.0)
Interest income, net and other.. 3.4 1.8 1.3
Gain on sale of Quattro Pro..... -- -- 40.4
------ ----- -----
Income (loss) before income
taxes.......................... (71.0) 7.4 (3.3)
Income tax provision............ 0.3 1.4 1.0
------ ----- -----
Net income (loss)....... (71.3)% 6.0% (4.3)%
====== ===== =====
</TABLE>
Percentage of net revenues:
United States...................... 38% 49% 55%
Non-US (includes US export sales).. 62 51 45
------ ----- -----
100% 100% 100%
====== ===== =====
OVERVIEW
Fiscal year 1997 was a challenging year for the Company. The Company
implemented worldwide restructurings, acquired Open Environment Corporation
("OEC") and put in place a plan for releasing new products and upgrades on a
periodic basis. In addition, the Company took steps to reduce costs and improve
its competitiveness and business processes. These actions included the
recruitment of a new chairman of the board and chief executive officer and a new
executive management team, reduction of the number of employees and the
implementation of new marketing, sales and support programs. The Company
believes these restructuring actions were necessary to bring operations and
operating expenses in line with fiscal year 1997 revenue and revenue forecast
for 1998.
15
<PAGE>
OPEN ENVIRONMENT CORPORATION MERGER
On November 18, 1996, the Company completed the acquisition of OEC. Borland
issued 4,975,000 shares of its common stock, or approximately 16% of the total
number of shares of Borland Common Stock outstanding as of that date in exchange
for all the outstanding common stock of OEC. In addition, Borland assumed
options for the purchase of approximately 1,190,000 shares of OEC Common Stock,
which were converted to options to purchase approximately 786,000 shares of
Borland Common Stock upon completion of the merger.
The merger was accounted for as a pooling of interests, and accordingly, the
Company's consolidated financial statements have been restated for all periods
presented. The Company reports its financial results on a March 31 fiscal year
end basis, whereas OEC reported its financial results on a calendar year basis.
For purposes of pooling of interests accounting, the balance sheet of the
Company as of March 31, 1996 has been combined with that of OEC as of December
31, 1995. The statements of operations of the Company for the years ended March
31, 1996 and 1995 have been combined with those of OEC for the years ended
December 31, 1995 and 1994, respectively.
OEC's statement of operations for the three months ended March 31, 1996 have
not been combined with any of the Company's statements of operations. Instead,
OEC's net income for that period has been credited to retained earnings. (See
Note 3 to the Consolidated Financial Statements).
NET REVENUES
The Company, develops, markets and supports software development tools,
intelligent middleware database management systems, and application management
systems for business enterprises and independent software developers. The
Company has several product lines and additional complementary products and
services that are designed to meet the needs of software developers and business
enterprises developing and using software in desktop, local area network
("LAN"), client/server and Internet/Intranet environments.
The Company distributes its products domestically and internationally through
independent distributors, dealers, ISVs and VARs and also by direct marketing
and sales to corporations, government bodies, educational institutions 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; and
allowances for estimated future returns, exchanges and rebates are recorded as a
reduction of revenue at that time.
Net revenues were $151.4 million, $245.1 million and $272.2 million in fiscal
years 1997, 1996 and 1995, respectively. Included in net revenues for fiscal
years 1997, 1996 and 1995 are revenues of $8.2 million, $29.9 million and $18.1
million respectively, related to OEC. Exclusive of such OEC revenues, revenues
declined by $72.0 million from fiscal years 1996 to 1997. The decline in net
revenues was primarily related to a decline in desktop product revenue
principally caused by extremely competitive pricing and reduced market share.
Net revenue from the desktop products in fiscal year 1997 declined $82.0 million
or 46%, as compared to fiscal year 1996. This decline in revenues during fiscal
year 1997 was partially offset by an increase in client/server products.
In the fourth quarter of 1997 the percentage of revenues associated with all
of the Company's desktop products constituted only 57.5% of all of the Company's
revenue as compared with 72.9% (81.7% excluding OEC), in the same period of the
prior year. In contrast, the Company's revenues from the sale of client/server
products increased to 42.2% (26.3% excluding OEC) in the fourth quarter of
fiscal year 1997, as compared with 26.4% (17.5% excluding OEC), in the same
period of the prior fiscal year. If the Company continues to experience declines
in sales of its desktop products beyond those levels already experienced, which
are not offset by sales of other products, the Company's operating results and
financial condition would be materially and adversely affected.
16
<PAGE>
Net revenues for fiscal 1996 and 1995, include $7.9 million and $27.1 million,
respectively, related to the sale of licenses of Paradox for Windows to Novell,
Inc. Exclusive of such license revenue in fiscal years 1996 and 1995, fiscal
year 1996 revenue declined from fiscal year 1995 by $7.9 million. Such revenues
declined for several reasons. These include an increasingly competitive
marketplace, including offerings by competitors of product suites at lower
prices, and declines in revenues from DOS product versions.
The Company's non-U.S. revenues represented approximately 59%, 45% and 43% of
total net revenues in fiscal years 1997, 1996 and 1995, respectively. The
increase in the percentage of non-U.S. revenues in fiscal years 1997 and 1996
was caused by aggressive pricing in the U.S. retail channel, the timing of
releases of foreign language versions of products and the slower decline in
revenues from desktop database products in non-U.S. markets. In addition in
fiscal year 1995, the Company recorded as part of U.S. revenues a large non-
recurring license fee from Novell, Inc. Fluctuations in currency exchange rates
did not have a material impact on total net revenues or operating results in
fiscal years 1997, 1996 or 1995. However, there can be no assurance that
fluctuations in currency exchange rates will not have a material impact on the
Company's future net revenues, operating results, or financial condition.
17
<PAGE>
Disposition of Products
- -----------------------
In June, 1994, the Company sold its Quattro Pro product line to Novell, Inc.
for $145 million in cash. The terms of the agreement also entitled Novell to
certain licensing rights to distribute up to one million copies of the Company's
Paradox for Windows database product over a three year period in a suite of
products also containing Quattro Pro for Windows and WordPerfect for Windows. Of
the $145 million, $110 million was attributed to the sale of the Quattro Pro
product line and $35 million to the Paradox licenses. In fiscal year 1997, the
Company granted a license to Corel Corporation. Pursuant to these rights, Corel
has rights to market and enhance the products; however, the Company retains
limited distribution rights until October, 1997.
In fiscal year 1995, the Company reported revenue of $27.1 million related to
the Paradox licenses and a net non-operating gain of $109.9 million related to
the sale of Quattro Pro, which reflected the costs and expenses of disposing of
the Quattro Pro product line, the net book value of assets sold to Novell and
the operating profit of the Quattro Pro product line for the first fiscal
quarter. As a result of the Company's significant tax loss carry-forwards and
other tax benefits, the Company did not incur a significant tax expense related
to this gain. Following the closing of this transaction, the Company no longer
had revenues related to sales of the Quattro Pro and Borland Office products.
Combined Quattro Pro and Borland Office revenues were $101.6 million and $87.3
million for the fiscal years 1994 and 1993, respectively. Such revenues were
25.8% and 18.8% of fiscal years 1994 and 1993 revenues, respectively. During
fiscal year 1994, the cost of revenues and operating expenses directly
attributable to Quattro Pro and Borland Office were $44.7 million and $29.2
million, respectively, which costs have not continued subsequent to the
disposition of the product line. The proforma net revenues and related operating
loss of the Company for the year ended March 31, 1994, after giving effect to
the Novell transaction as if it had been consummated at April 1, 1993, were
$291.9 million and $92.8 million, respectively.
The Company acquired ReportSmith, Inc. in May 1994 in exchange for
approximately 1.8 million shares of the Company's common stock and options.
Under the terms of the agreement, the former holders of ReportSmith stock had
the right to demand payment in cash for their stock, which election was made.
During the fiscal years ended March 31, 1996 and 1995, the Company paid out
cash of approximately $0.8 million and $16.0 million, respectively, to redeem
such shares. This acquisition was accounted for under the purchase method of
accounting. In connection with this transaction and based on an appraisal, the
Company recorded a write-off of $16.2 million at the time of the acquisition,
related to the estimated value of acquired research and development in process.
Inflation
- ---------
Inflation has not had a significant impact on the Company's revenues or
operations.
GROSS MARGINS
Gross margins were 80.5%, 84.4% and 78.1% in fiscal years 1997, 1996 and 1995,
respectively. Included in fiscal year 1996 is deferred license revenue of $7.9
million associated with the Paradox licenses sold to Novell in fiscal year 1995.
Without this revenue, gross margins for fiscal year 1996 would have been 83.9%.
Gross margins in fiscal year 1997 were negatively impacted by lower revenues,
resulting from lower volumes and lower selling prices. This also resulted in
certain fixed costs being spread across lower revenues, as well as by charges
related to the write-off of excess inventory. Favorable gross margins are
dependent upon the
18
<PAGE>
Company's ability to successfully manage its outsourcing arrangements and its
ability to sustain a higher percentage of revenues from products with relatively
higher margins.
Gross margins in fiscal year 1996 benefited from a cost reduction achieved as
a result of the outsourcing of the Company's manufacturing operations which
commenced in April, 1995. In addition, gross margins for the fiscal year 1996
were favorably affected as a higher percentage of revenues were generated from
products with relatively higher margins. Specifically, the increased business
from site licenses and OEM arrangements contributed to this favorable product
mix.
Gross margins in fiscal year 1995 were favorably impacted by the $27.1 million
of license revenue from the Paradox licenses sold to Novell. Excluding the
effect of this sale, gross margins for fiscal year 1995 would have been 75.6%.
Fiscal year 1995 gross margins were negatively impacted by lower revenues.
Amortization of acquired technology rights and capitalized software
development costs was $0.5 million, $0.9 million, and $2.3 million in fiscal
years 1997, 1996 and 1995, respectively.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $143.3 million, $141.7
million and $207.9 million in fiscal years 1997, 1996 and 1995, respectively.
Such expenses were 94.7%, 57.8% and 76.4% of revenues in years fiscal 1997, 1996
and 1995, respectively.
Selling, general and administrative ("SG&A") expenses increased in fiscal year
1997 from fiscal year 1996 in the areas of marketing, employee costs, facilities
and outside services. These increases primarily resulted from the acquisition
of OEC in November, 1996. Excluding the costs associated with OEC, the fiscal
year 1997 selling, general and administrative costs were $133.4 million, or
88.1% of revenue excluding revenue associated with OEC. Exclusive of OEC, SG&A
expenses as a percentage of revenue in fiscal year 1997 increased due to the
costs associated with recruiting new employees and costs associated with
retention and motivation of existing employees. (See Item 11. Executive
Compensation and Note 10 to the Consolidated Financial Statements).
Selling, general and administrative expenses decreased in fiscal year 1996
from fiscal year 1995 in the areas of marketing, employee costs, facilities and
outside services. These reductions primarily resulted from the restructuring
which occurred in January, 1995 in order to reduce the Company's cost structure.
Although certain selling, general and administrative expenses can be managed
or controlled on a short-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 impacts on its net revenues or margins because of delays in new
product introductions, price competition or other competitive factors, the
Company generally is unable to take actions in the short term to substantially
reduce expenses. As part of its efforts to attract and retain key employees, the
Company has adopted certain special bonus and other severance retention
programs. Such programs may have the effect of increasing the Company's
selling, general and administrative expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal years 1997, 1996 and 1995 were
$55.2 million, $50.7 million, and $63.8 million, respectively. Such expenses
were 36.4%, 20.7% and 23.5% of revenues in fiscal years 1997, 1996 and 1995,
respectively. This investment in research and development in fiscal year 1997
resulted in the release of a new product of Borland C++ Builder for Windows
-------------------
95/NT, and new versions of Delphi for Windows 95/NT, Intrabuilder for Windows
------ ------------
95/NT and InterBase. Substantial amounts were also invested in developing
---------
JBuilder, a new product which is scheduled to be released late this fiscal year.
The
19
<PAGE>
increase in research and development expenses from the prior year reflects
the efforts to increase product lines while continuing to release new versions
of existing products.
The Company incurs substantial development expenses in connection with the
introductions of a new product and generally significant portions of such costs
are incurred before the release of the new product. 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 to develop a new product, but
significant revenues from the new product are not recognized until later
quarters.
The Company has historically offered technical support to the purchasers of
its products. Support requirements continue to increase as product offerings
increase in sophistication, the Company's client/server business increases and
the client/server market expands to more sophisticated users and developers.
Such markets require an overall higher level of technical support expertise,
which could translate into a higher levels of personnel costs. However, the
combination of increasing support requirements and lower gross margins for the
Company's support products may have a material adverse effect on the Company's
operating results and financial condition. As part of its efforts to attract and
retain key employees, the Company has adopted certain special bonus and other
severance retention programs. Such programs may have the effect of increasing
the Company's selling, general and administrative expenses.
In addition, the Company has had and may continue to be required to
substantially increase the compensation, stock options or other benefits offered
to employees in order to attract and retain management and other 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 new personnel,
may have a material adverse affect on the Company, its product launches and its
operating results.
RESTRUCTURING, MERGER AND OTHER NON-RECURRING CHARGES
During fiscal year 1997, the Company recorded restructuring and merger related
charges totaling $18.9 million. OEC recorded a revision for restructuring
charges of $1.1 million in the quarter ended June 30, 1996. Charges included
write-off of inventory, prepaid royalties and facilities related to discontinued
education centers, and severance. In response to significant losses from
operations in the three and six months ended September 30, 1996, the Company
implemented a world-wide restructuring and realignment of its corporate
structure during October 1996, which resulted in a 15% reduction in workforce.
In connection with this restructuring, the Company recorded a $3.0 million
restructuring charge in the quarter ended December 31, 1996 primarily for
severance costs and lease terminations.
Based on the results of the October 1996 restructuring and the results of the
quarter ended December 31, 1996, the Company implemented an additional worldwide
restructuring and realignment and recorded the related charge of $6.5 million
during the quarter ended March 31, 1997. The fourth quarter restructuring plan
involved significant reductions in operational expenses as well as the
implementation of new programs aimed at increasing the Company's revenues. The
restructuring included measures to achieve a reduction in employees and
contractors of approximately 300 personnel worldwide, or a reduction of
approximately 30 percent. The Company also implemented new marketing and
support programs to replace programs no longer integral to Borland's core
business or strategic focus.
The Company recorded in the quarter ended December 31, 1996 a $3.0 million
restructuring charge of which $2.0 million was related to severance costs
associated with the reduction in the worldwide workforce, $.4 million to the
termination of certain lease agreements and $.1 million to the write off of
certain fixed assets $.5 million to other costs associated with the
restructuring.
Pursuant to the merger with OEC (see Note 3 to the Consolidated Financial
Statements ) the Company incurred merger related costs of $8.9 million. The
charge for merger related costs included in the Consolidated Statements of
Operations (see Note 6 to the Consolidated Financial Statements) consists
principally of severance costs, write-offs of certain assets and professional
fees.
20
<PAGE>
During fiscal year 1995, the Company recorded restructuring charges of $50
million. The restructuring charges were incurred for the world wide reduction
of the workforce by approximately 40%, the centralization of certain marketing
and development activities to improve efficiency, the outsource of manufacturing
operations in the U.S. and in Europe and the write-down of facilities and
certain purchased technology costs. In addition, several international
operations were closed, sales efforts in those areas are now conducted through
authorized distributors.
During the fourth quarter of fiscal year ended March 31, 1997 the Company
incurred non-recurring charges of $17.1 million relating to professional fees
and settlement costs.
INCOME TAXES
On a consolidated basis, the Company generated a pre-tax loss of approximately
$107.4 million in fiscal year 1997, a pre-tax profit of approximately $18.0
million in fiscal year 1996 and a pre-tax loss of approximately $8.9 million in
fiscal year 1995. Income tax expense was approximately $0.5 million, $3.3
million and $2.9 million in fiscal years 1997, 1996 and 1995, respectively.
For U.S. federal income tax purposes, the Company has net operating loss
carryforwards of approximately $177 million at March 31, 1997. There are also
available U.S. federal tax credit carryforwards of approximately $22 million.
These loss and credit carryforwards expire between 1998 and 2012, if not
utilized. The Company also has an Alternative Minimum Tax (AMT) credit
carryforwards of approximately $2 million, which does not expire. Additionally,
the Company has approximately $34 million of net operating loss carryforwards in
various foreign jurisdictions. Certain of these loss carryforwards will expire
beginning in 1998, if not utilized.
At March 31, 1997, the Company had a net deferred tax asset of approximately
$136 million. This asset is comprised of the tax effect of the above described
loss and credit carryforwards, plus the tax effect of future reversing temporary
differences. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been provided. Deferred tax assets and related valuation allowances of
approximately $37 million relate to certain U.S. operating loss carryforwards
resulting from the exercise of employee stock options, the tax benefit of which,
when recognized, will be accounted for as a credit to additional paid-in capital
rather than a reduction of the income tax provision.
During the year ended March 31, 1997 the Company recorded an income tax
benefit of approximately $2.1 million resulting from a settlement reached with
the U.S. Internal Revenue Service ("IRS"). The settlement resolved differences
regarding certain disputed deductions related to the years ending in 1986-1991
for its former subsidiary Ashton-Tate Corporation. Without the settlement
benefit, the Company would have incurred an income tax expense of approximately
$2.6 million.
During the year, the Company successfully appealed a foreign tax assessment of
approximately $18 million including interest. The Company originally was
successful in abating the assessment; yet, the foreign tax authority had
appealed the decision of the court. The above appeal has now definitively abated
the assessment.
At March 31, 1997 the Company had unresolved deficiency notices or proposed
adjustments from IRS and various state governments for additional taxes and
interest of approximately $5 million. The Company is protesting these
assessments or adjustments with the appellate divisions of the respective tax
authorities. The Company believes that the ultimate outcome of the above
assessment will not have a material adverse impact on the Company's financial
position or results of operations.
LITIGATION
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. This lawsuit 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. The Company is also subject to a second suit. 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 June 6, 1994 and October 19, 1994. As of
February 29, 1996 the parties had entered into a stipulation to settle both
these matters. This stipulation was then submitted to the Court for approval and
monies were deposited in escrow to fund the settlement. The Company recorded a
charge in the full amount of the settlement to be paid by the Company. On May
29, 1997, the Court entered an order declining to approve the present plan of
allocation proposed by counsel for the class representatives, but that order now
has been vacated in order that the parties may submit additional material in
support of the plan for distributing the settlement proceeds. Another hearing on
the plan has been scheduled for August 1, 1997. At this time, there can be no
assurance whether the plan will be approved, either in present or a modified
form, and the Court has established a schedule for completion of discovery and a
pretrial conference in March 1998. If not settled and litigated, in the event
of an adverse decision, such decision could have a material adverse effect on
the Company's financial condition and results of operations.
On January 16, 1996, in the case of Lotus Development Corp. v. Borland
----------------------------------
International, Inc., the U.S. Supreme Court affirmed the judgment of the U.S.
- -------------------
Court of Appeals for the First Circuit that Borland did not infringe the
copyright of Lotus's spreadsheet product, Lotus 1-2-3. The Company has initiated
proceedings in the U.S. District Court in Massachusetts for a determination of
what attorneys fees, if any, Borland may recover. On February 26, 1997, the U.S.
District Court in Massachusetts denied Borland's request for attorneys fees but
indicated the Court might award certain costs to Borland. The Company plans to
appeal the U.S. District Court's denial of attorneys fees.
On December 6, 1996 and December 19, 1996, two lawsuits were filed against the
Company's subsidiary, Open Environment Corporation, and certain former officers
and directors of Open Environment Corporation, alleging violations of federal
securities laws prior to the Company's acquisition of Open Environment
Corporation. The two lawsuits, Zeid vs. Open Environment Corp., et. al. and S &
---------------------------------------- ---
S Associates vs. Open Environment Corp., et. al. were both filed in the United
- -----------------------------------------------
States District Court for the District of Massachusetts. The lawsuits purport
to be class actions brought on behalf of purchasers of OEC common stock from
April 13, 1995 through October 10, 1996. The Company's OEC subsidiary intends
to defend these cases vigorously.
On May 7, 1997, the Company filed a lawsuit against Microsoft Corporation in
the Superior Court of California, County of Santa Clara. The suit alleges that
Microsoft has engaged in unfair competition in violation of California and
common law through, among other things, the concerted targeting and hiring of
numerous Borland employees. The Company seeks an injunction against Microsoft's
unlawful targeting, recruiting and hiring as well as damages, fees and costs. On
June 6, 1997 Microsoft removed the case to U.S. District Court for the Northern
District of California, but otherwise, Microsoft has not formally responded to
the complaint.
In addition, 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 any of
the above 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.
21
<PAGE>
The computer software 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
22
<PAGE>
Cash, cash equivalents and short-term investments were $54.4 million at March
31, 1997, a decrease of $53.4 million from a balance of $107.8 million as of
March 31, 1996. Working capital decreased from $86.6 million as of March 31,
1996 to $(1.3) million as of March 31, 1997.
Net cash used by the Company for operating activities during fiscal year 1997
was $56.2 million. The primary use of cash was to fund ongoing operations.
However, the Company incurred substantial cash expenditures related to the two
restructurings. Net cash paid for severance and facilities costs associated with
restructurings, approximated $10.8 million. In addition, the Company paid
approximately $12 million related to bonus and retention plans. (See Note 10 to
the Consolidated Financial Statements).
Net cash provided by investing activities of $21.9 million consisted primarily
of $4.9 million of acquisitions of property and equipment which was offset by
$4.6 million provided by the sale of fixed assets and real estate held for sale
and a decrease in short-term investments of $22.4 million. Cash provided by
financing activities, resulting primarily from the exercises of employee stock
options, provided net cash of $3.6 million.
Included in the Company's cash flows for the fiscal year 1997 is $1.5 million,
which represents the net cash provided by OEC for the three months ended March
31, 1996.
Currency fluctuations have had an insignificant impact on the Company's cash
flow during fiscal year 1997. The Company cannot predict the impact such
fluctuations might have on its future cash flows and there can be no assurance
that foreign exchange rates will not have a material impact on future cash
flows.
The Company expects to raise additional equity during fiscal 1997 in order to
improve its working capital position; nonetheless, in the absence of such
financing, 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 fiscal year 1998.
RECENT EVENTS
On June 30, 1997, the Company completed a private placement of 495 shares of
convertible preferred stock for approximately $25 million, net of issuance
costs. The non-dividend paying convertible preferred stock is convertible into
common shares of the Company. Each preferred share is accompanied by a warrant
to purchase 400 shares of the Company's common stock. The conversion price for
the convertible preferred stock and the warrant exercise price is based on the
market value of the Company's common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" ("SFAS 129") and Statement of Financial Accounting Standards
128, "Earnings per Share" ("SFAS 128"). SFAS No. 129 establishes standards for
disclosing information about an entity's capital structure. SFAS 129 is
effective for financial statements for the periods ending after December 15,
1997. The Company will adopt SFAS 129 in the year ending March 31, 1998, and has
not yet determined the effect of the adoption.
SFAS 128 simplifies the standards for computing earnings per share (EPS)
previously found in APB No. 15, "Earnings per Share," and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the financial statements for all entities with
complex capital structures. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS is computed similarly
to fully diluted EPS under APB Opinion No. 15. SFAS 128 is effective for the
Company's fiscal quarter ending December 31, 1997. The following table
represents unaudited, pro forma disclosures of basic and diluted EPS in
accordance with SFAS 128 assuming the standard was adopted during all periods
presented below:
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) per common share - as reported $(2.96) $ 0.40 $( 0.37)
Basic net income (loss) per common share - pro forma $(2.96) $ 0.43 $( 0.37)
Diluted net income (loss) per common share - pro forma $(2.96) $ 0.40 $( 0.37)
</TABLE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY DATA
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30
1997 1996 1996 1996 1996 1995 1995 1995
--------- ---------- --------- --------- -------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, PERCENTAGES AND STOCK PRICES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ $ 37,168 $ 36,756 $ 39,306 $ 38,146 $70,462 $55,261 $59,126 $60,238
Cost of revenues........................ 6,032 6,961 7,559 8,898 9,983 8,729 10,008 9,437
Gross profit............................ 31,136 29,795 31,747 29,248 60,479 46,532 49,118 50,801
Selling, general and administrative..... 37,493 33,986 32,575 39,235 38,457 33,746 33,392 36,149
Research and development................ 13,276 14,038 14,679 13,180 15,493 11,611 12,424 11,186
Restructuring and merger related charges 5,976 11,885 -- 1,083 -- 679 -- --
Other non-recurring
charges............................... 17,100 -- -- -- -- -- -- --
--------- -------- -------- -------- ------- ------- ------- -------
Operating income (loss)................. (42,709) (30,114) (15,507) (24,250) 6,529 496 3,302 3,466
Net income (loss)....................... $ (42,470) $(29,371) $(14,310) $(21,809) $ 6,957 $ 1,116 $ 3,492 $ 3,154
========= ======== ======== ======== ======= ======= ======= =======
Net income (loss) per common and
common equivalent share................ $ (1.15) $ (0.81) $ (0.40) $ (0.60) $ 0.18 $ 0.03 $ 0.09 $ 0.10
========= ======== ======== ======== ======= ======= ======= =======
Weighted average number of common
and common equivalent shares out-
standing............................... 37,006 36,429 36,319 36,268 38,294 38,717 37,162 33,572
Percentage of net revenues:
Gross profit........................... 83.8 % 81.1 % 80.8 % 76.7 % 85.8% 84. 2% 83.1% 84.3%
Operating income (loss)................ (114.9) % (81.9)% (39.5)% (63.6)% 9.3% 0.9% 5.6% 5.8%
Net income (loss)...................... (114.3) % (79.9)% (36.4)% (57.2)% 9.9% 2.0% 5.9% 5.2%
Stock prices:
High................................... $ 8.56 $ 8.44 $ 9.25 $ 20.00 $ 21.25 $ 20.63 $ 17.25 $ 14.38
Low.................................... 5.69 4.75 6.38 9.13 13.38 12.50 10.13 7.75
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements included with this Form 10-K are set forth
under Item 14 hereof.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on any matter of accounting principles, financial
statement disclosure, or auditing scope or procedure to be reported under this
Item.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the sections of the Company's proxy statement for
the 1997 Annual Meeting of Stockholders entitled "Election of Directors" and
"Management".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the sections of the Company's proxy statement for
the 1997 Annual Meeting of Stockholders entitled "Compensation of Executive
Officers" and "Compensation of Directors".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the sections of the Company's proxy statement for
the 1997 Annual Meeting of Stockholders entitled "Security Ownership of
Management and Principal Stockholders".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the sections of the Company's proxy statement for
the 1997 Annual Meeting of Stockholders entitled "Certain Transactions".
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
Report of Independent Accountants for Borland International, Inc.
Report of Independent Auditors for Open Environment Corporation
Report of Chartered Accountants for Jarrah Technologies Pty. Limited
Consolidated Balance Sheets at March 31, 1997 and 1996
Consolidated Statements of Operations for fiscal years ended March 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the three years
ended March 31, 1997
Consolidated Statements of Cash Flows for fiscal years ended March 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
26
<PAGE>
3. EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- ---------------- ---------------------------------------------------
2.30(9) Agreement and Plan of Merger among Borland
International, Inc., Aspen Acquisition Corporation
and Open Environment Corporation dated May 11,
1996.
3.1(1) Restated Certificate of Incorporation of the
Registrant
3.2(9) Amended By-Laws of the Registrant
4.1(9) Restated Certificate of Incorporation and Bylaws
of the Registrant are filed as Exhibits 3.1
and 3.2, respectively
4.2(3) Rights Agreement dated as of December 23, 1991
between Borland International, Inc. and
Manufacturers Hanover Trust Company of California
10.1(4) Loan commitment secured by a mortgage entered into
with Sanwa Bank California, Wells Fargo Bank, and
Pacific Trust Fund Company dated September 17,
1987 and amendment thereto dated April 27, 1988
10.2(5) Form of Indemnity Agreement
10.3(6) 1990 Employee Stock Purchase Plan
10.4(2) Non-Employee Directors' Stock Option Plan
10.5(7) 1992 Stock Option Plan
10.6(8) 1993 Stock Option Plan
10.7 Employment Agreement with Delbert W. Yocam as amended
11.1 Computation of Earnings (Loss) Per Share
22.1 Active Subsidiaries of Registrant
23.1 Consent of Price Waterhouse LLP, Independent
Accountants
23.2 Consent of Ernst & Young LLP, Independent
Auditors
23.3 Consent of Chartered Accountants for Jarrah Technologies
Limited.
24.1 Powers of Attorney
27.1 Financial Data Schedule
(1) Previously filed as Exhibit to Registrant's Registration Statement on
Form S-4 (filed with the Commission on July 18, 1989) and incorporated
herein by reference.
(2) Previously filed as Exhibit to Registrant's Current Report on Form 8-K
(filed with the Commission on December 27, 1991) and incorporated herein by
reference.
(3) Previously filed as Exhibit to Registrant's Annual Report on Form 10-K for
the year ended March 31, 1990 and incorporated herein by reference.
(4) Previously filed as Exhibit to Registrant's Amendment No. 1 to Registration
Statement on Form S-1 (filed with the Commission on December 12, 1989) and
incorporated herein by reference.
27
<PAGE>
(5) Previously filed as Exhibit to Registrant's Registration Statement on
Form S-8 (filed with the Commission on September 26, 1990) and incorporated
herein by reference.
(6) Previously filed as Exhibit to Registrant's Annual Report on Form 10-K for
the year ended March 31, 1993 and incorporated herein by reference.
(7) Previously filed as Exhibit to Registrant's Registration Statement on
Form S-8 (filed with the Commission on July 24, 1992) and incorporated
herein by reference.
(8) Previously filed as Exhibit to Registrant's Registration Statement on
Form S-8 (filed with the Commission on March 11, 1993) and incorporated
herein by reference.
(9) Previously filed on Form 8 and incorporated herein by reference.
A copy of any exhibit will be furnished (at a reasonable cost) to any
stockholder of the Company upon receipt of a written request. Such request
should be sent to Borland International, Inc. 100 Borland Way, Scotts Valley, CA
95066-3249, Attn: Secretary.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of the
fiscal year ended March 31, 1997.
28
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SCOTTS
VALLEY, CALIFORNIA, ON THE 23RD DAY OF JUNE, 1997.
Borland International, Inc.
(Registrant)
By /s/ KATHLEEN M. FISHER
----------------------------------
Kathleen M. Fisher,
Chief Financial Officer
Vice President of Finance
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AS INDICATED ON THE 30TH DAY OF JUNE 1997.
SIGNATURE TITLE
- --------------------------- ------------------------------------------------
/s/ DELBERT W. YOCAM Chairman, President and Chief Executive Officer
- ---------------------------
DELBERT W. YOCAM
* Director
- ---------------------------
HARRY SAAL
* Director
- ---------------------------
GEORGE HARA
* Director
- ---------------------------
DAVID HELLER
* Director
- ---------------------------
STEPHEN LEWIS
* Director
- ---------------------------
WILLIAM MILLER
/s/ HOBART McK. BIRMINGHAM
*By-------------------------------------------
(HOBART McK. BIRMINGHAM,
Attorney in Fact)
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
FOR BORLAND INTERNATIONAL, INC.
To the Board of Directors and Stockholders of
Borland International, Inc.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
14(a)1 and 2 on page 26 present fairly, in all material respects, the financial
position of Borland International, Inc. and its subsidiaries at March 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated financial statements of Open Environment Corporation, a wholly-
owned subsidiary, as of and for the two years ended December 31, 1995 which
statements reflect total assets of $36,647,000 at December 31, 1995 and total
revenues of $29,881,000 and $18,121,000 for the years ended December 31, 1995
and 1994, respectively. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Open Environment Corporation
as of December 31, 1995 and for the years ended December 31, 1995 and 1994, is
based solely on the report of the other auditors. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
April 29, 1997, except for the first and fourth paragraphs
of Note 12 which are as of May 29, 1997
and Note 14 which is as of June 30, 1997
30
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
FOR OPEN ENVIROMENT CORPORATION
The Board of Directors
Open Environment Corporation and subsidiaries
We have audited the accompanying consolidated balance sheet of Open
Environment Corporation and subsidiaries as of December 31, 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1995 (not seperately
presented herein). Our audits also included the financial statement schedule
listed in the Index at Item 14(a). The financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and schedule based on our audits.
We did not audit the 1994 financial statements of Jarrah Technologies Pty.
Limited, a wholly-owned subsidiary, which statements reflect total assets
constituting 16% and total revenues constituting 25% of the related
consolidated totals. These statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for Jarrah Technologies Pty. Limited for 1994, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts (including the conversion of the financial statements of Jarrah
Technologies Pty. Limited to U.S. generally accepted accounting principles) and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Open Environment Corporation and subsidiaries at December 31, 1995, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 27, 1996, except as to
the fourth paragraph of
Note 1, as to which the
date is October 4, 1996
31
<PAGE>
REPORT OF CHARTERED ACCOUNTANTS
FOR JARRAH TECHNOLOGIES Pty. LIMITED
Report to the Board of Directors of Open Environment Corporation
Audit Scope
We have audited the financial statements of Jarrah Technologies Pty. Limited for
the year ending December 31, 1994. These financial statements were the
responsibility of the management of Jarrah Technologies Pty. Limited. Our
responsibility was to express an opinion on these financial statements, which
were prepared in accordance with Australian Accounting Standards, based on our
audit.
We conducted our audit in accordance with Auditing Standards in Australia which
do not differ in any significant respect from the General Standards and
Standards of Field Work contained in the Generally Accepted Auditing Standards
in the United States of America. We have not, and do not offer an opinion on
compliance with United States reporting standards as they apply to adherence
with generally accepted accounting principles in the United States.
Those auditing standards required that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements, prepared in
accordance with Australian Accounting Standards, were free from material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used, and significant estimates made by
management.
Our audit scope included ensuring that the financial statements complied with
Australian Accounting Standards. The Australian financial statements, which
formed the basis of our audit opinion, were subsequently adjusted by Open
Environment Corporation to comply with generally accepted accounting principles
in the United States of America and included in the consolidated financial
statements of Open Environment Corporation and subsidiaries which was reported
on by Ernst & Young LLP.
Unqualified Audit Opinion
In our opinion the financial statements referred to above present fairly, and in
all material respects, the state of affairs of Jarrah Technologies Pty. Limited
at December 31, 1994 and the results of operations and cash flows for the year
then ended.
William Buck & Co.
Chartered Accountants
NT Hatzistergos
Partner
Sydney, Australia
September 3, 1996
32
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents............. $ 52,359 $ 81,694
Short-term investments................ 2,001 26,142
Accounts receivable, net of
allowances of $16,118 and $22,730.... 17,785 41,760
Inventories........................... 1,047 1,599
Other current assets.................. 5,837 12,789
--------- ---------
Total current assets............... 79,029 163,984
Property and equipment, net............. 106,563 117,826
Other non-current assets................ 7,110 10,424
--------- ---------
Total assets....................... $ 192,702 $ 292,234
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable...................... $ 14,574 $ 22,313
Accrued expenses...................... 37,724 21,710
Short-term restructuring.............. 4,740 2,684
Income taxes payable.................. 4,463 9,244
Other current liabilities............. 18,817 21,405
--------- ---------
Total current liabilities.......... 80,318 77,356
Long-term debt and other................ 22,508 14,583
--------- ---------
Total liabilities.................. 102,826 91,939
--------- ---------
Commitments and contingencies (Notes 7,
9 and 12)
Stockholders' equity:
Preferred stock; $.01 par value;
1,000 shares authorized; none issued
or outstanding ......................... -- --
Common stock; $.01 par value; 100,000
shares authorized; 37,119 and 36,481
issued and 37,119 and 36,096
outstanding........................ 371 365
Additional paid-in-capital............ 309,800 309,805
Accumulated deficit................... (223,497) (110,573)
Less: treasury stock, none and 385
common shares, at cost............... -- (3,500)
Cumulative translation adjustment..... 3,202 4,198
--------- ---------
Total stockholders' equity......... 89,876 200,295
--------- ---------
Total liabilities and $ 192,702 $ 292,234
stockholders' equity.............. ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
33
<PAGE>
BORLAND INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1997 1996 1995
---------- -------- ----------
<S> <C> <C> <C>
Net revenues............................ $ 151,376 $245,087 $ 272,185
Cost of revenues........................ 29,450 38,157 59,739
--------- -------- ---------
Gross profit............................ 121,926 206,930 212,446
--------- -------- ---------
Selling, general and administrative..... 143,289 141,744 207,942
Research and development................ 55,173 50,714 63,836
Restructuring and merger related
charges................................ 18,944 679 63,070
Other non-recurring charges............. 17,100 -- --
--------- -------- ---------
Total operating expenses........... 234,506 193,137 334,848
--------- -------- ---------
Operating income (loss)................. (112,580) 13,793 (122,402)
Interest income, net and other.......... 5,137 4,221 3,562
Gain on sale of Quattro Pro............. -- -- 109,927
--------- -------- ---------
Income (loss) before income taxes....... (107,443) 18,014 (8,913)
Income tax provision.................... 517 3,295 2,914
--------- -------- ---------
Net income (loss)....................... $(107,960) $ 14,719 $ (11,827)
========= ======== =========
Net income (loss) per common and common
equivalent share....................... $ (2.96) $ 0.40 $ (0.37)
========= ======== =========
Weighted average number of common and
common equivalent shares outstanding... 36,512 37,167 32,228
========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
34
<PAGE>
BORLAND INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
----------------- NOTE --------------
NUMBER ADDITIONAL RECEIVABLE NUMBER CUMULATIVE
OF PAID-IN FROM ACCUMULATED OF TRANSLATION
SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT SHARES AMOUNT ADJUSTMENT TOTAL
------ ------ ----------- ------------ ----------- ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 as
previously reported......... 26,854 $269 $239,500 $ -- $(114,123) -- $ -- $(5,276) $120,370
Pooling of interests with OEC
(see Note 3)................ 3,318 33 204 (77) 800 -- -- -- 960
------ ---- -------- ----- --------- ---- ------- ------- --------
Balances at March 31, 1994, as
restated................... 30,172 302 239,704 (77) (113,323) -- -- (5,276) 121,330
Restated employee stock
options, employee stock
purchase plan and other,
net.......................... 489 3 3,975 -- -- -- -- -- 3,978
Repurchase of common stock.... -- -- -- -- -- 385 (3,500) -- (3,500)
Issuance of ReportSmith shares 1,681 17 16,372 -- -- -- -- -- 16,389
Redemption of ReportSmith
shares....................... (1,602) (16) (15,963) -- -- -- -- -- (15,979)
Translation adjustment........ -- -- -- -- -- -- -- 10,996 10,996
Payment of notes receivable... -- -- -- 77 -- -- -- -- 77
Net loss...................... -- -- -- -- (11,827) -- -- -- (11,827)
------ ---- -------- -------- ---------- ---- ------- ------ --------
Balance at March 31, 1995..... 30,740 306 244,088 -- (125,150) 385 (3,500) 5,720 121,464
Employee stock options,
employee stock purchase
plan and other, net.......... 3,958 41 37,357 -- -- -- -- -- 37,398
Issuance of common stock...... 1,122 11 22,862 -- -- -- -- -- 22,873
Redemption of ReportSmith
shares....................... 81 1 27 -- -- -- -- -- 28
Other......................... 580 6 5,471 -- (142) -- -- (1,522) 3,813
Net income.................... -- -- -- -- 14,719 -- -- -- 14,719
------ ---- -------- -------- ---------- ---- ------- ------ -------
Balance at March 31, 1996..... 36,481 365 309,805 -- (110,573) 385 (3,500) 4,198 200,295
Adjustment, to reflect the
change in year end for OEC
(see Note 3)................. -- -- -- -- (4,967) -- -- -- (4,967)
Employee stock options,
employee stock purchase
plan and other, net.......... 638 6 23 -- -- -- -- -- 29
Other......................... -- -- (28) -- 3 (385) 3,500 (996) 2,479
Net loss...................... -- -- -- -- (107,960) -- -- -- (107,960)
------ ---- -------- -------- ---------- ---- ------- ------ --------
Balance at March 31, 1997..... 37,119 $371 $309,800 $ -- $(223,497) -- $ -- $3,202 $ 89,876
====== ==== ======== ======== ========= ==== ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
<TABLE>
<CAPTION>
BORLAND INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
---------------------------------
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $(107,960) $ 14,719 $ (11,827)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization...... 12,054 17,918 25,461
Non-cash restructuring costs and
write-down of real estate held
for sale......................... 883 -- 20,849
Write-off of purchased technology.. -- 353 16,158
Gain on sale of Quattro Pro........ -- -- (109,927)
Changes in assets and liabilities:
Accounts receivable................ 19,540 (20,554) 8,290
Inventories........................ 551 3,794 3,758
Other current assets............... 6,690 (4,463) 1,302
Accounts payable, accrued expenses
and short-term restructuring...... 9,600 (27,475) (23,925)
Income taxes payable............... (4,782) 2,115 73
Other (primarily deferred revenue 7,185 (8,109) 5,986
and long-term restructuring)...... --------- -------- ---------
Cash used in operating activities....... (56,239) (21,702) (63,802)
--------- -------- ---------
Cash flows from investing activities:
Acquisition of property and
equipment, net....................... (4,935) (5,795) (8,583)
Acquisition of product rights and
additions to capitalized software.... -- (726) (2,405)
Sale of Quattro Pro to Novell......... -- -- 110,000
Sale of fixed assets and real estate
held for sale........................ 4,603 5,041 7,200
Investment in and advances to joint
venture.............................. (137) (737) (536)
Net change in short-term investments.. 22,350 (24,437) (133)
--------- -------- ---------
Cash provided by (used in) investing 21,881 (26,654) 105,543
activities............................. --------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net........................... 3,239 60,550 3,980
Proceeds from issuance of preferred
stock, net........................... -- -- 5,854
Redemption of common stock............ -- (789) (19,478)
Notes receivable from shareholders.... -- -- 77
Borrowings (repayment) of short term
debt................................. 355 1,546 (30,000)
Repayment of capital lease
obligations and other debt activity.. (9) (974) (1,248)
Cash provided by (used in) financing --------- -------- ---------
activities............................. 3,585 60,333 (40,815)
--------- -------- ---------
Effect of exchange rate changes on cash. (34) (169) 1,885
--------- -------- ---------
Net change in cash and cash equivalents. (30,807) 11,808 2,811
Net cash adjustment to conform the year
end of OEC (see Note 3)................ 1,472 -- --
Beginning cash and cash equivalents..... 81,694 69,886 67,075
--------- -------- ---------
Ending cash and cash equivalents........ $ 52,359 $ 81,694 $ 69,886
========= ======== =========
Supplemental disclosure of cash flow
information:
Cash paid during year for:
Interest........................... $ 1,057 $ 1,356 $ 2,032
Income taxes....................... 1,616 2,244 5,628
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
BORLAND INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
--------
Borland International, Inc. (the "Company" or "Borland") develops, markets
and supports software development tools, intelligent middleware database
management systems, and application management systems for business enterprises
and independent software developers.
The Company experienced significant losses from operations during 1997, and
therefore its liquidity and capital resources have declined. Management
implemented measures designed to improve its operating results, including cost-
cutting measures, new product introductions and refocused marketing efforts.
However, rapid technological change and intense competition which is
characteristic of the software development industry results in frequent new
products and evolving industry standards. The Company's continued success
depends on its ability to enhance current products and develop new products on a
timely basis which keep pace with the changes in technology, evolving industry
standards and increasingly sophisticated customer needs. The Company's future
profitability is subject to certain risks, including competition from larger
companies with greater financial resources, its ability to retain key personnel
and its ability to successfully develop, produce and market new products.
Management feels that the recent measures combined with the introduction of new
products have heightened the possibility of the Company to improve cash flow.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated.
Revenue Recognition
-------------------
Revenue from the sale of software products, including sales to distributors
and retail dealers, is recognized upon shipment when no significant vendor
obligations remain and collection of the receivable is probable. Allowances for
estimated future returns and exchanges are provided at that time based on the
Company's return policies.
Service revenues from customer maintenance fees for ongoing customer support
and product updates, including maintenance bundled with software licenses, is
recognized ratably over the period of the contract and revenue from other
services, including training, are recognized as performed.
Cash Equivalents and Short-Term Investments
-------------------------------------------
Cash equivalents consists of highly liquid investments with original
maturities of three months or less. Short-term investments are held as
securities available for sale and are carried at their market value as of the
balance sheet date, which approximated cost. The amortized cost of debt
securities are adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization is included in net income. Realized gains or
losses are determined on the specific identification method and are reflected in
income. Net unrealized gains or losses are recorded directly to stockholders'
equity except that those unrealized losses that are deemed to be other than
temporary are reflected in income.
37
<PAGE>
The Company has classified all its investment securities as held to maturity.
Cash and cash equivalents and short-term investments at March 31, 1997 includes
$37.1 million and $2.0 million respectively; both primarily invested in
commercial paper. At March 31, 1996, the Company had $56.5 million cash and cash
equivalents invested primarily in commercial paper and municipal bonds. Short-
term investments at March 31, 1996 consists of $26.1 million invested primarily
in commercial paper and other high quality corporate obligations. The estimated
fair value of each investment approximates cost due to the short period of time
to effective maturity.
Foreign Exchange Contracts
--------------------------
The Company enters into foreign exchange option and forward contracts to
manage its exposure to currency fluctuations. The Company has outstanding short-
term forward exchange contracts to exchange various foreign currencies for U.S.
dollars in the amount of $19.3 million (principally Japanese yen, Australian
dollars and German marks) and $7.3 million (principally Japanese yen and
Canadian dollar) at March 31, 1997 and March 31, 1996, respectively. The
Company's accounting policy for these instruments is based on the Company's
designation of such instruments as hedging transactions. Gains and losses on
forward currency contracts and options, that are designated and effective as
hedges of existing transactions, for which a firm commitment has been attained,
are recognized in income in the same period as losses and gains on the
underlying transactions are recognized. By their nature, these transactions
generally offset. The net gain or loss on such foreign currency contracts and
underlying transactions were not material in fiscal years 1997, 1996 and 1995.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and trade accounts receivable. The Company places its
cash, cash equivalents and short-term investments in a variety of financial
instruments such as commercial paper, certificates of deposits, bankers'
acceptances and U.S. Government agency debt. The Company, by policy, limits the
amount of credit exposure to any one financial institution or commercial issuer.
The Company offers credit terms on the sale of its software products to
distributors, retail dealers and certain end-user customers. The Company
performs ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains an
allowance for uncollectible accounts receivable based upon the expected
collectibility of all accounts receivable.
The Company is exposed to credit loss in case of non-performance by
counterparties to foreign exchange contracts, but the Company does not
anticipate non-performance by these counterparties.
Inventories
-----------
Inventories consist primarily of completed product and are stated at the lower
of cost or market value. Cost is determined on a first-in, first-out basis.
Property and Equipment
----------------------
Property and equipment is stated at cost and depreciated using the straight-
line method based on the following estimated useful lives:
<TABLE>
<S> <C>
Building........................... 31.5 years
Computer equipment................. 3 to 5 years
Furniture, fixtures and equipment.. 5 years
Leasehold improvements............. Lease term
</TABLE>
Depreciation expense for the years ended 1997, 1996 and 1995 was $11.1
million, $16.7 million and $22.4 million, respectively. Maintenance and repairs
are expensed as incurred. The cost of assets and related
38
<PAGE>
accumulated depreciation are removed from the accounts upon retirement or other
disposition; any resulting gain or loss is reported as income or expense.
Impairment of Long-Lived Assets
-------------------------------
In the first quarter of fiscal year 1997, the Company adopted the Financial
Accounting Standards Board Statement No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
The statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The statement also requires that long-lived
assets and certain identifiable intangibles to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell, except for assets
that are covered by APB opinion No. 30. There was no impact on the Company's
results of operations or financial condition upon the adoption of SFAS 121.
Stock-Based Compensation Plans
------------------------------
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No.25, "Accounting for
Stock Issued to Employees," ("APB 25") and related Interpretations. Under APB
25, compensation cost is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the exercise price of the
option granted. Compensation cost for stock options, if any, is recognized
ratably over the vesting period. The Company's policy is to grant options with
an exercise price equal to the quoted market price of the Company's stock on the
grant date. Accordingly, no compensation has been recognized for its stock
option plans. The Company provides additional pro forma disclosures as required
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). See Note 10.
Product Rights and Intangibles
------------------------------
The Company capitalizes certain product rights acquired from others and
internal software development costs incurred after technological feasibility has
been demonstrated. Such capitalized amounts are amortized commencing with
product introduction at the greater of the straight-line basis utilizing the
estimated economic lives, which range from two to four years, or the ratio of
actual revenues achieved to the total anticipated revenues over the lives of the
products.
No internal development costs were capitalized in fiscal years 1997, 1996 or
1995. Amortization of product rights charged to cost of revenues during the
years ended in 1997, 1996 and 1995 was $522,000, $523,000 and $2.3 million,
respectively. At March 31, 1997 and 1996 unamortized product rights and
capitalized development costs were approximately $203,000 and $883,000,
respectively.
Goodwill
--------
Goodwill represents the excess of the aggregate purchase price over the fair
market value of the tangible and intangible assets acquired in various
acquisitions and is being amortized over the estimated useful life of seven
years. Amortization of goodwill charged to operating expenses during the years
ended in 1997, 1996 and 1995 was $447,000, $702,000 and $769,000, respectively.
At March 31, 1997, the Company had no unamortized goodwill. At March 31, 1996,
unamortized goodwill was approximately $447,000.
Advertising Costs
-----------------
39
<PAGE>
The Company expenses the production costs of advertising, including direct
response, the first time the advertising takes place. Advertising expense was
$14.7 million, $14.2 million and $28.8 million in fiscal year 1997, 1996 and
1995, respectively.
Income Taxes
------------
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred income tax assets and liabilities
are determined based on the differences between the financial reporting and tax
basis of assets and liabilities and are measured using currently enacted tax
rates and laws.
No U.S. federal income taxes are provided on undistributed earnings of the
non-U.S. subsidiaries as these earnings are considered to be permanently
invested in non-U.S. operations.
Foreign Currency Translation
----------------------------
The Company's non-U.S. subsidiaries' balance sheet accounts are translated
into U.S. dollars at the exchange rate as of the balance sheet date. Revenues,
costs and expenses are translated using an average rate. Resulting exchange
gains and losses are reported as a component of stockholders' equity, except for
certain fiscal year 1995 restructuring write-offs of cumulative translation
adjustments related to subsidiaries that were liquidated.
Earnings (Loss) Per Share
-------------------------
Net income (loss) per common and common equivalent share for fiscal years
1997, 1996 and 1995 was determined using the modified treasury stock method,
when applicable.
Management Estimates and Assumptions
------------------------------------
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.
Reclassifications
- -----------------
Certain amounts in the fiscal year 1996 and 1995 financial statements have
been reclassified to conform to the fiscal year 1997 financial statements
presentation.
Recent Accounting Pronouncements
- --------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" ("SFAS 129") and Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). SFAS NO. 129 establishes standards for
disclosing information about an entity's capital structure. SFAS 129 is
effective for financial statements for the periods ending after December 15,
1997. The Company will adopt SFAS 129 in the year ending March 31, 1998 and has
not yet determined the effect of adoption.
SFAS 128 simplifies the standards for computing earnings per share ("EPS")
previously found in APB No. 15, "Earnings per Share," and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the financial statements for all entities with
complex capital structures. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS is computed similarly
to fully diluted EPS under APB Opinion No. 15. SFAS 128 is effective for the
company's fiscal quarter ending December 31, 1997. The following table
represents unaudited, pro forma disclosures of basic and diluted EPS in
accordance with SFAS 128 assuming the standard was adopted during all periods
presented below:
40
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996 1995
-------- ------ --------
<S> <C> <C> <C>
Net income (loss) per common share - as reported $(2.96) $0.40 $( 0.37)
Basic net income (loss) per common share - pro forma $(2.96) $0.43 $( 0.37)
Diluted net income (loss) per common share - pro forma $(2.96) $0.40 $( 0.37)
</TABLE>
NOTE 2. CONSOLIDATED BALANCE SHEET COMPONENTS
Details of certain balance sheet captions are as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment, including
capitalized leases:
Building.............................. $ 99,101 $100,506
Computer equipment.................... 58,360 57,830
Furniture, fixtures and equipment..... 25,261 25,486
Other................................. 4,646 5,943
--------- --------
187,368 189,765
Less accumulated depreciation and
amortization......................... (103,819) (94,953)
--------- --------
83,549 94,812
Land.................................. 23,014 23,014
--------- --------
$ 106,563 $117,826
========= ========
Accrued expenses:
Employee related expenses............. $ 8,900 $ 6,496
Advertising and customer sales
incentives........................... 2,548 2,778
Professional fees and settlement costs 18,708
Other................................. 7,568 12,436
--------- --------
$ 37,724 $ 21,710
========= ========
Other current liabilities:
Deferred revenue...................... $ 8,028 $ 9,623
Deferred and other taxes.............. 1,841 2,129
Other................................. 8,948 9,653
--------- --------
$ 18,817 $ 21,405
========= ========
Long-term debt and other non-current
liabilities:
Non-current portion of accrued
restructuring charges................ $ 3,634 $ 4,807
Mortgage notes payable................ 9,348 9,468
Deferred and other taxes.............. 9,404 --
Capital lease obligations, deferred
revenue and other.................... 122 308
--------- --------
$ 22,508 $ 14,583
========= ========
</TABLE>
NOTE 3. MERGER WITH OPEN ENVIRONMENT CORPORATION
On November 18, 1996, Borland issued 4,975,000 shares of its common stock for
all of the outstanding stock of Open Environment Corporation ("OEC") and issued
options to purchase 1,190,216 shares of Borland common stock in exchange for all
the outstanding options to purchase OEC common stock. The merger has been
accounted for as a pooling of interests and, accordingly the consolidated
financial statements have been restated for all periods prior to the combination
to include the operations of OEC. OEC develops, markets and supports software
that enables companies to create applications for distributed, client/server-
computing systems.
41
<PAGE>
Prior to the merger, OEC's year-end was December 31. Accordingly, OEC's year-
end was conformed to Borland's March year-end for fiscal year 1997. For periods
prior to fiscal year 1997, the combined financial statements of Borland and OEC
include OEC's December year end consolidated financial statements, with OEC's
results of operations for the quarter ended March 31, 1996, reported as an
adjustment to the combined accumulated deficit. Net sales and net loss of OEC
for the quarter ended March 31, 1996, was $3,219,000 and $4,967,000,
respectively. OEC's statement of operations for the three months ended March 31,
1996 have not been combined with any of the Company's statements of operations.
Rather, OEC's net loss for that period has been credited to retained earnings.
Net revenues and net loss for the three months ended March 31, 1996, were $3.2
million and $(5.0) million respectively.
Separate pre-combination net revenues and net income (loss) of Borland and OEC
are as follows;
<TABLE>
<CAPTION>
April 1, 1996 to Year Ended
November 18, 1996 March 31,
------------------ ---------------------
1997 1996 1995
------------------ --------- ----------
(in thousands)
<S> <C> <C> <C>
Net revenues
Borland....... $ 88,947 $215,206 $254,064
OEC........... 8,161 29,881 18,121
-------- -------- --------
Combined........... $ 97,108 $245,087 $272,185
======== ======== ========
Net income (loss)
Borland........ $(43,808) $ 14,285 $(12,177)
OEC............ (13,991) 434 350
-------- -------- --------
Combined........... $(57,799) $ 14,719 $(11,827)
======== ======== ========
</TABLE>
NOTE 4. SALE OF QUATTRO PRO
In June 1994, the Company sold its Quattro Pro product line to Novell, Inc.
("Novell") for $145 million in cash. The terms of the agreement also entitled
Novell to certain licensing rights to distribute up to one million copies of the
Company's Paradox for Windows database product over a three year period to be
sold in a suite of products also containing Quattro Pro for Windows and
WordPerfect for Windows. Of the $145 million, $110 million was attributed to the
sale of the Quattro Pro product line and $35 million to the Paradox licenses.
In fiscal year 1997, the Company granted a license to Corel Corporation.
Pursuant to these rights, Corel has rights to market and enhance the products;
however, the Company retains limited distribution rights until October 1997.
In fiscal year 1995, the Company recorded a pre-tax non-operating gain related
to the sale of Quattro Pro of $109.9 million, which reflected the net costs and
expenses of disposing of the product line, the net book value of assets sold to
Novell and the operating profit of the Quattro Pro product line for the quarter
ending June 30, 1994. As a result of the Company's tax loss carry-forwards and
other tax benefits, the Company did not incur a significant tax expense related
to this gain.
In connection with the sale of its Quattro Pro product line, the Company sold
Novell the rights to distribute up to one million copies of its Paradox for
Windows database for $35 million. Under the terms of the agreement, Novell could
distribute such licenses over a three year period to be sold in a suite of
products also containing
42
<PAGE>
Quattro Pro for Windows and WordPerfect for Windows. Of the $35 million related
to the licensing rights, $24.5 million was recognized upon sale and the
remaining $10.5 million was deferred and recognized ratably over the three year
term.
In March 1996, Novell sold its Office suite of products to Corel Corporation
releasing Borland from any future liabilities or obligations to Novell regarding
the Paradox for Windows license agreement. Consequently, the Company recognized
the balance of $4.4 million of deferred revenue. During fiscal years 1996 and
1995, the Company recognized a total of $7.9 million and $27.1 million of
revenue, respectively, related to the Paradox licenses.
NOTE 5. ACQUISITION OF REPORTSMITH, INC.
The Company acquired ReportSmith, Inc. ("ReportSmith"), a developer of
client/server reporting and data query tools for the Windows operating
environment, in May 1994 in exchange for 1,680,789 shares of the Company's
common stock. Additionally, the Company exchanged options to purchase 118,228
shares of its common stock to former employees of ReportSmith for their
outstanding ReportSmith options, ranging in price from $.206 to $.361 per share.
Under the terms of the agreement, and subject to certain conditions, the former
holders of ReportSmith shares could elect to receive payment in cash, commencing
December, 1994, which election was made, at a price per share of $9.96875.
During the fiscal years ended March 31, 1996 and 1995, the Company has paid out
cash of approximately $.8 million and $16.0 million, respectively, to purchase
all such shares.
The acquisition has been accounted for under the purchase method. Based on an
independent appraisal, the Company recorded a $4 million asset related to
certain intangibles. Additionally, the Company recorded the net value of assets
acquired and liabilities assumed, and a one-time write-off of in process
research and development of $16.2 million. As part of the January 1995
restructuring, and resulting repositioning of certain products, the Company
reassessed the net realizability of the ReportSmith purchased technology and
recorded an additional write-down of $2 million.
NOTE 6. RESTRUCTURING, MERGER RELATED CHARGES
During fiscal year 1997, the Company recorded restructuring, merger and other
non-recurring charges totaling $18.9 million. OEC recorded a provision for
restructuring charges of $1.1 million in the quarter ended June 30, 1996.
Charges included write-off of inventory and prepaid royalties and facilities
related to a the discontinued education centers and severance. In response to
the significant losses from operations in the three and six months ended
September 30, 1996, the Company implemented a world wide restructuring and
realignment of its corporate structure during October 1996, which resulted in a
15% reduction in workforce. In connection with this restructuring, the Company
recorded a $3.0 million restructuring charge in the quarter ended December 31,
1996 primarily for severance costs and lease terminations.
Based on the results of the October 1996 restructuring and the results of the
quarter ended December 31, 1996, the Company implemented an additional worldwide
restructuring and realignment and recorded the related charge of $6.5 million
during the quarter ended March 31, 1997. The fourth quarter restructuring plan
involved significant reductions in operational expenses as well as the
implementation of new programs aimed at growing the Company's revenues. The
restructuring included measures to achieve a reduction in employees and
contractors of approximately 30 percent. The Company also implemented new
marketing and support programs to replace programs no longer integral to
Borland's core business or strategic focus.
During fiscal year 1995, the Company recorded restructuring charges of $50
million. The restructuring charges were incurred for the reduction of world
wide headcount by approximately 40%, the centralization of certain marketing and
development activities to improve efficiency, the outsource of manufacturing
operations in the U.S. and in Europe and the write-down of facilities and
certain purchased technology costs. In addition, several international
operations were closed, sales efforts in those areas are now conducted through
authorized distributors.
43
<PAGE>
The following table summarizes the Company's restructuring activity for the
three years ended March 31, 1997:
<TABLE>
<CAPTION>
REVERSAL
SEVERANCE OTHER OF PRIOR
AND ASSET RESTRUCTURING
BENEFITS FACILITIES CHARGES CTA OTHER ACCRUALS TOTAL
--------- ----------- -------- -------- -------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1995 Restructuring charge........... 15,923 17,996 6,970 7,591 4,695 (3,154) 50,021
Non-cash charges.................. -- $(12,290) (6,970) (7,591) (220) 3,154 (23,917)
Cash paid in fiscal 1995.......... (11,343) (1,028) -- -- (2,176) -- (14,547)
-------- -------- ------- ------- ------- --------- --------
Accrual as of March 31, 1995........ 4,580 4,678 -- -- 2,299 -- 11,557
Cash paid in fiscal 1996.......... (4,278) (2,437) -- -- (1,353) -- (8,068)
-------- -------- ------- ------- ------- --------- --------
Accrual as of March 31, 1996........ 302 2,241 -- -- 946 -- 3,489
1997 Charges........................ -- -- -- -- -- -- --
1997 Restructuring................ 6,228 1,777 562 -- 1,477 -- 10,044
Non-cash costs.................... -- (100) (562) -- -- -- (662)
Cash paid in fiscal year 1997..... (4,483) (1,959) -- -- (1,471) -- (7,913)
-------- -------- ------- ------- ------- --------- --------
Accrual as of March 31, 1997........ $ 2,047 $ 1,959 $ -- $ -- $ 952 $ -- $ 4,958
======== ======== ======= ======= ======= ========= ========
</TABLE>
Pursuant to the merger with OEC (See Note 3) the Company incurred merger
related costs of $8.9 million. The charge for the merger related costs included
in the Consolidated Statements of Operations and consist principally of
severance costs, write-off of certain assets and professional fees.
44
<PAGE>
NOTE 7. LONG-TERM DEBT
Long-term debt at March 31, 1997 represents outstanding mortgage notes. The
10.75% mortgage notes, secured by certain land, buildings and improvements, are
repayable in equal monthly installments over a thirty-year term ending in 2018.
Minimum annual repayments of these notes at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
Fiscal year:
<S> <C>
1998.................. $ 120
1999.................. 134
2000.................. 149
2001.................. 166
2002.................. 184
Thereafter............ 8,715
------
9,468
Less current portion.. (120)
------
Long-term portion..... $9,348
======
</TABLE>
Interest expense for all obligations was $1,186,000, $1,256,000 and $1,789,000
for the years ended in 1997, 1996 and 1995, respectively.
NOTE 8. INCOME TAXES
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
US................................ $(100,458) $ 3,127 $ 28,441
Non-US............................ (6,985) 14,887 (37,354)
--------- ------- --------
$(107,443) $18,014 $ (8,913)
========= ======= ========
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................ $ (2,136) $ 662 $ 1,818
State.......................... -- 487 385
Non-US......................... 2,653 2,938 720
--------- ------- --------
517 4,087 2,923
--------- ------- --------
Deferred:
Federal........................ -- (417) 3
State.......................... -- (128) 1
Non-US......................... -- (247) (13)
--------- ------- --------
-- (792) (9)
--------- ------- --------
Income tax provision.............. $ 517 $ 3,295 $ 2,914
========= ======= ========
</TABLE>
45
<PAGE>
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory rate on income (loss) before income taxes:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1997 1996 1995
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (benefit) at US
statutory rate................... $(37,605) $ 6,305 $(3,120)
Limitation/(benefit) on
utilization of non-US losses.... 4,214 (4,557) 12,347
Limitation/(benefit) on
utilization of US losses......... 33,024 (770) (7,981)
State income taxes................ - 356 353
Non-US withholding taxes.......... 884 2,060 1,364
Other............................. - (99) (49)
-------- ------- -------
Income tax provision.............. $ 517 $ 3,295 $ 2,914
======== ======= =======
</TABLE>
Under SFAS 109, deferred tax assets and liabilities are recognized for the
expected future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates in
effect for the year in which the differences are expected to reverse. Deferred
tax assets are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accrued expenses.................. $ 17,370 $ 12,793
Accounts receivable reserves...... 2,096 4,757
Inventory valuation............... 1,089 2,270
Depreciation, amortization and
other............................ 9,595 7,115
US federal and state loss and
credit carryforwards............. 90,038 64,641
Non-US loss carry-forwards........ 16,087 18,374
--------- ---------
Gross deferred tax assets...... 136,275 109,950
Deferred tax assets valuation
allowance........................ (136,275) (109,138)
--------- ---------
Total net deferred tax assets.. $ - $ 812
========= =========
</TABLE>
At March 31, 1997 and 1996, the Company had reserved for all or substantially
all of its deferred tax assets. The Company believes sufficient uncertainty
exists regarding the realizability of the deferred tax assets such that a
valuation allowance has been provided.
Deferred tax assets and related valuation allowances of approximately $37
million relate to certain US operating loss carryforwards resulting from the
exercise of employee stock options, the tax benefit of which, when recognized,
will be accounted for as a credit to additional paid-in capital rather than a
reduction of the income tax provision.
For US federal income tax purposes, the Company has net operating loss
carryforwards of approximately $177 million at March 31, 1997. There are also
available US federal tax credit carryforwards of approximately $22 million.
These loss and credit carryforwards expire between 1998 and 2012, if not
utilized. The Company also has an Alternative Minimum Tax (AMT) credit
carryforwards of approximately $2 million, which do not expire. Additionally,
the Company has approximately $34 million of net operating loss carryforwards in
various foreign jurisdictions. Certain of these loss carryforwards will expire
beginning in 1998, if not utilized.
During the tax year ended March 31, 1997 the Company recorded an income tax
benefit of approximately $2.1 million resulting from a settlement reached with
the US Internal Revenue Service (IRS). 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 $2.6 million.
During the year, the Company successfully appealed a foreign tax assessment of
approximately $18 million including interest.
At March 31, 1997 the Company had unresolved deficiency notices or proposed
adjustments from IRS and various state governments for additional taxes and
interest of approximately $5 million. The Company is protesting these
assessments or adjustments with the appellate divisions of the respective tax
authorities. The Company believes that the ultimate outcome of the above
assessment will not have a material adverse impact on the Company's financial
position or results of operations.
Applicable US income and non-US withholding taxes have not been provided on
undistributed earnings of approximately $6 million of the Company's foreign
subsidiaries as such earnings are considered to be permanently invested in
foreign operations.
NOTE 9. LEASES
The Company leases certain of its office and operating facilities, and certain
furniture and equipment under various operating and capital leases. Lease terms
range from one to seventeen years.
Minimum annual lease commitments at March 31, 1997 are as follows:
OPERATING CAPITAL
LEASES LEASES
--------- -------
Fiscal year:
1998................................... $ 2,371 $ 353
1999................................... 1,800 189
2000................................... 1,728 110
2001................................... 1,511 38
2002................................... 1,115 2
Thereafter............................. 11,195 -
------- -----
$19,720 692
=======
Less amount representing interest...... (20)
-----
$ 672
=====
Rent expenses for all operating leases was $3.3 million, $4.2 million and
$6.7 million for the fiscal years ended in 1997, 1996 and 1995, respectively.
NOTE 10. EMPLOYEE BENEFIT PLANS
Stock Option Plan
- -----------------
As of March 31, 1997, the Company had three stock-based compensation plans,
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation costs has been
recognized for its two stock option plans and its stock purchase plan. The
Employee Option Plan ("EOP") allows for the grant of both incentive stock
options and nonstatutory options. The exercise price of options granted under
the EOP may not be less than 85% of the fair market value of the common stock at
the date of the grant for nonstatutory options, and 100% of the fair market
value of the Company's common stock on the date of grant for incentive stock
options. However, in the case of options granted to an optionee who owns stock
representing more than 10% of the voting power of all classes of the Company's
stock, the exercise price must not be less than 110% of the fair market value on
the date and the maximum term of such options may not exceed five years. Certain
stock option grants made in fiscal year 1997, 1996 and 1995 have accelerated
vesting features that become effective under certain conditions in the event
that there is a change of control of the Company. Options generally vest 25% one
year from the date of grant and ratably thereafter on a daily basis over three
years. Options expire at the earlier of either three months after termination of
employment or ten years after the date of grant.
46
<PAGE>
At March 31, 1997 the Company had unresolved deficiency notices or proposed
adjustments from IRS and various state governments for additional taxes and
interest of approximately $5 million. The Company is protesting these
assessments or adjustments with the appellate divisions of the respective tax
authorities. The Company believes that the ultimate outcome of the above
assessment will not have a material adverse impact on the Company's financial
position or results of operations.
Applicable US income and non-US withholding taxes have not been provided on
undistributed earnings of approximately $6 million of the Company's foreign
subsidiaries as such earnings are considered to be permanently invested in
foreign operations.
NOTE 9. LEASES
The Company leases certain of its office and operating facilities, and certain
furniture and equipment under various operating and capital leases. Lease terms
range from one to seventeen years.
Minimum annual lease commitments at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- --------
LEASES LEASES
--------- --------
<S> <C> <C>
(IN THOUSANDS)
Fiscal year:
1998............................. $ 2,371 $353
1999............................. 1,800 189
2000............................. 1,728 110
2001............................. 1,511 38
2002............................. 1,115 2
Thereafter....................... 11,195 --
------- ----
$19,720 692
<>>>>>> =======
Less amount representing interest (20)
----
$672
====
</TABLE>
Rent expense for all operating leases was $3,280,000, $4,207,000 and
$6,657,000 for the years ended in 1997, 1996 and 1995, respectively.
NOTE 10. EMPLOYEE BENEFIT PLANS
Stock Option Plan
- -----------------
As of March 31, 1997, the Company had three stock-based compensation plans,
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation costs has been
recognized for its two stock option plans and its stock purchase plan. The
Employee Option Plan ("EOP") allows for the grant of both incentive stock
options and nonstatutory options. The exercise price of options granted under
the EOP may not be less than 85% of the fair market value of the common stock at
the date of the grant for nonstatutory options, and 100% of the fair market
value of the Company's common stock on the date of grant for incentive stock
options. However, in the case of options granted to an optionee who owns stock
representing more than 10% of the voting power of all classes of the Company's
stock, the exercise price must not be less than 110% of the fair market value on
the date and the maximum term of such options may not exceed five years.
Certain stock option grants made in fiscal year 1997, 1996 and 1995 have
accelerated vesting features that become effective under certain conditions in
the event that there is a change of control of the Company. Options generally
vest 25% one year from the date of grant and ratably thereafter on a daily basis
over three years. Options expire at the earlier of either three months after
termination of employment or ten years after the date of grant.
47
<PAGE>
The Company also has a Director's Option Plan (the "OP") which provides for
the grant to each non-employee director on the date of his election to the Board
a stock option for the purchase of 30,000 shares of the Company's common stock.
Additionally, the OP provides, upon the election of a non-employee director as
Chairman of the Board such person shall be granted a further stock option
covering 30,000 shares of the Company's common stock. The plan further provides
for the grant to each non-employee director at each annual meeting options
covering 7,500 shares (15,000 for the Chairman of the Board) of the Company's
common stock. All such shares vest over a one-year period.
In February 1997, substantially all outstanding options with a share price in
excess of $6.4375 were amended to an exercise price of $6.4375 per share, the
fair market value as of the date the amendment was announced. A total of
4,718,355 options were amended.
The following table summarizes the Company's stock option activity and related
weighted average exercise prices within each category for each of the fiscal
years ended March 31, 1997, 1996 and 1995 relating to the Company's stock option
plans:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
(share amounts in thousands) Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at April 1, 7,357 $10.88 11,106 $ 9.99 11,173 $ 9.98
Stock Options:
Granted 10,074 6.52 2,513 12.23 10,600 8.85
Exercised (321) 7.77 (3,874) 9.22 (262) 4.97
Canceled (8,244) 9.26 (2,388) 10.82 (10,405) 18.34
------ ------ ------ ------ ------- ------
Options outstanding at March 31, 8,866 $ 7.59 7,357 $10.88 11,106 $ 9.99
====== ====== ====== ====== ======= ======
Exercisable at March 31, 3,846 2,353 4,136
====== ====== =======
</TABLE>
At March 31, 1997, 1,278,309 shares were available for future grant under the
EOP and OP option plans. All options granted under the plan for the fiscal years
ended March 31, 1997, 1996 and 1995 were priced at market value at the time of
grant. The weighted average fair values of options granted under the EOP in
fiscal year 1997 and 1996 were $2.86 and $7.19 respectively.
The fair value of each option grant, as defined by SFAS 123, is estimated on
the date of grant using the Black-Scholes option-pricing model. The Black-
Scholes model, as well as other currently accepted option valuation models, was
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated fair value on the grant date. To
compute the estimated grant date fair value of the Company's stock option grants
in 1997 and 1996, respectively, the Black-Scholes model was used with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Expected life 2.5 years 2.5 years
Risk-free interest rate 6.57% 6.31%
Volatility 70.0% 63.0%
Dividend yield 0.00% 0.00%
</TABLE>
The following table summarizes information about fixed stock options outstanding
at March 31, 1997:
48
<PAGE>
<TABLE>
<CAPTION>
___________Options Outstanding________ __________Options Exercisable_______
Number Number
Outstanding Weighted- Weighted- Exercisable Weighted-
Range of at 3/31/97 Average Average at 12/31/96 Average
Exercise Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .03 - $ 6.00 1,935 9.62 $ 5.59 370 $ 5.29
$ 6.06 - $ 6.38 408 9.77 $ 6.24 25 $ 6.14
$ 6.44 - $ 6.44 4,718 8.12 $ 6.44 2,312 $ 6.44
$ 6.88 - $41.88 1,745 7.75 $11.84 1,079 $12.77
$49.00 - $49.00 60 4.57 $49.00 60 $49.00
----- -----
8,866 3,846
===== =====
</TABLE>
Employee Stock Purchase Plan
- ----------------------------
In September 1990, the Company adopted an Employee Stock Purchase Plan
("ESPP"), which allows eligible employees of the Company and its subsidiaries to
purchase shares of common stock through payroll deductions. Purchases are
limited to 15% of the employee's compensation, subject to a maximum annual
employee contribution limited to a $25,000 market value (calculated as the
employee's enrollment price multiplied by the purchased shares). The ESPP shares
may be purchased by participants at the lower of 85% of the fair market value at
the beginning or end of each six month offering period. Of the 850,000 shares of
common stock that have been reserved for issuance under the ESPP, 772,525 shares
were issued through March 31, 1997. Sales under the ESPP in 1997, 1996 and 1995
were 142,573, 105,753 and 128,839 shares of common stock at an average price of
$5.67, $9.55 and $8.52 per share, respectively. Compensation cost (included in
pro forma net income and net income per share amounts) is recognized for the
fair value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following weighted-average assumptions for fiscal
years 1997 and 1996, respectively: an expected life of six months for both
years; expected volatility of 70% and 63%; risk-free interest rates of 6.57% and
6.31%; and dividend yields of 0%. The weighted-average fair value of those
purchase rights granted in Fiscal years 1997 and 1996, as defined by SFAS 123,
was $3.24 and $3.74, respectively.
Pro Forma Net Income and Net Income Per Share
- ---------------------------------------------
Had the Company recorded compensation costs based on the estimated grant date
fair value, as defined by FAS 123, for awards granted under its stock option and
stock purchase plans, the Company's pro forma net income and earnings per share
for the years ended March 31, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996
<S> <C> <C>
Net income (loss):
As reported $(107,960) $14,719
Pro Forma $(122,941) $10,103
Net income (loss) per share:
As reported $ (2.96) $ 0.40
Pro Forma $ (3.37) $ 0.28
</TABLE>
The pro forma amounts include compensation expense related to 1997 and 1996
stock option grants and stock purchase rights. In future years, the annual
compensation expense will increase relative to the fair value of stock options
and stock purchase rights granted in those future years.
Profit Sharing Plan and Bonus Plans
- -----------------------------------
The Company has several bonus plans, which provide for additional compensation
to most U.S. and certain non-U.S. employees. Charges to income for the plans
were approximately $12.7 million, $2.9 million, and $2.7 million in fiscal year
1997, 1996 and 1995, respectively.
49
<PAGE>
NOTE 11. STOCKHOLDER RIGHTS PLAN
In December 1991, the Company implemented a Stockholder Rights Plan ("Rights
Plan") to protect the stockholders in the event of a proposed takeover of the
Company which has not been recommended or approved by the Board of Directors.
Under the Rights Plan, each share of the Company's outstanding common stock
carries one Preferred Share Purchase Right ("Right"). The Right entitles the
holder under certain circumstances, to purchase common stock of the Company at a
50% discount from its then current market price. The Rights are redeemable by
the Company at a nominal price and expire in 2001.
NOTE 12. LITIGATION
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. This lawsuit 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. The Company is also subject to a second suit. 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 June 6, 1994 and October 19, 1994. As of
February 29, 1996 the parties had entered into a stipulation to settle both
these matters. This stipulation was then submitted to the Court for approval and
monies were deposited in escrow to fund the settlement. The Company recorded a
charge in the full amount of the settlement to be paid by the Company. On May
29, 1997, the Court entered an order declining to approve the present plan of
allocation proposed by counsel for the class representatives, but that order now
has been vacated in order that the parties may submit additional material in
support of the plan for distributing the settlement proceeds. Another hearing on
the plan has been scheduled for August 1, 1997. At this time, there can be no
assurance whether the plan will be approved, either in present or a modified
form, and the Court has established a schedule for completion of discovery and a
pretrial conference in March 1998. If not settled and litigated, in the event of
an adverse decision, such decision could have a material adverse effect on the
Company's financial condition and results of operations.
On January 16, 1996, in the case of Lotus Development Corp. v. Borland
----------------------------------
International, Inc., the U.S. Supreme Court affirmed the judgment of the U.S.
- -------------------
Court of Appeals for the First Circuit that Borland did not infringe the
copyright of Lotus's spreadsheet product, Lotus 1-2-3. The Company has initiated
proceedings in the U.S. District Court in Massachusetts for a determination of
what attorneys fees, if any, Borland may recover. On February 26, 1997, the U.S.
District Court in Massachusetts denied Borland's request for attorneys fees but
indicated the Court might award certain costs to Borland. The Company plans to
appeal the U.S. District Court's denial of attorneys fees.
On December 6, 1996 and December 19, 1996, two lawsuits were filed against the
Company's subsidiary, Open Environment Corporation, and certain former officers
and directors of Open Environment Corporation, alleging violations of federal
securities laws prior to the Company's acquisition of Open Environment
Corporation. The two lawsuits, Zeid vs. Open Environment Corp., et. al. and S &
------------------------------------------------
S Associates vs. Open Environment Corp., et al. were both filed in the United
- ----------------------------------------------
States District Court for the District of Massachusetts. The lawsuits purport to
be class actions brought on behalf of purchasers of OEC common stock from April
13, 1995 through October 10, 1996. The Company's OEC subsidiary intends to
defend these cases vigorously.
On May 7, 1997, the Company filed a lawsuit against Microsoft Corporation in
the Superior Court of California, County of Santa Clara. The suit alleges that
Microsoft has engaged in unfair competition in violation of California and
common law through, among other things, the concerted targeting and hiring of
numerous Borland employees. The Company seeks an injunction against Microsoft's
unlawful targeting, recruiting and hiring as well as damages, fees and costs. On
June 6, 1997 Microsoft removed the case to U.S. District Court for the Northern
District of California, but otherwise, Microsoft has not formally responded to
the complaint.
In addition, 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 any of
the above 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.
50
<PAGE>
NOTE 13. WORLDWIDE OPERATIONS
The Company operates in a single industry segment, and has various wholly
owned subsidiaries, which develop and/or market the Company's products in other
countries. In certain international markets not covered by the Company's non-
U.S. subsidiaries, the Company generally sells through independent distributors.
Summary information regarding the Company's geographic operations follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues from unaffiliated
customers:
US operations..................... $ 61,936 $135,944 $155,240
European operations............... 47,632 56,767 66,110
Japan operations.................. 26,366 30,682 27,093
Other international operations.... 15,442 21,694 23,742
--------- -------- --------
Net revenues......................... $ 151,376 $245,087 $272,185
========= ======== ========
Operating results:
US operations..................... $(125,873) $(13,649) $ (83,645)
European operations............... 9,818 15,413 (33,602)
Japan operations.................. 5,700 6,706 1,812
Other international operations.... (2,225) 5,323 (6,967)
--------- -------- ---------
Operating income (loss).............. $(112,580) $ 13,793 $(122,402)
========= ======== =========
Identifiable assets:
US operations..................... $ 116,738 $153,377 $ 143,631
European operations............... 8,527 14,081 19,619
Japan operations.................. 7,058 8,694 14,360
Other international operations.... 6,019 8,246 7,053
--------- -------- ---------
Identifiable assets.................. 138,342 184,398 184,663
General corporate assets (cash,
cash equivalents and short-term
investments)..................... 54,360 107,836 71,597
--------- -------- ---------
Total assets...................... $ 192,702 $292,234 $ 256,260
========= ======== =========
</TABLE>
Other international operations include activities of subsidiaries in
Australia, Canada and Hong Kong.
Revenues, operating results and identifiable assets are classified by location
of the Company's facilities rather than by customer location. Revenues related
to product transfers between geographic areas were not significant. Export
revenues from the US represented $3.9 million, $16.3 million and $4.6 million in
fiscal year 1997, 1996 and 1995, respectively.
At March 31, 1997 and 1996, foreign liabilities (excluding intercompany
balances) were $18.5 million and $21.1 million, respectively.
51
<PAGE>
For the years ended March 31, 1997 and 1996, sales to one customer, Ingram
Micro and its subsidiaries, accounted for approximately 12% and 15% of the
Company's net revenues, respectively. During the year ended March 31, 1995, no
single customer accounted for 10% or more of the Company's net revenues.
NOTE 14. SUBSEQUENT EVENT
On June 30, 1997, the Company completed a private placement of 495 shares of
convertible preferred stock for approximately $25 million, net of issuance
costs. The non-dividend paying convertible preferred stock is convertible into
common shares of the Company. Each preferred share is accompanied by a warrant
to purchase 400 shares of the Company's common stock. The conversion price for
the convertible preferred stock and the warrant exercise price is based on the
fair market value of the Company's common stock.
52
<PAGE>
SCHEDULE II
BORLAND INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING STATEMENTS OF FROM END OF
OF PERIOD OPERATIONS RESERVES PERIOD
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
1995:
Allowance for sales returns, rebates
and doubtful accounts................ $35,268 $62,064 $66,591 $30,741
1996:
Allowance for sales returns, rebates
and doubtful accounts................ $30,741 $32,659 $40,670 $22,730
1997:
Allowance for sales returns, rebates
and doubtful accounts................ $22,730 $28,298 $34,910 $16,118
</TABLE>
53
<PAGE>
FORM 10-K
A copy of the Company's Form 10-K, as filed with the Securities and Exchange
Commission, is available upon request and without charge by contacting Borland's
Investor Relations Department at the corporate address, or by calling 408-431-
1525.
SHAREHOLDER INQUIRIES
Questions concerning shareholder accounts, change of address, or lost
certificate should be directed to: Chemical Mellon Shareholder Services
Washington Bridge Station
P.O. Box 469
New York, NY 10003
or by calling 800-356-2017
INVESTOR RELATIONS
Analysts, institutional investors, portfolio managers, brokers, and individuals
should address inquiries to Borland's Investor Relations Department at the
corporate address or by calling 408-431-1525.
STOCK LISTING
The Company's common stock is traded on the NASDAQ Market System under the
symbol BORL.
CORPORATE HEADQUARTERS
100 Borland Way
Scotts Valley, CA 95066-3249
408-431-1000
WEB SITE
Financial information and corporate press releases are available by accessing
the Borland home page located at: http://www.borland.com
BOARD OF DIRECTORS
Delbert W. Yocam
Chairman, President and Chief Executive Officer
Harry J. Saal
Director
George Hara
David Heller
Stephen J. Lewis
William Miller
EXECUTIVE OFFICERS
Hobart McK. Birmingham
Vice President, General Counsel and Secretary
Kathleen M. Fisher
Vice President and Chief Financial Officer
David McGlaughlin
Vice President, International Sales
<PAGE>
BORLAND INTERNATIONAL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
- --------------------------- ----
<S> <C> <C>
Exhibit 2.3 Agreement and Plan of Merger among Borland
International, Inc., Aspen Acquisition
Corporation and Open Environment Corporation
dated May 11, 1996........................... *
Exhibit 3.1 Restated Certificate of Incorporation of the *
Registrant...................................
Exhibit 3.2 Amended By-Laws of the Registrant............ *
Exhibit 4.1 Restated Certificate of Incorporation and
Bylaws of the Registrant are filed as *
Exhibits 3.1 and 3.2, respectively...........
Exhibit 4.2 Rights Agreement dated as of December 23,
1991 between Borland International, Inc. and *
Manufacturers Hanover Trust Company of
California...................................
Exhibit 10.1 Loan commitment secured by a mortgage
entered into with Sanwa Bank California,
Wells Fargo Bank, and Pacific Trust Fund *
Company dated September 17, 1987 and
amendment thereto dated April 27, 1988.......
Exhibit 10.2 Form of Indemnity Agreement.................. *
Exhibit 10.3 1990 Employee Stock Purchase Plan............ *
Exhibit 10.4 Non-Employee Directors' Stock Option Plan.... *
Exhibit 10.5 1992 Stock Option Plan....................... *
Exhibit 10.6 1993 Stock Option Plan....................... *
Exhibit 10.7 Employment Agreement with Delbert W. Yocam
as amended...................................
Exhibit 11.1 Computation of Earnings (Loss) Per Share.....
Exhibit 22.1 Active Subsidiaries of Registrant............
Exhibit 23.1 Consent of Price Waterhouse LLP,
Independent Accountants......................
Exhibit 23.2 Consent of Ernst & Young LLP,
Independent Auditors.........................
Exhibit 23.3 Consent of Chartered Accountants for
Jarrah Technologies Limited..................
Exhibit 24.1 Powers of Attorney...........................
Exhibit 27.1 Financial Data Schedule......................
</TABLE>
*Incorporated by reference
<PAGE>
EXHIBIT 10.7
ADDENDUM TO
DELBERT W. YOCAM EMPLOYMENT AGREEMENT
The parties have agreed to amend the terms of that certain employment
agreement between them dated November 21,1996, as follows:
Paragraph 6(a) is amended to provide that the two million dollar
($2,000,000) home purchase loan is to be forgiven as of February 28, 1997, and
the Company shall make an additional income payment to Executive on the date of
loan forgiveness sufficient to pay all state and federal tax, social security
and other applicable pay deductions.
Paragraph 10(g) shall be amended to reflect that the amount of the
home purchase loan ($2,000,000) is also subject to the gross up calculation set
forth above.
Except as specifically set forth in this addendum, all other terms of
the employment agreement shall remain the same.
IN WITNESS WHEREOF, the parties have executed this addendum on this
5th day of March 1997.
BORLAND INTERNATIONAL, INC.
/s/ Stephen J. Lewis
----------------------------------
By: Stephen J. Lewis
Chairman, Organization & Compensation
Committee, Borland International
/s/ Delbert W. Yocam
----------------------------------
Delbert W. Yocam
1
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective the 25th day of
November, 1996, is entered into by and between Delbert W. Yocam ("Executive")
and Borland International, Inc., a Delaware corporation (the "Company") with
reference to the following:
Executive and the Company deem it to be in their respective best interests
to enter into an agreement providing for the employment of Executive with
the Company pursuant to the terms herein stated.
The parties have agreed and do hereby agree as follows:
1. EMPLOYMENT.
----------
(a) The Company does hereby employ, engage and hire Executive as
Chairman of the Board and Chief Executive Officer of the Company, and Executive
does hereby accept and agree to such hiring, engagement, and employment.
(b) Executive shall also be appointed as of the Effective Date
to serve on the Board of Directors of the Company. Executive agrees to serve as
a director of the Company upon such appointment and to resign such directorship
if requested upon the termination of his employment with the Company.
2. TERM OF AGREEMENT.
------------------
(a) The initial term ("Term") of this Agreement shall commence
on December 2, 1996 (the "Effective Date") and, unless Executive's employment
hereunder is earlier terminated or extended in accordance with the terms of this
Agreement, shall expire on May 31, 1999. Executive shall have the irrevocable
right to extend the term of this Agreement for a second thirty (30) month
period. To be invoked, notice of the exercise of such right must be given no
sooner than during the 18th month following the Effective Date and no later than
during the 24th month following the Effective Date. Notwithstanding any
extension of the term of this Agreement in accordance with this Section, in no
event shall any obligation of the Company to continue to pay cash compensation
in the event of the termination of Executive's employment extend beyond thirty
(30) months from the date of termination.
(b) Notwithstanding anything to the contrary contained herein,
Executive and the Company acknowledge and agree that from November 14, 1996,
Executive has made himself available to advise the Company as requested by the
Company's Board of Directors and that he will continue to do so until the
Effective Date.
3. DUTIES.
------
(a) Executive shall act as Chairman and CEO and perform duties
consistent with those positions on a full time basis. The Company and Executive
acknowledge that it is expected that the Company will have four regular board
meetings annually with any additional meetings to be called by the Executive;
provided however, that the foregoing shall not limit the ability of a director
to call a Board meeting to the extent permitted under Delaware law or the
Company's Bylaws.
2
<PAGE>
(b) Executive shall be allowed to continue to serve as a member
of the board of directors of four to six additional companies.
4. CASH COMPENSATION.
------------------
(a) On the date of this Agreement, Executive shall be paid an
amount calculated to net Executive two million dollars ($2,000,000) after
withholding by Company to pay all state and federal tax, social security and
other applicable pay deductions. One half of this bonus is nonrefundable. Except
in the event of death or disability, the second half of this bonus is refundable
to Company in the event Executive terminates his employment with the Company
(other than a "constructive termination" or termination by Executive for "good
reason," both as defined below) or fails to be available for his duties as
Chairman and CEO for fifteen months (455 days) after the Effective Date.
Termination of Executive by the Company for any reason, with or without cause,
including constructive termination or termination by Executive for good reason,
shall not entitle the Company to a return of any of refundable or nonrefundable
portion of this bonus.
(b) Executive's pay will be $360,000 per year ("base pay") and a
performance based bonus amount which is a percentage of base pay. The bonus pay
for the months preceding April 1, 1998 (approximately 16 months) shall be
guaranteed to be not less than 100% of base pay, with the bonus accruing prior
to April 1, 1997 to be paid on April 1, 1997. After April 1, 1998, bonus pay
shall not be less than 50% nor more than 300% of base pay in any one year.
Target performance shall result in a 100% bonus award. Annual salary and bonus
pay are guaranteed for the term (30 months) of this Agreement unless Executive
is terminated for cause or terminates his employment (other than a constructive
termination or termination for good cause).
(c) Salary shall be paid twice-monthly or every two weeks in
accordance with regular Company payroll policies. Bonus awards shall be
calculated and paid promptly on April 1, 1997, and thereafter in accord with the
Company's general pay schedule.
(d) In the event any additional compensation (other than salary,
bonus plans and options) is currently available to executive level employees
generally and the terms and conditions set forth herein do not provide for
comparable or more favorable similar benefits to Executive, Executive shall
receive a comparable benefit without reduction for any compensation identified
above.
5. STOCK OPTION GRANT.
-------------------
(a) The Company confirms that it has granted Executive a non-
statutory option to purchase 1,100,000 shares of common stock of the Company at
an option price equal to $5.50 per share. These shares shall vest in equal daily
amounts from November 14, 1996 (the "Grant Date") over the thirty (30) month
term from such date. In addition to the daily vesting, 25% of such grant shall
vest upon the one year anniversary of the Grant Date. Based upon the foregoing,
shares shall vest at the rate of 1222 shares per day for the first year, plus
275,000 shares on the first year anniversary of the Grant Date and 713 shares
per day until all 1,100,000 shares are vested.
(b) The vesting of these option shares shall accelerate in the
following circumstances:
(1) If Executive is terminated without cause,
including constructive termination and termination for good reason.
3
<PAGE>
(2) If Executive voluntarily terminates after a
"change in control" as hereinafter defined; provided however, that in such
situation, the vesting shall only accelerate as to the number of additional
shares which would have vested in the twelve (12) month period following the
date of termination.
(c) Except as expressly set forth in this Agreement, all terms
and conditions of this stock option grant shall be the terms and conditions of
the Company's 1992 Stock Option Plan and amendments and attached form of
Nonstatutory Stock Option Agreements.
6. RELOCATION AND TEMPORARY RESIDENCE.
-----------------------------------
(a) The Company shall make a two million dollar ($2,000,000)
unsecured loan, interest-free to Executive for the purpose of purchasing a
residence in California. The loan shall be forgiven by the Company at the rate
of $200,000 for each quarter of Executive's employment with the Company,
regardless of the date of funding. This loan with its referenced terms shall
hereinafter be referred to as the "residence purchase loan." The entire loan
balance shall be forgiven coincident with Executive's completion of the thirty
(30) month term of this Agreement. The entire loan fund shall be placed in
escrow at North American Title or such other escrow as may be agreed by the
parties within five (5) days of the date Executive begins full time employment.
Instructions shall be provided to the escrow agent to the effect that the
principal of the loan fund shall be promptly paid to a closing escrow as
directed by Executive for his purchase of a California residence. If the
Employee's employment with the Company is terminated by the Company other than
for cause, including constructive termination or termination by Executive for
good reason, all of the residence purchase loan, whether previously forgiven or
not, shall be distributed to Executive. In the case of a termination for cause
or any other willful termination by Employee, that portion of the residence
purchase loan which has been forgiven shall be distributed to Executive and the
balance returned to the Company.
(b) The Company shall pay all reasonable and customary closing
costs on sale of Executive's Portland home and the purchase of a California
home, including loan fees, loan discount points, escrow fees, title insurance
and appraisal fees. The Company shall also pay all reasonable moving expenses.
The Company agrees to pay such expenses so long as incurred on or before the
sixtieth (60th) day after the expiration of the initial Term of this Agreement.
The Company shall pay these expenses upon submission of billing statements or
escrow closing statements; provided that the maximum amount reimbursable
pursuant to this Section shall be $150,000.
(c) The Company shall also pay reasonable living expenses for
the first six months of the term of employment to allow Executive to live in the
Santa Clara, Santa Cruz or San Mateo County area before a new family residence
is purchased. The Company shall also pay reasonable travel expenses between
Oregon and California for Executive and his family during first six months of
his term of employment. The Company shall pay these expenses upon submission of
expense reports; provided that the maximum amount reimbursable pursuant to this
Section shall be $50,000.
7. BENEFITS.
--------
(a) Executive shall be entitled to such benefits as other
Company executives are entitled to in addition to the terms and conditions of
this Agreement, including but not limited to medical and dental insurance;
provided however, that the foregoing shall not apply to the extent that this
Agreement provides a similar more favorable benefit to Executive.
(b) Executive shall receive 240 hours per year vacation time. He
shall be entitled to
4
<PAGE>
take a full year's vacation allocation during the first 12 months of his
employment.
(c) Air travel at Company's expense shall be business class
unless no business class is available, in which event Executive shall travel
first class.
8. CHANGE IN CONTROL.
-----------------
(a) For purposes of this Agreement, a "change in control" of the
Company shall have occurred under the following circumstances:
(1) If any person, as defined in Section 14(d) of the
Securities Exchange Act of 1934, other than the Company or any employee benefit
plan sponsored by the Company, becomes the "beneficial owner" as defined in
Rule 13(d-3) under the Exchange Act, directly or indirectly of 10 percent or
more of the combined voting power of the Company's voting securities; provided
that no change in control shall be deemed to have occurred for purposes of this
Agreement by virtue of any transaction which results in Executive or a group of
persons which includes Executive acquiring 10 percent or more of the combined
voting power of the Company's voting securities.
(2) If there is a sale or merger of the Company, the result
of which is that the holders of the Company's voting securities prior to such
transaction do not own or control 50% or more of the voting securities of the
surviving entity .
(3) After any change in control, termination of this
Agreement by either party, except termination for cause, shall not affect
Executive's rights to receive all of the cash compensation (including signing
bonus), stock option, residence purchase loan and other benefits to which he is
otherwise entitled to receive, including an acceleration of the vesting of his
stock option (except as limited pursuant to Section 5(b)(2) hereof.
Notwithstanding anything to the contrary contained in this Section, if Executive
terminates his employment more than six months following a change in control,
the rights and benefits of Executive under this Agreement shall be determined
without reference to such change of control.
9. TERMINATION.
-----------
(a) Either party may terminate the employment of Executive at
any time and for any reason. Such termination by the Company without cause will
be without prejudice to Executive's right to cash compensation (including
signing bonus), stock options, including acceleration under the stock option
agreement, residence purchase loan and all other benefits under this Agreement
for the balance of its term.
(b) "Cause" shall exist under the following circumstances: (1)
willful disregard and habitual neglect of Executive of his duties despite
adequate written warnings from the Board, (2) fraud or dishonesty with respect
to Company or deliberate injury or attempt to injure Company, or (3) conviction
of a felony. No act or failure to act by Executive shall constitute "cause" if
one or more members of the Board knew or should have known of the act or failure
to act for more than six months of its being asserted against Executive.
(c) "Constructive termination by the Company" shall be
considered termination without cause for purposes of this Agreement and shall be
considered to have occurred if: (1) Company reduces by 20% or more Executive's
base salary (except to the extent that such percentage reduction is effected
across all senior
5
<PAGE>
management); (2) if without Executive's consent, Company significantly reduces
Executive's job authority or responsibility, including, without limitation, a
change in title whereby Executive does not retain the title of Chairman and CEO;
or (3) if without Executive's consent, Company requires Executive to change the
location of his job or office, such that he will be based at a location more
than fifty (50) miles from the Company's current Scotts Valley headquarters.
(d) Termination of this Agreement by Executive for "good reason"
shall be considered termination by the Company without cause. "Good reason"
shall exist under the following circumstances: (1) if the Company fails in any
material respect to perform its obligation under this Agreement (including, but
not limited to, Company's obligation to employ Executive as Chairman and CEO);
or (2) if the Company, through its Board, has materially and improperly
interfered in Executive's management responsibilities and thus prevented
Executive from performing substantially his reasonably assigned duties and
written notice to the Company of the complained act(s) or failures to act has
not produced timely and reasonably satisfactory responsive action by Company; or
(3) if as of the date hereof, the Company's filings with the Securities and
Exchange Commission, taken as a whole, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
No act or failure to act by Company which is known or should have known to
Executive for more than six months prior to being asserted by Executive shall
constitute "good reason" under this section.
(e) In the event of any termination of his employment, for
whatever reason, Executive will promptly (1) deliver to the Company all physical
property, discs, documents, notes, printouts, and all copies thereof and other
materials in Executive's possession or under Executive's control pertaining to
the business of the Company, including, but not limited to, those embodying or
relating to the inventions and the confidential information of the Company, (2)
deliver to the Company's patent department or legal department or other person
designated by the Company all notebooks and other data relating to research or
experiments or other work conducted by Executive in the scope of employment or
any inventions made, created, authored, conceived, or reduced to practice by
Executive, either alone or jointly with others, and (3) make full disclosure
relating to any inventions.
10. MISCELLANEOUS.
-------------
(a) With the input of Executive as the incoming Chairman of the
Board, the Company's Board of Directors agrees to review its existing committees
and the composition thereof. Notwithstanding the foregoing, unless and until
otherwise determined by the Board, the executive committee and technology
committee will be disbanded.
(b) The Company agrees to reimburse Executive for the reasonable
legal and other professional fees which he incurs in connection with the review
and negotiation of the terms of this Agreement in an amount not to exceed
$20,000.
(c) It shall be a condition to Executive's employment and the
benefits to be provided herein, that Executive execute and deliver the Company's
standard employee confidentiality and inventions agreement. Without limiting the
generality of the foregoing, Executive represents, warrants, and covenants that
he:
i) will not, in the course of employment, infringe upon
or violate any
6
<PAGE>
proprietary rights of any third party (including, without limitation, any third
party confidential relationships, patents, copyrights, mask works, trade
secrets, or other proprietary rights);
ii) is not a party to any conflicting agreements with
third parties which will prevent his from fulfilling the terms of employment and
the obligations of this Agreement;
iii) does not have in his possession any confidential or
proprietary information or documents belonging to others and will not disclose
to the Company, use, or induce the Company to use, any confidential or
proprietary information or documents of others; and
iv) agrees to respect any and all valid obligations which
he may now have to prior employers or to others relating to confidential
information, inventions, or discoveries which are the property of those prior
employers or others, as the case may be.
Executive has supplied or shall promptly supply to the Company a copy of each
written agreement to which Executive is subject (other than any agreement to
which the Company is a party) which includes any obligation of non-competition
or nonsolicitation.
(d) Executive recognizes that he possesses and will possess
confidential information about other employees of the Company relating to their
education, experience, skills, abilities, compensation and benefits, and
interpersonal relationships with customers of the Company. Executive recognizes
that the information he possesses and will possess about these other employees
is not generally known, is of substantial value to the Company in developing its
business and in securing and retaining customers, and has been and will be
acquired by him because of his business position with the Company. Executive
agrees that, during the period of Executive's employment hereunder and for a
period of one (1) year thereafter, he will not, directly or indirectly, solicit
or recruit any employee of the Company for the purpose of being employed by him
or by any competitor of the Company on whose behalf he is acting as an agent,
representative or employee and that he will not convey any such confidential
information or trade secrets about other employees of the Company to any other
person.
(e) All notices and other communications under this Agreement
shall be in writing and shall be given by fax or first-class mail, certified or
registered with return receipt requested, and shall be deemed to have been duly
given three (3) days after mailing or twenty-four (24) hours after transmission
of a fax to the respective persons named below:
If to Company: 100 Borland Way
Scotts Valley, CA 95066
Legal Department
Fax: (408) 431-4171
If to Executive: 1264 North Shore Road
Lake Oswego, Oregon 97034
with a copy to:
7
<PAGE>
James C. Carter
Schulte, Anderson, Downes Carter & Aronson,
P.C. 811
Southwest Front Avenue, Ste. 500
Portland, Oregon 97204
Either party may change such party's address for notices by notice duly given
pursuant hereto.
(f) This Agreement and the legal relations thus created between
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of California.
(g) The Company shall make such deductions and withhold such
amounts from each payment made to the Executive hereunder as may be required
from time to time by law, governmental regulation or order. Except as provided
in Section 4(a) hereof, no amounts payable hereunder shall be subject to a
"gross up" for taxes payable by Executive with respect to such amounts.
(h) This Agreement embodies the entire agreement of the parties
respecting the matters within its scope and may be modified only in writing.
Section headings in this Agreement are included herein for convenience of
reference only and shall not constitute a part of this Agreement for any other
purpose.
(i) This Agreement may be executed in several counterparts, each
of which shall be deemed to be original but all of which together will
constitute one and the same instrument.
(j) Any controversy, claim or dispute arising out of or relating
to this Agreement, or the obligation of the parties hereunder, shall be settled
by binding arbitration in Santa Clara County, California. Arbitration shall be
conducted before J.A.M.S./Endispute or other mutually agreeable forum in
accordance with the California Employment Dispute Resolution Rules of the
American Arbitration Association. The parties agree to abide by all decisions
and awards rendered in such proceedings. Such decisions and awards shall be
final and conclusive and may be entered in any court having jurisdiction
thereof. If any arbitration or action at law or in equity is necessary to
enforce or interpret the terms of this letter or the option agreements referred
to herein, the prevailing party shall be entitled to reasonable attorney's fees,
costs and necessary disbursements in addition to any other relief to which such
party may be entitled.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first above written.
BORLAND INTERNATIONAL, INC.
By: /s/ Harry J. Saal
-----------------------------------------
Harry J. Saal, Vice Chairman of the Board
By: /s/ Delbert W. Yocam
-----------------------------------------
Delbert W. Yocam
8
<PAGE>
BORLAND INTERNATIONAL, INC.
EXHIBIT 11.1
COMPUTATION OF EARNINGS (LOSS) PER SHARE (1)
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------
1997 (2) 1996 (3) 1995 (2)
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss)..................................................... $(107,960) $ 14,719 $(11,827)
Weighted average number of common and common equivalent shares........ 36,512 -- 32,228
--------- --------
Net loss per common and common equivalent share....................... $ (2.96) -- $ (.37)
========= ========
Calculation of number of pro forma shares:
Dilutive effect of stock options...................................... -- 3,013 --
Add Series A Convertible Shares....................................... -- 186 --
Add average shares outstanding during period.......................... -- 33,968 --
--------
Pro forma shares for EPS.............................................. -- 37,167 --
--------
Calculation of pro forma net income
Net income as reported for period..................................... -- $ 14,719 --
Add after-tax interest adjustment related to assumed
net option exercises.............................................. -- -0- --
--------
Pro forma net income for EPS.......................................... -- $ 14,719 --
Calculation of EPS:
Pro forma net income divided by pro forma shares...................... -- $ .40 --
========
</TABLE>
(1) This exhibit should be read in conjunction with "Note 1-Earnings (Loss)
Per Share" of the "Notes to Consolidated Financial Statements".
(2) Calculation is antidilutive, therefore, used weighted average shares for
EPS.
(3) Calculation is dilutive, therefore, used for EPS.
<PAGE>
EXHIBIT 22.1
BORLAND INTERNATIONAL, INC.
ACTIVE SUBSIDIARIES OF REGISTRANT
JURISDICTION OF
NAME INCORPORATION
- ---------------------------------------- ---------------
BORLAND INTERNATIONAL (AUSTRALIA) PTY, LTD........ Australia
BORLAND CANADA SOFTWARE, INC...................... Canada
BORLAND INTERNATIONAL (UK) LIMITED................ United Kingdom
BORLAND INTERNATIONAL (FRANCE), SARL.............. France
BORLAND GMBH...................................... Germany
BORLAND (HONG KONG) LTD........................... Hong Kong
BORLAND COMPANY, LTD.............................. Japan
BORLAND INTERNATIONAL B.V......................... Netherlands
BORLAND A/O....................................... Russia
BORLAND TECHNOLOGIES (SINGAPORE) PTE, LTD......... Singapore
BORLAND INTERNATIONAL, INC........................ Delaware
REPORTSMITH, INC.................................. California
OPEN ENVIRONMENT CORPORATION...................... Massachusetts
OPEN ENVIRONMENT AUSTRALIA PTY. LIMITED........... Australia
OPEN ENVIRONMENT U.K. LTD......................... United Kingdom
OPEN ENVIRONMENT EUROPE LTD....................... United Kingdom
OPEN ENVIRONMENT FOREIGN SALES CORPORATION........ Barbados
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS FOR
BORLAND INTERNATIONAL, INC.
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-39185, 33-36975, 33-44301, 33-42495, 333-
13707,and 333-16313) of Borland International, Inc. of our report dated April
29, 1997, except for the first and fourth paragraphs of Note 12 which are as of
May 29, 1997 and Note 14 which is as of June 30, 1997 appearing on page 53 of
this Form 10-K.
Price Waterhouse LLP
San Jose, California
June 30, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-39185, 33-36975, 33-44301, 33-42495, 333-13707, and
333-16313) of Borland International, Inc. of our report dated March 27, 1996,
except as to the forth paragraph of Note 1, as to which the date is October 4,
1996, with respect to the consolidated financial statements of Open Environment
Corporation, not seperately presented, included in Borland International, Inc's
Form 10-K for the year ended March 31,1997 to be filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 30, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF CHARTERED ACCOUNTANTS FOR JARRAH TECHNOLOGIES LIMITED
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-39185, 33-36975, 33-44301, 33-42495, 333-13707
and 333-16313) of Borland International, Inc. of our report dated September 3,
1996, with respect to the consolidated financial statements of Jarrah
Technologies Pty. Limited for the year ended December 31, 1994, which are not
presented separately in Borland International, Inc.'s Form 10-K for the year
ended March 31, 1997.
William Buck & Company
Chartered Accountants
Sydney, Australia
June 30, 1997
<PAGE>
EXHIBIT 24.1
BORLAND INTERNATIONAL, INC.
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby make,
constitute and appoint HOBART McK. BIRMINGHAM and KATHLEEN M. FISHER and each of
them, acting together or alone, his true and lawful attorneys-in-fact and agents
with full power of substitution, in his name, place and stead to execute on his
behalf, in his capacity as a Director and/or officer of Borland International,
Inc., an annual report on Form 10-K for the fiscal year ended March 31, 1997 to
be filed with the Securities and Exchange Commission ("SEC") pursuant to the
Securities Exchange Act of 1934, as amended, (the "1934 Act") and any and all
other instruments, including any amendments thereto, which said attorneys-in-
fact and agents deem necessary or advisable to enable Borland International,
Inc. to comply with the 1934 Act and the rules, regulations and requirements of
the SEC in respect thereof, giving and granting to said attorneys-in-fact and
agents, and each of them, acting together or alone, full power and authority to
do and perform each and every act and thing whatsoever necessary or appropriate
to be done in and about the premises as fully to all intents as he might or
would do if personally present at the doing thereof, with full power of
substitution and revocation, hereby ratifying and confirming all that his said
attorneys-in-fact or substitutes may or shall lawfully do or cause to be done by
virtue hereof.
THIS POWER OF ATTORNEY expires on December 31, 1997.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the date
indicated below.
/s/ DELBERT W. YOCAM
--------------------------------
Delbert W. Yocam
/s/ GEORGE HARA
--------------------------------
George Hara
/s/ DAVID HELLER
--------------------------------
David Heller
/s/ STEPHEN LEWIS
--------------------------------
Stephen Lewis
/s/ WILLIAM MILLER
--------------------------------
William Miller
/s/ HARRY SAAL
--------------------------------
Harry Saal
Dated: June 30, 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 52,359
<SECURITIES> 2,001
<RECEIVABLES> 17,785
<ALLOWANCES> 0
<INVENTORY> 1,047
<CURRENT-ASSETS> 79,029
<PP&E> 106,563
<DEPRECIATION> 0
<TOTAL-ASSETS> 192,702
<CURRENT-LIABILITIES> 80,318
<BONDS> 0
0
0
<COMMON> 309,800
<OTHER-SE> (220,295)
<TOTAL-LIABILITY-AND-EQUITY> 192,702
<SALES> 151,376
<TOTAL-REVENUES> 151,376
<CGS> 29,450
<TOTAL-COSTS> 29,450
<OTHER-EXPENSES> 234,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,137)
<INCOME-PRETAX> (107,443)
<INCOME-TAX> 517
<INCOME-CONTINUING> (107,960)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (107,960)
<EPS-PRIMARY> (2.96)
<EPS-DILUTED> (2.96)
</TABLE>
