<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1996
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period ended ______ to ______
Commission File No. 0-16096
BORLAND INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2895440
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 BORLAND WAY, SCOTTS VALLEY, CALIFORNIA 95066-3249
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 431-1000
(Former name, former address and former fiscal year,
if changed since last report) N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
The number of shares of common stock outstanding
as of January 31, 1997 was 36,426,414.
<PAGE>
BORLAND INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1996
and March 31, 1996............................................ 3
Condensed Consolidated Statements of Operations for the three
and nine months ended December 31, 1996 and 1995.............. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 1996 and 1995....................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
PART II - OTHER INFORMATION
Item 1. Legal proceedings............................................... 15
Item 5. Other information............................................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 16
Signatures............................................................... 17
2
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PART I - FINANCIAL INFORMATION
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 72,242 $ 83,165
Short-term investments.......................... 1,754 24,353
Accounts receivable, net........................ 14,427 38,178
Inventories..................................... 1,043 1,599
Other........................................... 7,162 11,370
--------- ---------
Total current assets.......................... 96,628 158,665
Property and equipment, net....................... 109,946 117,754
Other non-current assets.......................... 8,338 9,572
Total assets.................................. $ 214,912 $ 285,991
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 12,583 $ 22,522
Accrued expenses................................ 19,879 21,333
Restructuring................................... 3,001 2,684
Income taxes payable............................ 13,127 9,244
Other........................................... 20,758 20,251
--------- ---------
Total current liabilities..................... 69,348 76,034
Long-term debt and other.......................... 13,919 14,563
--------- ---------
Total liabilities............................. 83,267 90,597
--------- ---------
Stockholders' equity:
Common stock; $.01 par value; 100,000
shares authorized; 36,431 and 36,108 issued
and outstanding............................... 364 365
Additional paid-in capital...................... 309,094 306,374
Accumulated deficit............................. (181,022) (115,537)
Cumulative translation adjustment............... 3,209 4,192
--------- ---------
Total stockholders' equity.................... 131,645 195,394
--------- ---------
$ 214,912 $ 285,991
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net revenues...................................... $ 36,756 $55,261 $114,209 $174,625
Cost of revenues.................................. 6,961 8,729 23,419 28,175
-------- ------- -------- --------
Gross profit...................................... 29,795 46,532 90,790 146,450
-------- ------- -------- --------
Selling, general and administrative............... 33,986 33,746 105,794 103,286
Research and development.......................... 14,038 11,611 41,897 35,221
Restructuring and merger related costs............ 11,885 679 12,968 679
-------- ------- -------- --------
Total operating expenses...................... 59,909 46,036 160,659 139,186
-------- ------- -------- --------
Operating profit (loss)........................... (30,114) 496 (69,869) 7,264
Interest income, net and other.................... 1,010 1,002 4,561 2,712
-------- ------- -------- --------
Income (loss) before income taxes................. (29,104) 1,498 (65,308) 9,976
Income tax provision (benefit).................... 267 382 177 2,212
-------- ------- -------- --------
Net income (loss)................................ $(29,371) $ 1,116 $(65,485) $ 7,764
======== ======= ======== ========
Net income (loss) per common and common
equivalent share................................ $ (.81) $ .03 $ (1.80) $ .21
======== ======= ======== ========
Weighted average number of common and
common equivalent shares outstanding............ 36,429 38,717 36,347 37,289
======== ======= ======== ========
</TABLE>
See accompanying notes
4
<PAGE>
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-----------------------------
1996 1995
-------- --------
<S>.................................................. <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(65,485) $ 7,764
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 7,833 13,862
Changes in assets and liabilities:
Accounts receivable........................... 23,526 (12,212)
Inventories................................... 555 6,362
Accounts payable, accrued
expenses and short-term restructuring....... (10,738) (29,619)
Income taxes payable.......................... 3,882 817
Other......................................... 6,595 (7,072)
-------- --------
Cash used by operating activities............. (33,833) (20,098)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment............. (3,410) (4,347)
Sale of fixed assets and assets held for sale..... 3,814 4,242
Net change in short-term investments.............. 22,599 (26,710)
-------- --------
Cash provided (used) by investing activities.. 23,003 (26,815)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net....... 2,523 55,105
Repayment of capital lease
obligations and other debt activity............ (1,671) 969
-------- --------
Cash provided by financing activities......... 852 56,074
-------- --------
Effect of exchange rate changes on cash.............. (946) 71
-------- --------
Net change in cash and cash equivalents.............. (10,924) 9,232
Beginning cash and cash equivalents.................. 83,166 69,886
-------- --------
Ending cash and cash equivalents..................... $ 72,242 $ 79,118
======== ========
</TABLE>
See accompanying notes
5
<PAGE>
BORLAND INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
On November 18, 1996 the Company completed the acquisition of Open
Environment Corporation (OEC) in a transaction accounted for as a pooling of
interests and, as a result, the Company's previously issued financial statements
for the periods presented in this Form 10-Q have been restated to include the
assets, liabilities and operating results of OEC in accordance with generally
accepted accounting principles and the instructions in Regulation S-X.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results for the periods shown. The results of
operations for such periods are not necessarily indicative of the results
expected for the entire fiscal year, which ends on March 31, 1997.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
of Borland International, Inc. for the year ended March 31, 1996 included in the
Registrant's Form 10-K, and the audited consolidated financial statements and
notes thereto of Open Environment Corporation for the year ended December 31,
1995 included in the Registrant's Form 10-K/A.
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2. EARNINGS (LOSS) PER SHARE
Net income (loss) per common and common equivalent share for the three
and nine months ended December 31, 1996 and 1995 was determined using the
modified treasury stock method when appropriate.
NOTE 3. 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 in exchange for all the
outstanding common stock of OEC or approximately 16% of the total number of
shares of Borland Common Stock outstanding as of that date. In addition, Borland
assumed options for the purchase of approximately 1,190,216 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 has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements have been restated for all
periods presented.
Restructuring and merger costs for the three months ended December 31,
1996 were $11.9 million, of which $8.9 million relates to the merger with OEC
and $3.0 million relates to the October 16, 1996 Borland restructuring (see note
4 below). Included in the $8.9 million of merger costs are $.6 million of
severance costs related to the elimination of redundant employees, $1.1 million
related to the write off of excess property, equipment and other assets, $3.2
million related to the write off of certain business ventures and
contractual obligations and $4.0 million representing the aggregate of
professional and other fees related to the merger.
6
<PAGE>
Of the $8.9 million in merger costs, $1.1 million relates to non-cash
write offs of assets, $2.8 million relates to cash payments made prior to
December 31, 1996, and $4.9 is a current liability at December 31, 1996.
Additionally, of the remaining $4.9 million liability $.2 million relates to
severance costs to be paid out in the quarter ended March 31, 1997, $1.3 million
relates to professional and other fees which are expected to be paid out over
the next two quarters, and the remaining $3.4 million relates to expected costs
associated with the closure of redundant operations.
OEC develops, markets and supports software that enables companies to
create applications for distributed, client/server computing systems. OEC's
three-tiered client/server software architecture allows customers to develop,
deploy and manage software applications which access information on an
enterprise-wide basis. OEC's product line includes Entera, an independent
framework for building, managing and deploying scaleable, client/server
applications, and OLEnterprise, an open, distributed object environment based on
Microsoft's OLE.
Because of differing fiscal year ends of the two companies, the
consolidated statements of income combine Borland's nine months ended December
31, 1996, and December 31, 1995 with OEC's six months ended September 30, 1996
and nine months ended September 30, 1995, respectively. The consolidated balance
sheets combine each company's balance sheet as of December 31, 1996 and March
31, 1996, respectively. OEC's operating results for the period January 1, 1996
to March 31, 1996 will be reflected as an adjustment to the combined Company's
retained earnings on March 31, 1996. Combined and separate results of the
Company and OEC for the periods prior to the acquisition were as follows
(unaudited, in thousands):
<TABLE>
<CAPTION>
Borland OEC Combined
-------- ------- ---------
<S> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31, 1996
Net revenues......................................... - - $ 36,756
Loss before restructuring, merger costs and
income taxes......................................... - - (18,229)
Restructuring and merger costs (See Notes 3 & 4)..... - - 11,885
Income taxes......................................... - - 267
Net loss............................................. - - (29,371)
NINE MONTHS ENDED DECEMBER 31, 1996
Net revenues......................................... - - $114,209
Income loss before restructuring, merger costs and
income taxes......................................... - - (56,901)
Restructuring and merger costs (See Notes 3 & 4)..... - - 12,968
Income taxes......................................... - - 177
Net loss............................................. - - (65,308)
THREE MONTHS ENDED DECEMBER 31, 1995
Net revenues......................................... $ 47,264 $ 7,997 $ 55,261
Income before restructuring, merger costs and
income taxes......................................... 310 865 1,175
Restructuring and merger costs....................... - 679 679
Income taxes......................................... 213 169 382
Net income........................................... 849 267 1,116
NINE MONTHS ENDED DECEMBER 31, 1995
Net revenues......................................... 152,345 22,280 $174,625
Income before restructuring, merger costs and
income taxes......................................... 5,335 2,608 7,943
Restructuring and merger costs....................... - 679 679
Income taxes......................................... 1,575 637 2,212
Net income........................................... 6,298 1,465 7,763
</TABLE>
7
<PAGE>
The two companies maintained a majority of similar accounting
practices. However, as a result of certain differing accounting practices
relating to the capitalization of fixed assets, which were not material to any
period presented, adjustments were made to conform the practices of the two
Companies.
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 income for that period has been credited to retained earnings.
Selected OEC operating results for the three months ended March 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) March 31, 1996
------------------
<S> <C>
Net revenues $ 3,219
Operating expenses 6,267
Other expense (197)
Net loss $(4,667)
</TABLE>
NOTE 4. RESTRUCTURING CHARGES
In response to the significant losses from operations in the three and
six months ended September 30, 1996, the Company implemented a worldwide
restructuring and realignment of its corporate structure on October 16, 1996,
which resulted in a 15% reduction in workforce. In connection with the
restructuring, 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.
Of the total $3.0 million in restructuring charges, $.1 relates to the
non-cash write off of fixed assets, $1.9 relates to cash payments made prior to
December 31, 1996, and $1.0 is a current liability at December 31, 1996.
Additionally, of the remaining $.9 million liability, $.6 million relates to
severance costs to be paid out in the quarter ended March 31, 1997, and $.3
million relates to certain lease obligations which will be paid out over the
remaining life of the lease agreements.
Based on the results of the October 16, 1996 restructuring and the
results of the quarter ended December 31, 1996, the Company believes it will be
necessary to implement an additional worldwide restructuring and realignment
during the quarter ending March 31, 1997.
The following table summarizes the Company's restructuring activity
for the three months ended December 31, 1996:
<TABLE>
<CAPTION>
Cash Paid in the
Accruals as of nine months ended Accrual as of
March 31, 1996 December 31, 1996 December 31, 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
Restructurings prior to
March 31, 1996............ $7,490 $1,594 $5,896
October 16, 1996
Restructure............... - 1,944 981
-------------- ------ ------
Total........... $7,490 $3,538 $6,877
============== ====== ======
</TABLE>
Subsequent to December 31, 1996, there have been no changes to the
Company's estimate of the total cost of prior restructurings. During the three
months ended December 31, 1996, prior restructuring reserves decreased by
8
<PAGE>
$1.6 million primarily due to cash payments related to noncancellable rent costs
of abandoned facilities. There were no non-cash charges during the quarter
related to prior restructurings.
NOTE 5. INCOME TAXES
Income tax expense for the quarter ended December 31, 1996 was
approximately $.3 million. Such tax expense results principally from non-U.S.
withholding taxes, which are assessed without regard to the profitability of the
applicable operation.
For the nine months ended December 31, 1996 the Company recorded an
income tax provision of approximately $.2 million, which is comprised of an
income tax benefit of approximately $.6 million for Borland and an income tax
provision of approximately $.8 million for OEC. The provision also reflects a
federal income tax refund of approximately $2.1 million resulting from a
settlement reached with the U.S. Internal Revenue Service. The settlement
resolved differences regarding certain disputed deductions related to the tax
years ending in 1986 -1991 for its former subsidiary Ashton Tate Corporation.
Excluding the settlement benefit, the Company would have incurred an income tax
expense of approximately $2.3 million for the nine months ended December 31,
1996.
BORLAND INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis is designed to be read in conjunction
with the Management's Discussion and Analysis set forth in the Company's Form
10-K for the fiscal year ended March 31, 1996. Historical results and
percentage relationships should not be taken as necessarily indicative of the
operating results for any future period.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL FUTURE RESULTS MAY DIFFER
MATERIALLY. READERS ARE REFERRED TO THE DOCUMENTS FILED BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION, SPECIFICALLY THE MOST RECENT REPORTS ON FORM
10-Q AND 8-K AND ITS REGISTRATION STATEMENT ON FORM S-4 RELATING TO THE
ACQUISITION OF OPEN ENVIRONMENT CORPORATION, WHICH IDENTIFY IMPORTANT RISK
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE CONTAINED IN THE
FORWARD-LOOKING STATEMENTS.
In addition to an analysis of recent and historical financial results,
the Form 10-K includes an analysis of certain risks of the Company's business,
including risks which are inherent to software development as well as specific
risks relating to the competitive environment in which the Company operates.
Although the Company has sought to identify the most significant risks to its
business, the Company cannot predict whether, or to what extent any of such
risks may be realized nor can there be any assurance that the Company has
identified all possible issues which the Company might face. In particular, the
Company has recently experienced substantial changes in its operations and
competitive environment and has suffered significant losses from operations in
the three and nine months ended December 31, 1996. In response to these losses,
the Company implemented a worldwide restructuring and realignment of its
corporate structure on October 16, 1996 which resulted in a 15% reduction in
workforce. The Company has included in its results of operations for the quarter
ended December 31, 1996 a one time charge of approximately $3.0 million (see
note 4) related to the October 16, 1996 restructuring.
Furthermore, based on the results of the October 16, 1996
restructuring and the results for the quarter ended December 31, 1996, the
Company believes it will be necessary to implement an additional worldwide
restructuring and realignment during the quarter ended March 31, 1997.
Among the other risk factors and uncertainties facing the Company,
include those related to: the challenges and opportunities presented by the
Company's recent focus on software development tools, including tools for the
9
<PAGE>
client/server and Internet/intranet market, the merger with Open Environment
Corporation (OEC), the market acceptance of Windows 95/NT and the emergence of
the Internet as an important new computing paradigm. Investors should carefully
read the Company's filings with the Securities and Exchange Commission, together
with this 10-Q, and consider all trends and uncertainties concerning the
Company's business before making an investment decision with respect to the
Company's stock.
In certain cases, the Company has lost management and other personnel
to competitors who have offered very substantial sign-on bonuses and
compensation packages which would be very difficult for the Company to match.
There can be no assurances that the Company will not be subject to further
losses of management and other key personnel. In addition, the Company may be
required to substantially increase the compensation, stock options or other
benefits offered to employees in order to attract or retain management and key
personnel. The loss of management and other key personnel, and the delays which
may be experienced in recruiting new management and other personnel, as well as
the additional costs which may be incurred in retaining or attracting personnel,
may have a material adverse affect on the Company and its operating results. In
particular, the disruptions inherent in such a situation are particularly
problematic for a company which has experienced the types of problems which the
Company has recently faced.
The Company experienced a substantial operating loss for the three and
nine months ended December 31, 1996 as well as operating losses for the four
prior fiscal years ended March 31, 1995. The Company expects to continue to
experience operating losses at least through the quarter ending March 31, 1997.
Among other matters, the Company's ability to regain profitability will be
substantially dependent upon its ability to successfully complete and introduce
new products, to successfully integrate OEC technology, to successfully
implement cost saving measures associated with the October 16, 1996
restructuring and to successfully implement an additional world- wide
restructuring and realignment during the quarter ended March 31, 1997.
The following table sets forth the unaudited consolidated results of
operations as a percentage of net revenues for the three and nine months ended
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues.................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................. 18.9 15.8 20.5 16.1
----- ----- ----- -----
Gross margin.................................. 81.1 84.2 79.5 83.9
----- ----- ----- -----
Selling, general and administrative........... 92.5 61.1 92.6 59.1
Research and development...................... 38.2 21.0 36.7 20.2
Restructuring & Other......................... 32.3 1.2 11.4 0.4
----- ----- ----- -----
Total operating expenses...................... 163.0 83.3 140.7 79.7
----- ----- ----- -----
Operating profit (loss)....................... (81.9) 0.9 (61.2) 4.1
Interest income, net and other................ 2.7 1.8 4.0 1.6
----- ----- ----- -----
Income (loss) before income taxes............. (79.2) 2.7 (57.1) 5.7
Income tax provision (benefit)................ 0.7 0.7 0.2 1.3
----- ----- ----- -----
Net income (loss)............................. (79.9)% 2.0% (57.3)% 4.4%
===== ===== ===== =====
</TABLE>
10
<PAGE>
NET REVENUES
The Company is engaged in the single business segment of designing,
producing and marketing computer software, primarily programming language and
database management tools. The Company provides such software development tools,
including tools for the client/server, multi-tier and Internet/intranet markets,
along with add-on products and services, to the software developer community.
The Company has several product lines which run primarily on personal computers
running under Windows and Windows 95/NT operating systems.
The Company distributes its products domestically and internationally
through independent distributors, dealers, ISVs and VARs and also by direct
marketing and sales to corporate, governmental, educational and end-user
customers. The Company offers certain return privileges to some of its
customers, and also offers its distributors certain limited product exchange
privileges and rebates. The Company recognizes revenue upon shipment subject to
allowances for estimated future returns, exchanges and rebates.
Net revenues of $36.8 million for the quarter ended December 31, 1996
increased from $36.4 million in the quarter ended September 30, 1996. Net
revenues in the December quarter included license fees from Corel Corporation
for source code related to the Paradox product line. In addition, revenues
were favorably impacted by the introduction of the client/server version of
IntraBuilder, the Company's first product principally developed for the
- ------------
Internet which is consistent with the Company's strategy to focus on the
client/server and Internet/intranet markets.
Net revenues for the nine months ended December 31, 1996 were $114.2
million, as compared to $174.6 million, for the same period of fiscal 1996.
This decrease in revenues is mainly attributable to the unit volume declines in
the desktop database products, lack of significant new product introductions,
maturing versions of current products and an overall increasingly competitive
marketplace.
Net revenues for the three months ended December 31, 1996 and 1995
include OEC revenues of $4.0 million and $8.0 million related to OEC's three
months ended September 30, 1996 and 1995, respectively. Net revenues for the
nine months ended December 31, 1996 and 1995 include OEC revenues of $10.5
million and $22.3 million related to OEC's nine months ended September 30, 1996
and 1995, respectively.
The Company's non-U.S. net revenues represented approximately 59.5%
and 51.7% of total net revenues in the third fiscal quarter ended December 31,
1996 and 1995, respectively. The percentage of non-U.S. net revenues was lower
in the three months ended December 31, 1995, primarily due to higher sales of
the desktop products included in the prior year U.S. revenue. Similar to trends
occurring in the U.S., non-U.S. net revenues experienced a decline in desktop
revenues which was offset by increases in client/server revenues.
The Company anticipates that as the Windows 95/NT operating systems
continues to be adopted, the Company will continue to experience a decline in
Windows 3.1 versions for its products. The extent to which such decline will be
offset by revenues from the release of the Windows 95/NT versions of the Company
products is uncertain and subject to a number of risks.
In light of the expected migration of customers to the Windows 95/NT
operating environment and an expected increase in revenues from client/server
products, it is uncertain whether the Company's historical product life cycle
will continue. Among other matters, the Company believes that a share in the
Windows market does not or will not automatically result in market share in the
Windows 95/NT market. As a result, the Company cannot predict the rate at which
owners of its current products are likely to upgrade to its products for a
different operating system. Also, to the extent that there are any
incompatibilities between the Company's products and Windows 95/NT, there could
be an adverse effect on the sale of the Company's products. In addition, the
Company has, in the past, experienced declining sales of certain of its products
in anticipation of the release of new products. Furthermore, the Company cannot
determine whether the increasing price competition in the industry, the timing
of competitors' product releases or other factors will have an adverse effect
upon the product upgrade revenue which has historically been a significant
component of the Company's revenue. Finally, a greater portion of the Company's
revenues are being derived from client/server sales which are characterized by
long sales cycles and increased transaction values. As a result, such revenues
may be subject to increased variability over time.
11
<PAGE>
The Company expects that a significant portion of its remaining fiscal
1997 revenues will come from new products and new versions of existing products.
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 or Sun Microsystems Inc.'s Java programming language,
may adversely affect such sales.
The Company's acquisition of OEC is consistent with its strategy to
focus on software developers and the opportunities associated with the
client/server, multi-tier market. The Company's relatively recent entry into
this market is subject to a number of risks, including that the Company has
historically not competed in this market, that the market itself is new and
evolving, that the Company must make choices regarding the operating systems to
focus upon, and that there are several very large and well entrenched businesses
as well as a number of smaller, very successful companies already competing in
this market. There can be no assurances that the sales of these client/server,
multi-tier products will meet the Company's expectations due to various factors
including the ongoing transition of and investment in resources for this segment
by the Company, the Company's credibility in this arena, and a competitive
environment in which many of the Company's competitors have greater financial
resources which may be leveraged to gain market share.
From time to time the Company makes announcements to its customers
with respect to the time frames within which the Company expects to ship new
products. For example, the Company has announced its goal to introduce a Java
development tool, 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 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.
GROSS MARGINS
Gross margins were at 81.1% and 84.2% of net revenues in the quarters
ended December 31, 1996 and 1995, respectively, and 79.5% and 83.9% for the nine
months ended December 31, 1996 and 1995, respectively. The lower margins in the
three and nine months ended December 31, 1996 were due primarily to higher costs
associated with the OEC consulting business and relatively flat worldwide
revenues in the quarter, which resulted in the fixed components of cost of
revenues being spread across a lower revenue base.
Gross margins can be affected by various factors, including price
changes, changes in the composition of sales by product or distribution channel,
sales volumes, special product promotions and return privileges, all of which
may be subject to other factors, including the timing of product releases,
actions taken by competitors, or other factors beyond the Company's control. In
particular, the Company's gross margins can be strongly affected in particular
periods by aggressive pricing strategies and return privileges employed in
connection with new product introductions and upgrades. The microcomputer
software industry continues to experience substantial price competition. The
extent to which price competition may require the Company to lower prices with
the result of lower margins remains uncertain.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $34.0 million and
$33.7 million for the quarters ended December 31, 1996 and 1995, and were 92.5%
and 61.1% of net revenues for such periods, respectively. Included in the
results for the quarter ended December 31, 1996 is $3.4 million of non-recurring
costs associated with certain employment agreements. Although selling, general
and administrative expenses remained relatively flat on a dollar basis year over
year, these costs as a percentage of revenues increased substantially due to the
decline in U.S. net revenues.
Although certain selling, general and administrative expenses can be
managed or controlled on a medium term basis, a substantial portion of such
expenses are essentially fixed on a quarter to quarter basis. As a result, when
the Company suffers adverse effects to its net revenues or margins because of
delays in new product introductions, price competition or other competitive
factors, in the short term the Company generally is unable to take actions to
substantially reduce expenses. As previously stated, the Company announced on
October 16, 1996 a worldwide restructuring to align these costs with expected
future revenues. This resulted in a $1.9 million savings in selling, general and
administrative costs in the quarter ended December 31, 1996 before adding the
$3.4 million in non-recurring employment costs as stated above.
The Company incurs substantial expenses in connection with the
introduction of new products and generally a significant portion of such costs
are incurred prior to the release of the new products. As a result, in addition
to the general risks associated with the ultimate success of the Company's new
products, results for any quarter may be materially and adversely affected to
the extent significant expenses are incurred, but significant revenues from the
new product are not recognized until the following quarter. In the quarter ended
December 31, 1996 the Company incurred significant promotional costs related to
the upcoming launch of C++ Builder.
Furthermore, based on the results of the October 16, 1996
restructuring and the results of the quarter ended December 31, 1996, the
Company believes it will be necessary to implement an additional worldwide
restructuring and realignment during the March 31, 1997 quarter.
RESEARCH AND DEVELOPMENT
Research and development expenses were $14.0 million and $11.6 million
in the quarters ended December 31, 1996 and 1995, and were 38.2% and 21.0% of
net revenues for such periods, respectively. The increase in research and
development expenses is principally due to efforts associated with the
development of future Internet/intranet-specific tools such as C++Builder,
----------
Delphi 3.0 and a visual development tool for Java, named JBuilder.
- ---------- --------
The Company's focus on providing products to the software developer
community is subject to a number of uncertainties including, but not limited to,
the Company's ability to make timely product introductions, the market's
acceptance of the Windows 95/NT operating platform, the increasing importance of
Internet technologies, and competitive responses to the Company's strategic
actions. The Company believes that it is necessary to continue to invest in
research and development efforts to remain competitive. Because of the inherent
uncertainties of software development projects, there can be no assurance that
the Company's research and development efforts will result in successful product
introductions or increased revenue.
RESTRUCTURINGS AND MERGER RELATED COSTS
During the quarter ended December 31, 1996, the Company recorded a
$11.9 million restructuring and OEC merger charge. Of this, approximately $3.0
million related to the October 16, 1996 restructuring (see note 4), and
approximately $8.9 million related to the merger with OEC (see note 3).
Of the $11.9 million restructuring and merger costs, $2.6 million is
related to severance costs associated with the reduction in work force, $.7
million to the termination of certain lease agreements, $1.3 million related to
the write off of excess property, equipment and other current assets, $3.2
million related to the write off of certain contractual obligations, $4.1
million representing the aggregate professional and other fees related to the
merger and restructuring. Of the $11.9 million of combined restructuring and
merger related costs $1.3 million relates to the
13
<PAGE>
non-cash reduction of assets, $4.8 million was related to cash paid prior to
December 31, 1996, and $5.8 million is a current liability at December 31, 1996.
Furthermore, based on the results of the October 16, 1996
restructuring and the December 31, 1996 quarter ended operating results, the
Company believes it will be necessary to implement an additional worldwide
restructuring and realignment during the quarter ended March 31, 1997.
During the quarter ended September 30, 1996 the Company had remaining
on its books total liabilities of $5.9 million related to prior fiscal year
restructurings.
Subsequent to March 31, 1996, there have been no changes to the
Company's estimate of the total cost of restructurings occurring prior to the
fiscal period beginning April 1, 1997. During the three and nine months ended
December 31, 1996, the restructuring reserves decreased by $.2 million and $1.6
million, respectively, primarily due to cash payments related to noncancellable
rent costs of excess facilities. There were no non-cash charges during the
quarter.
INTEREST INCOME, NET AND OTHER
Interest income, net and other was $1.0 million for both the three
months ended December 31, 1996 and 1995, and represented 2.7% and 1.8% of net
revenues for such periods, respectively. For the nine months ended December 31,
1996, interest income, net and other was $4.6 million and $2.7 million and
represented 4.0% and 1.6% of net revenues, respectively. The increase is
primarily due to an increase in interest income of $1.4 million in the second
quarter of fiscal 1997 related to a tax settlement with the U.S. Internal
Revenue Service.
INCOME TAXES
Income tax expense for the quarter ended December 31, 1996 was
approximately $.3 million. Such tax expense results principally from non-U.S.
withholding taxes, which are assessed without regard to the profitability of the
applicable operation.
For the nine months ended December 31, 1996 the Company recorded an
income tax provision of approximately $.2 million, which is comprised of an
income tax benefit of approximately $.6 million for Borland and an income tax
provision of approximately $.8 million for OEC. The provision also reflects a
federal income tax refund of approximately $2.1 million resulting from a
settlement reached with the U.S. Internal Revenue Service. The settlement
resolved differences regarding certain disputed deductions related to the tax
years ending in 1986 -1991 for its former subsidiary Ashton Tate Corporation.
Excluding the settlement benefit, the Company would have incurred an income tax
expense of approximately $2.3 million for the nine months ended December 31,
1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $74.0 million
at December 31, 1996 a decrease of $33.5 million from a balance of $107.5
million at March 31, 1996. Working capital decreased from $82.6 million as of
March 31, 1996 to $27.3 million as of December 31, 1996, primarily due to the
Company's operating losses.
Net cash used by the Company for operating activities in the nine
months ended December 31, 1996 was $33.8 million and was primarily comprised of
the Company's net loss of $65.5 million offset by a $23.5 million reduction in
the accounts receivable balance related to significant cash collections.
Additionally, $10.7 million was used to pay down accounts payable, accrued
expenses and short-term restructuring that originated in the quarter ended March
31, 1996, when spending levels were generally higher than in the subsequent
quarter. Net cash provided by investing activities of $23.0 million consisted
principally of $22.6 million from the net maturity of short-term investments,
less $3.4 million of equipment purchases. Financing activities provided net cash
of $.9 million, primarily from exercises of employee stock options.
14
<PAGE>
The Company believes that its existing cash balances and funds
expected to be provided by operations will be sufficient to finance its working
capital requirements at least through the next twelve months.
PART II - OTHER INFORMATION
ITEM 1. 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, which alleges certain securities law violations
by the Company and certain of its officers and directors. The lawsuit, as
amended, purports to represent a class of investors who purchased or otherwise
acquired the Company's Common Stock between March 5, 1991 and December 9, 1992.
As of February 29, 1996 the parties entered into a stipulation to settle this
matter. This stipulation has been submitted to the Court for approval. Although
the Company expects the settlement will be approved, the Company cannot predict
at this time when or if the Court will approve such settlement. If the
settlement is approved, there will not be any material adverse effect on the
Company's financial condition or results of operations. In particular, the
Company has already recorded a charge reserving in full for the amount of the
agreed settlement to be paid by the Company. Further as such amount has been
deposited in an escrow account pending the approval of the settlement,
settlement on the terms agreed will not affect the Company's liquidity.
On February 28, 1995, the Company and certain of its officers and
directors were named as defendants in a lawsuit, Crook et al v. Kahn et al filed
-------------------------
in the U. S. District Court for the Northern District of California. The
complaint alleges certain violations of the federal securities laws and purports
to be brought as a class action on behalf of all persons other than the
defendants, who purchased or otherwise acquired the Common Stock of the Company
between September 6, 1994 and October 19, 1994. As of February 29, 1996 the
parties entered into a stipulation to settle this matter. This stipulation has
been submitted to the Court for approval. Although the Company expects the
settlement will be approved, the Company cannot predict at this time when or if
the Court will approve such settlement. If the settlement is approved, there
will not be any material adverse effect on the Company's financial condition or
results of operations. In particular, the Company has already recorded a charge
reserving in full for the amount of the agreed settlement to be paid by the
Company. Further as such amount has been deposited in an escrow account pending
the approval of the settlement, settlement on the terms agreed will not affect
the Company's liquidity.
On December 6, 1996 and December 19, 1996, two lawsuits were filed
against the Company's subsidiary, OEC, and certain former officers and directors
of OEC, alleging violations of federal securities laws prior to the Company's
acquisition of OEC. 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.
The Company is involved in various other legal actions arising in the
normal course of business. The Company believes that the probability is remote
that the financial consequence of judgments, if any, arising from these actions
would have a materially adverse impact on its financial condition or results of
operations. However, due to the inherent uncertainties of litigation, the
outcome of any of these actions could be unfavorable and the Company may choose
to make payments, or enter into other arrangements, to settle such actions or
may be required to pay damages or other expenses. Such an outcome in certain of
these matters could have a material adverse effect on the Company's financial
condition or results of operations.
The computer industry has been subject to a substantial amount of
intra-industry litigation in recent years regarding, among other matters, the
extent of patent, copyright and intellectual property protection available for
software products. Such actions can require the expenditure of substantial
management time and financial resources and can adversely affect the financial
performance of the companies involved. There can be no assurance that the
Company will not be a party to other such litigation in the future.
15
<PAGE>
ITEM 5. OTHER INFORMATION
On November 8, 1996, Philippe Kahn resigned from the Board of
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
Reports on Form 8-K filed with the Securities and Exchange
Commission during the three months ended December 31, 1996.
On October 24, 1996, the Company filed a Report on Form 8-K
reporting under Item 5 thereof, the Company's third quarter restructuring
and the additional Paradox license rights granted to Corel Corporation.
On December 3, 1996, the Company filed a Report on Form 8-K
reporting under item 2 the completion of its acquisition of OEC and under
Item 5 that the Company entered into a thirty-month employment agreement
with Delbert W. Yocam pursuant to which the Company will employ Mr. Yocam
as its Chairman of the Board and Chief Executive Officer. On January 31,
1997 such report was amended to provide pro forma unaudited combined
financial statements.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
BORLAND INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: February 14, 1997
/s/ PAUL W. EMERY II
-----------------------------
PAUL W. EMERY II
Vice President and
Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10Q OF BORLAND
INTERNATIONAL, INC. FOR THE QUARTER ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 72,242
<SECURITIES> 1,754
<RECEIVABLES> 14,427
<ALLOWANCES> 0
<INVENTORY> 1,043
<CURRENT-ASSETS> 96,628
<PP&E> 109,946
<DEPRECIATION> 0
<TOTAL-ASSETS> 214,912
<CURRENT-LIABILITIES> 69,348
<BONDS> 0
0
0
<COMMON> 309,094
<OTHER-SE> (177,813)
<TOTAL-LIABILITY-AND-EQUITY> 214,912
<SALES> 114,209
<TOTAL-REVENUES> 114,209
<CGS> 23,419
<TOTAL-COSTS> 23,419
<OTHER-EXPENSES> 160,659
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,561)
<INCOME-PRETAX> (65,308)
<INCOME-TAX> 177
<INCOME-CONTINUING> (65,485)
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<NET-INCOME> (65,485)
<EPS-PRIMARY> (1.80)
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