<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
-------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended JUNE 30, 1998
[_] 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
INPRISE CORPORATION
(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 ENTERPRISE WAY, SCOTTS VALLEY, CALIFORNIA 95066-3249
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (831) 431-1000
(Former name, former address and former fiscal year,
if changed since last report)
BORLAND INTERNATIONAL, INC.
100 BORLAND WAY, SCOTTS VALLEY, CALIFORNIA 95066-3249
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 July 31, 1998 was 51,387,077.
<PAGE>
INPRISE CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE
----
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1998 and December 31, 1997................ 3
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 1998 and 1997............................................................. 4
Condensed Consolidated Statement of Comprehensive Income for the three and six months ended
June 30, 1998 and 1997 .................................................................. 5
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997............................................................. 6
Notes to Unaudited Condensed Consolidated Financial Statements.............................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 12
Item 3. Quantative and Qualitative Disclosures about Market Risk.................................... 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders......................................... 27
Item 6. Exhibits and Reports on Form 8-K............................................................ 27
Signatures............................................................................................ 28
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INPRISE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 79,938 $ 100,707
Short-term investments .............................................. 1,885 1,843
Accounts receivable, net ............................................ 44,201 34,664
Inventories ......................................................... 959 787
Other ............................................................... 9,370 6,462
--------- ---------
Total current assets ............................................. 136,353 144,463
Property and equipment, net ........................................... 104,305 104,944
Other non-current assets .............................................. 6,270 6,417
--------- ---------
Total assets ..................................................... $ 246,928 $ 255,824
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 14,040 $ 11,687
Accrued expenses .................................................... 35,119 38,424
Short-term restructuring ............................................ 8,636 1,277
Deferred revenue ..................................................... 13,615 12,429
Income taxes payable ................................................ 1,119 4,054
Other ............................................................... 6,440 12,012
--------- ---------
Total current liabilities ........................................ 78,969 79,883
Long-term debt and other .............................................. 22,241 22,025
Mandatorily redeemable convertible preferred stock;
$50,000 par value; 1,470 shares authorized;
550 issued and outstanding........................................... 27,500 27,358
Stockholders' equity:
Common stock; $.01 par value; 100,000,000 shares authorized;
51,346,000 and 50,745,000 issued and outstanding .................... 513 508
Additional paid-in capital .......................................... 385,512 381,894
Accumulated deficit ................................................. (271,280) (259,691)
Cumulative translation adjustment ................................... 3,473 3,847
--------- ---------
Total stockholders' equity ....................................... 118,218 126,558
--------- ---------
$ 246,928 $ 255,824
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
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INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
Licenses and other revenue................................. $41,172 $43,953 $ 82,215 $ 82,176
Service revenue............................................ 5,351 4,227 10,794 9,424
----------------------------------------------------------
Net revenues........................................ 46,523 48,180 93,009 91,600
----------------------------------------------------------
Cost of licenses and other revenue......................... 4,287 6,564 7,214 11,969
Cost of service revenue.................................... 3,446 2,619 6,904 4,896
----------------------------------------------------------
Cost of revenues.................................... 7,733 9,183 14,118 16,865
----------------------------------------------------------
Gross profit............................................... 38,790 38,997 78,891 74,735
----------------------------------------------------------
Selling, general and administrative........................ 25,974 28,169 53,566 69,615
Research and development................................... 11,907 13,417 22,788 29,540
Restructuring and merger related charges................... --- --- 19,281 5,976
Other non-recurring charges................................ --- --- --- 17,100
----------------------------------------------------------
Total operating expenses............................. 37,881 41,586 95,635 122,231
----------------------------------------------------------
Operating income (loss).................................... 909 (2,589) (16,744) (47,496)
Interest income, net and other............................. 1,125 405 1,723 1,144
----------------------------------------------------------
Income (loss) before income taxes.......................... 2,034 (2,184) (15,021) (46,352)
Income tax provision (benefit)............................. 150 342 (3,461) 709
----------------------------------------------------------
Net income (loss).......................................... $ 1,884 $(2,526) $(11,560) $(47,061)
==========================================================
Net income (loss) per share - basic........................ $0.04 $(0.05) $(0.23) $(0.99)
==========================================================
Net income (loss) per share - diluted...................... $0.03 $(0.05) $(0.23) $(0.99)
==========================================================
Shares used in computing basic income (loss) per share..... 51,166 48,702 50,984 47,334
==========================================================
Shares used in computing diluted income (loss) per share... 57,572 48,702 50,984 47,334
==========================================================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
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INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) ............................ $1,884 $(2,526) $(11,560) $(47,061)
Other comprehensive income (loss)
Foreign currency translation adjustments..... (169) 424 (374) 417
-------------- --------------- -------------- ---------------
Comprehensive income (loss).................... $1,715 $(2,102) $(11,934) $(46,644)
============== =============== ============== ===============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................. $(11,560) $(47,061)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization........................................................... 3,892 6,902
Loss on disposal of fixed assets........................................................ 2,482 1,580
Non-cash restructuring costs and other one-time charges................................. --- 1,294
Changes in assets and liabilities:
Accounts receivable..................................................................... (9,736) (7,665)
Inventories............................................................................. (172) 25
Other current assets.................................................................... (2,960) 319
Other non-current assets................................................................ 147 1,228
Accounts payable, accrued expenses and short-term restructuring......................... 7,796 17,806
Income taxes payable.................................................................... (2,935) (8,639)
Other (primarily deferred revenue and long-term restructuring).......................... (5,899) (632)
--------------- ---------------
Cash used by operating activities....................................................... (18,945) (34,843)
--------------- ---------------
Cash flows from investing activities:
Acquisition of property and equipment.................................................... (5,775) (3,934)
Sale of fixed assets..................................................................... 40 302
Net change in short-term investments..................................................... (42) ---
--------------- ---------------
Cash used by investing activities....................................................... (5,777) (3,632)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common and preferred stock, net................................ 3,736 41,112
Borrowings of capital lease obligations and other debt activity.......................... 216 8,552
--------------- ---------------
Cash provided by financing activities................................................... 3,952 49,664
--------------- ---------------
Effect of exchange rate changes on cash.................................................... 1 90
--------------- ---------------
Net change in cash and cash equivalents.................................................... (20,769) 11,279
Beginning cash and cash equivalents........................................................ 100,707 81,381
--------------- ---------------
Ending cash and cash equivalents........................................................... $ 79,938 $ 92,660
=============== ===============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE>
INPRISE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (which include only normal, recurring adjustments), which are,
in the opinion of management, 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 December 31, 1998. 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. These unaudited condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto of Inprise Corporation (the "Company") for the nine months ended
December 31, 1997 included in the Registrant's Form 10-K.
Reclassification
- ----------------
Certain reclassifications have been made to the prior period condensed
consolidated financial statements to conform to the presentation adopted in
the current period.
Change in Fiscal Year End
- -------------------------
During 1997, the Company changed its year end from March 31 to December 31
effective January 1, 1998.
Name Change
- -----------
On June 5, 1998, the Company's stockholders approved a proposal to amend the
Company's Restated Certificate of Incorporation to change the name of the
Company from Borland International, Inc. to Inprise Corporation. The Company's
stock symbol has been changed to "INPR".
REVENUE RECOGNITION
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 97-2 "Software Revenue Recognition"
("SOP97-2") and Statement of Position 98-4, "Deferral of the Effective Date of
the Provisions of SOP97-2, Software Revenue Recognition" ("SOP98-4"), which the
Company currently is required to adopt for transactions entered into in the
fiscal year beginning January 1, 1998. SOP97-2 and SOP98-4 provide guidance on
recognizing revenue on software transactions and supersedes issued Statements of
Position 91-1 "Software Revenue Recognition" ("SOP91-1"). The Company believes
that the adoption of SOP97-2 and SOP98-4 has not had a significant impact on its
current licensing or revenue recognition practices. Should the Company modify
its licensing practices, application of the requirements under SOP97-2 and
SOP98-4 may require different revenue recognition treatment.
ACQUISITION
On February 27, 1998 the Company completed the acquisition of Visigenic
Software, Inc. ("Visigenic") 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 Visigenic in accordance with
generally accepted accounting principles and the instructions in Regulation S-X.
7
<PAGE>
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for reporting comprehensive income and its components in financial statements.
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 were excluded from net income include foreign
currency translation adjustments and unrealized gains/losses on available-for-
sale securities. The Company adopted SFAS 130 in the quarter ended March 31,
1998. Components of comprehensive income for the three and six months ended
June 30, 1998 and 1997 have been disclosed on the Statement of Comprehensive
Income. The total accumulated other comprehensive income balance was
$3,473,000 as of June 30, 1998.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, FASB issued Statement No. 131, "Disclosure about Segments of an
Enterprise and Related Information" (SFAS 131"). SFAS 131 establishes standards
for the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
disclosures prescribed by SFAS 131 will be effective the year ending December
31, 1998. The Company has not evaluated the impact that adopting SFAS 131 will
have on its notes to the consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP98-1"). SOP98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The disclosures prescribed by SOP98-1
will be effective for the year ending December 31, 1999 consolidated financial
statements. The Company has not yet determined the impact, if any, of adopting
this statement.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of the derivative
depends on the intended use of the derivative and the resulting designation.
The Company will adopt SFAS 133 in the first quarter of the fiscal year ending
December 31, 2000 and has not yet evaluated the impact of the adoption on the
Company's results of operations, financial position, capital resources or
liquidity.
NOTE 2. EARNINGS (LOSS) PER SHARE
For the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS 128"), "Earnings Per Share." SFAS 128
requires the presentation of basic earnings per share ("EPS") and diluted EPS,
for companies with potentially dilutive securities, such as options. Earnings
per share data for all prior periods have been restated to conform with the
provisions of SFAS 128.
Basic earnings per share are computed using the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
share are computed using the weighted average number of shares of common stock
and potentially dilutive securities outstanding during the period. Potentially
dilutive securities consist of mandatorily redeemable convertible preferred
stock (using the if-converted method) and stock options and warrants (using the
treasury stock method). Potentially dilutive securities are excluded from the
computation if their effect is antidilutive. The following is a reconciliation
of the computation of basic and diluted earnings (loss) per share (in thousands,
except per share data):
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) before accretion charge to
the mandatorily redeemable convertible
preferred stock relating to warrants $1,884 $(2,526) $(11,560) $(47,061)
Accretion charge to the mandatorily redeemable
convertible preferred stock for warrants --- --- 142 ---
------------ ------------- ------------ ------------
Net income (loss) for basic and diluted
earnings per share income available to
common stockholders $1,884 $(2,526) $(11,702) $(47,061)
------------ ------------- ------------ ------------
Denominator:
Denominator for basic net income (loss) per
share - weighted average shares 51,166 48,702 50,984 47,334
Effect of dilutive securities 6,406 --- --- ---
------------ ------------- ------------ ------------
Denominator for diluted net income (loss) per
share - adjusted weighted average shares and
assumed conversions 57,572 48,702 50,984 47,334
------------ ------------- ------------ ------------
Net income (loss) per share - basic $0.04 $(0.05) $(0.23) $(0.99)
Net income (loss) per share - diluted $0.03 $(0.05) $(0.23) $(0.99)
</TABLE>
The 550 shares of Series B Preferred Stock and 220,000 warrants to purchase
common shares outstanding at June 30, 1998 were not included in the computation
of diluted EPS for the six months ended June 30, 1998, because their effect on
earnings per share would have been antidilutive.
For the three month period, options to purchase approximately 4,083,000 and
11,608,000 shares of common stock were outstanding at June 30, 1998 and 1997,
respectively, but were not included in the computation of diluted EPS as the
inclusion of such options would have been antidilutive. For the six month
period, options to purchase approximately 8,324,000 and 11,608,000 shares of
common stock were outstanding at June 30, 1998 and 1997, respectively, but
were not included in the computation of diluted EPS as the inclusion of such
options would have been antidilutive.
NOTE 3. ACQUISITION
On February 27, 1998, the Company issued approximately 12,118,060 shares of
Inprise Common Stock in exchange for all of the outstanding common stock of
Visigenic Software, Inc. ("Visigenic"). In connection with the Company's
assumption of Visigenic outstanding employee stock options, the Company reserved
2,527,284 common shares for future issuances. The merger was accounted for as a
pooling of interests and accordingly, the Company's consolidated financial
statements were restated for all periods prior to the merger to include the
operations of Visigenic.
Pursuant to the merger, Visigenic's year end was conformed to the Company's
newly adopted year end of December 31 (see Note 1). The following unaudited pro
forma combined financial information assumes that the merger occurred on the
first day of the earliest period presented (in thousands of dollars, except per
share amounts).
9
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<TABLE>
<CAPTION>
Proforma
Inprise Visigenic Combined
--------- ---------- ---------
<S> <C> <C> <C>
Three Months Ended June 30, 1998
Net revenues $ --- $ --- $ 46,523
Net income --- --- 1,884
Net income per share -- basic --- --- 0.04
Net income per share -- diluted $ --- $ --- $ 0.03
Three Months Ended June 30, 1997
Net revenues $ 41,970 $ 6,210 $ 48,180
Net income (loss) 80 (2,606) (2,526)
Net income (loss) per share -- basic --- (0.18) (0.05)
Net income (loss) per share -- diluted $ --- $ (0.18) $ (0.05)
</TABLE>
<TABLE>
<CAPTION>
Proforma
Inprise Visigenic Combined
--------- ---------- ---------
<S> <C> <C> <C>
Six Months Ended June 30, 1998
Net revenues $ --- $ --- $ 93,009
Net loss --- --- (11,560)
Net loss per share -- basic --- --- (0.23)
Net loss per share -- diluted $ --- $ --- $ (0.23)
Six Months Ended June 30, 1997
Net revenues $ 79,138 $ 12,462 $ 91,600
Net loss (42,390) (4,671) (47,061)
Net loss per share -- basic (1.14) (0.33) (0.99)
Net loss per share -- diluted $ (1.14) $ (0.33) $ (0.99)
</TABLE>
This pro forma combined financial information is provided for comparative
purposes only and does not purport to be indicative of the results which
actually would have been obtained if the merger had been effected for the
periods indicated, or of the results which may be obtained in the future.
In conjunction with the acquisition of Visigenic, the Company implemented a
worldwide realignment of its corporate structure. In the quarter ended March 31,
1998, the Company recorded a $19.3 million restructuring and merger related
charge of which $9.9 million related to severance costs associated with the
elimination of duplicate workforce, $3.2 million to termination of certain lease
agreements and the write-off of certain fixed assets and $2.5 million to other
costs associated with the restructuring. Additionally, the Company charged to
income approximately $3.7 million in expenses associated with the merger.
10
<PAGE>
The following table summarizes the Company's restructuring activity for the
six months ended June 30, 1998:
<TABLE>
<CAPTION>
SEVERANCE OTHER
AND ASSET
BENEFITS FACILITIES CHARGES OTHER TOTAL
--------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Accrual as of December 31, 1997......... $ 143 $572 $ --- $ 635 $ 1,350
Six Months Ended June 30, 1998:
1998 restructuring................. 9,863 336 2,900 2,482 15,581
Cash charges....................... (3,136) (12) --- (2,579) (5,727)
Non - cash charges................. --- --- (2,534) --- (2,534)
--------------------------------------------------------------
Accrual as of June 30, 1998............. $ 6,870 $896 $ 366 $ 538 $ 8,670
======= ==== ======= ======= =======
</TABLE>
Subsequent to December 31, 1997, there have not been any changes to the
Company's estimate of the total costs of prior restructurings.
NOTE 4. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
WARRANTS
On December 19, 1997, the Company completed the second closing (the "Second
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 "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. As part of the
Second Closing, Company issued an additional 55 Series B Shares and Warrants to
purchase 22,000 shares of the Company's Common Stock for net proceeds of
approximately $2.5 million.
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. 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 220 Series B Shares, for a purchase price of
approximately $11 million and the number of shares subject to additional
Warrants would be 88,000. 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.
During March 1998, the holders of the Series B Shares agreed to extend the
expiration date of the Company Put Option to December 31, 1998. See Note 7
Subsequent Events for further discussion regarding the Series B Shares.
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
11
<PAGE>
promulgated thereunder as a transaction by an issuer not involving a public
offering.
NOTE 5. INCOME TAXES
Income tax expense for the quarter ended June 30, 1998 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 6. LEGAL
Information with respect to this item is incorporated by reference to Part I -
Item 2 -"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Litigation," of this Form 10-Q.
NOTE 7. SUBSEQUENT EVENTS
Investment in Starfish Software, Inc.
- -------------------------------------
In July 1998, Motorola, Inc. ("Motorola") announced their intention to
acquire Starfish Software, Inc. ("Starfish"). The Company has a minority common
stock interest in Starfish. The acquisition involves a combination of cash and
Motorola common stock. Completion of the purchase is subject to the approval by
regulatory agencies and the shareholders of Starfish. There are no assurances
that the transaction will be consummated.
Series B Preferred Stock Call Option
- ------------------------------------
On July 27, 1998, the holders of the Series B Shares exercised their rights
under the Investor Call Options to purchase approximately 220 shares of Series B
Shares and 88,000 Warrants to purchase Inprise Common Stock. Total proceeds
from the exercise of the Investor Call Options were approximately $11.0 million.
Each of the newly issued Series B Shares is convertible, at the option of the
holder, into shares of Inprise common stock based upon a conversion price equal
to $6.88 or if lower, the lowest closing market price of Inprise common stock
during the seven trading days prior to the conversion date. The warrants have
an exercise price of $8.59 per share. The Company expects to record a charge of
approximately $0.3 million to the income available to common shareholders. The
charge will be recorded over the next three quarters for the accretion of the
value assigned to the warrants.
Stock Repurchase Program
- ------------------------
On July 21, 1998, the Company's Board of Directors authorized the Company to
repurchase up to one million shares of Company's common stock for up to $10.0
million.
On August 10, 1998, the Company announced completion of the stock buy-back
program authorized by its board of directors. The Company repurchased one
million shares as authorized by the board's resolution at an average price of
$6.56 per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains forward-
looking statements. The forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those reflected in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Financial Conditions
and Results of Operations--Factors That May Affect Future Results and Market
Price of Stock."
12
<PAGE>
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. The
Company undertakes no obligation to revise or publicly release the results of
any revisions to these forward-looking statements. Readers should carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission, including the Annual Report
on Form 10-K for the nine month period ended December 31, 1997, copies, of
which, may be obtained from the Company or from the Securities and Exchange
Commission at its website at www.sec.gov.
OVERVIEW
Inprise Corporation (the "Company") develops, markets and supports software
development tools, intelligent middleware, database management systems, and
application management systems for business enterprises and independent software
developers. The Company has several product lines and additional complementary
products and services that are designed to meet the needs of software developers
and business enterprises developing and using software in the desktop, local
area network ("LAN"), client/server and Internet/intranet environments.
The Company markets and sells to corporations, governments, educational
institutions and end-user customers through direct sales and through the
Internet. The Company also markets and distributes its products worldwide
through independent distributors, dealers, value-added resellers ("VARs") and
independent software vendors ("ISVs").
Results for the three and six month periods ended June 30, 1997 have been
restated to reflect the impact of the Company's acquisition of Visigenic
Software, Inc. which was completed on February 27, 1998 and was accounted for as
a pooling of interests.
The following table sets forth the unaudited consolidated results of
operations as a percentage of net revenues for the three and six months ended
June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------- --------------------------------------
1998 1997 1998 1997
------------------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Licenses and other revenue............... 88.5% 91.2% 88.4% 89.7%
Service revenue.......................... 11.5 8.8 11.6 10.3
------------------ --------------- --------------- -----------------
Net revenues........................... 100.0 100.0 100.0 100.0
Cost of licenses and other revenue....... 9.2 13.6 7.8 13.1
Cost of service revenue.................. 7.4 5.4 7.4 5.3
------------------ --------------- --------------- -----------------
Cost of revenues......................... 16.6 19.0 15.2 18.4
------------------ --------------- --------------- -----------------
Gross margin............................. 83.4 81.0 84.8 81.6
------------------ --------------- --------------- -----------------
Selling, general and administrative...... 55.8 58.5 57.6 76.0
Research and development................. 25.6 27.9 24.5 32.2
Restructuring and merger related charges. --- --- 20.7 6.5
Other non-recurring charges.............. --- --- --- 18.7
------------------ --------------- --------------- -----------------
Total operating expenses................. 81.4 86.4 102.8 133.4
------------------ --------------- --------------- -----------------
Operating income (loss).................. 2.0 (5.4) (18.0) (51.8)
Interest income, net and other........... 2.4 0.9 1.9 1.2
------------------ --------------- --------------- -----------------
Income (loss) before income taxes........ 4.4 (4.5) (16.1) (50.6)
Income tax provision (benefit)........... 0.4 0.7 (3.7) 0.7
------------------ --------------- --------------- -----------------
Net income (loss)........................ 4.0% (5.2)% (12.4)% (51.3)%
================== =============== =============== =================
</TABLE>
13
<PAGE>
NET REVENUES
The following table sets forth the unaudited consolidated net license and
other, and service revenues for the three and six months ended June 30, 1998 and
1997.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------------
1998 1997 Change
------------------ ----------------- -----------
<S> <C> <C> <C>
Licenses and other $41,172 $43,953 (6.3%)
Service revenue 5,351 4,227 26.6%
------------------ ----------------- -----------
Total revenue $46,523 $48,180 (3.4%)
================== ================= ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
1998 1997 Change
------------------ ----------------- -----------
<S> <C> <C> <C>
Licenses and other $82,215 $82,176 0.05%
Service revenue 10,794 9,424 14.5%
------------------ ----------------- -----------
Total revenue $93,009 $91,600 1.5%
================== ================= ===========
</TABLE>
License revenue represents amounts earned for granting customers licenses to
use the Company's software products. License and other revenue decreased 6%
for the quarter ended June 30, 1998 as compared to the corresponding calendar
quarter of 1997. Enterprise and client/server license revenue increased 20%
for the quarter ended June 30, 1998 as compared to the corresponding calendar
quarter of 1997. Enterprise and client/server revenue represented 64% of total
licenses and other revenue for the quarter ended June 30, 1998 as compared to
50% for the quarter ended June 30, 1997. This increase in enterprise and
client/server license revenue was offset by a decline in revenue from licenses
of the desktop database product line and certain other versions of desktop
language products. The Company experienced a decline in revenue from licenses
of desktop products and expects that revenues from such products will continue
to decline in future periods. The Company believes that license revenues
relating to enterprise and client/server products will continue to increase as
a percentage of the Company's total revenues.
Service revenue represents amounts earned for support, consulting and
education services for the Company's software products. Service revenue
increased 27% for the quarter ended June 30, 1998 as compared to the quarter
ended June 30, 1997. This increase is consistent with the Company's emphasis
on premium support and consulting services to enterprise and large corporate
customers.
International revenues accounted for 53% of the Company's total revenue
(revenues from Europe, Japan and other regions were 32%, 9%, and 12% of total
revenue, respectively) for the quarter ended June 30, 1998 as compared to 58%
(revenues from Europe, Japan and other regions were 29%, 15%, and 14% of total
revenue, respectively) for the quarter ended June 30, 1997. The decrease in
international revenues was principally attributable to lower revenues in Asia,
principally Japan, which was primarily due to the weakness in that region's
economy. The Company is unable to predict when and to what extent the
economies in that region will recover. There can be no assurances that should
there be an upturn in the region's economy that the Company will return to
previous revenue levels and/or profitability. The decrease in revenue in Asia,
principally Japan, was partially offset by an increase of the Company's
consulting services and client/server products in Europe. Management expects
that the Company's international operations will continue to provide a
significant portion of the Company's total revenues. International revenues
and profits will be adversely affected if the U.S. dollar strengthens against
certain major international currencies, if the ongoing economic weakness
continues in Asia, or if other international economies experience similar
economic weakness.
14
<PAGE>
COST OF REVENUES
Cost of license revenues consists primarily of production, royalties paid to
third-party vendors and product packaging. Cost of license and other revenues
was $4.3 million and $6.6 million for the quarters ended June 30, 1998 and 1997,
respectively. Cost of license revenues may vary as a percentage of license
revenue due to changes in the Company's royalty obligations to third-party
technology providers and the number of new products and product releases in a
given period. The reduction in the overall cost of license and other revenues
is principally attributable to a higher number of transactions in which license
revenue does not require the shipment of tangible property and an improvement in
the management of inventory and its associated costs.
Cost of service revenues consist primarily of employee and third-party
contractor costs and associated expenses incurred in providing customer support,
training, education and consulting services. Cost of service revenues was $3.4
million and $2.6 million for the quarters ended June 30, 1998 and 1997,
respectively. The increase in the cost of service expense was primarily due to
an increase in the number of personnel employed by the Company to provide these
services. The cost of services as a percentage of service revenues may vary
between periods due to the mix of services provided by the Company and the
extent to which employee or contractor resources are used to provide those
services.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses consist primarily of salaries,
commissions and bonuses and other personnel-related expenses, facilities
expenses, travel and entertainment, promotional lead generation expenses,
advertising and marketing costs. Selling, general and administrative expenses
were $26.0 million and $28.2 million for the three months ended June 30, 1998
and 1997, respectively, and were 56% and 59% of net revenues for such periods,
respectively. Selling, general and administrative expenses declined by 7.8% as
compared to the corresponding calendar quarter of 1997. In addition to cost
savings associated with the prior year restructuring efforts, the Company took
steps to eliminate redundant marketing programs and duplicative functions within
its sales organization.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and other
personnel-related expenses, facilities costs and third-party consultants.
Research and development expenses were $11.9 million and $13.4 million for the
three months ended June 30, 1998 and 1997, respectively, and were 26% and 28% of
net revenues for such periods, respectively. Research and development expenses
declined 11.3% as compared to the corresponding calendar quarter of 1997. The
decrease in research and development expenses is principally due to a reduction
in headcount associated with the prior year restructuring efforts.
RESTRUCTURINGS
The following table summarizes the Company's restructuring activity for the
six months ended June 30, 1998:
<TABLE>
<CAPTION>
SEVERANCE OTHER
AND ASSET
BENEFITS FACILITIES CHARGES OTHER TOTAL
--------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Accrual as of December 31, 1997......... $ 143 $572 $ -- $ 635 $ 1,350
Six Months Ended June 30, 1998:
1998 restructuring................. 9,863 336 2,900 2,482 15,581
Cash charges....................... (3,136) (12) --- (2,579) (5,727)
Non - cash charges................. --- --- (2,534) --- (2,534)
--------------------------------------------------------------
Accrual as of June 30, 1998............. $ 6,870 $896 $ 366 $ 538 $ 8,670
==============================================================
</TABLE>
15
<PAGE>
Subsequent to December 31, 1997, there have been no changes to the Company's
estimate of the total costs of prior restructurings.
INTEREST INCOME, NET AND OTHER
Interest income, net and other was $1.1 million and $0.4 million for the three
months ended June 30, 1998 and 1997, respectively, and represented 2.4% and 0.9%
of net revenues for such periods, respectively.
INCOME TAXES
Income tax expense for the quarter ended June 30, 1998 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 and certain of its former officers and directors were named
defendants in two lawsuits, Kaplan, et al vs. Kahn, et al, and Crook, et al vs.
----------------------------- ----------------
Kahn, et al, originally filed in the United States District Court for the
- -----------
Northern District of California in 1993 and 1995, respectively. The lawsuits
allege certain securities law violations by the Company and certain of its
former officers and directors relating to periods between 1991 and 1994. In
1996, the parties entered into a stipulation to settle both lawsuits, the
stipulation was submitted for court approval and monies were deposited in
escrow to fund the settlement. At the time, the Company recorded a charge in
the amount of its contribution to the settlement to be paid by the Company. On
March 18, 1998, the Court preliminarily approved a revised settlement plan,
which did not involve any further contribution by the Company. The court has
directed counsel for the class representatives to provide notice of the
revised settlement plan to the members of the shareholder classes. A form of
notice has been submitted to the court and is awaiting approval, at which
point the notice will be mailed to the settlement class members for the
purpose of soliciting their views on the settlement. It is unknown what
response, if any, will be elicited from the class members. In the interim, the
previously-established discovery cut-off and pretrial conferences dates remain
vacated. The Company continues to believe that the settlement ultimately will
be approved, but is unable to predict the outcome of this matter at this
time. If these lawsuits are not settled and the cases are litigated, an
adverse decision in either case could have a material adverse effect on the
Company's financial condition and results of operations.
In January, 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 the Company 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 attorney's fees and costs, if any, the Company may recover. In February
1997, the U.S. District Court in Massachusetts denied the Company's request for
attorneys' fees but awarded costs to the Company in a small amount. The Company
appealed the U.S. District Court's denial of attorneys fees and payment of full
costs and a hearing was held in January 1998 in the U.S. Court of Appeals for
the First Circuit. The court rejected the Company's appeal.
Three securities class action lawsuits have been filed against the Company's
OEC subsidiary, certain former officers and directors of OEC, and OEC's outside
auditors which lawsuits allege certain securities laws violations prior to the
Company's acquisition of OEC. 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. The Company and other defendants
- --------------------------------------
filed a motion to dismiss the consolidated complaint on December 16, 1997. The
motion was granted in part and denied in part. The case will now proceed to the
discovery phase. No trial date has been set. The Company's OEC subsidiary
intends to defend this lawsuit vigorously. If this lawsuit is not settled and
the case is litigated, an adverse decision could have a material adverse effect
on the Company's financial condition and results of operations.
16
<PAGE>
Western Imaging, Inc. ("Western Imaging") filed a complaint in the U.S.
---------------------
District Court for the Northern District of California in April 1997 against
Visigenic (prior to the acquisition of Visigenic by the Company) and Corel
Corporation ("Corel"), a licensee of Visigenic, alleging breach of contract and
other claims relating to the sale by Visigenic of certain technology to Western
Imaging. Western Imaging is seeking injunctive relief, unspecified damages,
impoundment of the disputed software during the pendency of the litigation, and
punitive damages. Prior to its acquisition by the Company, Visigenic had not
sold or marketed the disputed software products since January 1995 and the
Company does not utilize this technology in any current product offering.
Visigenic agreed to defend Corel pursuant to the terms of its license to Corel.
In August 1997, Visigenic and Corel filed an answer to the complaint denying
Western Imaging's allegations. Pursuant to the Court's February 20, 1998 order,
the parities completed a non-binding mediation on July 17, 1998. No settlement
was reached. The parties have agreed to participate in a second mediation
following discovery and a motion for summary judgment or, in the alternative,
summary adjudication which Visigenic and Corel intend to file. A further case
management conference is set for August 14, 1998. The Company believes it has
meritorious defenses to such claims and intends to defend the litigation
vigorously. Because the results of the litigation, including any potential
settlement, are uncertain, there can be no assurance that they will not have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company is involved in various 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 such 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 $81.8 million
at June 30, 1998, a decrease of $20.8 million from a balance of $102.6 million
at December 31, 1997. Working capital decreased from $64.6 million as of
December 31, 1997 to $57.4 million as of June 30, 1998.
Net cash used by the Company for operating activities in the six months ended
June 30, 1998 was $18.9 million and was primarily comprised of the $11.6 million
net loss for the period, a $9.7 million increase in accounts receivable as a
result of increased sales and the increase in collection cycle due to a higher
percentage of enterprise sales and a $2.9 million decrease in income tax
payable, offset by an increase of $7.8 million of accounts payable and accrued
expenses, $3.9 million of depreciation and amortization, and $2.5 million
write off of assets as part of the restructuring. Net cash used by investing
activities of $5.8 million consisted principally of the purchase of computer
equipment and software for internal use. Financing activities provided net
cash of $4.0 million in connection with common stock issued upon exercise of
employee options and the purchase of common stock pursuant to the employee
stock purchase plan.
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
INVESTMENT OF STARFISH SOFTWARE, INC.
In July 1998, Motorola, Inc. ("Motorola") announced their intention to
acquire Starfish Software, Inc. ("Starfish"). The Company has a minority common
stock interest in Starfish. The acquisition involves a combination of cash and
Motorola common stock. Completion of the purchase is subject to the approval by
regulatory agencies and the shareholders of Starfish. There are no assurances
that the transaction will be consummated.
17
<PAGE>
CALL OPTION EXERCISE
On July 27, 1998, the holders of the Series B Shares exercised their rights
under the Investor Call Options to purchase approximately 220 shares of Series B
Shares and 88,000 Warrants to purchase Inprise Common Stock. Total proceeds
from the exercise of the Investor Call Options were approximately $11.0 million.
Each of the newly issued Series B Shares is convertible, at the option of the
holder, into shares of Inprise common stock based upon a conversion price equal
to $6.88 or if lower, the lowest closing market price of Inprise common stock
during the seven trading days prior to the conversion date. The warrants have
an exercise price of $8.59 per share. The Company expects to record a charge of
approximately $0.3 million to the income available to common shareholders over
the next three quarters for the accretion of the value assigned to the warrants.
STOCK REPURCHASE
On July 21, 1998, the Company's Board of Directors authorized the Company to
repurchase up to one million shares of Company's common stock for up to $10.0
million.
On August 10, 1998, the Company announced completion of the stock buy-back
program authorized by its board of directors. The Company repurchased one
million shares as authorized by the board's resolution at an average price of
$6.56 per share.
18
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
HISTORY OF OPERATING LOSSES. Although the Company had a profit for the nine
month period ended December 31, 1997 and the quarter ended June 30, 1998, the
Company has had operating losses on an annual basis for five of the past six
fiscal years, including a loss of approximately $128.0 million for the year
ended March 31, 1997. The Company's revenues have declined in each year since
fiscal 1993 as a result of declines in the sales of the Company's desktop
products. In recent years, such declines were in part offset by sales of the
Company's enterprise, Internet/intranet and client/server products. The
Company's ability to achieve revenue growth and profitability are
substantially dependent upon the success of the Company's enterprise,
Internet/Intranet and client/server product strategies, and upon its ability
to successfully complete and introduce new products, to successfully implement
restructuring and cost control measures from time to time and to successfully
integrate the Visigenic business with the Company's (See "Integration of
Visigenic"). There can be no assurance that the Company will be able to
successfully accomplish the foregoing or to achieve profitability in future
periods. There can be no assurance that the Company will be successful with
this strategy, that the Company will achieve revenue growth on an annual basis
or that the Company will maintain or increase profitability. The Company
believes that its existing capital resources will enable it to fund its
operations through the next twelve months. Notwithstanding the foregoing, if
the Company determines to seek additional capital through the issuance of
additional shares of Series B Preferred Stock pursuant to its existing
arrangements with current holders of Series B Preferred Stock or by seeking
other sources of capital, such issuance could result in dilution to the
holders of the Company's Common Stock. There can be no assurance that the
Company will be able to obtain such capital on acceptable terms or at all.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND SEASONALITY. The
strength and profitability of the Company's business depends on the overall
demand for computer software and growth in the computer industry. Additionally,
the Company's business depends in part on general economic and business
conditions. The Company's quarterly operating results have varied significantly
in the past and the Company expects that such results are likely to vary
significantly from time to time in the future. Such variations result from,
among other matters, the following: the size and timing of significant orders
and their fulfillment; demand for the Company's products; the number, timing and
significance of product enhancements and new product announcements by the
Company and its competitors; changes in pricing policies by the Company or its
competitors; changes in the level of operating expenses; changes in the
Company's sales incentive plans; budgeting cycles of its customers; customer
order deferrals in anticipation of enhancements or new products offered by the
Company or its competitors; product life cycles; product defects and other
product quality problems; personnel changes; seasonal trends and general
domestic and international economic and political conditions. Operating results
can also be adversely impacted by deferrals of customer orders in light of
customer uncertainty regarding the Company's short- and long-term prospects. As
an increasing percentage of the Company's revenues are from enterprise,
Internet/Intranet and client/server products, the Company expects that an
increasing percentage of its revenues will be from large orders. The timing of
such orders and their fulfillment may cause material fluctuations in the
Company's operating results, particularly on a quarterly basis. In addition, the
Company intends to continue to expand its domestic and international direct
sales force. The timing of such expansion and the rate at which new sales people
become productive could also cause material fluctuations in the Company's
quarterly operating results.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. Revenues are also difficult to forecast because the
market for client/server and enterprise application development software is
rapidly evolving, and the Company's sales cycle for client/server products, from
initial evaluation to purchase and the provision of support services, is lengthy
and varies substantially from customer to customer. Because the Company normally
ships products within a short time after it receives an order, it typically does
not have any material backlog. As a result, to achieve its quarterly revenue
objectives, the Company is dependent upon obtaining orders in any given quarter
for shipment in that quarter. Furthermore, because many customers place orders
toward the end of a quarter, the Company generally recognizes a substantial
portion of its revenues at the end of a quarter. As the Company's expense levels
are based in significant part on the Company's expectations as to future
revenues and are therefore relatively fixed in the short term, if revenue levels
fall below expectations, net income is likely to be disproportionately adversely
affected. There can be no assurance that the Company will be able to achieve or
maintain profitability on a quarterly or annual basis in the future. Due to the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
19
<PAGE>
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
TRANSITION TO DIRECT SALES STRATEGY. In order for the Company's enterprise
software products to achieve market acceptance, the Company will need to
continue to adjust to longer sales cycles and successfully transition from the
channel sales model for its traditional desk top products to a direct sales
model. Sales of these products are expected to be made predominately to large
companies, institutions, and government entities. These types of customers
generally commit significant resources to an evaluation of enterprise software
and require the vendor to expand substantial time, effort, and money educating
them about the value of the vendor's solution. As a result, sales to these
types of customers generally require an extensive sales effort throughout the
customer's organization, and often require final approval by an executive
officer or senior level employee. The Company has experienced and will likely
continue to experience delays following initial contact with a prospective
customer and expend substantial funds and management effort in connection with
these sales. The Company has very little experience with these types of sales,
and there can be no assurance that the Company can successfully transition to
the direct sales model. In order to complete these new, difficult, and lengthy
sales, the Company will be required to restructure its direct sales force ,
extensively train and effectively manage its sales personnel, invest greater
resources in the sales effort, and educate the indirect channels. The Company
may not be able to accomplish any of the foregoing on a timely and cost-
effective basis. Failure to do so could have a material adverse effect on the
Company's business, operating results, or financial condition. Additionally,
the Company will need to add trained technical personnel to help it implement
solutions for its enterprise software customers relating to enterprise
software products. Personnel with the sufficient level of expertise and
experience for these positions are in great demand, and the Company may not be
able to hire and retain a sufficient number of qualified personnel for these
purposes. Failure to do so could have a material adverse effect on the
Company's business, operating results, or financial condition.
In 1998, the Company made changes to its sales compensation programs.
Although such changes are intended to enhance overall revenues, such changes
could have a material adverse impact on revenues and sales related expenses.
INTEGRATION OF VISIGENIC. The Company's success will depend, in substantial
part, upon whether the Company can integrate the operations, sales, marketing,
engineering and other technical employees of Visigenic in an efficient and
effective manner. While certain key management have resigned subsequent to the
merger, the Company believes their departure will not materially affect the
consolidation of the two companies. The combination of the two companies will
require, among other things, integration of the companies' respective product
offerings and technology and coordination of their research and development,
sales and marketing, and financial reporting efforts. There can be no assurance
that such integration will be accomplished smoothly or successfully. If
significant difficulties are encountered in the integration of the existing
product lines and technology, resources could be diverted from new product
development, resulting in delays in new product introductions. The integration
of the product lines could also cause confusion or dissatisfaction among
existing customers. The integration of certain operations will require the
dedication of management and other personnel resources, which may distract
attention from the day-to-day business of the Company. Failure to successfully
accomplish the integration of the two companies' operations and personnel
(including the retention of key personnel) could have a material adverse effect
on the Company's business, financial condition or results of operations.
RESTRUCTURINGS. In connection with the Company's acquisitions and in response
to the significant losses from operations, the Company implemented
restructurings and realignments of its operations in October 1996, February 1997
and March 1998. These restructurings resulted in significant reductions in
workforce and other ongoing costs. Given the extent of the restructurings which
the Company has undertaken, there can be no assurance that the remaining
resources are sufficient for the Company to return to consistent revenue growth
or profitability, nor can there be any assurance that the Company will realize
the cost savings which the restructurings have been designed to produce.
DEPENDENCE ON KEY PERSONNEL AND CHANGES IN MANAGEMENT. The success of the
Company depends in large part upon the ability of the Company to recruit and
retain qualified employees, particularly highly skilled engineers. The
competition for such personnel is intense, and there can be no assurance that
the Company will be successful in retaining or recruiting such personnel. In
prior years, certain management and other key personnel were hired away by
competitors who offered very substantial signing bonuses and compensation
packages that would have been very difficult for the Company to match. There can
be no assurance that the Company will not be subject to further losses of
management and other key personnel. In addition, the Company has had and may
continue to be required to substantially increase the compensation, bonuses,
stock options or other fringe benefits offered to employees in order to attract
and retain management and other key personnel. Further, new government
regulations, poor stock performance, or other factors could diminish the value
of the stock option program and force the Company to pay more cash compensation.
The loss of management and other key personnel, and the delays which may be
experienced in recruiting new management and other personnel as well as the
additional costs which may be incurred in retaining or attracting new personnel,
may have a material adverse affect on the Company, its product launches and its
operating results.
NEW BUSINESS AREAS. The Company's strategy is to focus on software
developers, enterprise customers and the Internet/intranet markets. Accordingly,
revenues derived from the Company's products, particularly its distributed
object products, will depend in large part upon the rate of adoption by
businesses and end-users of distributed object technology for information
processing and the Internet and intranets for commerce and communications.
Critical issues concerning the Internet and intranets, including security,
reliability, cost, ease of use and access and quality of service, remain
unresolved at this time, inhibiting adoption by many enterprises and end-users.
To the extent the Internet and intranets are not widely used by businesses and
end-users, there would be a corresponding material adverse effect on the
Company's business, operating results and financial condition. The Company's
relatively recent entry into these markets is subject to a number of risks,
including among others, its inexperience in these markets; the new and evolving
nature of the markets themselves; the Company's need to make choices regarding
20
<PAGE>
the operating systems, database management systems and server software on which
to focus; the ongoing transition of and investment of resources for this segment
by the Company; the Company's limited credibility in this area; and, the
presence of several very large and well-established businesses, as well as a
number of smaller very successful companies, already competing in this market.
There can be no assurance that sales in these markets will meet the Company's
objectives, in which case the Company's business, operating results or financial
condition could be materially adversely affected.
The Company's distributed object products acquired from Visigenic are based on
several standards, including Common Object Request Broker Architecture ("CORBA")
and Internet Inter-ORB Protocol ("IIOP"). These standards are intended to
facilitate the management and communication of applications created in object
oriented programming languages such as C + + and Java. These new standards are
just beginning to gain widespread acceptance, and compete with proprietary
solutions such as Microsoft's ActiveX and DCOM. The distributed object software
market is relatively young, and there are few proven products. Further, some of
the distributed object products acquired from Visigenic are designed
specifically for use in applications for the Internet and intranets. Because
critical issues concerning the Internet and intranets, including security,
reliability, cost, ease of use and access and quality of service remain
unresolved, the growth of applications targeted at the Internet/intranets is
uncertain and difficult to predict. If CORBA or IIOP are not adopted or are
adopted more slowly than anticipated or if product offerings from competitors
are chosen in lieu of the Company's products, there could be a material
adverse effect on the Company's business, operating results or financial
condition.
DEPENDENCE ON JAVA; RISKS ASSOCIATED WITH ENCRYPTION TECHNOLOGY. Certain of
the Company's products are based on Java, an object-oriented programming
language developed by JavaSoft, a subsidiary of Sun Microsystems. Java was
developed primarily for Internet/intranet applications. Java was only recently
introduced and does not yet have sufficient history to establish its
reliability, thereby inhibiting adoption of Java. To date, there have been only
a very limited number of commercially significant Java-based products, and it is
too early to determine whether Java will become a significant technology.
Alternatives to Java have been announced by several companies, including
Microsoft. If Java is not adopted or is adopted more slowly than anticipated,
there could be a material adverse effect on the Company's business, operating
results or financial condition.
The Company plans to use encryption technology in certain of its future
products to provide the security required for the exchange of confidential
information. Encryption technologies have been breached in the past. There can
be no assurance that there will not be a compromise or breach of the security
technology used by the Company. If any such compromise or breach were to occur,
it could have a material adverse effect on the Company's business, results of
operations or financial condition. Additionally, the export of encryption
technology is subject to government regulation. The inability to obtain approval
for the export of such technology could have a material adverse effect on the
Company's business, operating results or financial condition.
DECLINE IN REVENUE FROM DESKTOP PRODUCTS. A significant portion of the
Company's revenues to date have been attributable to its desktop products.
Revenues derived from the sale of these products, particularly the Company's
desktop database products, have declined over the last three fiscal years. The
decline in revenues has been caused by a number of factors, including, among
others, the success of product "suites" offered by competitors which have had an
adverse impact on the sale of individual products; the sale by the Company of
its Quattro Pro and Paradox product lines; and the continued competitive pricing
pressures that have resulted in lower average sales prices for desktop products.
While the Company expects the decline in revenues associated with the
Company's desktop products to continue, revenues from the sales of the Company's
desktop products currently continue to represent an important portion of the
Company's revenues. Although the Company plans to invest in the development,
sales, marketing and support of such products on a limited basis, there can be
no assurance that revenues from desktop products will not decline faster than
expected. If revenues from such products decline materially or at a more rapid
rate than currently anticipated, the Company's business, operating results and
financial condition would be materially adversely affected.
ENFORCEMENT OF THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS. The Company relies
on a combination of patent, copyright, trademark, and trade secret laws, non-
disclosure agreements and other intellectual property protection methods to
protect its proprietary technology. Despite these efforts to protect its
proprietary rights, unauthorized parties may copy aspects of its products or
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of its products is difficult, and while it is difficult to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of many
foreign countries do not protect the proprietary rights as fully as do the laws
of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate or that competitors will not independently develop similar technology.
Other than the Western Imaging matter discussed in Part I, Item 2
---------------
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Litigation," of this Form-10Q, there are no pending material
lawsuits against the Company regarding infringement of any existing patents or
other intellectual property rights or any material notices that the Company is
infringing the intellectual property rights of others. However, there can be
no assurance that such infringement claims will not be asserted by third
parties in the future. If any such claims are asserted and determined to be
valid, there can be no assurance that the Company will be able to obtain
licenses of the intellectual property rights in question on reasonable terms.
The Company's involvement in any patent dispute or other intellectual property
dispute or action to protect proprietary rights may have a material adverse
effect on the Company's business, operating results and financial condition.
Adverse determinations in any litigation may subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties and prevent the Company from manufacturing and selling its
products. Any of these situations can have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE ON THIRD-PARTY LICENSES. The Company is dependent on licenses from
third-party suppliers for certain elements of its products. In particular, the
Company is dependent upon certain licenses from Microsoft which is both a
licensor to the Company and its most significant competitor. If any such third-
party licenses were
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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.
Furthermore, 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 condition.
NEW PRODUCT INTRODUCTIONS. The Company's future sales will depend
substantially on its ability to continue to successfully design and market new
products and upgrades of current products for existing and new computer
platforms and operating environments. There can be no assurances that sales of
such new products and versions will meet the Company's expectations, due to
various factors. For example, the Company may introduce certain of such products
later to market than expected or later to market than competitors'
introductions, or competitors may introduce competitive products at lower
prices. In addition, product upgrades (which enable users to upgrade from
earlier versions of the Company's products or competitor's products) have lower
prices and margins than new products. The acceptance of the Company's new
products is dependent, in part, on the adoption of the Internet as a new
computing paradigm and the adoption of the Java programming language.
From time to time, the Company has made and expects to make, announcements to
its customers with respect to the time frames within which new products are
expected to be shipped. Such announcements are made for the purpose of providing
customers with a general idea of the expected availability of products for
planning purposes, are based only upon estimates and are not a prediction of the
exact availability date for 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. Some of the products acquired from Visigenic are based on technology
licensed from third parties, and the Company has limited control over whether
and when these technologies are enhanced. The failure or delay in enhancements
of technology licensed from third parties could have a material adverse effect
on the Company's ability to develop and enhance its products. Due to the
inherent uncertainties of software development, it is likely that such
situations will occur from time to time in the future. Moreover, the loss of key
employees may increase the risk of delays in product availability from
timeframes 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 quarter
or otherwise be relied upon by investors as a basis for predicting the Company's
results for any future period. Delays in the shipment of such products and
product enhancements could have a material adverse impact on the Company.
Without the introduction of such new products and product enhancements, the
Company's products may become technologically obsolete, and as a result the
Company's business, operating results and financial condition could be
materially adversely affected. There can be no assurance that the future
development and marketing efforts by the Company will be successful.
YEAR 2000. The Company is in the process of addressing the broad range of
issues associated with the programming code in existing computer systems as the
year 2000 approaches. The "Year 2000" issue is pervasive and complex, as many
computer systems were not designed to handle any dates beyond the year 1999,
and therefore computer hardware and software will need to be modified prior to
the Year 2000 in order to remain functional. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Year 2000 issue creates potential risk for the Company from
unforeseen problems in its own computer systems, and from third parties with
whom the Company deals on financial and other transactions worldwide and in
its own software products licensed to customers. Failures of the Company
and/or third parties' computer systems could have a material impact on
the Company's business, operating results and financial condition.
The Year 2000 issue could affect the Company's products. The Company is
currently reviewing its current product offerings and based upon its review
to date, believes that its current products are Year 2000 compliant. However,
the Company's current products are subject to ongoing analysis and review.
Despite such analysis and review the Company's products may contain
undetected errors or defects associated with Year 2000 date functions, which
could result in delay or loss of revenue, diversion of development
resources, damage to the Company's reputation, or increased service or
warranty costs, any of which could materially adversely affect the business,
operating results and financial condition. To the extent the Company's
products prove to be non-compliant, or in the event of any dispute with any
customer regarding whether the Company's products are compliant, the Company's
business, results of operations and financial condition could be materially
adversely affected.
The existence of Year 2000 issues may give rise to legal claims against the
Company, notwithstanding standard provisions in the Company's license
agreements with its customers disclaiming all express and implied warranties
against such defects. Such legal claims could have a materially adverse
impact on the Company's business and results of operations.
The Company is currently reviewing its internal systems, as appropriate, to
determine what, if anything, is required to resolve the Year 2000 issue.
Although the Company is not aware of any material operational issues of costs
associated with its internal systems for the Year 2000, the
Company may experience material unanticipated problems and costs caused by
undetected errors or defects in the technology used in its internal systems,
which include both the Company's software products and third-party software and
hardware technology. The Company does not currently have any information
concerning the Year 2000 compliance status of its suppliers. The Company plans
to initiate formal communications with all of its significant suppliers to
determine their compliance status.
Many companies are currently expending significant resources in order to
address the Year 2000 issue. Expenditures to address the Year 2000 issue often
involve the modification of legacy and other existing software systems rather
than the development of new systems. Because of the size of such expenditures,
companies may defer or cancel other new software development projects for which
such companies might otherwise have purchased products from the Company. Any
reductions in the Company's revenues resulting from such the Year 2000 issue
could have a material adverse effect on the Company's business, results of
operations and financial condition.
In addition, the Company could be materially adversely affected by costs or
complications relating to code changes, testing and implementation for its own
systems or similar issues faced by its distributors, suppliers, customers,
vendors and the financial service organizations with which the Company
interacts. At this time, the Company has not yet determined the cost related
to achieving Year 2000 compliance.
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EVOLVING MARKETS. In light of the changing market in which the Company
competes, it is uncertain whether the Company's historical product life cycle
will continue. The Company has, in the past, experienced declining sales of
certain of its products in anticipation of the release of new products.
Furthermore, it cannot be determined whether the increasing price competition in
the industry, the timing of competitors' product releases or other factors will
have an adverse effect upon the product upgrade revenue that has historically
been a significant component of the Company's revenue. Finally, a greater
portion of the Company's revenues are expected to be derived from the licensing
of client/server products to enterprise customers, which transactions are
characterized by longer sales cycles and increased transaction values. As a
result, such revenues may be subject to increased variability over time.
The Company's distributed object products acquired from Visigenic are based on
several standards, including Common Object Request Broker Architecture ("CORBA")
and Internet Inter-ORB Protocol ("IIOP"). These standards are intended to
facilitate the management and communication of applications created in object
oriented programming languages such as C + + and Java. These new standards are
just beginning to gain widespread acceptance, and compete with proprietary
solutions such as Microsoft's ActiveX and DCOM. The distributed object software
market is relatively young, and there are few proven products. Further, some of
the distributed object products acquired from Visigenic are designed
specifically for use in applications for the Internet and intranets. Because
critical issues concerning the Internet and intranets, including security,
reliability, cost, ease of use and access and quality of service remain
unresolved, the growth of applications targeted at the Internet/intranets is
uncertain and difficult to predict. If CORBA or IIOP are not adopted or are
adopted more slowly than anticipated or if product offerings from competitors
are chosen in lieu of the Company's products, there could be a material adverse
effect on the Company's business, operating results or financial condition.
The Company's VisiChannel for Java Database Connectivity ("JDBC") database
access product acquired from Visigenic is based on the JDBC standard, which was
developed to enable applications to access data from JDBC compliant data
sources. While the JDBC standard is supported by most of the major database and
software vendors, it is a recent standard that has not yet gained widespread
acceptance and it currently co-exists with proprietary database access solutions
from many of these same database and software vendors.
Because the markets for the Company's products are new and evolving, it is
difficult to assess or predict with any assurance the size or growth rate, if
any, of these markets. There can be no assurance that the markets for the
Company's products will develop, or that the Company's products will be adopted.
If these markets fail to develop, develop more slowly than expected or attract
new competitors, or if the Company's products do not achieve market acceptance,
the Company's business, operating results and financial condition could be
materially adversely affected. Because the Company's strategy is to develop
standards-based products and these standards are relatively new, not widely
accepted and compete with other emerging standards, to the extent that these
standards are not commercially successful, this will have a material adverse
affect on the Company's business, operating results and financial condition.
Competing or alternative technologies are being or are likely in the future to
be promoted by current and potential competitors of the Company, some of which
have well-established relationships with current and potential customers of the
Company and have extensive knowledge of the markets served by the Company,
better name recognition and more extensive development, sales and marketing
resources than the Company.
RELIANCE ON VARS AND ISVS. A significant element of the strategy employed by
Visigenic prior to its acquisition by the Company was to embed the technology in
products offered by value-added reseller ("VAR") and independent software vendor
("ISV") customers, such as Cisco, Compuware, Healtheon, Hewlett-Packard,
Microsoft, Netscape, Novell, Oracle, Platinum technology and Sybase.
Historically, a relatively small number of VAR and ISV customers have accounted
for a significant percentage of Visigenic's revenues. In fiscal 1996, ten VAR
and ISV customers accounted for approximately 65% of Visigenic's revenues and in
fiscal 1997, ten VAR and ISV customers accounted for approximately 48% of the
Visigenic's revenues. The Company intends to seek similar distribution
arrangements with other VARs and ISVs to embed Visigenic technology in their
products. To date, the terms and conditions, including prices and discounts, of
agreements with VAR and ISV customers relating to the
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product line acquired from Visigenic have been highly negotiated and vary
significantly among customers; however, substantially all such agreements are
non-exclusive and do not require the VAR or ISV to make minimum purchases. Many
of the markets for the VAR and ISV products in which technology acquired from
Visigenic is being embedded are new and evolving and, therefore, will be subject
to the same risks faced by the Company in the markets for its other products.
Furthermore, certain of the companies with which Visigenic maintained or would
have otherwise sought to establish VAR or ISV relationships are competitors of
the Company, and accordingly, the acquisition of Visigenic could adversely
affect the Company's ability to maintain or secure such relationships. If the
Company is unsuccessful in maintaining its current relationships and securing
license agreements with additional VARs and ISVs on commercially reasonable
terms or at all, or if the Company's VAR and ISV customers are unsuccessful in
selling their products, the Company's business, financial condition or results
of operations could be materially adversely affected.
EXTREME VOLATILITY OF STOCK PRICE. Like the stock of other high technology
companies, the market price of the Company's Common Stock has experienced
significant fluctuations and may continue to be extremely volatile. During the
past three fiscal years, the market price of the Company's Common Stock has
ranged from a high of $21.25 to a low of $4.75. The market price of the Common
Stock may be significantly affected by factors such as the announcement of new
products or product enhancements by the Company or its the competitors,
technological innovation by the Company or its competitors, quarterly
variations in the Company's or competitors' results of operations, changes in
prices of the Company's or its competitors' products and services, changes in
revenue and revenue growth rates for the Company as a whole or for specific
geographic areas, business units, products or product categories, changes in
earnings estimates by market analysts, speculation in the press or analyst
community, and general market conditions or market conditions specific to
particular industries. Such fluctuations may have a significant impact on the
market price of the Company's Common Stock.
EXTREMELY COMPETITIVE INDUSTRY. The software industry is extremely
competitive. Rapid change, uncertainty due to new and emerging technologies and
fierce competition characterize the industry. The pace of change has recently
accelerated due to the Internet/intranet and new programming languages, such as
Java. The Company competes with a number of other companies, including
Microsoft, Computer Associates, Oracle, Sybase and Symantec. Certain of its
competitors have substantially greater financial, management, marketing and
technical resources than the Company. In the past, competitors have utilized
their greater resources to provide substantial signing bonuses and other
inducements to lure away the Company's management and other key personnel. In
addition, Microsoft is the developer of the Windows operating environments. To
the extent that the Company is unable to obtain information regarding existing
and future operating systems from the developer of such systems, the release of
the Company's products for such systems may be delayed. The product line
acquired from Visigenic is targeted at the emerging markets for standards-based
distributed object software products. The markets for these products are
intensely competitive, subject to rapid change and significantly affected by new
product introductions and other market activities of industry participants. The
Company's principal competitive factors in these markets will be product
quality, performance and price, vendor and product reputation, product
architecture and quality of support. In the standards-based distributed object
market, the products acquired from Visigenic compete principally against
offerings by Iona Technologies, Expersoft and BEA. These products also compete
against existing or proposed distributed object solutions from hardware vendors
such as Hewlett-Packard, ICL, IBM and Sun. In addition, because there are
relatively low barriers to entry in the software market and because the products
are based on publicly available standards, the Company expects to experience
additional competition in the future from other established and emerging
companies if the market for distributed object software continues to develop and
expand. In particular, operating system vendors such as ICL, Hewlett-Packard,
IBM, Microsoft and Sun may offer standards-based distributed object products
bundled with their operating systems. For instance, Microsoft has introduced
DCOM for Microsoft operating systems, which could reduce or eliminate the need
for CORBA-compliant ORBs, such as those offered by the products acquired from
Visigenic.
Many of the foregoing and potential competitors have well-established
relationships with current and potential customers of the Company, have
extensive knowledge of the markets serviced by the Company's customers, more
extensive development, sales and marketing resources and are capable of offering
single vendor solutions. Increased competition could result in price reductions,
fewer customer orders, reduced gross margins and loss of market share, any one
of which could materially adversely affect the Company's business, operating
results and financial condition. In addition, current and potential competitors
may make strategic acquisitions or establish cooperative relationships, thereby
increasing the ability of their products to address the needs of the Company's
current and prospective customers. Accordingly, it is possible that new
competitors may emerge, or alliances among current and new competitors may be
formed, that may rapidly gain significant market share. Certain competitors
have been
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known to license software for free to gain competitive advantage. Such
competition could materially adversely affect the Company's ability to sell
additional licenses and maintenance and support renewals on terms favorable to
the Company. Further, competitive pressures could require the Company to reduce
the price of its products and related services, which could materially adversely
affect the Company's business, operating results and financial condition.
Commercial acceptance of the Company's products and services could be adversely
affected by critical or negative statements or reports by brokerage firms,
industry and financial analysts, and industry periodicals concerning the Company
and its products, business, or competitors, or the advertising or marketing
efforts of competitors that could affect customer perception. There can be no
assurance that the Company will be able to compete successfully against current
and future competition, and the failure to do so would have a material adverse
effect upon the Company's business, operating results and financial condition.
The advent of the Internet/intranet as a computing, communication and
collaboration platform as well as a low cost and efficient distribution vehicle,
on-line services, and electronic commerce increases competition and creates
uncertainty as to future technology directions. The Company faces intense
competition in the development and marketing of Internet/intranet and Java
development software from a wide variety of companies. There can be no
assurances that the Company will be able to compete effectively for business
opportunities as they arise on the Internet/intranet, on-line services,
electronic commerce and other emerging areas.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND SALES. There are certain
risks inherent in doing business on an international level, such as unexpected
changes in regulatory requirements, export restrictions, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates, seasonal reductions in
business activity during the summer months in Europe and certain other parts of
the world and potentially adverse tax consequences, any of which could adversely
impact the success of the Company's international operations. In addition,
similar to other software companies, the Company has experienced adverse effects
including but not limited to longer payment terms, declining sales and currency
fluctuations, as a result of the Asian financial crisis. There can be no
assurance that one or more of such factors will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, operating results and financial condition. In addition,
the Company's subsidiaries in Europe and Japan operate in local currencies, and
their results are translated monthly into US dollars. If the value of the US
dollar increases relative to foreign currencies, the Company's business,
operating results and financial condition could be materially adversely
affected.
ANTI-TAKEOVER PROVISIONS. The Company's Stockholders' Rights Plan and certain
provisions of the Company's Certificate of Incorporation may discourage or
prevent certain types of transactions involving an actual or potential change in
control of the Company, including transactions in which the stockholders might
otherwise receive a premium for their shares over then current market prices,
and may limit the ability of stockholders to approve transactions that they may
deem to be in their best interests. In addition, the Company's Board of
Directors has the authority to fix the rights and preferences of and issue
shares of Preferred Stock without action by the stockholders, which may have the
effect of delaying or preventing a change in control of the Company.
SOFTWARE DEFECTS AND LIABILITY CLAIMS. Software products frequently contain
errors or defects, especially when first introduced or when new versions or
enhancements are released. Although the Company has not experienced any material
adverse effects resulting from any such defects or errors to date, there can be
no assurance that, despite testing by the Company and by current and potential
customers, defects and errors will not be found in current versions, new
versions or enhancements after commencement of commercial shipments, which could
result in delay or loss of revenue, delay in market acceptance, diversion of
development resources, damage to the Company's reputation, increased service
and warranty costs, and of which could have a material adverse effect upon the
Company's business, operating results and financial condition.
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective as
a result of existing or future federal, state or local laws or ordinances or
unfavorable judicial decisions. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
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SUPERIOR RIGHTS AND PREFERENCES OF SERIES B PREFERRED STOCK. The
Company has authorized the issuance of up to 1,470 shares of its Series B
Preferred Stock, of which 770 shares are outstanding as of July 31, 1998. The
Series B Preferred Stock has certain rights and preferences which are superior
to those of Common Stock. In particular, each share of Series B Preferred Stock
is entitled to vote the number of shares of Common Stock into which such share
of Series B Preferred Stock is convertible, on matters on which all
stockholders of the Company are entitled to vote as compared to one vote per
share of Common Stock. In addition, upon any liquidation, dissolution or
winding up of the Company, each share of Series B Preferred Stock is entitled
to be paid the original purchase price per share, or $50,000, from the assets
of the Company prior to any payments to the holders of Common Stock. The
Company's Board of Directors, without stockholder approval, is authorized to
issue up 1,000,000 shares of the Company's Preferred Stock (including the
1,470 authorized shares of Series B Preferred Stock) with voting, conversion
or other rights that could adversely affect the voting power and other rights
of the holders of Common Stock or the market price of the Common Stock.
POTENTIAL DILUTIVE EFFECT OF CONVERSION AND ADDITIONAL ISSUANCE OF SERIES B
PREFERRED STOCK. The number of shares of Common Stock which may be issued upon
conversion of the Series B Preferred Stock is dependent upon the trading price
of Common Stock at the time of conversion. To the extent that the trading price
of Common Stock is lower than $6.94 per share (or $6.88 per share for the
Series B shares purchased on July 27, 1998) at the time of any conversion of the
currently outstanding shares of Series B Preferred Stock, the number of shares
of Common Stock issuable upon such conversion will increase. Until December 31,
1998, the Company has the option, subject to certain conditions, to require
existing holders of Series B Preferred Stock to purchase in the aggregate up to
500 additional shares of Series B Preferred Stock. In the event the Company
exercises this option and additional shares of Series B Preferred Stock are
issued, existing holders of Common Stock could be subject to dilution.
Upon at least twenty trading days' written notice, the Company may elect to
redeem, on the date which is the second, third, or fourth anniversary of
effectiveness of the Registration Statement, all of the Series B Shares which
remain outstanding on the date which is the second anniversary of effectiveness
of the Registration Statement, at 110% of par. Subject to certain conditions,
the Company also has a right to call for redemption for all or a portion of the
Series B Shares if the Conversion Rate is less than $6.00 per share.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. As a part of the Company's
business strategy, the Company will review acquisition prospects that would
complement the Company's existing product offerings, augment the Company's
market coverage or enhance its technological capabilities, or that may otherwise
offer growth opportunities. Although the Company does not have current
agreements or negotiations underway with respect to any such acquisitions, the
Company may make acquisitions of businesses, products or technologies in the
future. Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's operating
results and/or the market price of the Common Stock. Acquisitions entail
numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets in which the Company has no
or limited prior experience and potential loss of key employees of acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel that
might be acquired in the future, and the failure of the Company to do so could
materially adversely effect the Company's business, financial condition and
operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No disclosure is required by the Registrant.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference to Part I,
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Litigation, of the Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of the Company's stockholders held on June 5, 1998, the
following matters were voted upon:
1. The election of David Heller as a Class III director to serve a three-year
term expiring upon the 2001 Annual Meeting of Stockholders or upon election
and qualification of his duly elected successor. Of the total shares voting
on the foregoing resolution (41,447,653), 41,055,253 voted in favor and
392,400 withheld authority to vote.
2. The election of William F. Miler as a Class III director to serve a
three-year term expiring upon the 2001 Annual Meeting of Stockholders or
upon election and qualification of his duly elected successor. Of the total
shares voting on the foregoing resolution (41,447,653), 41,072,662 voted in
favor and 374,991 withheld authority to vote.
3. The election of Harry J. Saal as a Class III director to serve a three-year
term expiring upon the 2001 Annual Meeting of Stockholders or upon election
and qualification of his duly elected successor. Of the total shares voting
on the foregoing resolution (41,447,653), 41,073,823 voted in favor and
373,830 withheld authority to vote.
4. A proposal to amend the Company's Restated Certificate of Incorporation to
change the name of the Company to Inprise Corporation. Of the total shares
voting on the foregoing resolution (41,447,653), 40,440,895 voted in favor,
751,387 voted against and 255,371 abstained.
5. A proposal to approve the amendment the Company's 1997 Stock Option Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 2,400,000. Of the total shares voting on the foregoing
resolution (41,447,653), 36,711,544 voted in favor, 4,432,604 voted against
and 303,505 abstained.
6. A proposal to approve the amendment the Company's 1997 Employee Stock
Purchase Plan to increase the number of shares of Common Stock available for
purchase thereunder by 100,000. Of the total shares voting on the foregoing
resolution (41,447,653), 40,104,309 voted in favor, 1,133,162 voted against
and 210,182 abstained.
7. The appointment of Pricewaterhouse LLP as the Company's independent
accountants for the calendar year ending December 31, 1998. Of the total
shares voting on the foregoing resolution (41,447,653), 41,089,394 voted in
favor, 200,137 voted against, and 158,122 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 3.1 - Restated Certificate of Incorporation, as amended, previously
filed as an exhibit to Registrant's Registration Statement on
Form S-8 (filed with the Commission on August 13, 1998) as
incorporated herein by reference.
Exhibit 3.2 - Amended Bylaws of Inprise Corporation, previously filed as an
exhibit to Registrant's Registration Statement on Form S-8
(filed with the Commission on August 13, 1998) as incorporated
herein by reference.
Exhibit 27 - Financial Data Schedule
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(b) REPORTS ON FORM 8-K
The Company has not filed a report on Form 8-K during the quarter ended
June 30, 1998.
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.
INPRISE CORPORATION
-------------------
(Registrant)
Date: August 14, 1998 /s/ Kathleen M. Fisher
----------------------------------
KATHLEEN M. FISHER
Vice President and
Chief Financial Officer
28
<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 INPRISE CORPORATION
FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 79,938
<SECURITIES> 1,885
<RECEIVABLES> 54,452
<ALLOWANCES> (10,251)
<INVENTORY> 959
<CURRENT-ASSETS> 136,353
<PP&E> 216,486
<DEPRECIATION> (112,181)
<TOTAL-ASSETS> 246,928
<CURRENT-LIABILITIES> 78,969
<BONDS> 0
27,500
0
<COMMON> 386,025
<OTHER-SE> (267,807)
<TOTAL-LIABILITY-AND-EQUITY> 246,928
<SALES> 82,215
<TOTAL-REVENUES> 93,009
<CGS> 7,214
<TOTAL-COSTS> 14,118
<OTHER-EXPENSES> 95,635
<LOSS-PROVISION> 470
<INTEREST-EXPENSE> (422)
<INCOME-PRETAX> (15,021)
<INCOME-TAX> (3,461)
<INCOME-CONTINUING> (11,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,560)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
