<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
-------
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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
BORLAND INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2895440
(STATE OR OTHER JURISDICTION OF (I.R.S EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 BORLAND WAY, SCOTTS VALLEY, CALIFORNIA 95066-3249
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 431-1000
(Former name, former address and former fiscal year, if changed since last
report)
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 March 31, 1998 was
50,879,000.
<PAGE>
BORLAND INTERNATIONAL, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----------------
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1998 and December 31, 1997.......... 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997....................................................... 4
Condensed Consolidated Statement of Comprehensive Income for the three months ended
March 31, 1998 and 1997............................................................. 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 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.. 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk.............................. 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holder..................................... 25
Item 6. Exhibits and Reports on Form 8-K....................................................... 25
Signatures............................................................................. 26
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 91,885 $ 100,707
Short-term investments............................................... 1,867 1,843
Accounts receivable, net............................................. 40,113 34,664
Inventories.......................................................... 1,039 787
Other................................................................ 7,265 6,462
--------------- --------------
Total current assets.............................................. 142,169 144,463
Property and equipment, net............................................. 104,686 104,944
Other non-current assets................................................ 6,382 6,417
--------------- --------------
Total assets...................................................... $ 253,237 $ 255,824
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 12,051 $ 11,687
Accrued expenses..................................................... 42,727 41,170
Short-term restructuring............................................. 11,531 1,277
Deferred revenue..................................................... 13,475 8,028
Income taxes payable................................................. 769 4,054
Other................................................................ 9,220 13,667
--------------- --------------
Total current liabilities......................................... 89,773 79,883
Long-term debt and other................................................ 22,211 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;
50,879,000 and 50,780,000 issued and outstanding..................... 509 508
Additional paid-in capital........................................... 382,969 381,894
Accumulated deficit.................................................. (273,367) (259,691)
Cumulative translation adjustment.................................... 3,642 3,847
--------------- --------------
Total stockholders' equity........................................ 113,753 126,558
--------------- --------------
$ 253,237 $ 255,824
=============== ==============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Licenses and other revenue............................................................ $ 41,043 $ 38,223
Service revenue....................................................................... 5,443 5,197
-------- --------
Net revenues..................................................................... 46,486 43,420
-------- --------
Cost of licenses and other revenue.................................................... 2,926 5,404
Cost of service revenue............................................................... 3,458 2,277
-------- --------
Cost of revenues................................................................. 6,384 7,681
-------- --------
Gross profit.......................................................................... 40,102 35,739
-------- --------
Selling, general and administrative................................................... 27,302 41,448
Research and development.............................................................. 11,171 16,123
Restructuring and merger related charges.............................................. 19,282 5,976
Other non-recurring charges........................................................... -- 17,100
-------- --------
Total operating expenses......................................................... 57,755 80,647
-------- --------
Operating loss........................................................................ (17,653) (44,908)
Interest income, net and other........................................................ 598 739
-------- --------
Loss before income taxes.............................................................. (17,055) (44,169)
Income tax (benefit) provision........................................................ (3,612) 367
-------- --------
Net loss.............................................................................. $(13,443) $(44,536)
======== ========
Net loss per common and common equivalent share (Note 2).............................. $ (0.27) $ (0.92)
======== ========
Shares used in computing basic and diluted loss per share (Note 2).................... 50,863 48,275
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net loss.............................................................................. $(13,443) $(44,536)
Other comprehensive loss..............................................................
Foreign currency translation adjustments............................................ (205) (4)
-------- --------
Comprehensive loss.................................................................... $(13,648) $(44,540)
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
BORLAND INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $(13,443) $(44,536)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization......................................... 1,884 3,807
Loss on disposal of fixed assets ..................................... 2,522 1,580
Changes in assets and liabilities:
Accounts receivable................................................... (5,593) (6,357)
Inventories........................................................... (251) (4)
Other current assets.................................................. (857) 1,815
Other non-current assets ............................................. 36 1,228
Accounts payable, accrued expenses and short-term restructuring...... 12,073 22,922
Income taxes payable.................................................. (3,285) (8,664)
Other (primarily deferred revenue and long-term restructuring)........ 1,293 (1,636)
------------ ------------
Cash used by operating activities..................................... (5,621) (29,845)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment........................................ (4,162) (2,194)
Sale of fixed assets......................................................... 12 38
Net change in short-term investments......................................... (24) (247)
------------ ------------
Cash used by investing activities..................................... (4,174) (2,403)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net.................................. 985 14,389
Borrowings (repayment) of capital lease obligations and other debt activity.. (33) 8,589
------------ ------------
Cash provided by financing activities................................. 952 22,978
------------ ------------
Effect of exchange rate changes on cash......................................... 21 (232)
------------ ------------
Net change in cash and cash equivalents......................................... (8,822) (9,502)
Beginning cash and cash equivalents............................................. 100,707 81,306
------------ ------------
Ending cash and cash equivalents................................................ $ 91,885 $ 71,804
============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE>
BORLAND INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (which 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 calendar 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 consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
of Borland International, Inc. 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 current year presentation.
Change in Fiscal Year End
During 1997, the Company resolved to change its year end from March 31 to
December 31 effective January 1, 1998.
Revenue Recognition
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2 "Software Revenue Recognition"
("SOP97-2") and 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. SOP 97-2 and SOP98-4 provide guidance on recognizing revenue
on software transactions and supersedes SOP91-1. The Company believes that the
adoption of SOP97-2 and SOP 98-4 has not had a significant impact on its current
licensing or revenue recognition practices. However, should the Company adopt
new or change its existing licensing practice, the Company's revenue recognition
practices may be subject to change to comply with the accounting guidance
provided in SOP 97-2 and SOP 98-4.
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 Visgenic 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 has adopted SFAS 130 for the quarter ended March
31, 1998. Components of comprehensive income for the quarter ended March 31,
1998 and 1997 have been disclosed on the Statement of Comprehensive Income. The
total accumulated other comprehensive income balance was $3,264,000 as of March
31, 1998.
New Accounting Pronouncement
In June 1997, FASB issued SFAS 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" ("SOP 98-1"). SOP 98-1 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 Company has not yet determined the
impact, if any, of adopting this statement. The disclosure prescribes by SOP98-
1 will be effective for the year ending December 31, 1999 consolidated financial
statements.
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>
Quarter Ended
March 31,
-----------------------------
1998 1997
------------- ------------
Numerator:
<S> <C> <C>
Net loss before accretion charge to the mandatorily redeemable
convertible preferred stock relating to warrants $(13,443) $(44,536)
Accretion charge to the mandatorily redeemable convertible preferred
stock for warrants 142 ---
--------- ---------
Net loss available to common stockholders for basic and diluted earnings
per share $(13,585) $(44,536)
========= =========
Denominator:
Denominator for basic loss per share - weighted average shares 50,863 48,275
Effect of dilutive securities --- ---
--------- ---------
Denominator for diluted loss per share - adjusted weighted average
shares and assumed conversions 50,863 48,275
========= =========
Loss per share - basic $ (0.27) $ (0.92)
Loss per share - diluted $ (0.27) $ (0.92)
</TABLE>
The 550 shares of Series B Preferred Stock and 220,000 warrants to purchase
common shares outstanding at March 31, 1998 were not included in the computation
of diluted EPS because their effect on earnings per share would have been
antidilutive.
Additionally, options to purchase 7,701,000 and 8,866,000 shares of common
stock were outstanding at March 31, 1998 and 1997, respectively, but were not
included in the computation of diluted EPS as inclusion of such options would
have been antidilutive.
NOTE 3. ACQUISITION
On February 27, 1998, the Company issued approximately 12,118,060 shares of
Borland Common Stock in exchange for all of the outstanding common stock of
Visigenic Software, Inc. ("Visigenic"). The Company also reserved approximately
2,527,284 shares for issuance in connection with Visigenic's outstanding
employee stock options. 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
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
Borland Visigenic Proforma Combined
-------------------- --------------------- ------------------
<S> <C> <C> <C>
Net revenues $ - $ - $ 46,486
Net income (loss) - - (13,443)
Loss per share -- basic - - (0.27)
Loss per share -- diluted $ - $ - $ (0.27)
Three Months Ended March 31, 1997
Net revenues $ 37,168 $ 6,252 $ 43,420
Net loss (42,470) (2,066) (44,536)
Loss per share -- basic (1.15) (0.15) (0.92)
Loss per share -- diluted $ (1.15) $ (0.15) $ (0.92)
</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.
The following table summarizes the Company's restructuring activity for the
three months ended March 31, 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
Three Months Ended March 31, 1998:
1998 restructuring.................. 9,863 336 2,900 2,482 15,581
Cash charges........................ (1,238) (12) -- (1,616) (2,866)
Non - cash charges.................. -- -- (2,534) -- (2,534)
------- ---- ------- ------- -------
Accrual as of March 31, 1998............ $ 8,768 $896 $ 366 $ 1,501 $11,531
======= ==== ======= ======= =======
</TABLE>
Subsequent to December 31, 1997, there have not been any changes to the
Company's estimate of the total costs of prior restructurings. During the three
months ended March 31, 1998, prior restructuring reserves decreased by $0.3
million primarily due to payments related to noncancellable rent costs of
abandoned facilities.
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
10
<PAGE>
$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. Assuming that the Company exercises its
right to sell the maximum number of shares under the Company Put Option, the
maximum number of additional Series B Shares which the Investors may require
that the Company sell to them under the Investor Call Options is 420 Series B
Shares, for a purchase price of approximately $21 million, (220 Series B Shares,
for a purchase price of approximately $11 million, if the Company does not
exercise the Company Put Option) and the number of shares subject to additional
Warrants would be 168,000 (88,000 if the Company does not exercise the Company
Put Option). The Series B Shares and Warrants issued upon exercise of the
Company Put Option or the Investor Call Options will have the same terms and
rights as the Series B Shares and Warrants issued at the Initial Closing except
that the maximum conversion price and exercise price, respectively, will be
based upon the market price of the Company's Common Stock at the time of the
subsequent issuance of such Series B Shares and Warrants.
During March 1998, the holders of the Series B Shares agreed to extend the
expiration date of the Company's Put Options to December 31, 1998.
Each of the above issuances were not and will not be registered under the
Securities Act of 1933, as amended (the "1933 Act") in reliance upon the
exemptions provided by Section 4(2) of the 1933 Act and/or Regulation D
promulgated thereunder as a transaction by an issuer not involving a public
offering.
NOTE 5. INCOME TAXES
An income tax benefit of $3.8 million was recorded for the quarter ended March
31, 1998. Such income tax benefit resulted from the conclusion of the
examination of the Company's federal income tax returns by the U.S. Internal
Revenue Service for the period from 1984 through 1992. Such benefit resulted in
the favorable resolution of certain issues in which the Company had previously
provided an income tax provision. Partially offsetting this income tax benefit
are amounts, principally 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.
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."
11
<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-period ended December 31, 1997, of which
copies may be obtained from the Company or from the Securities and Exchange
Commission at its website at www.sec.gov.
OVERVIEW
Borland International, Inc. (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 distributes its products worldwide primarily through
independent distributors, dealers, value-added resellers ("VARs") and
independent software vendors ("ISVs"). The Company also markets and sells to
corporations, governments, educational institutions and end-user customers
through direct sales and through the Internet.
The following table sets forth the unaudited consolidated results of
operations as a percentage of net revenues for the three months ended March 31,
1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Licenses and other revenue................................ 88.3 % 88.0 %
Service revenue........................................... 11.7 12.0
------ -------
Net revenues............................................ 100.0 100.0
Cost of revenues.......................................... 13.8 17.7
------ -------
Gross margin.............................................. 86.2 82.3
------ -------
Selling, general and administrative....................... 58.7 95.5
Research and development.................................. 24.0 37.1
Restructuring and merger related charges.................. 41.4 13.8
Other non-recurring charges............................... -- 39.4
------ -------
Total operating expenses.................................. 124.1 185.8
------ -------
Operating loss............................................ (37.9) (103.5)
Interest income, net and other............................ 1.3 1.7
------ -------
Loss before income taxes.................................. (36.6) (101.8)
Income tax (benefit) provision............................ (7.7) 0.8
------ -------
Net loss.................................................. (28.9)% (102.6)%
====== =======
</TABLE>
12
<PAGE>
NET REVENUES
The following table sets forth the unaudited consolidated net license and
other, and service revenues for the quarter ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------
March 31, 1998 March 31, 1997 Change
--------------------- -------------------- --------------
(in thousands)
<S> <C> <C> <C>
Licenses and other 41,043 38,223 7%
Service revenue 5,443 5,197 5%
------ ------
Total revenue 46,486 43,420 7%
====== ======
</TABLE>
License revenue represents amounts earned for granting customers licenses to
use the Company's software products. License and other revenue increased 7% for
the quarter ended March 31, 1998 as compared to the corresponding calendar
quarter of 1997. Enterprise, Internet/intranet and client/server revenue
increased 48% for the quarter ended March 31, 1998 as compared to the
corresponding calendar quarter of 1997. Enterprise, Internet/intranet and
client/server revenue represented 62% of total licenses and other revenue for
the quarter ended March 31, 1998 as compared to 45% for the quarter ended March
31, 1997. This increase in revenue was partially offset by a decline in revenue
from licenses of the Paradox product line and certain other versions of desktop
products. The Company expects that revenues from licenses of desktop products
will continue to decline in future periods and that license revenues relating to
enterprise, Internet/intranet 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 5% for the quarter ended March 31, 1998 as compared to the calendar
quarter ended March 31, 1997.
International revenues accounted for 55% of the Company's total revenue for
the quarter ended March 31, 1998 as compared to 47% for the quarter ended March
31, 1997. The increase in international revenues is principally attributable to
an increase in the market acceptance of the Company's consulting services and
client/server products in Europe partially offset by lower revenues in Japan
which is primarily due to the weakness in that region's economy. 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.
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 $2.9 million and $5.4 million for the quarters ended March 31, 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.
13
<PAGE>
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 $3.5
million and $2.3 million for the quarters ended March 31, 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 employees or contractors 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 $27.3 million and $41.4 million for the quarter ended March 31, 1998
and 1997, respectively, and were 59% and 96% of net revenues for such periods,
respectively. Selling, general and administrative expenses declined by 34% 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 $11.2 million and $16.1 million for the
quarter ended March 31, 1998 and 1997, respectively, and were 24% and 37%
of net revenues for such periods, respectively. Research and development
expenses declined 30% 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
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.
The following table summarizes the Company's restructuring activity for the
quarter ended March 31, 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
Three Months Ended March 31, 1998:
1998 restructuring 9,863 336 2,900 2,482 15,581
Cash charges....................... (1,238) (12) -- (1,616) (2,866)
Non - cash charges................. -- -- (2,534) -- (2,534)
------- ----- ------- ------- -------
Accrual as of March 31, 1998............ $ 8,768 $ 896 $ 366 $ 1,501 $11,531
======= ===== ======= ======= =======
</TABLE>
14
<PAGE>
Subsequent to December 31, 1997, there have been no changes to the Company's
estimate of the total costs of prior restructurings. During the quarter
ended March 31, 1998, prior restructuring reserves decreased by $0.3 million
primarily due to payments related to noncancellable rent costs of abandoned
facilities.
INTEREST INCOME, NET AND OTHER
Interest income, net and other was $0.6 million and $0.7 million for the
quarter ended March 31, 1998 and 1997, respectively, and represented 1% and 2%
of net revenues for such periods, respectively.
INCOME TAXES
An income tax benefit of $3.8 million was recorded for the quarter ended March
31, 1998. Such income tax benefit resulted from the conclusion of the
examination of the Company's federal income tax returns by the U.S. Internal
Revenue Service for the period from 1984 through 1992. Such benefit resulted in
the favorable resolution of certain issues in which the Company had previously
provided an income tax provision. Partially offsetting this income tax benefit
are amounts, principally, non-U.S. withholding taxes, which are assessed without
regard to the profitability of the applicable operation.
LITIGATION
The Company is a party to two lawsuits, Kaplan, et al vs. Kahn et al, 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 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 financial contribution by the Company. The plan remains
subject to comment from class members and there can be no assurance that the
settlement will receive final approval by the Court. 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
has 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 appeal is under submission.
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.
15
<PAGE>
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 Borland's financial condition or results of
operations.
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. Following a case management conference held on
February 20, 1998, the parties have been ordered by the Court to complete
mediation on or before July 17, 1998. In addition, a further case management
conference is scheduled 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 $93.8 million at March
31, 1998, a decrease of $8.8 million from a balance of $102.6 million at
December 31, 1997. Working capital decreased from $64.3 million as of December
31, 1997 to $52.4 million as of March 31, 1998.
Net cash used by the Company for operating activities in the three months
ended March 31, 1998 was $5.6 million and was primarily comprised of the $13.4
million net loss for the quarter, a $5.6 million increase in accounts receivable
as a result of increased sales and a $3.3 million decrease in income tax
payable, offset by an increase of $12.1 million of accounts payable and accrued
expenses $2.5 million write off of assets as part of the restructuring and $1.9
million of depreciation and amortization. Net cash used by investing activities
of $4.2 million consisted principally of the purchase of computer equipment and
software for internal use. Financing activities provided net cash of $1.0
million in connection with common stock issued upon exercise of stock options
and the purchase of common stock pursuant to the Company's 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.
The Company has an investment portfolio of fixed income securities that are
classified as "held to maturity securities". These securities, like all fixed
income instruments, are subject to interest rate risk and will fall in value if
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short-term securities.
The Company will make purchases denominated in foreign currencies or will
extent funds to various foreign subsidiaries. As a result, Borland's cash flows
and earnings are exposed to fluctuations in interest rates and foreign
16
<PAGE>
currency exchange rates. The Company attempts to limit these exposures through
operational strategies and certain foreign currency transactions.
RECENT EVENTS
NAME CHANGE
On April 29, 1998, the Company announced its plan to changes its name, subject
to stockholder approval, to Inprise Corporation. The proposed name change will
be voted on by the Company's stockholders at its Annual Meeting of Stockholders
scheduled for June 5, 1998.
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, the Company has had operating losses on an
annual basis for five of the past six fiscal years, including a loss of
approximately $128 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 adopted during the quarter
ended March 31, 1997 and to successfully integrate the Visigenic business with
Borland'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 also partly depends 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.
17
<PAGE>
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
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
Integration of Visigenic. The Company's success will depend, in substantial
part, upon whether the Company can integrate the operations, retain and
integrate key management, sales, marketing, engineering and other technical
employees of Visigenic in an efficient and effective manner. 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.
18
<PAGE>
New Business Areas. The Company's strategy will be 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
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.
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.
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 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
19
<PAGE>
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 Issues. 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.
The Company is currently reviewing its internal information systems. The
objective of the review is to address necessary code changes, testing and
implementation with the objective of taking corrective action based on the
results of such review.
The Year 2000 issue could affect the Company's products. The Company is
reviewing its current product offerings and based upon its review to date,
believes that its current products are Year 2000 compliant. However, to the
extent that 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.
20
<PAGE>
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.
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.
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 product line
21
<PAGE>
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 been and may
continue to be extremely volatile. During the past three fiscal years, the
market price of the Company's Common Stock has ranged from a high of $21.25 to a
low of $4.75. Factors such as quarterly fluctuations in the Company's results of
operations, the announcement of technological innovations or the introduction of
new products by the Company or its competitors, and general conditions in the
computer hardware and software industries may have a significant impact on the
market price of the Company's Common Stock.
Extremely Competitive Industry. The software industry is extremely
competitive. 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 these current 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 known to license software for free to gain competitive advantage. Such
competition could materially adversely affect the Company's ability to sell
22
<PAGE>
additional licenses and maintenance and support renewals on terms favorable to
the Company. Further, competitive pressures could require the Company to reduce
the price of its products and related services, which could materially adversely
affect the Company's business, operating results and financial condition. There
can be no assurance that the Company will be able to compete successfully
against current and future competition, and the failure to do so would have a
material adverse effect upon the Company's business, operating results and
financial condition.
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, many
software companies have recently experienced adverse effects relating to
declining sales 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, resulting
in the loss of revenues, delay in market acceptance or unexpected re-programming
costs, which could have a material adverse effect upon the Company's business,
operating results and financial condition.
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective as
a result of existing or future federal, state or local laws or ordinances or
unfavorable judicial decisions. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
Superior Rights and Preferences of Borland Series B Preferred Stock. The
Company has authorized the issuance of up to 1,470 shares of its Series B
Preferred Stock, of which 550 shares are currently outstanding. 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
23
<PAGE>
which such share of Series B Preferred Stock is convertible, or 7,207 votes for
each currently outstanding share of Series B Preferred Stock, 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 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 all 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.
Commencing June 30, 1998 and extending through June 30, 2000, holders of Series
B Preferred Stock have the option to purchase in the aggregate of up to an
additional 198 shares of Series B Preferred Stock. In the event some or all
existing holders of Series B Preferred Stock exercise this option and additional
shares of Series B Preferred Stock are issued, existing stockholders of the
Company would be subject to dilution at that time.
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 DISCLOSURE ABOUT MARKET RISK
No disclosure is required by the Registrant.
24
<PAGE>
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 this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a special meeting of the Company's stockholders held on February 27, 1998,
the following matters were voted upon:
1. The approval of the issuance of shares of the Company's common stock to the
stockholders of Visigenic Software, Inc. ("Visigenic") in connection with the
Company's acquisition of Visigenic. Of the total shares voting on the foregoing
resolution, 23,375,172 voted in favor, 763,707 voted against, 154,799 abstained,
and there were 9,949,941 broker non-votes.
2. The approval of amendments to the Company's 1997 Stock Option Plan to (i)
increase the number of shares of the Company's common stock reserved for
issuance thereunder from 1,600,000 shares to 3,300,000 shares, (ii) increase the
one-time option grant limit for newly-hired employees from 1,500,000 shares to
2,000,000 shares and (iii) increase the annual option grant limit for continuing
employees from 500,000 shares to 1,000,000 shares. Of the total shares voting
on the foregoing resolution, 27,002,892 voted in favor, 6,767,699 voted against,
190,352 abstained and there were 282,676 broker non-votes.
3. The approval of an amendment to the Company's 1997 Employee Stock Option
Plan to increase the number of shares of the Company's common stock available
for purchase thereunder from 200,000 shares to 400,000 shares. Of the total
shares voting on the foregoing resolution, 32,481,706 voted in favor, 1,543,057
voted against, 218,856 abstained and there were no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
On January 28, 1998, the Company filed a Report on Form 8-K reporting under
item 5 thereof. The Company announced their operating results for the nine
months ended December 31, 1997, which represented the new fiscal year end.
On March 5, 1998, the Company filed a Report on Form 8-K reporting under
item 5 thereof. The Company disclosed that on February 19, 1998, the
Company had resolved to change its fiscal year end. The fiscal year end
will change from the last Saturday ending closest to December thirty-first
to December thirty-first. The change will be effective for calendar year
1998 starting with the period beginning January 1, 1998.
On March 10, 1998, the Company filed a Report on Form 8-K reporting under
item 2 thereof. The Company disclosed the completion of the merger
with Visigenic Software, Inc.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed by the undersigned thereunto duly
authorized.
BORLAND INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: May 15, 1998
/s/ Kathleen M. Fisher
---------------------------
KATHLEEN M. FISHER
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BORLAND
INTERNATIONAL, INC AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 91,885
<SECURITIES> 1,867
<RECEIVABLES> 50,415
<ALLOWANCES> (10,302)
<INVENTORY> 1,039
<CURRENT-ASSETS> 142,169
<PP&E> 215,114
<DEPRECIATION> 110,428
<TOTAL-ASSETS> 253,237
<CURRENT-LIABILITIES> 89,773
<BONDS> 0
27,500
0
<COMMON> 383,478
<OTHER-SE> (269,725)
<TOTAL-LIABILITY-AND-EQUITY> 253,237
<SALES> 41,043
<TOTAL-REVENUES> 46,486
<CGS> 2,926
<TOTAL-COSTS> 6,384
<OTHER-EXPENSES> 57,755
<LOSS-PROVISION> 2,487
<INTEREST-EXPENSE> (253)
<INCOME-PRETAX> (17,055)
<INCOME-TAX> (3,612)
<INCOME-CONTINUING> (13,443)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,443)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
