<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 June 30, 1999
------- 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)
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, 1999 was
57,769,352.
<PAGE>
INPRISE CORPORATION
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 1999 and December 31, 1998 .................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 1998 ......... 4
Condensed Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 1999 and 1998.. 5
Condensed Consolidated Statements of Cash Flows for the
three and six months ended June 30, 1999 and 1998 ......... 6
Notes to Condensed Consolidated Financial Statements ...... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .......... 10
Item 3. Quantitative and Qualitative Disclosure
About Market Risk ......................................... 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 33
Item 2. Changes in Securities and Use of Proceeds.................. 33
Item 3. Defaults Upon Senior Securities............................ 33
Item 4. Submission of Matters to a Vote of Security Holders........ 33
Item 5. Other Information.......................................... 34
Item 6. Exhibits and Reports on Form 8-K .......................... 34
Signatures ................................................ 35
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. 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,
1999 1998
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $175,803 $ 81,137
Short-term investments 3,084 3,225
Accounts receivable, net 33,493 43,515
Inventories 894 763
Other current assets 12,382 9,613
---------------------------
Total current assets 225,656 138,253
Property and equipment, net 108,600 111,149
Other non-current assets 5,047 4,386
---------------------------
Total assets $339,303 $253,788
===========================
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,380 $ 12,280
Accrued expenses 30,883 35,954
Short-term restructuring 5,905 3,274
Income taxes payable 10,953 2,983
Deferred revenue 14,388 14,513
Other 8,176 7,764
---------------------------
Total current liabilities 81,685 76,768
Long-term debt and other 18,210 19,138
Mandatorily redeemable convertible preferred
stock: Series B, $50,000 par value; 1,470 shares
authorized; 50 shares issued and outstanding 2,500 36,873
Stockholders' equity:
Preferred stock: Series A, $.01 par value;
1,000,000 shares authorized; no shares
issued or outstanding - -
Preferred stock: Series C convertible, $.01 par
value; 625 shares authorized; 625 shares
issued and outstanding - -
Common stock: $.01 par value; 100,000,000
shares authorized; 57,761,960 and 48,140,000
shares issued and outstanding 578 481
Additional paid-in capital 447,566 386,468
Accumulated deficit (189,891) (251,751)
Cumulative comprehensive income 3,860 6,155
---------------------------
262,113 141,353
Common stock in treasury, at cost - 4,473,800
and 3,472,000 shares (25,205) (20,344)
---------------------------
Total liabilities and stockholders' equity $339,303 $253,788
===========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3 of 35
<PAGE>
INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Licenses and other revenue $ 34,217 $ 41,172 $ 72,137 $ 82,215
Service revenue 6,022 5,351 11,517 10,794
---------------------------------------------------------------
Net revenue 40,239 46,523 83,654 93,009
---------------------------------------------------------------
Cost of licenses and other revenue 4,568 4,287 10,318 7,213
Cost of service revenue 5,876 3,446 11,302 6,904
---------------------------------------------------------------
Cost of revenue 10,444 7,733 21,620 14,117
---------------------------------------------------------------
Gross profit 29,795 38,790 62,034 78,892
---------------------------------------------------------------
Selling, general and administrative 30,503 25,974 63,480 53,276
Research and development 9,807 11,907 20,713 23,078
Restructuring and merger related charges - - 6,959 19,282
Other non-recurring charges - - 8,193 -
---------------------------------------------------------------
Total operating expenses 40,310 37,881 99,345 95,636
---------------------------------------------------------------
Operating income (loss) (10,515) 909 (37,311) (16,744)
Income from patent cross-license
agreement and other 105,065 - 105,065 -
Interest income, net and other 1,195 1,125 3,430 1,723
---------------------------------------------------------------
Income (loss) before income taxes 95,745 2,034 71,184 (15,021)
Income tax provision (benefit) 8,225 150 9,253 (3,463)
---------------------------------------------------------------
Net income(loss) $ 87,520 $ 1,884 $ 61,931 $(11,558)
---------------------------------------------------------------
Net income(loss) per share:
Basic $ 1.61 $ 0.04 $ 1.21 $ (0.23)
Weighted average shares - basic 54,343 51,166 51,048 50,984
Diluted $ 1.47 $ 0.03 $ 1.10 $ (0.23)
Weighted average shares - diluted 59,634 57,572 56,011 50,984
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 35
<PAGE>
INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 87,520 $ 1,884 $ 61,931 $(11,558)
Other comprehensive income (loss):
Foreign currency translation adjustments (330) (169) (2,295) (374)
---------------------------------------------------------------------
Comprehensive income (loss) $ 87,190 $ 1,715 $ 59,636 $(11,932)
---------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 5 of 35
<PAGE>
INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 61,931 $(11,558)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 7,814 3,892
(Gain)/loss on disposal of fixed assets (20) 2,482
(Gain) on sale of investment (1,263) -
Change in assets and liabilities:
Accounts receivable 8,883 (9,736)
Inventories (131) (172)
Other assets (3,683) (2,813)
Accounts payable, accrued expenses and short-term restructuring (3,061) 7,796
Income taxes payable 9,053 (2,935)
Other (primarily deferred revenue and long-term restructuring) (1,067) (5,901)
-----------------------------
Cash provided by (used in) operating activities 78,456 (18,945)
-----------------------------
Cash flows from investing activities:
Acquisition of property and equipment (4,327) (5,775)
Sale of fixed assets 20 40
Net change in short-term investments 141 (42)
Proceeds from sale of long-term investment 529 -
-----------------------------
Cash used in investing activities (3,637) (5,777)
-----------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,761 3,736
Proceeds from issuance of preferred stock, net 25,000 -
Repurchase of common stock (4,871) -
Borrowings (payment) of capital lease
obligations and other debt activity (66) 216
-----------------------------
Cash provided by financing activities 21,824 3,952
Effect of exchange rates on cash (1,977) 1
-----------------------------
Net change in cash and cash equivalents 94,666 (20,769)
Cash and cash equivalents at beginning of period 81,137 100,707
-----------------------------
Cash and cash equivalents at end of period $175,803 $ 79,938
=============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 6 of 35
<PAGE>
INPRISE CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements as of June 30, 1999
and December 31, 1998, and the three and six months ended June 30, 1999 and
1998, are unaudited. The unaudited interim condensed consolidated financial
statements have been prepared on the same basis as the annual condensed
consolidated financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and cash
flows as of June 30, 1999 and for the three and six months ended June 30, 1999
and 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
condensed consolidated financial statements and notes should be read in
conjunction with the Company's audited financial statements included in the
Company's Form 10-K for the year ended December 31, 1998.
Principles of Consolidation
The condensed financial statements as of June 30, 1999 and for the three
and six months then ended are consolidated and include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financials statements to conform to current year presentations.
NOTE 2. NET INCOME(LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with SFAS
No. 128 "Earnings per Share". Under the provisions of SFAS No. 128, basic net
income (loss) per share is computed by dividing the net income (loss)
available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed by dividing the net income available to common stockholders
for the period by the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares, composed of
unvested restricted Common Stock and incremental shares issuable upon exercise
of stock options and warrants and upon conversion of Series B Mandatorily
Redeemable Convertible Preferred Stock and Series C Convertible Preferred Stock,
are included in diluted net income per share to the extend such shares are
dilutive.
Page 7 of 35
<PAGE>
The following table sets forth the computation of basic and diluted net income
(loss) per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income(loss) before accretion charges $87,520 $ 1,884 $ 61,931 $ (11,558)
Accretion charges to preferred stock 41 - 68 142
----------------------------------------------------------
Net income (loss) for basic and diluted
earnings per share income available to
common stockholders $87,479 $ 1,884 $ 61,863 $ (11,700)
----------------------------------------------------------
Denominator:
Denominator for basic earnings (loss)
per share - weighted average shares 54,343 51,166 51,048 50,984
Effect of dilutive securities 5,291 6,406 4,963 -
----------------------------------------------------------
Denominator for diluted earnings (loss)
per share - adjusted weighted average shares
and assumed conversions 59,634 57,572 56,011 50,984
----------------------------------------------------------
Net income (loss) per share - basic $ 1.61 $ 0.04 $ 1.21 $ (0.23)
----------------------------------------------------------
Net income (loss) per share - diluted $ 1.47 $ 0.03 $ 1.10 $ (0.23)
----------------------------------------------------------
</TABLE>
NOTE 3. RESTRUCTURING
In January 1999 the Company announced the restructuring of its corporate
operations. A restructuring charge of $7.0 million was recorded during the
quarter ended March 31, 1999, of which $6.7 million related to severance costs
associated with the reduction of workforces and $0.3 million related to
termination of certain lease arrangements.
In conjunction with the 1998 acquisition of Visigenic Software, Inc.
(Visigenic), the Company recorded a $19.3 million restructuring and merger
related charge during the quarter ended March 31, 1998, of which $9.9 million
related to severance costs associated with the elimination of duplicate
workforces, $3.2 million related to termination of certain lease agreements and
the write-off of certain fixed assets and $2.5 million represented other costs
associated with the restructuring.
The following table summarizes the Company's short term restructuring activity
for the six months ended June 30, 1999:
Page 8 of 35
<PAGE>
<TABLE>
<CAPTION>
Severance Other Asset
and Benefits Facilities Charges Other Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1999:
Accrual at December 31, 1998 $ 2,303 $ 713 $ 152 $ 106 $ 3,274
1999 restructuring 6,679 252 - 28 6,959
Cash payments (4,093) (139) - (96) (4,328)
Non-cash costs - - - - -
--------------------------------------------------------------------------------
Accrual at June 30, 1999 $ 4,889 $ 826 $ 152 $ 38 $ 5,905
--------------------------------------------------------------------------------
</TABLE>
Subsequent to December 31, 1998, there have not been any changes to the
Company's estimate of the total costs of prior restructuring provisions. During
the three months ended June 30, 1999, prior restructuring reserves decreased by
$0.3 million primarily due to payments related to noncancellable rent costs of
vacated facilities.
NOTE 4. INCOME TAXES
The income tax provision for the three and six months ended June 30, 1999
consists primarily of US taxes, non-US withholding taxes and income taxes on
certain of the Company's non-US subsidiaries. While the Company has substantial
US net operating loss and credit carryforwards due to the US alternative minimum
tax rules, only a portion of these carryforwards may be utilized to offset the
Company's 1999 US tax liability.
NOTE 5. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
During the quarter ended June 30, 1999, 688 shares of Series B Mandatorily
Redeemable Convertible Preferred Stock ("Series B Stock") were converted into
10,177,125 shares of Common Stock at an average conversion price of $3.38 per
share. As of June 30, 1999, 50 shares of Series B Stock remain outstanding.
NOTE 6. SERIES C CONVERTIBLE PREFERRED STOCK
In June 1999, the Company sold an aggregate of 625 shares of Series C
Convertible Preferred Stock ("Series C Stock") to Microsoft Corporation
(Microsoft) for total proceeds of $25 million.
The holder of the Series C Stock has the following rights and preferences:
Voting
The Series C Stock is without voting rights, until such stock is converted to
Common Stock.
Dividends
The holders of shares of Series C Stock are not entitled to receive any
dividends except as and when declared by the Board of Directors.
Liquidation
In the event of liquidation and to the extent assets are available, the holders
of shares of Series C Stock are entitled to receive the same consideration as
Page 9 of 35
<PAGE>
if the share of Series C Stock had been converted into Common Stock immediately
prior to such an event.
Conversion
Each share of Series C Stock is convertible, at the option of the holder, after
the satisfaction of a two year holding period or upon liquidation of the
Company, into fully paid and non-assessable shares of Common Stock based upon a
fixed conversion ratio. The conversion ratio is subject to certain adjustments,
stock splits or other capital reorganizations.
At June 30, 1999, 6,720,430 shares of Inprise Common Stock were reserved for
issuance upon the conversion of the outstanding Series C Stock.
NOTE 7. CONTRACTUAL AGREEMENTS
In June 1999, the Company and Microsoft Corporation entered into a set of
technology license agreements. Microsoft also paid the Company $100 million for
the rights to use Inprise-patented technology in Microsoft products and in
settlement of a number of long standing patent and technology licensing
disputes.
NOTE 8. LEGAL PROCEEDINGS
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. Notice of the settlement and
the revised plan for allocating the settlement fund has been mailed to the
members of the settlement class. The date for objections to the settlement has
passed, and no member of the settlement class has served any objection to the
settlement itself or the revised plan of allocation. A motion to approve the
stipulation of settlement and the plan for allocating the settlement fund has
been taken under submission by the court, and no further hearing on the motion
is expected. It is not known when the court will make a final ruling. In the
interim, the previously established discovery cut-off and pretrial conferences
dates remain vacated. The Company continues to believe that the revised
settlement plan 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.
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
Reid, et al, v. Open Environment Corp., et al. By Order and Final Judgement of
- ---------------------------------------------
Dismissal, dated June 24, 1999 the Court approved the parties' stipulation and
settlement of the case.
On April 10, 1997, Western Imaging, Inc. ("Western Imaging") filed a complaint
--------------------
in the U.S. District Court for the Northern District of California against
Visigenic Software, Inc. ("Visigenic"), a company acquired by the Company on
February 27, 1998, and Corel Corporation ("Corel"), a licensee of Visigenic,
alleging breach of contract, intentional and negligent misrepresentation,
copyright infringement, trademark infringement, misappropriation of trade
secrets and other related claims. Pursuant to a June 2, 1994 Asset Purchase
Agreement, Western Imaging acquired from Visigenic the rights to a software
product called "Lumena." Western Imaging's claims arise from (1) its allegation
that Visigenic failed to deliver all of the source code for Lumena as called for
by the agreement, and (2) its interpretation of the agreement under which it
contends that "Lumena" included three additional software products called "Color
Tools," "Creative License," and "Oasis." These three products were licensed by
Visigenic to Corel on a nonexclusive basis. Defendants deny Western Imaging's
claims.
Pursuant to the Court's February 20, 1998 order, the parties completed a
non-binding mediation on July 17, 1998. No settlement was reached. Both parties
brought summary judgment motions which were recently ruled on by the court.
Plaintiff's motion was denied in its entirety. Defendants' motion was granted in
part and denied in part, the court dismissing plaintiff's claims for unfair
competition, unjust enrichment and misappropriation of trade secrets statutory.
The parties agreed to participate in a second mediation following additional
discovery and rulings on the summary judgment motions. The further mediation
will take place in September 1999. Trial is now set for January 24, 2000. If the
mediation does not result in settlement, the case will be vigorously defended.
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.
In a related matter, Visigenic sued its insurer, Federal Insurance Company,
("Federal") seeking to obtain a declaration that Federal owes Visigenic and
Corel a duty of defense and coverage for the Western Imaging lawsuit and claims
based on advertising injury coverage. Both Federal and Visigenic filed summary
judgment motions in this case, which were heard on August 14, 1998. On May 3,
1999, the court granted defendants' motion and denied Federal's motion, the
effect of which (subject to any appeal) is that Visigenic and Corel will be
entitled to reimbursement of attorneys fees and costs and to payment of further
such fees and costs with respect to the Western Imaging lawsuit.
The Company is also involved in various other legal actions arising in the
normal course of business. The Company believes that the probability is remote
that the financial consequence of judgments, if any, arising from any of 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q in addition to historical information
contains forward-looking statements. These statements have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995, as
amended. Such forward-looking statements are based on current expectations,
estimates and projections about industry trend's management's beliefs, and
certain assumptions made by the Company's management . Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict; therefore, actual results may
differ materially from those expressed or forecasted in any such forward-
looking statements. Such risks and uncertainties include, but are not limited
to, those discussed in the section entitled "Factors That May Affect Future
Results and Market Price of Stock." The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-
looking statements, whether as a result of new information, future events or
otherwise. Readers are advised to read this Form 10-Q in its entirety paying
careful attention to the risk factors set forth in this and other reports or
documents the Company files from time to time with the Securities and Exchange
Commission, particularly the Annual Reports on Form 10-K, other Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K, copies of
Page 10 of 35
<PAGE>
which may be obtained from the Company or from the Securities and Exchange
Commission at its website at www.sec.gov.
-----------
OVERVIEW
The Company is a developer and provider of software development products and
services that simplify the complexity of development, integration, deployment
and management of software applications. 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 deploying
software in desktop, client/server, distributed objects 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, for the periods presented, certain data from
Inprise's consolidated statements of operations as a percentage of net revenue.
This data has been derived from Inprise's unaudited consolidated financial
statements, which in management's opinion have been prepared on substantially
the same basis as the audited consolidated financial statement and include all
adjustments necessary for fair presentation of the financial information for the
periods presented. The operating results in any quarter are not necessarily
indicative of the results that may be expected from any future periods.
Page 11 of 35
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Licenses and other revenue 85.0% 88.5% 86.2% 88.4%
Service revenue 15.0 11.5 13.8 11.6
----------------------------------------------------------------
Net revenue 100.0 100.0 100.0 100.0
----------------------------------------------------------------
Cost of licenses and other revenue 11.4 9.2 12.3 7.8
Cost of service revenue 14.6 7.4 13.5 7.4
----------------------------------------------------------------
Cost of revenue 26.0 16.6 25.8 15.2
----------------------------------------------------------------
Gross profit 74.0 83.4 74.2 84.8
----------------------------------------------------------------
Selling, general and administrative 75.8 55.8 75.9 57.3
Research and development 24.4 25.6 24.8 24.8
Restructuring and merger related charges - - 8.3 20.7
Other non-recurring charges - - 9.8 -
----------------------------------------------------------------
Total operating expenses 100.2 81.4 118.8 102.8
----------------------------------------------------------------
Operating income (loss) (26.2) 2.0 (44.6) (18.0)
Income from patent cross-license
agreement and other 261.1 - 125.6 -
Interest income, net and other 3.0 2.4 4.1 1.9
----------------------------------------------------------------
Income (loss) before income taxes 237.9 4.4 85.1 (16.1)
Income tax provision (benefit) 20.4 0.4 11.1 (3.7)
----------------------------------------------------------------
Net income(loss) 217.5% 4.0% 74.0% (12.4%)
================================================================
</TABLE>
Page 12 of 35
<PAGE>
NET REVENUE
The following table sets forth the Company's unaudited consolidated net revenue
for the periods presented.
Three Months Ended
June 30,
------------------------------------------
1999 1998 Change
------------------------------------------
Licenses and other revenue $ 34,217 $ 41,172 -16.9%
Service revenue $ 6,022 $ 5,351 12.5%
------------------------------------------
Net revenue $ 40,239 $ 46,523 -13.5%
------------------------------------------
Six Months Ended
June 30,
------------------------------------------
1999 1998 Change
------------------------------------------
Licenses and other revenue $ 72,137 $ 82,215 -12.3%
Service revenue $ 11,517 $ 10,794 6.7%
------------------------------------------
Net revenue $ 83,654 $ 93,009 -10.1%
------------------------------------------
License revenue represents amounts earned for granting customers licenses to use
the Company's software products. Licenses and other revenue declined 16.9% for
the quarter ended June 30, 1999 as compared to the corresponding quarter of
1998. Contributing factors for this decrease were the anticipated release of new
products, disruptions related to the continuing transition of management and
loss of certain key personnel and the restructuring of the corporate sales and
support organizations. Revenue levels during the remaining portion of 1999 may
be adversely impacted by the continuing transition of management, purchasing
delays as customers divert resources from new development projects to address
year 2000 issues and the anticipated slow-down in new software deployments in
late 1999 and early 2000 as a result of year 2000 issues.
Service revenue represents amounts earned for customer support, training,
consulting and education services for the Company's software products. Service
revenue increased 12.5% for the quarter ended June 30, 1999 compared to the
corresponding periods ended June 30, 1998. The increase in service revenue was
primarily due to the growth in the US consulting business as a result of the
hiring of additional consultants and the acquisition of professional services
firms.
International revenue was at 53% of the Company's total net revenue for the
quarters ended June 30, 1999 and 1998. In addition to the factors noted above,
international revenue for the quarter ended June 30, 1999 was negatively
impacted by the strengthening US dollar against several European currencies.
Management expects that the Company's international
Page 13 of 35
<PAGE>
operations will continue to provide a significant portion of the Company's total
revenue.
Information regarding the Company's operations by geographic areas is as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------
United States $ 18,755 $ 24,024 $ 38,285 $ 48,228
Europe 13,042 14,765 28,501 29,532
Japan 4,866 4,323 9,564 8,224
Other 3,576 3,411 7,304 7,025
-------------------------------------------------------
Net revenues $ 40,239 $ 46,523 $ 83,654 $ 93,009
=======================================================
COST OF REVENUE
Cost of licenses and other revenue consists primarily of production costs,
royalties paid to third-party vendors and product packaging costs. Cost of
licenses and other revenues was $4.6 million and $4.3 million for the quarters
ended June 30, 1999 and 1998, respectively. Amortization costs for the
Company's investment in internal systems and write-down of certain excess
inventories contributed to increase the cost of licenses and other revenue
during the quarter. Cost of licenses revenue may vary as a percentage of
licenses revenue due to changes in the Company's royalty obligations to third-
party technology providers, certain variable manufacturing costs and the
number of new products and product upgrades introduced during a given period.
Cost of service revenue consists primarily of employee and third-party
contractor costs and related expenses incurred in providing customer support,
training, education and consulting services. Cost of service revenue was $5.9
million and $3.4 million for the quarters ended June 30, 1999 and 1998,
respectively. An increase in the number of personnel employed by the Company to
provide these services and the amortized cost associated with the acquisitions
of professional services firms contributed to the increase in the cost of
service revenue during the quarter. The Company expects that it will continue to
invest in the consulting and training portion of its business. As the Company
makes such additional investment, there may be a delay between the hiring of new
service personnel and such personnel becoming fully productive. Therefore, the
Company does not expect an improvement in the gross margin for service revenue
for the remainder of 1999. Cost of service as a percentage of service revenue
may also vary between periods due to the combination of services provided by the
Company and the extent to which employees or contractors are used to provide
those services.
SELLING, GENERAL AND ADMINISTRATIVE
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<PAGE>
Selling, general and administrative expenses consist primarily of salaries,
commissions, 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 $30.5 million
and $26.0 million for the quarters ended June 30, 1999 and 1998, respectively,
and were 76% and 56% of net revenue for such periods, respectively. Selling,
general and administrative expenses increased by 17% compared to the
corresponding quarter of 1998. The increase in selling, general and
administrative expenses was principally due to the increased amortization of the
cost for the Company's investment in information systems and the utilization of
non-employee resources for certain on-going operations.
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 $9.8 million and $11.9 million for the
quarters ended June 30, 1999 and 1998, respectively, and were 25% and 26% of net
revenues for such periods, respectively. Research and development expenses
declined 18% compared to the corresponding quarter of 1998. Research and
development expenses have decreased primarily due to a reduction in personnel.
The Company currently plans to increase its investment in research and
development and to continue recruiting and hiring experienced software
development personnel. In addition, the Company plans to consider the licensing
and acquisition of technologies complementary to the Company's business.
RESTRUCTURING
In January 1999, the Company announced the restructuring of its corporate
operations. The Company recorded a restructuring charge of $7.0 million
related to severance costs associated with the reduction in workforce and $0.3
million related to termination of certain lease arrangements. The table in
Note 3. of the financial statement summarizes the restructuring activity to
the restructuring account for the six months ended June 30, 1999.
In the quarter ended March 31, 1998, in conjunction with the 1998 acquisition of
Visigenic, 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 workforces, $3.2 million related to termination of
certain lease agreements and the write-off of certain fixed assets and $2.5
million represented other costs associated with the restructuring.
Subsequent to December 31, 1998, there have not been any changes to the
Company's estimate of the total costs of prior restructuring. During the three
months ended June 30, 1999, prior restructuring reserves decreased by $0.3
million primarily due to payments related to severance costs and noncancellable
rent costs of vacated facilities.
INCOME FROM PATENT CROSS-LICENSE AGREEMENT AND OTHER
In June 1999, the Company and Microsoft entered into a set of technology license
agreements. Microsoft also paid the Company $100 million for the rights to use
Inprise-patented technology in Microsoft products and settle a number of long
standing patent and technology licensing disputes. It also includes a reversal
of previously recorded estimated non-recurring professional fees and
settlement cost related to this transaction, totaling approximately $5
million.
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<PAGE>
INTEREST INCOME, NET AND OTHER
Interest income, net and other was $1.2 million and $1.1 million for the
quarters ended June 30, 1999 and 1998, respectively.
INCOME TAXES
The income tax provision for the three and six months ended June 30, 1999
consists primarily of US taxes, non-US withholding taxes and income taxes on
certain of the Company's non-US subsidiaries. While the Company has substantial
US net operating loss and credit carryforwards only a portion of these
carryforwards, due to the US alternative minimum tax rules, may be utilized to
offset the Company's 1999 US tax liability.
LITIGATION
Information with respect to this item is incorporated by reference to "Part
I - Item 1. - Note 8," of this Form 10-Q.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $178.9 million at June
30, 1999, an increase of $94.5 million from a balance of $84.4 million at
December 31, 1998. Working capital increased from $61.5 million as of December
31, 1998 to $144.0 million as of June 30, 1999.
About $78.5 million of net cash was provided by operating activities in the six
months ended June 30, 1999, primarily as a result of a one-time licensing fee of
$100 million offset against cash used to fund ongoing operations, the repurchase
of all options outstanding under the InterBase stock option plan at a total cost
of $5.1 million and net cash paid for severance and other costs associated with
restructuring was approximately $4.3 million. Net cash used by investing
activities consisted principally of $4.3 million for the purchase of computer
equipment and software. Financing activities provided net cash of $22.0 million
principally from the sale of $25 million of Series C Preferred Stock and $1.9
million of Common Stock less the repurchase of $4.9 million of Common Stock.
The Company believes that its current working capital will be sufficient to
finance its working capital requirements at least through the next twelve
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
The Company operates in a rapidly changing environment that involves numerous
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks.
History of Declining Revenues and Operating Losses
The Company recorded a profit of $87.5 million for the quarter ended June 30,
1999 as a result of a one-time licensing fee of $100 million. Without the one-
time licensing fee, the Company would have incurred an operating loss of $10.5
million. The Company had net losses in four of the past six fiscal years and net
revenues declined each year from fiscal 1993 through 1997.
The Company's ability to achieve revenue growth and profitability in the future
is substantially dependent upon enterprise, Internet/intranet, software
development tools and client/server product strategies, its ability to
successfully complete and introduce new products and services, market acceptance
of such products and services, its ability to successfully implement
restructuring and cost control measures and to successfully integrate products
and operations of acquired companies. There can be no assurance that the Company
will be able to successfully accomplish the foregoing or to achieve or maintain
revenue growth or profitability in future periods.
Hiring and retention of employees
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
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<PAGE>
recruiting such personnel. The Chief Executive Officer (CEO) of the Company is
an interim CEO with a six month contract expiring October 9, 1999. There is no
assurance that the CEO will remain after his current contract expires or that
the Company would be able to find a qualified replacement should the CEO decide
to leave the Company. In the current year, a number of key employees have left
the Company. As a result, the Company has been required to substantially
increase the compensation, bonuses, stock options and other fringe benefits
offered to employees in order to attract and retain key personnel and may be
required to further increase such compensation and benefits. Further, new
government regulations and accounting pronouncements, 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 key personnel, and delays
which may be experienced in recruiting key personnel as well as the additional
costs which may be incurred in retaining or attracting new personnel, may have a
material adverse impact on the Company, its product launches, its operating
results and financial condition.
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 that it has used for
its traditional desktop products to a direct sales model for its enterprise
software products. Sales of these enterprise 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 expend 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 prospective customers for its enterprise
software products and has expended substantial funds and management effort in
connections for its enterprise software products with these sales. As the
Company has relatively little experience with these types of sales in non-US
markets, there can be no assurance that the Company can successfully continue
the transition to the direct sales model. In order to complete these types of
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 authorized resellers in these
countries. 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 has added trained technical personnel to
assist customers in implementing solutions which utilize the Company's
enterprise software products. Personnel with sufficient expertise and
experience for these positions are in great demand, and the Company may not be
able to attract or retain a sufficient number of qualified personnel. Failure
to do so could have a material adverse effect on the Company's business,
operating results, or financial condition.
In 1998 and early 1999, the Company made changes to its sales compensation
programs. Although such changes are intended to enhance overall revenues,
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<PAGE>
there can be no assurance of such result, and such changes could have a material
adverse impact on revenues and sales related expenses.
New Product Introduction; Rapid Technological and Market Change
The Company's future revenues 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 revenues derived from 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
than expected or later 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
continued 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 timeframes 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
timeframe within which the Company originally anticipated that the products
would be available. Some of the Company's products are based on technology
licensed from third parties, and the Company has limited control over whether
and when these technologies are updated. 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.
The Company has experienced a loss of key employees which 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.
New Business Areas
The Company's strategy is to focus on enterprise customers, software developers,
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
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<PAGE>
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 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, 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 experience 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 are based on several standards,
including Common Object Request Broker Architecture ("CORBA") and eXtensible
Markup Language ("XML"). These standards are intended to facilitate the
development and management 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
Company's distributed object products are designed specifically for use in
applications for the Internet and intranets. If CORBA is not adopted or is
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 is allocating resources and making investments in development
efforts for products for Linux-based operating system ("Linux"). Linux to date
has a very limited history as a commercially sold and supported operating
system. There are a limited number of products which operate on Linux. If Linux
is not adopted or is adopted more slowly than anticipated, these resources and
investments may not generate the anticipated return or meet the Company's
objectives which could have a material adverse effect on the Company's business
operating results and financial condition.
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<PAGE>
Business Practices, Processes and Information Systems
In order to remain competitive in a rapidly changing industry, the Company is
continually improving and changing its business practices, processes and
information systems. In this regard, during 1998 and 1999 the Company
implemented a number of new business practices and a series of related
information systems and processes. The Company expects to continue its efforts
to optimize usage of system capabilities, enhance user skills surrounding system
features, and reduce runtime errors. The ability of the Company to fully
leverage system capabilities are subject to a number of risks, including the
complexity of the new systems themselves and the need for substantial and
comprehensive employee training in connection with the adoption of such new
business practices and information systems. Should the Company experience
significant implementation problems or costs in connection with these
information systems there could be a material adverse impact on the Company's
business, operating results, or financial condition.
Restructurings
In connection with the Company's acquisitions and in response to the significant
losses from operations, the Company implemented a restructuring and realignment
of its operations in March 1998 and January 1999, respectively. These
restructurings resulted in significant reductions in workforce and other ongoing
costs. Given the extent of the restructuring 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 were designed to produce.
Significant Fluctuations in Quarterly Operating Results and Seasonality
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; timing of revenue recognition related to
license fees; 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; the timing and extent of sales and
marketing organizations within OEM customers and resellers becoming familiar
with and endorsing the Company's products for resale; changes in 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.
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<PAGE>
Operating results can also be adversely impacted by deferral of customer orders
in light of customer uncertainty regarding the Company's short-term and
long-term prospects. As a significant percentage of the Company's revenues are
from enterprise, Internet/intranet, software development tools and client/server
products, the Company expects that a significant 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.
Enterprise sales typically contain multiple elements, including licenses for
development and deployment products, technical support and maintenance,
consulting and training services. Often enterprise sales will include a license
and deployment fee paid upon signing of the contracts and may include current
and future payments for technical support and consulting services. Most of these
elements, including the technical support, maintenance, consulting and training,
are not delivered upon signing of the contract, and therefore, revenue
associated with these elements must be deferred until delivery or until the
services are rendered. By contrast, the Company's desktop sales historically
have included only a license for the current version of the product with an
option to purchase technical support and maintenance. With regard to the
Company's enterprise sales, a more significant portion of the fees may often
relate to elements that are not delivered at the time of sale, requiring a
larger portion of the revenue to be deferred. As the Company expects that an
increasing percentage of its business will be from the sale of enterprise
products and services, the Company expects a larger percentage of revenue may be
deferred. The amount of revenue associated with these undelivered elements and
the timing of recognition of the revenue may have a material affect on the
Company's business, operating results and financial position.
Industry sources widely predict that large corporations will stop deploying new
computer systems in late 1999 and early 2000. Large corporations represent a
significant portion of the Company's revenue and new customers represent a
significant portion of the Company's license revenue growth. If the freeze in
deployments is larger than anticipated, starts earlier, or lasts longer then
anticipated or affects our targeted customer to a greater degree than
anticipated the Company's revenues in late 1999 and early 2000 could be
materially and adversely affected.
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 and enterprise
products, from initial evaluation to purchase and the provision of support
services, is lengthy and varies substantially from customer to customer. As the
Company normally ships products within a short time after it receives an order,
it typically does not have any material backlog. Moreover, the timing of revenue
recognition relative to orders may generate substantial deferred revenue for any
undelivered elements.
As a result, to achieve its quarterly revenue objectives, the Company is
dependent upon obtaining orders in a given quarter for shipments in that
quarter. Furthermore, because many customers place orders toward the end of a
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<PAGE>
quarter, the Company generally recognizes a substantial portion of its revenues
at the end of each 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 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.
Extremely Competitive Industry
The computer software industry is an intensely competitive industry. Rapid
change, uncertainty due to new and emerging technologies, and fierce competition
characterize the industry. The pace of change has accelerated due to the
Internet/intranet and new programming languages such as Java.
The Company's development tools and distributed object products compete with a
number of companies including, but not limited to the following: Microsoft
Corporation, Computer Associates, Oracle, Sybase, Symantec, BEA Systems, Sun
Microsystems, IONA Technologies and IBM. Our competitors include hardware
vendors, who bundle their own middleware software products with their computer
systems, as well as database vendors that advocate client/server networks driven
by the database server. Many of our competitors have substantially greater
resources than the Company's including financial, management, marketing, support
and technical as well as greater name recognition. Additionally, many
existing competitors 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; have
more extensive development and sales resources; and are capable of offering
single vendor solutions. Current and potential competitors may continue to make
strategic acquisitions or cooperative relationships that increases their ability
to address customers' needs with their products. It is possible that new
competitors, or alliances among current and new competitors, may rapidly gain,
or increase, significant market share.
The Company's distributed object products are targeted at the emerging markets
for standards-based distributed object software. The markets for these products
are intensely competitive. The relatively low barriers to entry in the software
market and the fact that these products typically are based on publicly
available standards and specifications, the Company expects to experience
additional competition in the future from other established and emerging
companies.
The Company needs to differentiate its products from our competitors' products
based on functionality, interoperability, performance, and reliability as well
as more effective solutions to customers' needs than our competitors. There can
be no assurance that we will be able to successfully differentiate our products
from our competitors. Additionally, commercial acceptance of the Company's
products and related services could be adversely affected by critical or
negative statements by brokerage firms, industry and financial analysts, and
industry periodicals concerning the Company and its products, business, or
competitors, as well as the advertising or marketing efforts of competitors that
could adversely affect customer perception.
Certain competitors have been known to license software for free to gain
competitive advantage. Such competition strategies could materially affect the
Company's ability to sell licenses, maintenance, and support on terms favorable
to the Company. Furthermore, competitive pressure could require the Company to
reduce the price of products and related services, could result in fewer
customer orders, reduced gross margins and loss of market share. There can be
no assurance that the Company will be able to compete successfully against
current and future competition. The failure to do so would have a material
adverse effect on the Company's business, operating results and financial
condition.
Microsoft Corporation has announced that it intends to include certain
middleware functionality in future versions of its Windows 2000 operating
system. Microsoft has also introduced a product that includes certain basic
application server functionality. The bundling of competing functionality in
versions of Windows products requires the Company to compete with Microsoft in
the Windows marketplace where Microsoft has certain inherent advantages due to
its significantly greater financial, technical, marketing and other resources,
greater name recognition, substantial installed base and the integration of
its middleware functionality with Windows. The Company needs to differentiate
its products from Microsoft's, based on scalability, functionality,
interoperability with non-Microsoft platforms, performance and reliability as
well as to establish that the Company's products are more effective solutions
to customers' needs. There can be no assurance that the Company will be able
to successfully differentiate its products from those offered by Microsoft, or
that Microsoft's entry into the middleware market will not materially
adversely affect its business, operating results and financial condition.
The Company's development efforts rely on the ability to obtain timely and
accurate information on existing and future operating systems. To the extent
that the Company is unable to obtain such information, the release of the
Company's products for such systems may be delayed or may not be competitive and
as a result would have material adverse impact on the Company's business,
operating results and financial condition.
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Impact of the Year 2000
The information provided below constitutes a "Year 2000 Readiness Disclosure"
for purposes of the Year 2000 Information and Readiness Disclosure Act.
The "Year 2000" issue is pervasive and complex, since many currently installed
computer systems and software products are coded to accept only two digit
entries in the date code field. As the Year 2000 approaches, these code fields
will need to accept four digit entries to distinguish years beginning with a
"19" from those beginning with a "20". This, as well as other date related
processing issues, may cause systems to fail or malfunction unless corrected. As
a result, in less than four months, computer systems and/or software products
used by many companies may need to be upgraded to comply with such Year 2000
issues. The Company has organized a corporate-wide initiative led by executives
from information systems, research & development, marketing, legal and finance.
The initiative includes the identification of Year 2000 issues in the following
three areas: (1) product readiness, which concerns product functionality; (2)
internal infrastructure readiness, which concerns internal hardware and
software, including both information technology such as financial and order
entry systems and non-information technology systems such as phones and
facilities; and (3) third party readiness, which concerns the preparedness of
third parties with whom the Company has significant business relationships.
Product Readiness. The Company is continuing to test its products and classify
its products into the following categories of Year 2000 readiness: ready, ready
with issues, not ready and will not be tested. The Company generally believes
the most recent versions of its products are Year 2000 ready. Some of the
Company's older products are not 2000 ready or will not be tested. Where
possible the Company has been encouraging customers to migrate to current
product versions. The Company's products are subject to ongoing review and
analysis with respect to Year 2000 readiness issues. Despite such analysis and
review the Company's products may contain undetected errors or defects
associated with Year 2000 date functions, that may result in material costs to
the Company. Furthermore, use of the Company's products in connection with
other products, which may or may not be Year 2000 ready, including hardware,
software and firmware, may result in the inaccurate exchange of date data
resulting in performance issues and system failures. To the extent the
Company's products or third party products that include the Company's
products, prove not to be Year 2000 ready or in the event of disputes with
customers regarding whether the Company's products are ready, the Company's
business, results of operations and financial condition could be materially
adversely affected. Moreover, the Company's customers could choose to convert
to other Year 2000 ready products or to develop their own products in order to
avoid such malfunctions, and such actions by customers could have a material
adverse effect on the Company's business, financial condition or results of
operations. To date, the cost of the readiness program for products are
primarily costs of existing internal resources largely absorbed within
existing engineering spending levels. These costs have not been reported
separately from other product engineering costs.
Year 2000 readiness issues may give rise to legal claims against the Company,
notwithstanding standard provisions in the Company's license agreements with its
customers which disclaims all expressed and implied warranties for such defects
and/or which limit the Company's obligations with respect to such issues. The
Company is aware of a growing number of lawsuits against software vendors.
Because of the unprecedented nature of such litigation, it is uncertain to what
extent the Company may be affected by it. Such legal claims could have a
materially adverse impact on the Company's business, financial condition or
results of operations.
The Company anticipates that it may experience a significant increase in calls
to customer support from customers seeking Year 2000 product information;
information on migrating from older, not ready products to ready products; and
assistance in handling other Year 2000 issues. The Company may incur
significant costs in connection with handling a substantial increase in the
number of customer calls.
It is unknown how Year 2000 issues may affect customer-spending patterns. As
customers focus their attention and capital budgets in the near term on
preparing their business for the Year 2000, they may either delay or accelerate
software and related purchases. Any reductions in the Company's revenues
resulting from such delayed purchases could have a material adverse effect on
the Company's business, results of operations and financial condition.
In addition, certain countries where the Company either operates or sells its
products may impose requirements in connection with the Year 2000 which are in
addition to or different from those in the United States. Such requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Internal System Readiness. The Company has completed its assessment of the
readiness of its internal systems for handling the Year 2000. This assessment
included software products provided by third-party vendors, the Company's own
internal software and hardware supplied by third party vendors. The Company has
completed a significant portion of the implementation and testing of its new or
upgraded internal systems for Year 2000 readiness. The Company plans to have the
implementation and testing of the new or upgraded internal systems completed by
the end of the third quarter 1999. Based on this assessment, the Company does
not believe that it will incur any material costs or experience material
disruptions in its business associated with preparing its internal systems for
the Year 2000, but there can be no assurances that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in its internal systems, which are
composed of third-party software, hardware and the Company's own software
products. In addition to application and information technology systems, the
Company is in the process of testing and remediation of its non-information
technology systems, including embedded systems, facilities and other operations,
such as its financial, banking, security and utility systems. A contingency plan
addressing issues related to the Company's internal infrastructure is being
developed as the ongoing testing and remediation activities are completed.
Material Third-Party Relations Readiness. The Company continues formal
communications with its key suppliers, contract manufacturers, distributors,
vendors and partners in order to determine whether their operations and the
products and services they provide are Year 2000 ready and to monitor the
progress of their remediation efforts toward Year 2000 readiness. Based on the
Company's assessment of each third party's progress to adequately address Year
2000 issues, the Company is developing a third party action list and contingency
plans. In the event any such third party cannot provide in a timely manner the
Company with products, services, or systems that are Year 2000 ready, this event
could have material adverse effect on the Company's business, financial
condition and results of operations. The Company could be materially adversely
affected by costs or complications arising from Year 2000 issues 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 does business. The Company is
working to identify and analyze the most reasonably likely worst case scenarios
for third party relationships affected by the Year 2000. These scenarios could
include possible infrastructure collapse, the failure of power and water
supplies, major transportation disruptions, unforeseen product shortages and
failures of communications and financial systems, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Costs related to the Company's efforts to address Year 2000 issues have been
expended as incurred and have not been material to date. The Company expects to
fund the Year 2000 related costs through funds provided by operations and does
not expect these costs to have a material adverse impact on the Company's
operations. The Company's estimate of the cost of Year 2000 readiness issues is
based partially on numerous assumptions about future events. There can be no
assurance that these estimates will be correct, and actual costs could differ
materially from these estimates.
Contingency plans will be developed if it appears the Company or its key
suppliers and vendors will not be Year 2000 ready and if such condition is
likely to have a material adverse impact on the Company's operations. It is
expected that assessment, remediation and contingency planning activities will
be ongoing through 1999 with the goal of resolving all material internal systems
and third party issues.
Although the Company is dedicating resources toward becoming Year 2000 ready,
there is no assurance it will be successful in its efforts to identify and
address all Year 2000 issues. Even if the Company acts in a timely manner to
complete its assessments, identify, develop and implement its remediation plans
(if necessary) some problems may not be identified or corrected in time to
prevent material adverse consequences to the Company. The most reasonably likely
worst case scenarios include: (1) corruption of data contained in the Company's
internal information systems, and (2) failure of hardware, software, or other
information technology systems, causing an interruption or failure of normal
business operations. Such scenarios could have a material adverse impact on the
Company. The discussion above regarding estimated completion dates, costs,
risks and other forward-looking statements regarding the Year 2000 is based on
the Company's best estimates given information that is currently available and
is subject to change. As the Company continues to make progress with its Year
2000 initiative, it may discover that actual results will differ materially from
these estimates. The impact of the Year 2000 issue on future results of the
Company is difficult to discern but is a risk, which should be considered in
evaluating future prospects for this Company.
Page 24 of 35
<PAGE>
Regulation of the Internet and Electronic Commerce
The electronic commerce market, particularly over the Internet, is new, rapidly
evolving and intensely competitive. The Company intends to expand over time its
operations by promoting new or complementary products and by expanding the
breadth and depth of its product and service offerings. There can be no
assurance that the Company will be able to expand its operations in a
cost-effective or timely manner or that such expansion will be successful.
Currently, there are few laws or regulations that directly apply to access or
commerce on the Internet. The Company could be materially adversely affected by
encryption technology and access charges for Internet service providers, as well
as the continuing deregulation of the telecommunication industry. The adoption
of such measures could decrease demand for the Company's products, and at the
same time increase the Company's cost of selling its products.
Changes in laws or regulations governing the Internet and electronic commerce
could have a material adverse effect on the Company's business, operating
results and 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 to date
has a limited history, thereby inhibiting adoption of Java on a widespread
basis. Additionally, there are 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
Page 25 of 35
<PAGE>
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 uses encryption technology in certain of its 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.
Retail Distribution Channel
A significant portion of the Company's sales are made through the retail
distribution channel, which is subject to fluctuations in customer demand. The
Company's retail distribution customers also carry the products of competitors.
These retail distributors may have limited capital to invest in inventory, and
their decisions to purchase the Company's products is partly a function of
pricing, terms and special promotions offered by the Company. Competitors may
also offer such pricing terms and marketing incentives over which the Company
has no control and which it cannot predict.
The Company's pattern of net revenues and earnings may be affected by "channel
fill." Distributors may fill their distribution channels in anticipation of
price changes, sales promotions or incentives. Distributor purchases may be
decreased between the date the Company announces a new version or new product
and the date of release, because distributors, dealers and end users often delay
purchases, cancel orders or return products in anticipation of availability of a
new version or a new product. The impact of channel fill is somewhat mitigated
by the Company's deferral of revenue associated with distributors and resellers
inventories which are estimated to be in excess of appropriate levels; however,
net revenues may still be materially affected favorably or adversely by the
effects of channel fill, particularly in periods where a large number of new
products are simultaneously introduced.
Product returns can occur when the Company introduces upgrades and new versions
of products or when distributors or retailers have excess inventories. The
Company's return policy allows its distributors, subject to certain limitations,
to return purchased products in exchange for new products or for credit towards
future purchases. End users may return products through dealers and distributors
within a reasonable period from the date of purchase for a full refund, and
retailers may return older versions of the products. The Company estimates and
maintains reserves for product returns. However, future returns could exceed the
reserves established by the Company, which could have a material adverse affect
on the operating results of the Company.
Page 26 of 35
<PAGE>
Reliance on VARs & ISVs
A significant element of the Company's strategy is to embed and bundle the
technology in products offered by VAR and ISV customers, such as Cisco,
Compuware, Hewlett-Packard, Microsoft, Hitachi, Netscape, Novell, Oracle and
Sybase. Historically, a relatively small number of VAR and ISV customers
accounted for a significant percentage of VisiBroker, InterBase and other
enterprise revenues. The Company continues to secure similar distribution
arrangements with other VARs and ISVs to embed distributed object technology in
their products. To date, the terms and conditions, including prices and
discounts, of agreements with VAR and ISV customers have been highly negotiated
and vary significantly among customers. Substantially all such agreements are
non-exclusive and do not require the VAR or ISV to make minimum purchases. The
Company has no control over the shipping dates or volumes of systems shipped by
its VAR and ISV customers, and there can be no assurance that the VARs and ISVs
will ship products incorporating the Company's products in the future.
Furthermore, the Company's license agreements with its VAR and ISV customers
generally do not require the VARs and ISVs to recommend or offer the Company's
products exclusively.
Many of the markets for the VAR and ISV products in which technology 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.
If the Company is unsuccessful in maintaining its current relationships and
continuing to secure 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 and results of operations could be materially adversely
affected.
Risks Associated with International Operations and Sales
A substantial portion of the Company's revenue is derived from international
sales. These sales are subject to risks inherent in doing business on an
international level, including the general economic conditions in each country,
overlap of different tax structures, the difficulty of managing an organization
spread over various countries, changes in regulatory requirements, compliance
with a variety of laws and regulations, longer payment cycles in certain
countries, export restrictions, tariffs and other trade barriers, political
instability, fluctuations in currency exchange rates, and seasonal reductions in
business activity during the summer months in Europe and certain other parts of
the world. The Company experienced a large decline in revenue in Asia Pacific
during 1998, in part due to the economic difficulties that have occurred
throughout this region. There can be no assurance that these economies will
recover in the near term or that the Company's net revenues from this geographic
region will return to previous levels if a recovery occurs. 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 generally 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.
Page 27 of 35
<PAGE>
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 both 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 a delay or loss of
revenue, delay in market acceptance, diversion of development resources, damage
to the Company's reputation, increased service and warranty costs, any 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.
Dependence on Third Party Licenses
The Company is dependent on licenses from third party suppliers for certain
elements of its products. If any such third party licenses were terminated or
not renewed or if these third parties failed to develop new products in a timely
manner, the Company would be unable to redistribute certain components of its
products and would be required to develop an alternative approach to developing
its products. 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.
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 the Company's
efforts to protect its intellectual property rights, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to reverse engineer or obtain and use technology or other information that the
Company regards as proprietary. In addition, the laws of certain foreign
countries do not protect the proprietary rights to the same extent as do the
laws of the United States. Accordingly, there can be no assurance the Company
will be able to protect its proprietary technology against unauthorized third
party copying or use, which could adversely affect the Company's competitive
position.
The Company from time to time receives notices from third parties claiming
infringement by the Company's products of third party patent and other
intellectual property rights. The Company expects that software products will
increasingly be subject to such claims as the number of products and
Page 28 of 35
<PAGE>
competitors in the Company's industry segment grows and the functionality of
products overlap. Regardless of its merit, responding to any such claim could be
time consuming, result in costly litigation, and require the Company to enter
into royalty and licensing agreements which may not be offered or available on
terms acceptable to the Company. If a successful claim is made against the
Company and the Company fails to develop or license a substitute technology, the
Company's business, results of operation or financial condition could be
materially adversely effected.
European Monetary Union (EMU)
The Company is implementing new or upgraded information systems in Europe, and
as part of the implementation, is testing its new or upgraded system for EMU
compliance. The Company currently plans to have its review and testing
substantially completed by late 1999. Although the assessment is still underway,
the Company does not believe that it will incur material cost or experience
material disruption in its business associated with preparing its internal
systems for EMU compliance, but there can be no assurance that the Company will
not experience serious unanticipated negative consequences or material costs
caused by undetected errors or defects.
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.
Potential Dilutive Effect of Conversion and Additional Issuance of Series C
Preferred Stock ("Series C Stock")
Each share of Series C Stock is convertible, at the option of the holder, after
the satisfaction of a two year holding period or upon liquidation of the
Company, into fully paid and non-assessable shares of Common Stock based upon a
fixed conversion ratio. The conversion ratio is subject to certain adjustments
for stock splits or other capital reorganizations. At June 30, 1999, 6,720,430
shares of the Company's Common Stock were reserved for issuance upon the
conversion of the Series C Stock.
Risks Associated with Potential Business Combinations
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. The Company may
make acquisitions of businesses, products or technologies in the future. Future
acquisitions by the Company could result in potentially dilutive
Page 29 of 35
<PAGE>
issuance 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.
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 period from January 1, 1996 to July 31,
1999, the closing market price of the Company's Common Stock has ranged from a
high of $20.88 to a low of $3.00. 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 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.
Natural Disaster
The Company's corporate headquarters, including most of its research and
development operations, are located in Northern California, a region known for
seismic activity. A natural disaster, such as an earthquake, could have a
material adverse impact on the Company's business, financial condition and
operating results.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market risks relating to the Company's operations result primarily from changes
in interest rates and foreign exchange rates, as well as credit risks. To
address the foreign exchange rate risk the Company enters into various foreign
exchange forward contracts as described below. The Company does not use such
financial instruments for trading purposes.
Foreign Currency Risk
Page 30 of 35
<PAGE>
The Company transacts business in various foreign countries, including Japan,
Canada, Latin America and certain countries within Europe and South East Asia.
The Company has established a foreign currency program utilizing foreign
currency forward exchange contracts to minimize intercompany balances and other
monetary assets denominated in foreign currencies. The goal of the program is to
offset the earnings impact of foreign denominated balances. The Company does not
use foreign currency forward exchange contracts for trading purposes. At month
end, the foreign denominated balances and the forward exchange contracts are
marked-to-market and unrealized gains and losses are included in current period
net income.
During the six months ended June 30, 1999, the Company recorded foreign
exchanges losses on intercompany receivables due to the dollar strengthening
against many foreign currencies including the German Mark, the French Franc, and
the Dutch Guilder. Such losses have been mostly offset by the Company's foreign
exchange contracts. It is not certain that these currencies trends will
continue. If these currencies trends continue, the Company will continue to
experience foreign exchange losses on its intercompany receivables to the extent
that the Company has not limited the exposure with foreign currency forward
exchange contracts. Such foreign exchange losses could have a materially adverse
affect on the Company's operating results and cash flows.
The table below provides information about the Company's derivative financial
instruments, comprised of foreign currency forward exchange contracts
outstanding as of June 30, 1999. The information is provided in U.S. Dollar
equivalents amounts, as presented in the Company's financial statements. For
foreign currency forward exchange contracts, the table presents the notional
amounts (at the contract exchange rates) and the weighted average contractual
foreign currency exchange rates. All instruments mature within a period of
twelve months or less.
Foreign currency forward exchange contracts:
June 30,
1999
Notional Average Estimated
Amount Contract Rate Fair Value
------------ -------------- ----------
Australian Dollar $ 6,277,920 0.6674 $109,098
Canadian Dollar 1,883,910 1.4633 12,488
German Mark 1,413,250 1.8897 2,318
Italian Lira 872,606 1870.79 1,418
Hong Kong Dollar 5,227,937 7.7583 3,234
Dutch Guilder 4,069,904 2.1292 4,396
New Taiwan Dollar 1,725,493 32.31 6,943
Others 1,685,831 -6,118
------------ ----------
Total $23,156,851 $133,777
============ ==========
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does
Page 31 of 35
<PAGE>
not use derivative financial instruments in its investment portfolio. The
Company places its cash equivalents and short-term investments in a variety of
financial instruments such as commercial paper. The Company, by policy, limits
the amount of credit exposure to any one financial institution or commercial
issuer.
The Company mitigates default risk by investing in only high credit
quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in the credit rating of any investment
issuer. The portfolio includes only marketable securities with active secondary
and resale markets to ensure portfolio liquidity.
The Company has minimal interest rate exposure for long-term debt
obligations as such debt and capital lease obligations have a fixed rate of
interest. The Company primarily enters into debt and capital lease obligations
to finance capital expenditures
The table below presents principal (or notional) amounts and related
weighted average interest rates by year of maturity for the Company's investment
portfolio and debt obligations.
<TABLE>
<CAPTION>
In thousands 1999 2000 2001 2002 2003 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash Equivalents $175,803 $175,803
Fixed rate 4.70%
Short-term investments $3,084 $ 3,084
Fixed rate 1.00%
LONG-TERM DEBT
$74 $161 $180 $200 $222 $8,384 $ 9,221
Fixed Rate 10.75%
</TABLE>
The short term investment balances are principally required compensating balance
accounts invested in Japanese securities.
Credit Risks
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash, cash equivalents, short term investments and
trade receivables. The Company's cash and cash equivalents are placed in high
quality securities with major banks and financial institutions. Concentrations
of credit risk with respect to trade account receivables are limited due to the
large number of customers and their dispersion across geographic areas. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. One customer located in the
United States accounts for approximately 13% of net account receivable. No other
single group or customer represents greater than 10% of net accounts receivable.
The Company is exposed to credit loss in circumstances from non-performance by
counter parties to foreign exchange contacts, however, the Company does not
anticipate non-performance by these counter parties.
Page 32 of 35
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item is incorporated by reference to
"Part I - Item 1 - Note 8," of this Form 10-Q.
Item 2. Changes in Securities and Use of Proceeds
In June 1999 the Company issued to Microsoft Corporation 625 shares of Inprise
Series C Convertible Preferred Stock at a price of $40,000 per share, for an
aggregate purchase price of $25,000,000. The Series C shares are convertible at
the option of the holders at anytime after June 10, 2001, into an aggregate of
6,720,430 shares of Common Stock, subject to certain adjustments for stock
splits or other capital reorganizations.
The above issuance was not registered under the Securities Act of 1933, as
amended (the "1933 Act") in reliance upon the exemptions provided by Section
4(2) of the 1933 Act and/or Regulation D promulgated thereunder as a transaction
by an issuer not involving a public offering.
Item 3. Defaults on Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the Company's stockholders held June 4, 1999 at Inprise
Corporation, 100 Enterprise Way, Scotts Valley, California the following matters
were voted upon:
1) The following individuals were elected to Class 1 of the Company's
Board of Directors:
Nominee: Votes Cast For Withheld or Against
-------- -------------- -------------------
Stephen J. Lewis 41,318,706 4,493,778
C. Robert Coates 45,231,674 580,810
The following additional proposals were considered at the Annual Meeting and
were approved by the vote of the stockholders, in accordance with the tabulation
shown below.
2) Proposal to approve an amendment to the Inprise Corporation 1997 Stock
Option Plan to increase the number of shares of Common Stock reserved
for issuance thereunder by 1,500,000 shares.
Votes For Votes Against Abstain
--------- ------------- -------
38,844,674 6,807,673 160,137
3) Proposal to approve the Inprise Corporation 1999 Employee Stock
Purchase Plan, including the reservation of 800,000 shares of Common
Stock thereunder.
Votes For Votes Against Abstain
--------- ------------- -------
44,711,909 930,965 169,610
Page 33 of 35
<PAGE>
4) Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the
independent auditors for Inprise Corporation for the calendar year
ending December 31, 1999.
Votes For Votes Against Abstain
--------- ------------- -------
45,486,457 177,643 148,384
Item 5. Other Information
On July 26, 1999, Stephen Lewis, a director of the Company, announced
his resignation effective as of July 28, 1999.
Item 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS
Exhibit 27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
Page 34 of 35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INPRISE CORPORATION
---------------------------
(Registrant)
Date: August 16, 1999
/s/ Jay R. Leite
---------------------------
JAY R. LEITE
Chief Financial Officer
Page 35 of 35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INPRISE INCORPORATED 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 175,803
<SECURITIES> 3,084
<RECEIVABLES> 44,745
<ALLOWANCES> (11,253)
<INVENTORY> 894
<CURRENT-ASSETS> 225,656
<PP&E> 230,836
<DEPRECIATION> 122,235
<TOTAL-ASSETS> 339,303
<CURRENT-LIABILITIES> 81,685
<BONDS> 0
2,500
0
<COMMON> 448,144
<OTHER-SE> (211,236)
<TOTAL-LIABILITY-AND-EQUITY> 339,303
<SALES> 72,137
<TOTAL-REVENUES> 83,654
<CGS> 10,318
<TOTAL-COSTS> 21,620
<OTHER-EXPENSES> 99,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507
<INCOME-PRETAX> 71,184
<INCOME-TAX> 9,253
<INCOME-CONTINUING> 61,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,931
<EPS-BASIC> 1.21
<EPS-DILUTED> 1.10
</TABLE>
