<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
[ ] 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 September 30, 1997 was
38,335,855.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
SEPTEMBER 30, MARCH 31,
1997 1997
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 81,679 $ 52,359
Short-term investments ....................................... 1,793 2,001
Accounts receivable, net ..................................... 21,375 17,785
Inventories .................................................. 971 1,047
Other ......................................................... 7,164 5,837
--------- ---------
Total current assets ................................. 112,982 79,029
Property and equipment, net .......................................... 103,244 106,563
Other non-current assets ............................................. 6,992 7,110
--------- ---------
Total assets ........................................ $ 223,218 $ 192,702
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 11,044 $ 14,574
Accrued expenses ............................................. 40,303 37,724
Short-term restructuring ..................................... 1,892 4,740
Income taxes payable ......................................... 4,227 4,463
Other.......................................................... 18,646 18,817
--------- ---------
Total current liabilities ............................ 76,112 80,318
Long-term debt and other ............................................. 22,141 22,508
--------- ---------
Total liabilities .................................... 98,253 102,826
--------- ---------
Mandatorily redeemable convertible preferred stock;
$50,000 par value; 1,470 shares authorized;
495 issued and outstanding..................................... 24,265 --
Stockholders' equity:
Common stock; $.01 par value; 100,000 shares authorized;
38,336 and 37,119 issued and outstanding ................... 383 371
Additional paid-in capital ................................... 318,600 309,800
Accumulated deficit .......................................... (221,900) (223,497)
Cumulative translation adjustment ............................ 3,617 3,202
--------- ---------
Total stockholders' equity ........................... 100,700 89,876
--------- ---------
$ 223,218 $ 192,702
========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
2
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BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net revenues.......................................................... $42,500 $ 39,306 $84,470 $ 77,452
Cost of revenues...................................................... 6,375 7,559 12,731 16,457
------- -------- ------- --------
Gross profit.......................................................... 36,125 31,747 71,739 60,995
------- -------- ------- --------
Selling, general and administrative................................... 25,095 32,575 50,024 71,810
Research and development.............................................. 9,905 14,679 20,481 27,859
Restructuring related charges......................................... - - - 1,083
------- -------- ------- --------
Total operating expenses........................................... 35,000 47,254 70,505 100,752
------- -------- ------- --------
Operating income (loss)............................................... 1,125 (15,507) 1,234 (39,757)
Interest income, net and other........................................ 593 1,660 764 3,547
------- -------- ------- --------
Income (loss) before income taxes..................................... 1,718 (13,847) 1,998 (36,210)
Income tax provision (benefit)........................................ 200 463 401 (91)
------- -------- ------- --------
Net income (loss).................................................... $ 1,518 $(14,310) $ 1,597 $(36,119)
======= ======== ======= ========
Net income (loss) per common and common equivalent share (Note 2)..... $0.03 $(0.40) $0.03 $(1.00)
======= ======== ======= ========
Weighted average number of common and common equivalent 39,101 36,319 39,064 36,293
shares outstanding................................................... ======= ======== ======= ========
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE>
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................................... $ 1,597 $(36,119)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................... 5,041 8,085
Changes in assets and liabilities:
Accounts receivable..................................................................... (3,590) 17,900
Inventories............................................................................. 76 378
Other current assets.................................................................... (1,327) (31)
Other non-current assets................................................................ (44) (183)
Accounts payable, accrued expenses and short-term restructuring........................ (3,799) (6,098)
Income taxes payable and other.......................................................... (236) 4,773
Other current liabilities............................................................... (171) (3,019)
------- -------
Cash used by operating activities....................................................... (2,453) (14,314)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment...................................................... (2,326) (2,899)
Acquisition of product rights and additions to capitalized software........................ - (22)
Sale of fixed assets and assets held for sale.............................................. 718 35
Net change in short-term investments....................................................... 208 19,624
------- -------
Cash provided (used) by investing activities............................................ (1,400) 16,738
------- -------
Cash flows from financing activities:
Proceeds from issuance of common and preferred stock, net.................................. 33,078 2,393
Repayment of capital lease obligations and other debt activity............................. (367) (368)
------- -------
Cash provided by financing activities................................................. 32,711 2,025
------- -------
Effect of exchange rate changes on cash...................................................... 462 (331)
------- -------
Net change in cash and cash equivalents...................................................... 29,320 4,118
Net cash adjustment to conform the year end of Open Environment Corporation.................. - 1,472
------- -------
Beginning cash and cash equivalents.......................................................... 52,359 81,694
------- -------
Ending cash and cash equivalents............................................................. $81,679 $ 87,284
======= ========
</TABLE>
See notes to the condensed consolidated financial statements.
4
<PAGE>
BORLAND INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and related
interim statements of income and cash flows include all adjustments (consisting
only of normal recurring items) necessary for their fair presentation in
conformity with generally accepted accounting principles. Preparing financial
statements requires management to make estimates and assumptions that effect the
reported amounts of assets, liabilities, revenues and expenses. Examples include
provisions for returns and bad debts and the length of product life cycles and
buildings' lives. Actual results may differ from these estimates. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and notes thereto included in the
Borland International, Inc. Annual Report on Form 10-K for the fiscal year ended
March 31, 1997.
NOTE 2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share was calculated on net income (loss) available to
common stockholders. For the three and six months ended September 30, 1997, the
net income per share was computed as net income of $1,518,000 and $1,597,000,
respectively, less $383,000 relating to the accretion attributable to the
warrants issued in conjunction with the private placement of manditorily
redeemable convertible preferred stock (see Note 3) divided by the weighted
average common and common equivalent shares outstanding. For the three and six
months ended September 30, 1997 and 1996 the weighted average common and common
equivalent shares were determined using the modified treasury stock method.
The impact of the manditorily redeemable convertible preferred stock on fully
diluted earnings per share were antidilutive for the three and six months ended
September 30, 1997.
NOTE 3. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
WARRANTS
On June 30, 1997, the Company completed the initial closing (the "Initial
Closing") of a privately placed equity financing pursuant to a series of
subscription agreements (the "Financing Agreements") with 22 investors (the
"Investors"). The Financing Agreements contemplate several closings of sales of
Series B Preferred Stock (the "Series B Shares") and warrants to purchase Common
Stock (the "Warrants") which closings are subject to various conditions. At
the Initial Closing, the Company raised net proceeds of approximately $25
million through the sale of 495 Series B Shares and Warrants to purchase up to
198,000 shares of the Company's Common Stock. After the satisfaction of certain
holding periods, each Series B Share is convertible, at the option of its
holder, into shares of Common Stock of the Company based upon a conversion price
equal to the lower of the lowest closing market price of the Company's Common
Stock during the seven trading days before the conversion date or $6.94. The
Warrants have an exercise price of $8.67 per share. Subject to various
conditions, the Financing Agreements provide for the issuance of an additional
55 Series B Shares and Warrants to purchase 22,000 shares of the Company's
Common Stock which is to be made at a second closing and on the same terms
applicable at the Initial Closing.
Subject to various additional conditions, the Company has the option ("Company
Put Option") to require the Investors to purchase additional Series B Shares and
Warrants, and the Investors have the right to require that the Company sell to
them additional Series B Shares and Warrants ("Investor Call Options"). The
maximum number of additional Series B Shares and Warrants which the Company may
require the Investors to purchase is 500 Series B Shares, for an additional
purchase price of approximately $25 million, and Warrants to purchase 200,000
shares
5
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of the Company's Common Stock. If the Company exercises its right to sell the
maximum number of shares pursuant to the Company Put Option, the Investors may
require that the Company sell to them pursuant to the Investor Call Options a
maximum of 420 additional Series B Shares, for a purchase price of approximately
$21 million, (or 220 Series B Shares, for a purchase price of approximately $11
million, if the Company does not exercise the Company Put Option) and the number
of shares subject to additional Warrants would be 168,000 (or 88,000 if the
Company does not exercise the Company Put Option). The Series B Shares and
Warrants issued upon exercise of the Company Put Option or the Investor Call
Options will have the same terms and rights as the Series B Shares and Warrants
issued at the Initial Closing except that the maximum conversion price and
exercise price, respectively, will be based upon the market price of the
Company's Common Stock at the time of each subsequent issuance of such Series B
Shares and Warrants.
For further information regarding this transaction the reader should refer to
the Company's Current Report on Form 8-K and Definitive Proxy Statement filed
with the Securities and Exchange Commission on July 14, 1997 and July 24, 1997,
respectively.
NOTE 4. INCOME TAXES
Income tax expense for the quarter ended September 30, 1997 was approximately
$0.2 million. Such tax expense results principally from non-U.S. withholding
taxes, which are assessed without regard to the profitability of the applicable
operation.
NOTE 5. PRO FORMA NET INCOME (LOSS) PER SHARE
The Company computes its net income (loss) per share as stated in Note 2 in
accordance with provisions of the Accounting Principles Board's Opinion No. 15
(APB 15), "Earnings Per Share". In February 1997, the Financial Accounting
Standards Board released FAS 128, "Earnings Per Share" (FAS 128). The new
standard supersedes APB 15 and is effective for fiscal quarters beginning after
December 15, 1997.
Under FAS 128, primary and fully diluted net income per share will be replaced
by basic and diluted net income per share. Basic net income per share is
computed based only on the weighted average number of common shares outstanding
during the period and does not give effect to the dilutive effect of common
equivalent shares, such as stock options. Diluted net income per share is
computed in the same manner as fully diluted net income per share, except that
the dilutive effect of the stock options is always based on the average market
price of the stock during the period, not the higher of the average and the
period end market price as required under APB 15.
Had the Company computed its net income (loss) per share based on FAS 128, the
pro forma amounts for basic and diluted net income per share would have been as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
----------------------- --------------------
Ended September 30, Ended September 30,
------------------------ ---------------------
1997 1996 1997 1996
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net income (loss) per common share - as reported $0.03 $(0.40) $0.03 $(1.00)
Basic net income (loss) per common share - pro forma $0.03 $(0.39) $0.03 $(0.97)
Diluted net income (loss) per common share - pro forma $0.03 $(0.40) $0.03 $(1.00)
</TABLE>
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
6
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In June 1997, the Financial Accounting Standards Board (FASB) issued FAS No.
130 "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for reporting and display of comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements for periods beginning after December 15, 1997.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. Examples of items to be included in
comprehensive income which are excluded from net income include cumulative
translations adjustments resulting from consolidation of foreign subsidiaries'
financial statements and unrealized gains and losses on available-for-sale
securities. Reclassification of financial statements for earlier periods for
comparative purposes is required. The Company will adopt FAS 130 beginning in
1998 and does not expect such adoption to have a material effect on the
consolidated financial statements.
In June 1997, the FASB issued FAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements for periods beginning after December 15, 1997. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis is designed to be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Form 10-K for the fiscal year ended March
31, 1997. Copies of the Form 10-K are available from the Company. Historical
results and percentage relationships should not be taken as 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.
The Company's operating results have varied significantly in the past and the
Company expects such results are likely to vary significantly from time to time
in the future. Readers are referred to the documents filed by the Company with
the Securities and Exchange Commission, specifically the most recent reports on
Form 10-K and 8-K, 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 to 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 risks which the Company might face. In particular, 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. 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 updates 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. Among other factors, key employee retention, delays
in product introductions, market acceptance of product introductions, currency
rate fluctuations, anticipated decline in revenue from desktop database
products, and the challenges inherent in the Company's entry into the
client/server, enterprise and Internet/intranet markets all contribute to
substantial further uncertainties. All investors should carefully read the Form
10-K, together with this 10-Q, and consider all such risks before making an
investment decision with respect to the Company's stock.
Although the Company realized an operating profit in the quarter ended
September 30, 1997, no assurance can be given that the Company will remain
profitable. Among other matters, the Company's ability to continue to
7
<PAGE>
remain profitable will be substantially dependent upon its ability to
successfully complete and introduce new products and to successfully maintain
cost saving measures associated with previous restructurings. There can be no
assurance that the Company will be able to successfully accomplish the foregoing
or to remain profitable in future periods.
The following table sets forth the unaudited consolidated results of
operations as a percentage of net revenues for the three and six months ended
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net revenues........................................ 100.0% 100.0 % 100.0% 100.0 %
Cost of revenues.................................... 15.0 19.2 15.1 21.2
----- ----- ----- -----
Gross profit........................................ 85.0 80.8 84.9 78.8
----- ----- ----- -----
Selling, general and administrative................. 59.0 82.9 59.2 92.7
Research and development............................ 23.3 37.3 24.2 36.0
Restructuring related charges....................... - - - 1.4
----- ----- ----- -----
Total operating expenses......................... 82.3 120.2 83.4 130.1
----- ----- ----- -----
Operating income (loss)............................. 2.7 (39.4) 1.5 (51.3)
Interest income, net and other...................... 1.4 4.2 .9 4.6
----- ----- ----- -----
Income (loss) before income taxes................... 4.1 (35.2) 2.4 (46.7)
Income tax provision (benefit)...................... 0.5 1.2 0.5 (0.1)
----- ----- ----- -----
Net income (loss).................................. 3.6% (36.4)% 1.9% (46.6)%
===== ===== ===== =====
</TABLE>
OVERVIEW
Borland International, Inc. 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 the
desktop, local area network ("LAN"), client/server and Internet/intranet
environments.
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.
NET REVENUES
Net revenues were $42.5 million for the three months ended September 30, 1997,
an increase of 8% from $39.3 million for the three months ended September 30,
1996. Net revenues were $84.5 million for the six months ended September 30,
1997, an increase of 9% from $77.5 million for the six months ended September
30, 1996. Net revenues in the current quarter were favorably affected by the
introduction of JBuilder 1.0, the Company's Java development product. In
addition, the Company continues to realize positive results from its increased
focus and marketing efforts on the client/server, enterprise and Internet
markets. These products represented approximately 55% of net revenues for the
three months ended September 30, 1997 as compared to 47% of net revenues for the
three months ended June 30, 1997. The Company's non-U.S. net revenues
represented approximately 56% for the three months ended September 30, 1997 and
1996.
The Company expects its revenue may vary from quarter to quarter as a result
of numerous factors. For example, in the past, the Company has experienced
declining sales of certain of its products in anticipation of the release of new
products. Also, the Company cannot determine whether the increasing price
competition in the
8
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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 and enterprise
sales which are characterized by longer sales cycles and increased transaction
values.
The Company expects that a significant portion of its revenues for the quarter
ending December 31, 1997, will come from new products and new versions of
existing products as well as the release of client/server developer tools and
products for Internet/intranet-related development. There can be no assurances
that these products will be released on a timely basis or that the sales of such
products will meet the Company's expectations.
The Company's ability to implement its strategy to focus on software
developers and the opportunities associated with the enterprise market could
have a significant impact on future revenues. The Company's relatively recent
entry into this market is subject to a number of risks, including the risks 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 may make announcements to its customers
with respect to the time frames within which the Company expects to ship new
products. 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.
The Company is dependent on licenses from third-party suppliers for certain of
its products. In particular, the Company is dependent upon certain licenses from
Microsoft Corporation which is both a licensor to the Company and its most
significant competitor. If any such third-party licenses were terminated or not
renewed or if these third parties fail to develop new products in a timely
manner, the Company could be required to develop an alternative approach to
developing its products which could require payment of substantial fees to third
parties or additional internal development costs and delays and such products
may not be successful in providing the same level of functionality. Such delays,
increased costs or reduced functionality could materially adversely affect the
Company's business, operating results and financial conditions.
GROSS MARGINS
Gross margins were 85.0% and 80.8% of net revenues for the three months ended
September 30, 1997 and 1996, respectively. Gross margins were 84.9% and 78.8%
of net revenues for the six months ended September 30, 1997 and 1996,
respectively. The improvement in margins for the respective periods was
primarily the result of the increase in client/server and enterprise products as
a percentage of net revenues. In addition, the Company benefited from improved
inventory control measures implemented during fiscal 1997.
Gross margins can be affected by various factors, including product revenue
mix, price changes, changes in the composition of sales by product or
distribution channel, sales volumes, special product promotions and return
privileges, all of which may be subject to other factors, including the timing
of product releases, actions taken by competitors, or other factors beyond the
Company's control. In particular, the Company's gross margins can be strongly
affected in particular periods by aggressive pricing strategies and return
privileges employed in connection with new product introductions and upgrades.
The microcomputer software industry continues to experience substantial price
competition. The extent to which price competition may require the Company to
lower prices with the result of lower margins remains uncertain.
SELLING, GENERAL AND ADMINISTRATIVE
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Selling, general and administrative expenses were $25.1 million and $32.6
million for the three months ended September 30, 1997 and 1996, respectively,
and were 59.0% and 82.9% of net revenues for such periods, respectively.
Selling, general and administrative expenses declined by 23.0% as compared to
the same quarter last year. In addition to cost savings associated with prior
year restructurings, the Company took steps to eliminate redundant marketing
programs and duplicative functions within its sales organization.
Although certain selling, general and administrative expenses can be managed
or controlled on a medium or long 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, the Company generally is unable to take actions in the short term to
substantially reduce expenses.
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 a later quarter.
RESEARCH AND DEVELOPMENT
Research and development expenses were $9.9 million and $14.7 million for the
three months ended September 30, 1997 and 1996, and were 23.3% and 37.3% of net
revenues for such periods, respectively. Research and development expenses
declined 32.5% as compared to the same quarter last year. The decrease in
research and development expenses is principally due to a reduction in headcount
associated with the prior year restructuring efforts.
The Company's focus on providing products to the software developer community
is subject to a number of uncertainties including, but not limited to, rapid
changes in the industry, the Company's ability to make timely product
introductions, the increasing importance of Internet technologies, and
competitive responses to the Company's strategic actions. The Company believes
that it is necessary to continue to invest in research and development efforts
to remain competitive. Because of the inherent uncertainties of software
development projects, there can be no assurance that the Company's research and
development efforts will result in successful product introductions or increased
revenue.
RESTRUCTURINGS
Subsequent to March 31, 1997, there have been no changes to the Company's
estimate of the total cost of restructurings occurring prior to fiscal year
1998. During the six months ended September 30, 1997, the restructuring
reserves decreased by $2.9 million. The decrease is primarily due to cash
payments related to severance and noncancellable rent costs of excess
facilities. The following table summarizes the Company's restructuring activity
during the six months ended September 30, 1997:
<TABLE>
<CAPTION>
Severance
and
Benefits Facilities Other Total
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Accrual as of March 31, 1997 $ 2,047 $ 1,959 $ 952 $ 4,958
Cash charges................................... (1,634) (1,032) (230) (2,896)
------- ------- ----- -------
Accrual as of September 30, 1997.................... $ 413 $ 927 $ 722 $ 2,062
======= ======= ===== =======
</TABLE>
10
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INTEREST INCOME, NET AND OTHER
Interest income, net and other, was $0.6 million and $1.7 million for the
three months ended September 30, 1997 and 1996, and were 1.4% and 4.2% of net
revenues for such periods, respectively. The decrease is principally due to a
non-recurring benefit of $1.4 million of interest income in fiscal year 1997
related to a tax settlement with the U.S. Internal Revenue Service.
INCOME TAXES
Income tax expense for the quarter ended September 30, 1997 was approximately
$0.2 million. Such tax expense results principally from non-U.S. withholding
taxes, which are assessed without regard to the profitability of the applicable
operation.
LITIGATION
The Company is subject to a lawsuit, Kaplan et al vs. 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 vs. 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. At the time, 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 was held on November 12, 1997. At this
time, there can be no assurance whether the plan will be approved, either in
present or a modified form. 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. vs. 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 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
have awarded costs to Borland in a small amount. The Company has appealed the
U.S. District Court's denial of attorneys fees and payment of full cost.
Three securities class action lawsuits have been filed against the Company's
Open Environment Corp. ("OEC") subsidiary, certain former officers and directors
of OEC, and OEC's outside auditors. These three lawsuits have been consolidated
in the United States District Court for the District of Massachusetts under the
name Zeid, et al. v. Open Environment Corp., et al., Civil Action No. 96-12466
----------------------------------------------
EFH. The consolidated lawsuit alleges violations of the federal securities laws
prior to the Company's acquisition of OEC. The lawsuit is purportedly brought as
a class action on behalf of purchasers of OEC stock from April 13, 1995 to
October 10, 1996. The Company's OEC subsidiary intends to defend this lawsuit
vigorously.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $83.5 million at
September 30, 1997 an increase of $29.1 million from a balance of $54.4 million
at March 31, 1997. Working capital (deficit) increased from $(1.3) million as of
March 31, 1997 to $36.9 million as of September 30, 1997.
Net cash used by the Company for operating activities in the six months ended
September 30, 1997, was $2.5 million and was primarily comprised of the
Company's net income of $1.6 million offset by an increase in accounts
receivable of $3.6 million. Additionally, $3.8 million was used to pay down
accounts payable, accrued expenses and short-term restructuring charges
originating from the year ended March 31, 1997. Net cash used by the Company
for investing activities of $1.4 million consisted primarily of $2.3 million
from the purchase of property and equipment less sales of equipment for $.7
million. Financing activities provided net cash of $33.0 million, primarily
from exercises of employee stock options and the issuance of 495 shares of
manditorily convertible preferred stock and warrants.
The Company believes that its existing cash balances and funds expected to be
provided by operations will be sufficient to finance its working capital
requirements at least through the next twelve months.
RECENT EVENTS
CHANGE IN FISCAL YEAR
On July 22, 1997, the Company resolved to change its fiscal year end. The
fiscal year end will change from the last calendar day of March to the last
Saturday ending closest to December thirty-first. The change will be effective
for calendar year 1998 starting with the period beginning January 1, 1998. Due
to this change, the fiscal year which began on April 1, 1997, will end on
December 31, 1997, a short period of nine calendar months.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities
On June 30, 1997, the Company completed the initial closing (the "Initial
Closing") of a privately placed equity financing pursuant to a series of
subscription agreements (the "Financing Agreements") with 22 investors (the
"Investors"). The Financing Agreements contemplate several closings of sales of
Series B Preferred Stock (the "Series B Shares") and warrants to purchase Common
Stock (the "Warrants") which closings are subject to various conditions. At
the Initial Closing, the Company raised proceeds of approximately $25 million
through the sale of 495 Series B Shares and Warrants to purchase up to 198,000
shares of the Company's Common Stock. After the satisfaction of certain holding
periods, each Series B Share is convertible, at the option of its holder, into
shares of Common Stock of the Company based upon a conversion price equal to the
lower of the lowest closing market price of the Company's Common Stock during
the seven trading days before the conversion date or $6.94. The Warrants have
an exercise price of $8.67 per share. Subject to various conditions, the
Financing Agreements provide for the issuance of an additional 55 Series B
Shares and Warrants to purchase 22,000 shares of the Company's Common Stock
which is to be made at a second closing and on the same terms applicable at the
Initial Closing.
Subject to various additional conditions, the Company has the option
("Company Put Option") to require the Investors to purchase additional Series B
Shares and Warrants and the Investors have the right to require that the Company
sell to them additional Series B Shares and Warrants ("Investor Call Options").
The maximum number of additional Series B Shares and Warrants which the Company
may require the Investors to purchase is 500 Series B Shares, for an additional
purchase price of approximately $25 million, and Warrants to purchase 200,000
shares of the Company's Common Stock. Assuming that the Company exercises its
right to sell the maximum number of shares under the Company Put Option, the
maximum number of additional Series B Shares which the Investors may require
that the Company sell to them under the Investor Call Options is 420 Series B
Shares, for a purchase price of approximately $21 million, (220 Series B Shares,
for a purchase price of approximately $11 million, if the Company does not
exercise the Company Put Option) and the number of shares subject to additional
Warrants would be 168,000 (88,000 if the Company does not exercise the Company
Put Option). The Series B Shares and Warrants issued upon exercise of the
Company Put Option or the Investor Call Options will have the same terms and
rights as the Series B Shares and Warrants issued at the Initial Closing except
that the maximum conversion price and exercise price, respectively, will be
based upon the market price of the Company's Common Stock at the time of the
subsequent issuance of such Series B Shares and Warrants.
Each of the above issuances were not and will not be registered under the
Securities Act of 1933, as amended (the "1933 Act") in reliance upon the
exemptions provided by Section 4(2) of the 1933 Act and/or Regulation D
promulgated thereunder as a transaction by an issuer not involving a public
offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Borland International, Inc.'s Annual Meeting of Stockholders held on
September 5, 1997, the following proposals were submitted to the stockholders
for vote at the meeting:
1. The election Delbert W. Yocam as a Class II director to serve a three year
term expiring upon the 2000 Annual Meeting of Stockholders or upon the
election and qualification of a duly elected successor. Of the total shares
voting on the forgoing resolution 30,397,550 voted in favor and 1,185,026
withheld authority to vote.
2. The approval of the Company's 1997 Stock Option Plan, including the
reservation of 1,600,000 shares of Common Stock thereunder. Of the total
shares voting on the forgoing resolution 24,454,505 voted in favor,
6,021,458 voted against and 222,423 abstained.
13
<PAGE>
3. The approval of the Company's 1997 Employee Stock Purchase Plan, including
the reservation of 200,000 shares of Common Stock thereunder. Of the total
shares voting on the forgoing resolution 29,356,856 voted in favor,
1,183,390 voted against and 158,140 abstained.
4. The approval of the issuance of the Company's Common Stock upon (i) the
conversion of up to 1,470 shares of the Company's Series B Convertible
Preferred Stock and (ii) the exercise of warrants for the purchase of up to
588,000 shares of the Company's Common Stock. Of the total shares voting on
the forgoing resolution 15,997,182 voted in favor, 1,137,139 voted against
and 218,694 abstained.
5. Ratification of the appointment of Price Waterhouse LLP as the Company's
independent accountants for the year ending December 31, 1998. Of the total
shares voting on the forgoing resolution 31,232,488 voted in favor, 220,789
voted against and 129,299 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 3.1 - Restated Certificate of Incorporation of the Registrant
Exhibit 3.2 - Amended By Laws of the Registrant
Exhibit 10.1 - Third Addendum to Employment Agreement with Delbert W.
Yocam
Exhibit 11 - Statement Regarding Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
On July 14, 1997, the Company filed a Report on Form 8-K reporting under
item 5 thereof. The Company announced the initial closing on June 30, 1997
of a privately placed equity financing arrangement. The Company raised net
proceeds of approximately $25 million through the sale of 495 Series B
Shares and Warrants to purchase up to 198,000 shares of the Company's
Common Stock. Subject to various additional conditions, the Company has the
option ("Company Put Option") to require the Investors to purchase
additional Series B Shares and Warrants, and the Investors have the right
to require that the Company sell to them additional Series B Shares and
Warrants ("Investor Call Options").
On August 5, 1997, the Company filed a Report on Form 8-K/A reporting
under item 8 thereof. The Company disclosed that on July 22, 1997, the
Company had resolved to change its fiscal year end. The fiscal year end
will change from the last calendar day of March to the last Saturday ending
closest to December thirty-first. The change will be effective for calendar
year 1998 starting with the period beginning January 1, 1998. Due to this
change, the fiscal year which began on April 1, 1997, will end on December
31, 1997, a short period of nine calendar months.
On September 23, 1997, the Company filed a Report on Form 8-K reporting
under item 5 thereof. The Company disclosed that on September 19, 1997,
the Company and Microsoft Corporation had settled a lawsuit brought by
Borland on May 7, 1997, in Santa Clara County, Calif., Superior Court.
Details of the terms of the settlement were not disclosed.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed by the undersigned thereunto duly
authorized.
BORLAND INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: November 14, 1997
/s/ Kathleen M. Fisher
-------------------------------
KATHLEEN M. FISHER
Vice President and
Chief Financial Officer
(on behalf of the registrant and as
principal financial and accounting officer)
15
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
BORLAND INTERNATIONAL, INC.
* * * * *
Borland International, Inc., a corporation organized and existing under and
by virtue of the Delaware General Corporation Law filed its original Certificate
of Incorporation with the Secretary of State of Delaware on July 10, 1989 under
the name Borland International Delaware, Inc. Pursuant to Section 245 of the
Delaware General Corporation Law, Borland International, Inc. DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of Borland International, Inc. has duly
adopted resolutions setting forth the Restated Certificate of Incorporation of
said corporation, declaring said restatement of the Certificate of Incorporation
to be advisable. Said Restated Certificate of Incorporation only restates and
integrates and does not further amend the provisions of the Corporation's
Certificate of Incorporation as heretofore amended and supplemented and there is
no discrepancy between such provisions and the provisions of the Restated
Certificate of Incorporation. The resolution setting forth the proposed
restatement is as follows:
RESOLVED, that the Certificate of Incorporation of the Corporation shall be
restated to read as set forth in Exhibit A hereto.
SECOND: That said amendment was duly adopted in accordance with the
provisions of Section 245 of the General Incorporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said Borland International Delaware, Inc. has caused
this certificate to be signed by Delbert W. Yocam, its President, and Hobart
McK. Birmingham, its Secretary, this 21st day of October, 1997.
By: /s/ Delbert W. Yocam
-------------------------------------
Delbert W. Yocam, President
Attested: /s/ Hobart McK. Birmingham
-------------------------------------
Hobart McK. Birmingham, Secretary
A-1
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
BORLAND INTERNATIONAL, INC.
ARTICLE I
CORPORATE OFFICES
-----------------
1. Principal Office
----------------
The principal executive office of the corporation shall be located at such
place as the Board of Directors may from time to time authorize. If the
principal executive office is located outside the State of Delaware, and the
corporation has one or more business offices in the State of Delaware, the Board
of Directors shall fix and designate a principal business office in the State of
Delaware.
2. Other Offices
-------------
Additional offices of the corporation shall be located at such place or
places, within or outside the State of Delaware, as the Board of Directors may
from time to time authorize.
3. Registered Agent in State
-------------------------
The corporation shall have and maintain in the State of Delaware a
registered agent, which agent may be either an individual resident in the State
whose business office is identical with the corporation's registered office, or
a domestic corporation (which may be itself), or a foreign corporation
authorized to transact business in the State, having a business office identical
with such registered office.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
4. Place of Meetings
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the Board of Directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
B-1
<PAGE>
EXHIBIT 10.1
THIRD ADDENDUM TO
DELBERT W. YOCAM EMPLOYMENT AGREEMENT
Borland International, Inc. (Company) and Delbert W. Yocam (Executive),
entered into an employment agreement on November 21, 1996, The employment
agreement has been amended by addendum dated March 5, 1997, and by second
addendum dated July 22, 1997. In consideration of the mutual promises set forth
herein, the parties wish to further amend the terms of their employment
agreement. It is agreed as follows:
Paragraph 2 of the employment agreement is amended to extend the current
term of the employment agreement to December 31, 2000. Executive may elect to
serve the final twelve (12) months of his employment agreement, with its current
extension to December 31, 2000, as only Chairman of the Board. In the event the
Executive elects to serve as only Chairman of the Board, his salary and future
stock option grants will be adjusted commensurate with his new duties and
responsibilities. Furthermore, Executive agrees to give a minimum of six months
notice of his intent to resign as Chief Executive Officer of the Company.
Paragraph 5 (a) is amended by the addition of the following: Beginning
September 5, 1997, and no later than the same calendar day each year thereafter,
the Company shall ascertain the projected total Company shares of common stock
outstanding for the current fiscal year end and calculate the number of
nonstatutory stock options to be granted to Executive to provide Executive with
current ownership of options, whether or not vested, and shares, whether
retained or sold, totaling four (4) percent of the projected outstanding shares.
If, at the date of calculation, Executive's current ownership of options and
shares is less than four (4) percent of the projected total outstanding shares,
the Company, through its Board of Directors, shall grant additional nonstatutory
stock options in the amount needed to achieve the referenced four (4) percent
ownership for Executive. The option price shall be set at the market price of
the Company stock at the close of the NASDAQ market on the date of award of the
option. Newly granted options shall vest on a pro rata basis over the remaining
term of the employment agreement without consideration of extensions, unless a
shorter period is provided in the grant.
Executive's award of additional stock options on September 5, 1997 shall be
580,000 shares, based upon a projection of 42 million shares outstanding at
yearend. The stock awarded on September 5, 1997, under the terms of this
amendment shall vest at 509 shares per day beginning November 15, 1997, with an
additional 275,000 shares vesting on November 14, 1998, until all shares are
vested.
Paragraph 5 (b) (2) of the employment agreement is amended to provide that
all stock options granted under the employment agreement, including those
granted under this third
<PAGE>
addendum, shall fully vest if Executive voluntarily terminates after a "change
in control" as defined in paragraph 8 of the employment agreement.
Paragraph 5 of the employment agreement is further amended by the addition
of this paragraph 5 (d): In the event any excise or premium federal or state tax
is charged to Executive as a consequence of stock or stock option awards or
vestings which occur in response to a change of control in Company ownership,
the Company agrees to pay enough additional compensation to Executive to allow
payment of such taxes by Executive without any loss of full value of the stock
or stock options.
Paragraph 6 (b) of the employment agreement is amended to include broker's
sales commission expense as an allowable closing cost on Executive's Oregon
residence sale and to provide that all relocation expenses, including broker's
sales commission, are to be tax protected for the benefit of Executive. The
limit of allowable relocation expense is increased to an amount sufficient to
accommodate the additional expenses for sales commission and tax protection.
Except as specifically set forth in this Third Addendum, all of the terms
of the employment agreement, as amended by the first and second addenda, shall
remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Third Addendum on the
5th day of September, 1997
- ---
Borland International, Inc.
By: /s/ David Heller
----------------------------------
Organization and Compensation Committee
/s/ Delbert W. Yocam
-------------------------------------
Delbert W. Yocam
<PAGE>
EXHIBIT 11
BORLAND INTERNATIONAL, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE (1)
(unaudited)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,518 $(14,310) $ 1,597 $(36,119)
Accretion attributable to warrants relating to the manditorily
redeemable convertible preferred stock (383) - (383) -
------- -------- ------- --------
Net income (loss) available to common stockholders $ 1,135 $(14,310) $ 1,214 $(36,119)
======= ======== ======= ========
Weighted average shares outstanding:
Common stock 38,200 36,319 37,659 36,293
Common stock issuable upon exercise of options
and warrants 901 - 1,405 -
------- -------- ------- --------
Weighted average common shares and equivalents 39,101 36,319 39,064 36,293
======= ======== ======= ========
Net income (loss) per share $0.03 $ (0.40) $0.03 $ (1.00)
======= ======== ======= ========
</TABLE>
(1) This exhibit should be read in conjunction with "Note 2 - Net
Income (Loss) Per Share" of the "Notes to Condensed Consolidated
Financial Statements".
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF BORLAND
INTERNATIONAL, INC. THE QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 APR-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 81,679 81,679
<SECURITIES> 1,793 1,793
<RECEIVABLES> 21,375 21,375
<ALLOWANCES> 0 0
<INVENTORY> 971 971
<CURRENT-ASSETS> 112,982 112,982
<PP&E> 103,244 103,244
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 223,218 223,218
<CURRENT-LIABILITIES> 76,112 76,112
<BONDS> 0 0
24,265 24,265
0 0
<COMMON> 318,983 318,983
<OTHER-SE> (218,283) (218,283)
<TOTAL-LIABILITY-AND-EQUITY> 223,218 223,218
<SALES> 42,500 84,470
<TOTAL-REVENUES> 42,500 84,470
<CGS> 6,375 12,731
<TOTAL-COSTS> 6,375 12,731
<OTHER-EXPENSES> 35,000 70,505
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (593) (764)
<INCOME-PRETAX> 1,718 1,998
<INCOME-TAX> 200 401
<INCOME-CONTINUING> 1,518 1,597
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,518 1,597
<EPS-PRIMARY> .03 .03
<EPS-DILUTED> .03 .03
</TABLE>
