<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
{X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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 March 31, 1999 was
47,204,909.
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INPRISE CORPORATION
TABLE OF CONTENTS
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Page
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 1999 and December 31, 1998............................. 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998.................. 4
Condensed Consolidated Statement of Comprehensive Income
for the three months ended March 31, 1999 and 1998.................. 5
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 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................... 11
Item 3. Quantitative and Qualitative Disclosure
About Market Risk.................................................. 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 34
Item 6. Exhibits and Reports on Form 8-K................................... 35
Signatures......................................................... 35
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
INPRISE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 61,834 $ 81,137
Short-term investments 458 3,225
Accounts receivable, net 38,384 43,515
Inventories 749 763
Other 9,897 9,613
---------------------------
Total current assets 111,762 138,253
Property and equipment, net 110,530 111,149
Other non-current assets 5,600 4,386
---------------------------
Total assets $ 227,892 $ 253,788
===========================
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,695 $ 12,280
Accrued expenses 36,348 35,954
Short-term restructuring 7,305 3,274
Income taxes payable 2,827 $ 2,983
Deferred revenue 15,033 14,513
Other 10,456 7,764
---------------------------
Total current liabilities 83,664 76,768
Long-term debt and other 18,620 19,138
Mandatorily redeemable convertible preferred stock:
$50,000 par value; 1,470 shares authorized; 738
shares issued and outstanding. 36,899 36,873
Stockholders' equity:
Preferred stock: $.01 par value; 1,000,000
shares authorized; none issued or outstanding - -
Common stock: $.01 par value; 100,000,000
shares authorized; 47,204,909 and 48,140,000
shares issued and outstanding 472 481
Additional paid-in capital 386,618 386,468
Accumulated deficit (277,366) (251,751)
Cumulative comprehensive income 4,190 6,155
---------------------------
113,914 141,353
Common stock in treasury, at cost - 4,473,800
and 3,472,000 shares (25,205) (20,344)
---------------------------
Total liabilities and stockholder's equity $ 227,892 $ 253,788
===========================
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
Three Months Ended
March 31,
-----------------------
1999 1998
-----------------------
Licenses and other revenue $ 37,920 $ 41,043
Service revenue 5,495 5,443
-----------------------
Net Revenue 43,415 46,486
-----------------------
Cost of licenses and other revenue 5,750 2,926
Cost of service revenue 5,426 3,458
-----------------------
Cost of revenue 11,176 6,384
-----------------------
Gross Profit 32,239 40,102
-----------------------
Selling, general and administrative 32,977 27,302
Research and develoment 10,906 11,171
Restructuring and merger related charges 6,959 19,282
Other non-recurring charges 8,193 -
-----------------------
Total operating expenses 59,035 57,755
-----------------------
Operating Loss (26,796) (17,653)
Interest income, net and other 2,235 598
-----------------------
Loss before income taxes (24,561) (17,055)
Income tax provision (benefit) 1,028 (3,612)
-----------------------
Net Loss $ (25,589) $ (13,443)
=======================
Net Loss per share -- basic and diluted $ (0.54) $ (0.27)
=======================
Shares used in computing net loss per share 47,753 50,863
=======================
See accompanying notes to condensed consolidated financial statements.
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INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS; UNAUDITED)
Three Months Ended
March 31,
----------------------
1999 1998
----------------------
Net loss $ (25,589) $ (13,443)
Other comprehensive loss:
Foreign currency translation adjustments (1,965) (205)
----------------------
Comprehensive loss $ (27,554) $ (13,648)
======================
See accompanying notes to condensed consolidated financial statements.
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INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS; UNAUDITED)
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<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1988
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Cash flows from operating activities:
Net loss $ (25,589) $ (13,443)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 3,662 1,884
(Gain)/loss on disposal of fixed assets (18) 2,522
Gain on sale of investment (1,263) -
Change in assets and liabilities:
Accounts receivable 3,552 (5,593)
Inventories 14 (251)
Other assets (814) (821)
Accounts payable, accrued expenses and
short-term restructuring 4,119 12,073
Income taxes payable (156) (3,285)
Other (primarily deferred revenue and long-
term restructuring) 3,309 1,293
--------------------------
Cash used by operating activities (13,184) (5,621)
--------------------------
Cash flows from investing activities:
Acquisition of property and equipment (3,043) (4,162)
Sale of fixed assets 18 12
Net change in short-term investments 2,767 (24)
Proceeds from sale of long-term investment 529 -
--------------------------
Cash provided (used in) by investing
activities 271 (4,174)
--------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 36 985
Repurchase of common stock (4,871) -
Repayment of capital lease
obligations and other debt activity (26) (33)
--------------------------
Cash (used in) provided by financing
activities (4,861) 952
Effect of exchange rates on cash (1,529) 21
--------------------------
Net change in cash and cash equivalents (19,303) (8,822)
Cash and cash equivalents at beginning of period 81,137 100,707
--------------------------
Cash and cash equivalents at end of period $ 61,834 $ 91,885
==========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INPRISE CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements reflect all
adjustments (which include only normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for the
periods shown. The results of operations for such periods are not necessarily
indicative of the results that may be expected for any future period. 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 consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1998.
<PAGE>
NOTE 2. EARNINGS (LOSS) PER SHARE
Basic earnings per share are computed using the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
share are computed using the weighted average number of shares of common stock
and potentially dilutive securities outstanding during the period. Potentially
dilutive securities consist of mandatorily redeemable convertible preferred
stock (using the if-converted method) and stock options and warrants (using the
treasury stock method). Potentially dilutive securities are excluded from the
computation if their effect is antidilutive. The following is a reconciliation
of the computation of basic and diluted earnings (loss) per share (in thousands,
except per share data) for the quarters ended March 31:
<PAGE>
Numerator: 1999 1998
- ---------- -------- --------
Net loss before accretion charge to the
mandatorily redeemable convertible
preferred stock relating to warrants $(25,589) $(13,443)
Accretion charge to the mandatorily
redeemable convertible preferred stock
for warrants 26 142
Net loss available to common
stockholders for basic and diluted
earnings per share $(25,615) $(13,585)
========= ========
Denominator:
- ------------
Denominator for basic loss per share -
weighted average shares
Effect of dilutive securities 47,753 50,863
Denominator for diluted loss per share
- adjusted weighted average shares and
assumed conversions 47,753 50,863
========= =========
Loss per share - basic $ (0.54) $ (0.27)
Loss per share - diluted $ (0.54) $ (0.27)
The Series B Mandatorily Redeemable Convertible Preferred Stock and employee
stock options and warrants to purchase common shares were not included in the
computation of diluted EPS because their effect on earnings per share would
have been antidilutive.
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 elimination of duplicate workforce and $0.3 million related
to termination of certain lease agreements.
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 workforce, $3.2 million related to termination of
certain lease agreements and the write-off of certain fixed assets and $2.5
million related to other costs associated with the restructuring.
The following table summarizes the Company's restructuring activity for the
three months ended March 31, 1999:
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Severance Other Asset
and benefits Facilities Charges Other Total
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Accrual at December 31, 1998 $ 2,303 $ 713 $ 152 $ 106 $ 3,274
1999 restructuring 6,679 252 - 28 6,959
Cash payments (2,772) (116) - (40) (2,928)
Non cash costs - - - - -
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Accrual at March 31, 1999 $ 6,210 $ 849 $ 152 94 7,305
==========================================================================
</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 March 31, 1999, prior restructuring reserves
decreased by $0.3 million primarily due to payments related to noncancellable
rent costs for vacated facilities and severance payments for employee
terminations.
NOTE 4. INCOME TAXES
The income tax provision for the quarter ended March 31, 1999 consists
principally of non-U.S. taxes.
NOTE 5. EMPLOYEE STOCK COMPENSATION
As part of the restructuring of the Company during the quarter ended March 31,
1999, the Company merged its wholly-owned subsidiary, InterBase Software
Corporation into the Company. The Company repurchased all options outstanding
under the InterBase Employee Stock Option Plan at a total cost of $5.1
million. Such repurchase is reported as part of the other non-recurring
charges in the accompanying condensed consolidated statement of operations.
NOTE 6. STOCK REPURCHASE PROGRAM
During the quarter ended March 31, 1999, the Company repurchased approximately
1.0 million shares of common stock at an average price of $4.86 per share.
NOTE 7. SUBSEQUENT EVENT
During April 1999, several holders of the Mandatorily Redeemable Series B
Preferred Stock ("Series B Shares") converted 316 Series B Shares into
Common Stock. Based upon the closing price of the Company's common stock
during the last seven trading days prior to conversion, the Series B Shares
converted into 4,974,059 shares of Common Stock. After conversion, the number
of Series B Shares outstanding is 422 shares.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the documents incorporated herein by
reference 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. Such forward-looking
statements are based on current expectations, estimates and projections about
Inprise's industry, management's beliefs, and certain assumptions made by
Inprise'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 sections entitled "Factors That May
Affect Future Results and Market Price of Stock" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as those
noted in the documents incorporated herein by reference. 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 should be 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 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 leading provider of cross-platform software, software
development tools and services that simplify the complexity of software
application development, integration, deployment and management. 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 the desktop, local area
network ("LAN"), client/server and Internet/intranet environments.
The Company is developing a premier destination Web site and online community
serving software developers' needs. The Company intends to offer a wide range of
products, services and technical information including advanced Internet
products and technologies. These offerings will include products of the Company
and products licensed from or offered by third parties through the Company's web
site. The Company also provides integrated enterprise solutions to Global 1000
corporations.
The Company markets and distributes its products worldwide through
independent distributors, dealers, value-added resellers ("VARs") and
<PAGE>
independent software vendors ("ISVs"). The Company also markets and sells to
corporations, governments, educational institutions and end-user customers
through direct sales and through the Internet.
The following table sets forth the unaudited consolidated results of operations
as a percentage of net revenues for the three months ended March 31, 1999 and
1998.
Three Months Ended
March 31,
--------------------
1999 1998
--------------------
Licenses and other revenue 87.3% 88.3%
Service revenue 12.7 11.7
--------------------
Net Revenue 100.0 100.0
--------------------
Cost of licenses and other revenue 13.2 6.3
Cost of service revenue 12.5 7.4
--------------------
Cost of revenue 25.7 13.7
--------------------
Gross profit 74.3 86.3
--------------------
Selling, general and administrative 76.0 58.7
Research and development 25.1 24.0
Restructuring and merger related charges 16.0 41.5
Other non-recurring charges 18.9 -
--------------------
Total operating expenses 136.0 124.2
--------------------
Operating loss (61.7) (37.9)
Interest income, net and other 5.1 1.3
--------------------
Loss before income taxes (56.6) (36.6)
Income tax provision (benefit) 2.4 (7.8)
--------------------
Net loss (59.0) (28.8)
NET REVENUE
The following table sets forth the unaudited consolidated net license and other,
and service revenues for the quarter ended March 31, 1999 and 1998.
<PAGE>
Three Months Ended
March 31,
-------------------------
1999 1998 change
----------------------------------
License and other revenue $ 37,920 $ 41,043 -7.6%
Service revenue 5,495 5,443 1.0%
-------------------------
Net Revenue $ 43,415 $ 46,486 -6.6%
-------------------------
License revenue represents amounts earned for granting customers licenses to use
the Company's software products. License and other revenue declined 8% for the
quarter ended March 31, 1999 as compared to the corresponding calendar quarter
of 1998. Disruptions related to the restructuring of management and the
corporate sales and support organizations, and the anticipation of new product
versions contributed to the decline in licensing revenue for the quarter.
Revenue levels during the remaining portion of 1999 may be adversely impacted by
the uncertainty regarding management changes and by purchasing delays by
customers as they divert resources from new development projects to address year
2000 issues.
Service revenue represents amounts earned for support, consulting and education
services for the Company's software products. Service revenue remained at $5.5
million for the quarter ended March 31, 1999 as compared to the quarter ended
March 31, 1998.
International revenue was 55% of the Company's total revenue for the
quarter ended March 31, 1999. Management expects that the Company's
international operations will continue to provide a significant portion of the
Company's total revenue.
COST OF REVENUE
Cost of license revenue consists primarily of production, royalties paid to
third-party vendors and product packaging. Cost of license and other revenue was
$5.8 million and $2.9 million for the quarters ended March 31, 1999 and 1998,
respectively. Additional obligation relating to licenses of third party
technology, increased provision for obsolete and slow moving inventory, and
amortization costs for the Company's investment in internal systems contributed
to increase in the cost of license and other revenue during the quarter. Cost of
license revenues may vary in future quarters as a percentage of license revenue
due to changes in the Company's royalty obligations to third-party technology
providers and the number of new products and product releases in a given period.
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
<PAGE>
revenue was $5.4 million and $3.5 million for the quarters ended March 31, 1999
and 1998, respectively. The increase in the number of personnel employed by the
Company to provide these services and the amortized cost associated with the
acquisition 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.
Because there is a delay between the hiring of new service personnel and such
personnel becoming fully productive, as the Company makes such additional
investments, the Company does not expect an improvement in the gross margin of
the service revenues for the remainder of the calendar year. The cost of
services as a percentage of service revenues 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
Selling, general and administrative expenses consist primarily of salaries,
commissions and bonuses and other personnel-related expenses, facilities
expenses, travel and entertainment, promotional lead generation expenses,
advertising and marketing costs. Selling, general and administrative expenses
were $33.0 million and $27.3 million for the quarters ended March 31, 1999 and
1998, respectively, and were 76% and 59% of net revenue for such periods,
respectively. Selling, general and administrative expenses increased by 21% as
compared to the corresponding calendar quarter of 1998. The increase in
selling, general and administrative expenses is due to an increase in headcount
over the same quarter in 1998, the increased selling cost for its products and
service revenue and increased depreciation cost for the Company's investment
in information systems.
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 $10.9 million and $11.2 million for the
quarters ended March 31, 1999 and 1998, respectively, and were 25% and 24% of
net revenues for such periods, respectively. Research and development expenses
declined 2% as compared to the corresponding calendar quarter of 1998.
RESTRUCTURINGS
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 elimination of duplicate workforce and $0.3 million related
to termination of certain lease agreements.
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 workforce, $3.2 million relates to termination of
certain lease agreements and the write-off of certain fixed assets and $2.5
million relates to other costs associated with the restructuring.
<PAGE>
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 March 31, 1999, prior restructuring reserves decreased by $0.3
million primarily due to payments related to noncancellable rent costs of
vacated facilities.
INTEREST INCOME, NET AND OTHER
Interest income, net and other was $2.2 million and $0.6 million for the
quarters ended March 31, 1999 and 1998, respectively. Other income for the
quarter ended March 31, 1999 includes $1.3 million from the gain on sale of
investments.
INCOME TAXES
The income tax provision for the quarter ended March 31, 1999 consists
principally of non-U.S. taxes.
LITIGATION
The Company and certain of its former officers and directors were named
defendants in two lawsuits, Kaplan, et al vs. Kahn, et al, and, Crook, et al vs.
Kahn, et al, originally filed in the United States District Court for the
Northern District of California in 1993 and 1995, respectively. The lawsuits
allege certain securities law violations by the Company and certain of its
former officers and directors relating to periods between 1991 and 1994. In
1996, the parties entered into a stipulation to settle both lawsuits, the
stipulation was submitted for court approval and monies were deposited in escrow
to fund the settlement. At the time, the Company recorded a charge in the amount
of its contribution to the settlement to be paid by the Company. On March 18,
1998, the Court preliminarily approved a revised settlement plan, which did not
involve any further contribution by the Company. 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.
<PAGE>
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 Zeid, et al. v. Open Environment Corp., et al. The parties have agreed to
---------------------------------------------
a settlement of the case subject to final documentation and court approval. If
the settlement does not became final and the case is litigated, an adverse
decision could have a material adverse effect on the Company's financial
condition and results of operations.
Western Imaging, Inc. ("Western Imaging") filed a complaint in the U.S. District
Court for the Northern District of California in April 1997 against Visigenic
(prior to the acquisition of Visigenic by the Company) and Corel Corporation
("Corel"), a licensee of Visigenic, alleging breach of contract and other claims
relating to the sale by Visigenic of certain technology to Western Imaging.
Western Imaging is seeking injunctive relief, unspecified damages, impoundment
of the disputed software during the pendency of the litigation, and punitive
damages. Prior to its acquisition by the Company, Visigenic had not sold or
marketed the disputed software products since January 1995 and the Company does
not utilize this technology in any current product offering. The Company
believes it has meritorious defenses to such claims and intends to defend the
litigation vigorously. Because the results of the litigation, including any
potential settlement, are uncertain, there can be no assurance that they will
not have a material adverse effect on the Company's business, operating
results and financial condition.
The Company is 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
<PAGE>
material adverse effect on the Company's financial condition or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $62.3 million at March
31, 1999, a decrease of $22.1 million from a balance of $84.4 million at
December 31, 1998. Working capital decreased from $61.5 million as of December
31, 1998 to $28.1 million as of March 31, 1999.
About $13.2 million of net cash was used by the Company for operating activities
in the three months ended March 31, 1999, primarily 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 $2.9 million. Net cash
used by investing activities consisted principally of $3.0 million for the
purchase of computer equipment and software, offset by $2.8 million received
from the sale of short-term investments. Financing activities used net cash of
$4.9 million principally for the repurchase of common stock.
The Company believes that its existing cash balances, funds expected to be
provided by operations, or other possible financing arrangements 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 Operating Losses
The Company incurred a loss of $25.6 million for the quarter ended March 31,
1999 and has had net losses in four of the past six fiscal years. The
Company's net revenues declined each year from fiscal 1993 through 1997. The
Company's ability to achieve revenue growth and profitability are substantially
dependent upon the success of the Company's enterprise, Internet/intranet and
client/server product strategies, upon its ability to successfully complete and
introduce new products and services, market acceptance of such products and
services, to successfully implement restructuring and cost control measures from
time to time 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 maintain or improve profitability in
future periods.
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
<PAGE>
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. Sales during the remaining
portion of 1999 may also be adversely impacted by purchasing delays by customers
as they divert resources from new development projects to address Year 2000
issue.
Operating results can also be adversely impacted by deferral of customer orders
in light of customer uncertainty regarding the Company's short- and long-term
prospects. In particular, recent announcements regarding operating losses and
management changes may adversely impacts the size and timing of customer orders
as customers await further developments regarding the Company. As an increasing
percentage of the Company's revenues are from enterprise, Internet/intranet and
client/server products, the Company expects that an increasing percentage of its
revenues will be from large orders. The timing of such orders and their
fulfillment may cause material fluctuations in the Company's operating results,
particularly on a quarterly basis. In addition, the Company intends to continue
to expand its domestic and international direct sales force. The timing of such
expansion and the rate at which new sales people become productive could also
cause material fluctuations in the Company's quarterly operating results.
Enterprise sales, typically contain multiple elements, including license for
development and deployment products, technical support, 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 to these elements must be deferred until delivery or the services
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 the growth of the Company's enterprise
sales, a significant portion of the fees may relate to undelivered elements,
requiring a portion of the revenue from the fees 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 to 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.
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. Because
the Company normally ships products within a short time after it receives an
order, it typically does not have any material backlog.
As a result, to achieve its quarterly revenue objectives, the Company is
dependent upon obtaining orders in any given quarter for shipments in that
quarter. Furthermore, because many customers place orders toward the end of a
<PAGE>
quarter, the Company generally recognizes a substantial portion of its revenues
at the end of a quarter. As the Company's expense levels are based in
significant part on the Company's expectations as to future revenues and are
therefore relatively fixed in the short term, if revenue levels fall below
expectations, net income is likely to be disproportionately adversely affected.
There can be no assurance that the Company will be able to 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.
Restructuring
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
restructuring 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
restructuring were designed to produce.
Entering New or Developing 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 Internet and intranets for
commerce and communications. Critical issues concerning the Internet and
intranets,
<PAGE>
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 VisiBroker products are based on several standards, including
Common Object Request Broker Architecture ("CORBA") and Internet Inter-ORB
Protocol ("IIOP"). These standards are intended to facilitate the management and
communication of applications created in object oriented programming languages
such as C + + and Java. These new standards are just beginning to gain
widespread acceptance, and compete with proprietary solutions such as
Microsoft's ActiveX and DCOM. The distributed object software market is
relatively young, and there are few proven products. Further, some of the
VisiBroker products are designed specifically for use in applications for the
Internet and intranets. If CORBA or IIOP are not adopted or are adopted more
slowly than anticipated or if product offerings from competitors are chosen in
lieu of the Company's products, there could be a material adverse effect on the
Company's business, operating results or financial condition.
The Company's VisiChannel for Java Database Connectivity ("JDBC") database
access product based on the JDBC standard was developed to enable applications
to access data from JDBC compliant data sources. While the JDBC standard is
supported by most of the major database and software vendors, it is a recent
standard that has not yet gained widespread acceptance and it currently co-
exists with proprietary database access solutions from many of these same
database and software vendors. If JDBC 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.
Transition To Direct Sales Strategy
In order for The Company's enterprise software products to achieve market
acceptance, the Company will need to continue to adjust to longer sales cycles
and successfully transition from the channel sales model for its traditional
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.
<PAGE>
The Company has experienced and will likely continue to experience delays
following initial contact with a prospective customer and expend substantial
funds and management effort in connection with these sales. As the Company has
relatively little experience with these types of sales, there can be no
assurance that the Company can successfully 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. The Company may not be able to accomplish any of the
foregoing on a timely and cost-effective basis. Failure to do so could have a
material adverse effect on the Company's business, operating results, or
financial condition. Additionally, the Company will need to add trained
technical personnel to help it implement solutions for its enterprise software
customers relating to enterprise software products. Personnel with the
sufficient level of expertise and experience for these positions are in great
demand, and the Company may not be able to hire and retain a sufficient number
of qualified personnel for these purposes. Failure to do so could have a
material adverse effect on the Company's business, operating results, or
financial condition.
In 1998 and early 1999, the Company made changes to its sales compensation
programs. Although such changes are intended to enhance overall revenues, such
changes could have a material adverse impact on revenues and sales related
expenses.
Sale of Third Party Products
Part of the Company's strategy is to make third party products available for
sale through the Company's website. Although the company will not expressly
provide any warranties regarding such third party products, the sale of such
third party products by the Company entails additional risk that the Company
could be subject to claims regarding the performance or other issues related to
third party products.
Decline In Revenue From Desktop Products
A significant portion of the Company's revenues to date has been attributable to
its desktop products. Revenues derived from the sale of these products,
particularly the Company's desktop database products, have declined over the
last six fiscal years. The decline in revenues has been caused by a number of
factors, including, among others, the success of product "suites" offered by
competitors which have had an adverse impact on the sale of individual products;
the sale by the Company of its Quattro Pro and Paradox product lines; and the
continued competitive pricing pressures that have resulted in lower average
sales prices for desktop products.
While the Company expects the decline in revenues associated with certain of the
desktop products to continue, revenues from the sales of the desktop products
currently continue to represent an important portion of the Company's revenue.
Although the Company plans to invest in the development, sales, marketing and
support of such products on a limited basis, there can be no assurance that
revenues from desktop products will not decline faster than expected. If
revenues from such products decline materially or at a more rapid rate than
currently anticipated, the Company's business, operating results and financial
condition would be materially adversely affected.
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 recently accelerated due to
the Internet/intranet and new programming languages, such
<PAGE>
as Java. The Company competes with a number of other companies, including
Microsoft, Computer Associates, Oracle, Sybase, and Symantec. Certain of its
competitors have substantially greater financial, management, marketing and
technical resources than the Company. In the past, competitors have utilized
their greater resources to provide substantial signing bonuses and other
inducements to lure away the Company's management and other key personnel. In
addition, Microsoft is the developer of the Windows operating environments. To
the extent that the Company is unable to obtain information regarding existing
and future operating systems from the developer of such systems, the release of
the Company's products for such systems may be delayed or may not be
competitive. The VisiBroker products are targeted at the emerging markets for
standards-based distributed object software products. The markets for these
products are intensely competitive, subject to rapid change and significantly
affected by new product introductions and other market activities of industry
participants. The Company's principal competitive factors in these markets are
product quality, performance and price, vendor and product reputation, product
architecture and quality of support. In the standards-based distributed object
market, the VisiBroker products compete principally against offerings by Iona
Technologies, Expersoft and BEA Systems. These products also compete against
existing or proposed distributed object solutions from hardware vendors such as
Hewlett-Packard, ICL, IBM and Sun. In addition, because there are relatively low
barriers to entry in the software market and because the products are based on
publicly available standards, the Company expects to experience additional
competition in the future from other established and emerging companies if the
market for distributed object software continues to develop and expand. In
particular, operating system vendors such as ICL, Hewlett-Packard, IBM,
Microsoft and Sun may offer standards-based distributed object products bundled
with their operating systems. For instance, Microsoft has introduced DCOM for
Microsoft operating systems, which could reduce or eliminate the need for CORBA-
compliant ORBs, such as those offered by the products acquired from Visigenic.
Many 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, more
extensive development, sales and marketing resources and are capable of offering
single vendor solutions. Increased competition could result in price reductions,
fewer customer orders, reduced gross margins and loss of market share, any one
of which could materially adversely affect the Company's business, operating
results and financial condition. In addition, current and potential competitors
may make strategic acquisitions or establish cooperative relationships, thereby
increasing the ability of their products to address the needs of the Company's
current and prospective customers. Accordingly, it is possible that new
competitors may emerge, or alliances among current and new competitors may be
formed that may rapidly gain significant market share. Certain competitors have
been known to license software for free to gain competitive advantage. Such
competition could materially adversely affect the Company's ability to sell
additional licenses and maintenance and support renewals on terms favorable to
the Company. Further, competitive pressures could require the Company to reduce
the price of its products and related services, which could materially adversely
affect the Company's business, operating results and financial condition.
Commercial acceptance of the Company's products and services could be adversely
affected by critical or negative statements or reports by brokerage firms,
industry and financial analysts, and industry periodicals concerning the Company
and its products, business, or competitors, or the advertising or marketing
<PAGE>
efforts of competitors that could affect customer perception. There can be no
assurance that the Company will be able to compete successfully against current
and future competition, and the failure to do so would have a material adverse
effect upon the Company's business, operating results and financial condition.
The advent of the Internet/intranet as a computing, communication and
collaboration platform as well as a low cost and efficient distribution vehicle,
on-line services, and electronic commerce increases competition and creates
uncertainty as to future technology directions. The Company faces intense
competition in the development and marketing of Internet/intranet and Java
development software from a wide variety of companies. There can be no
assurances that the Company will be able to compete effectively for business
opportunities as they arise on the Internet/intranet, on-line services,
electronic commerce and other emerging areas.
New Product Introduction; Rapid Technological and Market Change
The Company's future sales will depend substantially on its ability to continue
to successfully design and market new products and upgrades of current products
for existing and new computer platforms and operating environments. There can be
no assurances that sales of such new products and versions will meet the
Company's expectations, due to various factors. For example, the Company may
introduce certain of such products later to market than expected or later to
market than competitors' introductions, or competitors may introduce competitive
products at lower prices. In addition, product upgrades (which enable users to
upgrade from earlier versions of the Company's products or competitor's
products) have lower prices and margins than new products. The acceptance of the
Company's new products is dependent, in part, on the 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 VisiBroker 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.
Moreover, the loss of key employees may increase the risk of delays in product
availability from timeframes originally anticipated. Consequently, announcements
regarding the Company's expectations of when products may ship should not be
considered a prediction by the Company that the products will ship in any
particular quarter or otherwise be relied upon by investors as a basis for
predicting the Company's results for any future period. Delays in the shipment
of such products and product enhancements could have a material
<PAGE>
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.
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 wide spread
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 announced by several
companies, including Microsoft. If Java is not adopted or is adopted more slowly
than anticipated, there could be a material adverse effect on the Company's
business, operating results or financial condition.
The Company plans to use encryption technology in certain of its future products
to provide the security required for the exchange of confidential information.
Encryption technologies have been breached in the past. There can be no
assurance that there will not be a compromise or breach of the security
technology used by the Company. If any such compromise or breach were to occur,
it could have a material adverse effect on the Company's business, results of
operations or financial condition. Additionally, the export of encryption
technology is subject to government regulation. The inability to obtain approval
for the export of such technology could have a material adverse effect on the
Company's business, operating results or financial condition.
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>
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 recruiting such
personnel. In prior years, certain management and other key personnel were hired
away by competitors who offered very substantial signing bonuses and
compensation packages that would have been very difficult for the Company to
match. In addition, recent announcements regarding operating losses and
management changes may adversely impact the ability of the Company to retain and
attract personnel. There can be no assurance that the Company will not be
subject to further losses of management and other key personnel. In addition,
the Company has had and may continue to be required to substantially increase
the compensation, bonuses, stock options or other fringe benefits offered to
employees in order to attract and retain management and other key personnel.
Further, new government regulations, poor stock performance, or other factors
could diminish the value of the stock option program and force the Company to
pay more cash compensation. The loss of management and other key personnel, and
the delays which may be experienced in recruiting new management and other
personnel as well as the additional costs which may be incurred in retaining or
attracting new personnel, may have a material adverse affect on the Company, its
product launches, its operating results and financial condition.
Reliance on VAR & ISV
A significant element of the Company's strategy is to embed and bundle
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 product 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.
<PAGE>
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's Competitors 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
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.
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 one year, 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-financial
<PAGE>
information technology systems such as phones and facilities; and (3) third
party readiness, which concerns the preparedness of third party's with whom the
Company has business relationships.
Product Readiness. The Company is in the process of gathering, testing, and
producing information about its products with respect to Year 2000 readiness.
The Company has classified its main products into 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. 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 express 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.
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.
<PAGE>
Internal Infrastructure Readiness. The Company is assessing the readiness of its
internal systems for handling the Year 2000. These systems include software
products provided by third-party vendors, the Company's own internal software
and hardware supplied by third party vendors. The Company is implementing new
internal systems and as part of the implementation is testing its new systems
for Year 2000 readiness. The Company currently plans to have its review and
testing substantially completed by mid-1999. Although the assessment is still
underway, 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 assessing, testing and remediating 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 will be developed when ongoing testing and remediation activities
are complete.
Material Third-Party Relations Readiness. The Company has initiated 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 expects to develop a third party action list and
contingency plans by mid-1999. 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 possibly 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 our 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 estimates 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, if such condition is
<PAGE>
likely to have a material adverse impact on the Company's operations. It is
expected that assessment, remediation and contingency planning activities will
be on going 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 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.
European Monetary Union (EMU)
The Company is implementing new information systems in Europe, and as part of
the implementation, is testing its new system for EMU compliance. The Company
currently plans to have its review and testing substantially completed by mid-
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.
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.
Software Defects And Liability Claims
Software products frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Although the
Company has not experienced any material adverse effects resulting from any such
defects or errors to date, there can be no assurance that, despite testing by
the Company and by current and potential customers, defects and errors will not
be found in current versions, new versions or enhancements after commencement of
commercial shipments, which could result in delay or loss of revenue, delay in
market acceptance, diversion of development resources, damage to the Company's
reputation, increased service and warranty costs, 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.
<PAGE>
Dependence on Third Party Licenses
The Company is dependent on licenses from third-party suppliers for certain
elements of its products. In particular, the Company is dependent upon certain
licenses from Microsoft, which is both a licensor to the Company and a
significant competitor. If any such third-party licenses were terminated or not
renewed or if these third parties fail to develop new products in a timely
manner, the Company 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 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.
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.
<PAGE>
Superior rights and preferences of Series B Preferred Stock
The Company has authorized the issuance of up to 1,470 shares of its Series B
Preferred Stock, of which 738 shares were outstanding as of March 31, 1999. The
Series B Preferred Stock has certain rights and preferences, which are superior
to those of Common Stock. In particular, each share of Series B Preferred Stock
is entitled to vote the number of shares of Common Stock into which such share
of Series B Preferred Stock is convertible, on matters on which all stockholders
of the Company are entitled to vote as compared to one vote per share of Common
Stock. In addition, upon any liquidation, dissolution or winding up of the
Company, each share of Series B Preferred Stock is entitled to be paid the
original purchase price per share, or $50,000, from the assets of the Company
prior to any payments to the holders of Common Stock. The Company's Board of
Directors, without stockholder approval, is authorized to issue up 1,000,000
shares of the Company's Preferred Stock (including the 1,470 authorized shares
of Series B Preferred Stock) with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of Common
Stock or the market price of the Common Stock.
Potential Dilutive Effect Of Conversion And Additional Issuance Of Series B
Preferred Stock
During April 1999, the Company received notification from several holders of the
Mandatorily Redeemable Series B Preferred Stock ("Series B Shares") of their
intention to convert 316 Series B Shares. Based upon the closing price of the
Company's common stock during the last seven trading days prior to conversion,
the Series B Shares converted into 4,974,059 shares of Common Stock.
The number of shares of Common Stock which may be issued upon conversion of the
Series B Preferred Stock is dependent upon the trading price of Common Stock at
the time of conversion. To the extent that the trading price of Common Stock is
lower than $6.94 per share (or $6.88 per share for the Series B shares purchased
on July 27, 1998) at the time of any conversion of the currently outstanding
shares of Series B Preferred Stock, the number of shares of Common Stock
issuable upon such conversion will increase.
Upon at least twenty trading days' written notice, the Company may elect to
redeem, on the date which is the second, third, or fourth anniversary of
effectiveness of the registration statement, all of the outstanding Series B
Shares, at 110% of par. Subject to certain conditions, the Company also has a
right to call for redemption for all or a portion of the Series B Shares if the
Conversion Rate is less than $6.00 per share.
Risks Associated with Potential 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 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
<PAGE>
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 many 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 April 30,
1999, the closing market price of the Company's Common Stock has ranged from a
high of $20.00 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 risk
concentrations. To address the foreign exchange rate risk the Company enters
into various hedging transactions as described below. The Company does not use
financial instruments for trading purposes.
Foreign Currency Risk
The Company transacts business in various foreign countries, including Japan,
Canada and certain countries within Europe and South East Asia. The Company has
established a foreign currency hedging program utilizing foreign currency
forward exchange contracts to hedge intercompany balances and other monitory
assets denominated in foreign currencies. The goal of the hedging 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
<PAGE>
exchange contracts are marked-to-market and unrealized gains and losses are
included in current period net income.
During the year ending December 31, 1998, the Company has recorded
foreign exchanges losses on intercompany receivables due to the dollar
strengthening against many foreign currencies including Japanese Yen, Australia
Dollar and Singapore Dollar during the first quarter and several European
currencies decreasing value against the Dutch Guilder during the third quarter.
Such losses have been mostly offset by the Company's foreign exchange contracts.
It is uncertain that these currencies trends will continue. If these
currencies trends continue, the Company will continue to experience foreign
exchange losses on their intercompany receivables to the extent that the Company
has not hedged 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.
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 twelve months.
Amount Contract rate Fair value
----------- -------------- ----------
Foreign currency forward exchange contracts:
Australian Dollar $10,313,195 0.6345 165,573
Canadian Dollar 1,575,742 1.51 3,765
German Mark 1,777,443 1.8168 (24,361)
Italian Lira 1,149,059 1936.27 (96,303)
Hong Kong Dollar 8,796,749 7.75 13,219
Dutch Guilder (5,293,067) 2.05 83,258
New Taiwan Dollar 1,577,905 32.95 17,240
Others 4,977,417 (39,188)
----------- ----------
Total $24,874,443 $123,203
=========== ==========
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 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.
<PAGE>
The Company mitigates default risk by investing in only the safe and
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 no interest rate exposure due to rate changes for
long-term debt obligations. The Company primarily enters into debt and capital
lease obligations to financial capital expenditures. Such debt and capital
lease obligations have a fixed rate of interest.
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.
In thousands 1999 2000 2001 2002 2003 Thereafter Total
- --------------------------------------------------------------------------------
ASSETS
Cash Equivalents $61,834
Fixed rate 4.40%
Short-term investments $458
Fixed rate 5.00%
LONG-TERM DEBT
$145 $161 $180 $200 $222 $8,341 $9,249
Fixed Rate 10.75%
The short term investment balances are principally invested in non-U.S.
countries.
Credit Risks
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash equivalents and trade receivables. The Company's
cash equivalents are in high quality securities placed with major banks and
financial institutions. Concentrations of credit risk with respect to
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 11% of total accounts receivable. No other single group or
customer represents greater than 10% of total accounts receivable.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item is incorporated by reference to "Part I -
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations - Litigation," of this Form 10-Q.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS
Exhibit 10 - Employment Agreement with Dale Fuller
Exhibit 27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed by the undersigned thereunto duly
authorized.
INPRISE CORPORATION
---------------------------
(Registrant)
Date: May 14, 1999
/s/ JAY R. LEITE
---------------------------
JAY R. LEITE
Chief Financial Officer
<PAGE>
Exhibit 10
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into by and between Inprise
Corporation (the "Company") and Dale Fuller ("Executive") as of April 9, 1999.
1. Position and Duties: Executive shall be employed by the Company as its
-------------------
interim President and Chief Executive Officer, reporting to the Company's Board
of Directors (the "Board"). Executive agrees to devote his full business time,
energy and skill to his duties at the Company. In addition, Executive will be
appointed to the Company's Board of Directors (the "Board").
2. Term of Employment: Executive's employment with the Company will be
------------------
for a six month term (the "Term") which may be extended by Executive and the
Company by mutual written agreement. Upon the termination of Executive's
employment with the Company, for any reason, neither Executive nor the Company
shall have any further obligation or liability under this Agreement to the
other, except as set forth in paragraphs 4, 5, 6, 7, 8 and 9 below.
3. Compensation: Executive shall be compensated by the Company for his
------------
services as follows:
(a) Base Salary: Executive shall be paid a salary of $1 for his
-----------
employment services during the term; provided however that the Company shall
also pay such sums as are required to satisfy any minimum compensation
requirements under law and the minimum amount necessary to cover any employee
contributions under any of the Company's benefit plan(s) that require such
contributions.
(b) Benefits: Executive shall have the right, on the same basis as
--------
other members of senior management of the Company, to participate in and to
receive benefits under any of the Company's employee benefit plans, as such
plans may be modified from time to time. In addition, Executive shall be
entitled to the benefits afforded to other members of senior management under
the Company's vacation, holiday and business expense reimbursement policies.
Upon the termination of Executive's employment with the Company, for any reason,
in the event the Executive elects to continue to participate in the Company's
group health insurance plans pursuant to state or federal COBRA law, the Company
shall reimburse Executive for all insurance premiums for the duration of such
COBRA coverage. In the event that the Term is continued beyond six months by
written agreement of the Company, this provision concerning the payment of COBRA
premiums shall not necessarily apply.
(c) Stock Options:
-------------
(1) Executive shall be granted the option to purchase 1,000,000
shares of the Common Stock of the Company (the "Options") with an exercise
price equal to the closing price of the Company's Common Stock as of the date
of this Agreement. The Options shall vest at the rate of 1/6 following the end
of each month of employment hereunder and shall be
1
<PAGE>
exercisable for twenty-four (24) months following the termination of
Executive's employment with the Company to the extent that the Options were
vested as of the date of such termination of employment or as otherwise
provided herein (but in no event beyond the term of the Options). Except as
provided herein, the Options shall be subject to the terms of the Company's
Stock Option Plan and the standard option agreements provided pursuant to such
plan.
(2) The agreement for the Options shall contain the following
additional provisions:
(i) In the event of a Change in Control (as defined
below) of the Company, all of the unvested shares subject to the Options shall
become vested immediately prior to the Change in Control.
(ii) For purposes of this Agreement, a "Change in Control"
shall mean an Ownership Change Event (as defined below) or a series of related
Ownership Change Events (collectively, the "Transaction") wherein the
stockholders of the Company immediately before the Transaction do not retain
immediately after the Transaction direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations
which, as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive. A "Change in Control" shall also mean a change in the
composition of the Board, as a result of which 50% or fewer of the
incumbentdirectors are directors who either (i) had been directors of the
Company on the date 24 months prior to the date of the event that may
constitute a Change in Control (the "original directors") or (ii) were
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the aggregate of the original directors who were still
in office at the time of the election or nomination and the directors whose
election or nomination was previously so approved.
(iii) For purpose of this Agreement, an "Ownership Change
Event" shall be deemed to have occurred if any of the following occurs with
respect to the Company:
(A) the direct or indirect sale or exchange in a
single or series of related transactions by the stockholders of the Company of
more than fifty percent (50%) of the voting stock of the Company;
(B) a merger or consolidation in which the Company
is a party;
2
<PAGE>
(C) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(D) a liquidation or dissolution of the Company.
4. Benefits Upon Termination: Executive agrees that his employment may be
-------------------------
terminated by the Company at any time, with or without cause. In the event of
the termination of Executive's employment by the Company for the reasons set
forth below, he shall be entitled to the following:
(a) Termination for Cause: If Executive's employment is terminated by
---------------------
the Company for cause as defined below, Executive shall be entitled to no
compensation or benefits from the Company other than those earned under
paragraph 3, or in the case of any stock options, vested through the date of his
termination. For purposes of this Agreement, a termination "for cause" occurs
if Executive is terminated for any of the following reasons:
(1) theft, dishonesty, or falsification of any employment or
Company records that has a material, detrimental effect on the Company;
(2) conviction of a felony or any act involving moral turpitude;
(3) improper disclosure of the Company's confidential or
proprietary information; or
(4) any material breach of this Agreement, which breach, if
curable, is not cured within thirty (30) days following written notice of such
breach from the Company.
(b) Termination Without Cause: If Executive's employment is
-------------------------
terminated by the Company for any reason other than for cause, Executive shall
be entitled to full vesting of the Options.
5. Additional Payment:
------------------
(a) In the event that any payment or benefit received or to be
received by Executive pursuant to this Agreement (collectively, the "Payments")
would be subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any similar or successor
provision (the "Excise Tax"), the Company shall pay to Executive within ninety
(90) days of the date Executive becomes subject to the Excise Tax, an additional
amount (the "Gross-Up Payment") such that the net amount retained by Executive,
after deduction of (1) any Excise Tax on the Payments and (2) any federal, state
and local income or employment tax and Excise Tax upon the payment provided for
by this paragraph, shall be equal to the Payments.
(b) For purposes of determining whether any of the Payments will be
subject to the Excise Tax and the amount of such Excise Tax:
3
<PAGE>
(1) Any other payments or benefits received or to be received by
Executive in connection with transactions contemplated by a Change in Control
event or Executive's termination of employment (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with the Company),
shall be treated as "parachute payments" within the meaning of Section 280G of
the Code or any similar or successor provision, and all "excess parachute
payments" within the meaning of Section 280G or any similar or successor
provision shall be treated as subject to the Excise Tax, unless in the opinion
of tax counsel selected by the Company such other payments or benefits (in whole
or in part) do not constitute parachute payments, or such excess parachute
payments (in whole or in part) represent reasonable compensation for services
actually rendered within the meaning of Section 280G (or any similar or
successor provision of the Code) in excess of the base amount within the meaning
of Section 280G (or any similar or successor provision of the Code), or are
otherwise not subject to the Excise Tax.
(2) The amount of the Payments which shall be treated as
subject to the Excise Tax shall be equal to the lesser of (i) the total amount
of the Payments or (ii) the amount of the excess parachute payments within the
meaning of Section 280G (after applying paragraph (b)(1) above).
(3) The value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Company's independent auditors in accordance
with the principles of Section 280G of the Code.
(c) For purposes of determining the amount of the Gross-Up Payment,
Executive shall be deemed to pay federal income taxes at the highest marginal
rate of federal income taxation in the calendar year in which the Gross-Up
Payment is to be made and state and local income taxes at the highest marginal
rate of taxation in the state and locality of Executive's residence on the date
the Gross-Up Payment is to be made, net of the maximum reduction in federal
income taxes which could be obtained from deduction of such state and local
taxes.
(d) In the event that the Excise Tax is subsequently determined to be
less than the amount taken into account hereunder, Executive shall repay to the
Company at the time that the amount of such reduction in Excise Tax is finally
determined the portion of the Gross-Up Payment attributable to such reduction
(plus the portion of the Gross-Up Payment attributable to the Excise Tax and
federal, state and local income and employment taxes imposed on the Gross-Up
Payment being repaid by Executive if such repayment results in a reduction in
Excise Tax and/or a federal, state or local income or employment tax deduction)
plus interest on the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code.
(e) In the event that the Excise Tax is determined to exceed the
amount taken into account hereunder (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Company shall make an additional gross-up payment in respect of
such excess (plus any interest payable with respect to such excess) at the time
that the amount of such excess is finally determined.
4
<PAGE>
6. Employee Inventions and Proprietary Rights Assignment Agreement:
---------------------------------------------------------------
Executive agrees to enter into and abide by the terms and conditions of the
Company's standard Employee Inventions and Proprietary Rights Assignment
Agreement.
7. Agreement Not To Compete Unfairly: Executive agrees that in the event
---------------------------------
of his termination at any time and for any reason, he shall not use any
confidential or proprietary information of the Company to compete with the
Company in any way.
8. Non-Solicitation: Executive agrees that for a period of one year after
----------------
the date of the termination of his employment for any reason, he shall not,
either directly or indirectly, solicit the services, or attempt to solicit the
services, of any employee of the Company to any other person or entity.
9. Dispute Resolution: In the event of any dispute or claim relating to
------------------
or arising out of this Agreement (including, but not limited to, any claims of
breach of contract, wrongful termination or age, sex, race or other
discrimination), Executive and the Company agree that all such disputes shall be
fully and finally resolved by binding arbitration conducted by the American
Arbitration Association in Santa Clara, California in accordance with its
National Employment Dispute Resolution rules, as those rules are currently in
effect (and not as they may be modified in the future). Executive acknowledges
that by accepting this arbitration provision he is waiving any right to a jury
trial in the event of such dispute. Provided, however, that this arbitration
provision shall not apply to any disputes or claims relating to or arising out
of the misuse or misappropriation of trade secrets or proprietary information.
10. Attorneys' Fees: The prevailing party shall be entitled to recover
---------------
from the losing party its attorneys' fees and costs incurred in any action
brought to enforce any right arising out of this Agreement. The Company agrees
to reimburse Executive for his reasonable attorneys fees relating to the
negotiation of this Agreement up to a maximum of $5,000.
11. Tax Withholding: All payments made and benefits provided pursuant to
---------------
this Agreement shall be subject to withholding of all applicable income and
employment taxes.
12. Interpretation: Executive and the Company agree that this Agreement
--------------
shall be interpreted in accordance with and governed by the laws of the State of
California.
13. Successors and Assigns: This Agreement shall inure to the benefit of
----------------------
and be binding upon the Company and its successors and assigns. In view of the
personal nature of the services to be performed under this Agreement by
Executive, he shall not have the right to assign or transfer any of his rights,
obligations or benefits under this Agreement, except as otherwise noted herein.
14. Entire Agreement: This Agreement constitutes the entire employment
----------------
agreement between Executive and the Company regarding the terms and conditions
of his employment, with the exception of (i) the agreement described in
paragraph 6 and (ii) any stock option agreements between Executive and the
Company. This Agreement (including the documents
5
<PAGE>
described in (i) and (ii) herein) supersedes all prior negotiations,
representations or agreements between Executive and the Company, whether
written or oral, concerning Executive's employment by the Company.
15. Validity: If any one or more of the provisions (or any part thereof)
--------
of this Agreement shall be held invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
(or any part thereof) shall not in any way be affected or impaired thereby.
16. Modification: This Agreement may only be modified or amended by a
------------
supplemental written agreement signed by Executive and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year written below.
Inprise Corporation
Date:_________________________ By:___________________________
Its:__________________________
Date:_________________________ ______________________________
Dale Fuller
6
<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> 3-MOS
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0
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