UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
0-16096
(Commission File Number)
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 October 31, 2000,
the latest practicable date prior to the filing of this report, was 61,550,718.
<PAGE>
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 1
Condensed Consolidated Balance Sheets
for September 30, 2000 and December 31, 1999...................... 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and 1999........... 2
Condensed Consolidated Statements of Comprehensive Income for
for the three and nine months ended September 30, 2000 and 1999... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999..................... 4
Notes to Condensed Consolidated Financial Statements.............. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk........24
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................27
Item 2. Changes in Securities and Use of Proceeds.........................27
Item 4. Submission of Matters to a Vote of Security Holders...............27
Item 6. Exhibits and Reports on Form 8-K..................................28
Signatures........................................................29
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
INPRISE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value and Share Amounts)
September 30, December 31,
2000 1999
--------------- --------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents................. $ 214,415 $ 192,013
Short-term investments ................... 36,272 5,680
Accounts receivable, net ................. 35,908 27,303
Other current assets ..................... 11,626 8,139
--------------- --------------
Total current assets ................ 298,221 233,135
Property and equipment, net .................. 20,908 75,002
Other non-current assets ..................... 6,334 4,879
--------------- --------------
$ 325,463 $ 313,016
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..... $ 41,361 $ 41,733
Income taxes payable ..................... 4,612 5,808
Deferred revenue ......................... 17,721 12,273
Other .................................... 10,063 18,083
--------------- --------------
Total current liabilities ........... 73,757 77,897
Long-term debt and other ..................... 19,778 19,462
--------------- --------------
Total Liabilities.................... 93,535 97,359
Stockholders' equity:
Preferred stock: Series A, $.01 par
value; 1,000,000 shares authorized;
no shares issued and outstanding..... -- --
Preferred stock: Series C convertible,
$.01 par value; 625 shares
authorized; 625 shares issued and
outstanding ......................... -- --
Common stock: $.01 par value;
100,000,000 shares authorized;
61,520,825 and 60,672,547 shares
issued and outstanding............... 615 607
Additional paid-in capital ............... 470,290 464,527
Accumulated deficit ...................... (217,937) (229,572)
Cumulative comprehensive income .......... 4,165 5,300
--------------- --------------
257,133 240,862
Less common stock in treasury, at cost
- 4,473,800 shares................... (25,205) (25,205)
--------------- --------------
Total Stockholders' Equity........... 231,928 215,657
--------------- --------------
$ 325,463 $ 313,016
=============== ==============
</TABLE>
See Notes to the Condensed Consolidated Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Amounts, Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Licenses and other revenues................ $ 40,926 $ 39,928 $120,700 $ 112,065
Service revenues........................... 6,631 5,750 20,073 17,267
----------- ----------- ----------- ------------
Net revenues............................ 47,557 45,678 140,773 129,332
----------- ----------- ----------- ------------
Cost of licenses and other revenues........ 2,501 4,943 9,431 15,261
Cost of service revenues................... 4,944 5,389 14,760 16,691
----------- ----------- ----------- ------------
Cost of revenues........................ 7,445 10,332 24,191 31,952
----------- ----------- ----------- ------------
Gross profit............................... 40,112 35,346 116,582 97,380
----------- ----------- ----------- ------------
Research and development................... 10,515 10,076 32,077 30,789
Sales, general and administrative.......... 24,176 30,253 76,844 93,733
Restructuring and merger-related charges... -- -- 3,556 6,959
Other non-recurring charges................ -- -- -- 8,193
----------- ----------- ----------- ------------
Total operating expenses................ 34,691 40,329 112,477 139,674
----------- ----------- ----------- ------------
Operating income (loss).................... 5,421 (4,983) 4,105 (42,294)
Income from patent cross-license agreement
and other............................... -- -- -- 105,065
Interest income, net and other............. 4,511 3,444 9,118 6,874
Non-recurring benefit...................... 2,967 -- 2,967 --
----------- ----------- ----------- ------------
Income (loss) before income taxes.......... 12,899 (1,539) 16,190 69,645
Income tax provision (benefit)............. 1,455 (120) 3,890 9,133
----------- ----------- ----------- ------------
Net income (loss)....................... $ 11,444 $ (1,419) $ 12,300 $ 60,512
=========== =========== =========== ============
Net income (loss) per share:
Basic...................................... $ 0.18 $ (0.03) $ 0.19 $ 1.13
=========== =========== =========== ============
Diluted.................................... $ 0.17 $ (0.03) $ 0.18 $ 0.99
=========== =========== =========== ============
Weighted average number of common shares outstanding:
Basic ..................................... 61,506 57,992 61,308 53,339
=========== =========== =========== ============
Diluted.................................... 68,983 57,992 70,087 60,855
=========== =========== =========== ============
</TABLE>
See Notes to the Condensed Consolidated Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss)..................................... $ 11,444 $(1,419) $ 12,300 $60,512
Other comprehensive income (loss):
Foreign currency translation adjustments.............. (908) 1,234 (1,135) (1,061)
---------- ---------- ---------- -----------
Comprehensive income (loss)........................... $ 10,536 $ (185) $ 11,165 $59,451
========== ========== ========== ===========
</TABLE>
See Notes to the Condensed Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
INPRISE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Unaudited)
Nine Months Ended
September 30,
-------------------------------
2000 1999
------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ............................................................... $ 12,300 $ 60,512
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ....................................... 7,109 11,613
Gain on sale of long-term investment ................................ (723) (2,937)
Loss on sale of fixed asset ......................................... 1,540 --
Provision for bad debts ............................................. 494 449
Changes In Assets And Liabilities:
Accounts receivable ................................................. (10,897) 4,710
Other assets ........................................................ 325 (117)
Accounts payable and accrued expenses ............................... 1,767 (4,660)
Income taxes payable ................................................ (2,371) 5,951
Other (primarily deferred revenue and restructuring) ................ 3,254 2,297
------------- --------------
Cash provided by operating activities ............................... 12,798 77,818
------------- --------------
Cash Flows From Investing Activities:
Purchase of property and equipment ....................................... (1,340) (6,365)
Proceeds from sale of property ........................................... 39,651 --
Net change in short-term investments ..................................... (30,592) (11,285)
Net change in long-term investments ...................................... (2,077) 2,056
------------- --------------
Cash provided by (used in) investing activities...................... 5,642 (15,594)
------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net .............................. 5,105 1,854
Proceeds from the issuance of preferred stock, net........................ -- 25,000
Repurchase of common stock ............................................... -- (4,871)
(Repayment)borrowings of capital lease obligations and other debt activity (133) 92
------------- --------------
Cash provided by financing activities ............................... 4,972 22,075
Effect of exchange rate changes on cash...................................... (1,010) (488)
------------- --------------
Net change in cash and cash equivalents...................................... 22,402 83,811
Cash and cash equivalents at beginning of period............................. 192,013 81,137
------------- --------------
Cash and cash equivalents at end of period................................... $ 214,415 $ 164,948
============= ==============
</TABLE>
See Notes to the Condensed Consolidated Financial Statements.
4
<PAGE>
INPRISE CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1--BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements as of
September 30, 2000, the three and nine months ended September 30, 2000, and the
three and nine months ended September 30, 1999, are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all financial information and disclosures required by generally accepted
accounting principles for complete financial statements, and certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The unaudited interim condensed consolidated financial statements have
been prepared on the same basis as the annual consolidated financial statements
and, in the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly Inprise's financial
position as of September 30, 2000, and its results of operations and cash flows
for the three and nine months ended September 30, 2000 and for the three and
nine months ended September 30, 1999. The preparation of condensed 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. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. The
condensed consolidated financial statements and notes should be read in
conjunction with our audited financial statements included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 as filed with the
Securities and Exchange Commission (the "SEC") on April 4, 2000.
NOTE 2--NET INCOME PER SHARE
We compute net income (loss) per share in accordance with SFAS No. 128
"Earnings per Share." Under the provisions of SFAS No. 128, basic net income per
share is computed by dividing the net income available to common stockholders
for the period by the weighted average number of common shares outstanding
during the period. Diluted net income per share is computed by dividing the net
income for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares, which
consist of incremental shares issuable upon exercise of stock options and
warrants and upon conversion of the Series C Convertible Preferred Stock, are
included in diluted net income per share to the extent such shares are dilutive.
5
<PAGE>
The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) before accretion charges .............. $11,444 $(1,419) $12,300 $60,512
Accretion charges to preferred stock..................... 219 219 656 287
---------- ---------- ----------- ----------
Income (loss) available to common
stockholders for basic earnings per share............. $11,225 $(1,638) $11,644 $60,225
---------- ---------- ----------- ----------
Denominator:
Denominator for basic income per share -
weighted average shares............................. 61,506 57,922 61,308 53,339
Effect of dilutive securities............................ 7,477 -- 8,779 7,546
---------- ---------- ----------- ----------
Denominator for dilutive income per share................ 68,983 57,922 70,087 60,885
---------- ---------- ----------- ----------
Net income (loss) per share - basic...................... $ 0.18 $ (0.03) $ 0.19 $ 1.13
========== ========== =========== ==========
Net income (loss) per share - diluted.................... $ 0.17 $ (0.03) $ 0.18 $ 0.99
========== ========== =========== ==========
</TABLE>
NOTE 3--RESTRUCTURING
The following table summarizes our restructuring activity for the nine
months ended September 30, 2000, (in thousands):
<TABLE>
<CAPTION>
Severance Other
and Asset
Benefits Facilities Charges Other Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Accrual at December 31, 1999 $ 3,003 $ 997 $ 4,764 $ 1,204 $ 9,968
Additions................... 269 -- (181) -- 88
Cash payments............... (2,259) (293) -- (178) (2,730)
Non-cash costs.............. -- -- (4,139) (459) (4,598)
---------- ---------- ---------- ---------- ----------
Accrual at September 30, 2000 $ 1,013 $ 704 $ 444 $ 567 $ 2,728
========== ========== ========== ========== ==========
</TABLE>
During December 1999, we recorded a restructuring charge of $34.8 million.
The restructuring charge consists primarily of a loss on the sale of our Scotts
Valley corporate headquarters of $29.7 million; a $3.1 million charge for
discontinuation of our European information system implementation; severance
costs associated with organizational changes of $3.0 million (representing
planned termination of approximately five percent of the workforce as of
December 1999); and other miscellaneous restructuring related costs of $3.1
million. These charges were offset, in part, by the reversal of prior
restructuring charges totaling $4.1 million.
Subsequent to December 31, 1999, there have not been any significant
changes to our estimate of the total costs of prior restructuring activities.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A CAUTION ABOUT FORWARD-LOOKING STATEMENTS
The matters discussed throughout this Quarterly Report that are not
historical facts are foward-looking statements and accordingly, involve
estimates, projections, goals, forecasts, assumptions and uncertainties that
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements.
These forward-looking statements may relate to, but are not limited to,
future capital expenditures, acquisitions, future revenues, earnings, margins,
costs, product release dates, demand for our products, market trends in the
software industry, interest rates, foreign currency rates, inflation, and
various economic and business trends. You can identify forward-looking
statements by the use of words such as "believe," "expect," "estimate,"
"project," "budget," "forecast," "anticipate," "plan" and similar expressions.
Forward-looking statements include all statements regarding expected financial
position, results of operations, cash flows, dividends, financing plans,
business strategies, operating efficiencies or synergies, budgets, capital and
other expenditures, competitive positions, markets and growth opportunities for
existing or proposed products or services, plans and objectives of management,
and markets for the capital stock of Inprise and conditions or trends in the
securities markets where shares of Inprise common stock are traded.
These forward-looking statements are found at various places throughout
this Quarterly Report. We caution you not to place undue reliance on these
forward-looking statements, which unless otherwise indicated, speak only as of
the date they were made. Inprise does not undertake any obligation to release
publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Quarterly Report or to reflect the
occurrence of events that we do not currently anticipate.
You are advised to read this Quarterly Report on Form 10-Q in conjunction
with other reports and documents that we file from time to time with the SEC. In
particular, please read our Annual Report on Form 10-K for the year ended
December 31, 1999, our other Quarterly Reports on Form 10-Q and our Current
Reports on Form 8-K. You may read and copy any reports, statements or other
information filed by Inprise at SEC Public Reference Rooms at 450 Fifth Street,
N.W., Washington, D.C. 20549 or at any of the SEC's other public reference rooms
in New York and Chicago. Please call the SEC at 1-800-SEC-0330 for further
information on public reference rooms. Inprise's filings with the SEC are also
available to the public from commercial document-retrieval services and at the
Internet web site maintained by the SEC at www.sec.gov. In addition, any
reports, statements or other information filed by Inprise with the SEC may also
be obtained for free from Inprise by directing such request to: Inprise
Corporation, 100 Enterprise Way, Scotts Valley, California 95066-3249,
Attention: Investor Relations, telephone: (831) 431-1000, e-mail:
[email protected].
OVERVIEW
Inprise is a leading provider of Internet-enabling software and services
designed to reduce the complexity of application development for corporations
and individual programmers. We develop and provide integrated, scalable and
secure solutions, distinguished
7
<PAGE>
for their ease of use, performance and productivity. Committed to most major
computing platforms as well as the open standards of the Internet, we provide
service and support for software developers worldwide through our online
developer community and E-commerce site - community.borland.com - offering a
range of technical information, value-added services and third-party products.
Our product lines and services are designed to assist software developers and
business enterprises in their development and deployment of software in the
desktop, client/server, distributed objects, and Internet and corporate intranet
environments.
We market and distribute our products worldwide primarily through
independent distributors, dealers, value-added resellers ("VARs") and
independent software vendors ("ISVs"). We also market and sell to corporations,
governments, educational institutions and other end-user customers through
direct sales and through the Internet.
RESULTS OF OPERATIONS
REVENUES
Our revenues are derived from software licenses, customer support, training
and consulting services.
LICENCES AND OTHER REVENUES
Licenses and other revenues represent amounts earned from granting
customers licenses to use our software products. Licenses and other revenues
totaled $40.9 million for the quarter ended September 30, 2000; an increase of
3% from the same quarter a year ago. Licenses and other revenues during the
three months ended September 30, 2000 were favorably affected by the release of
JBuilder(TM) 4.0 causing the licenses and other revenues to grow approximately
268% over the same quarter a year ago. Additionally, licenses and other revenues
from Inprise's enterprise products, including VisiBroker(R), Application
Server(TM) and AppCenter(TM), have increased by approximately 57% over the same
quarter a year ago due to the execution of several large customer contracts
during the quarter. Licenses and other revenues from Inprise's Delphi(TM)
product line decreased 63% from the same quarter in 1999, due to the absence of
any new releases of Delphi during the three months ended September 30, 2000
compared with the release of Delphi 5.0 during the same quarter a year ago.
Inprise presently expects to release Delphi 6.0 during the first half of 2001.
The quarter-over-quarter decline in revenues from the Delphi product line is
also due to Inprise's decision to reallocate Delphi-related research and
development and marketing resources to support the development and launch of
Kylix(TM) (Delphi for Linux) which is targeted for release in the first quarter
of 2001. Licenses and other revenues from other products declined approximately
39% from the same quarter a year ago. Licenses and other revenues from other
products represented approximately 5% and 9% of Inprise's overall revenue for
the quarters ended September 30, 2000 and 1999, respectively.
SERVICE REVENUES
Service revenues represent amounts earned from customer support, training,
consulting and educational services related to our software products. Service
revenues increased to $6.6 million for the quarter ended September 30, 2000,
compared to $5.8 million for the quarter ended September 30, 1999. This increase
is primarily due to increased support revenues in
8
<PAGE>
Europe as Inprise expands its focus on support offerings for its enterprise
products into non-U.S. locations.
INTERNATIONAL REVENUES
International revenues represented 51% of our total net revenue for the
quarter ended September 30, 2000 compared to 53% for the quarter ended September
30, 1999. We expect that our international operations will continue to provide a
significant portion of our total revenue.
The following table presents our total revenue by geographic area:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States............. $ 23,160 $ 21,312 $ 58,755 $ 59,597
Europe.................... 14,010 14,520 46,035 43,021
Japan..................... 4,457 4,892 17,994 14,456
Other..................... 5,930 4,954 17,989 12,258
---------- ---------- ---------- ----------
Net revenues.............. $ 47,557 $ 45,678 $140,773 $129,332
========== ========== ========== ==========
</TABLE>
COST OF REVENUES
COST OF LICENSES AND OTHER REVENUES
Cost of licenses and other revenues consist primarily of production costs,
product packaging, and royalties paid to third-party vendors. Cost of licenses
and other revenues were $2.5 million and $4.9 million for the quarters ended
September 30, 2000 and 1999, respectively. The decrease in cost of licenses and
other revenues during the quarter was due to the decrease in direct production
costs, as enterprise sales increased as a percentage of overall license
revenues. Enterprise revenues typically have a lower direct cost of sale as a
large portion of enterprise revenues are generated from transactions that
involve multiple licenses to the same customer. Additionally, Inprise
experienced a decrease in royalty costs payable to third-party vendors,
resulting from a decrease in sales of third-party products. Cost of licenses or
other revenues may vary in future periods due to changes in royalty obligations
to third-party technology providers, certain manufacturing costs as well as the
number of new products and product upgrades introduced in any respective
quarter.
COST OF SERVICE REVENUES
Cost of service revenues consist primarily of salaries and benefits,
third-party contractor costs, and related expenses incurred in providing
customer support, training and education. Cost of service revenues were $4.9
million and $5.4 million for the quarters ended September 30, 2000 and 1999,
respectively. This decrease in costs was primarily due to lower employee-related
expenses, principally in the U.S., as Inprise reduced the headcount within its
professional services group during the fourth quarter of 1999. Cost of service
revenues as a percentage of service revenues may also vary between periods due
to the combination of services that we provide to customers and the extent to
which employees or contractors are used to provide those services.
9
<PAGE>
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and other
personnel-related expenses, facilities costs and fees and expenses of
third-party consultants. Research and development expenses were 22% of net
revenues for each of the quarters ended September 30, 2000 and 1999. Research
and development expenses for the quarter ended September 30, 2000 increased to
$10.5 million from $10.1 million for the quarter ended September 30, 1999,
primarily due to an increase in employee-related costs in our Singapore and
Australia research facilities.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative (SG&A) expenses consist primarily of
salaries, benefits, sales commissions, the cost of product marketing programs,
and facility and information system costs. SG&A expenses decreased by 20% this
quarter compared to the same quarter of last year and represented 51% and 66% of
net revenues for the quarters ended September 30, 2000 and 1999, respectively.
This decrease was principally due to decreased employee costs and a reduction in
depreciation costs resulting from the sale of our Scotts Valley corporate
headquarters during the quarter ended March 31, 2000 and the disposal of certain
information systems capital assets during the quarter ended December 31, 1999.
During December 1999, we recorded a restructuring charge of $34.8 million.
The restructuring charge consisted primarily of a loss on the sale of our Scotts
Valley corporate headquarters of $29.7 million; a $3.1 million charge for
discontinuation of our European information system implementation; severance
costs associated with organizational changes of $3.0 million (representing
planned termination of approximately five percent of the workforce as of
December 1999) and other miscellaneous restructuring related costs of $3.1
million. These charges were offset, in part, by the reversal of prior
restructuring charges totaling $4.1 million.
During the nine months ended September 30, 2000, Inprise paid approximately
$2.7 million for severance, facility and other costs as part of the December
1999 restructuring.
INTEREST INCOME, NET AND OTHER
Interest income, net and other increase from $3.4 million during the
quarter ended September 30, 1999 to $4.5 million during the quarter ended
September 30, 2000. This increase is principally due to the increase in interest
income. Interest income increased by $1.9 million during the quarter ended
September 30, 2000 over the same quarter a year ago, as the cash, cash
equivalents and short-term investment balance has increased by $71.2 million, or
40% from September 30, 1999 to September 30, 2000. During the quarters ended
September 30, 1999 and 2000, interest income, net and other also included $1.4
million and $0.7 million, respectively, in gain on contingent consideration
relating to the 1998 sale of Inprise's investment in Starfish Software, Inc.
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<PAGE>
NON-RECURRING BENEFIT
During the quarter ended September 30, 2000, Inprise reversed approximately
$3.0 million in reserves established in prior periods for potential litigation
which, due to changes in facts and circumstances, have been determined to be no
longer necessary.
INCOME TAXES
We have significant net operating loss and tax credit carryforwards in the
U.S. and a number of non-U.S. jurisdictions in which we conduct business. These
losses and credit carryforwards are used to offset our tax liability. In
addition, we incur withholding taxes in a number of non-U.S. jurisdictions that
are imposed regardless of the profitability of Inprise in that jurisdiction. We
anticipate our tax provision for 2000 to be comprised principally of non-U.S.
income taxes and non-U.S. withholding taxes. The principal difference between
the 2000 and 1999 tax provisions is the U.S. tax provision related to the income
from the one-time patent cross license agreement with Microsoft recorded in the
quarter ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, total cash, cash equivalents and short-term
investments totaled $250.7 million; up from $197.7 million at December 31, 1999.
Working capital increased to $224.5 million, up from $155.2 million at December
31, 1999, due primarily to the $39.6 million in cash received from the sale of
our Scotts Valley corporate headquarters; the $12.8 million in cash provided
from operations during the nine months ended September 30, 2000; and an increase
in Inprise's trade accounts receivable balance of $10.9 million from December
31, 1999 to September 30, 2000. The increase in accounts receivable balance at
September 30, 2000 is generally the result of enterprise revenue that was
generated towards the end of the quarter. We expect that our current working
capital will be sufficient to finance our working capital requirements at least
through the next twelve months.
LEGAL PROCEEDINGS
On April 19, 2000, a complaint was filed by a purported stockholder, on his
own behalf and purportedly on behalf of the other stockholders of Inprise,
against Inprise and its directors in the Court of Chancery of the State of
Delaware, in a lawsuit captioned Paul Berger v. Dale L. Fuller, William F.
Miller, William K. Hooper, David Heller and Inprise Corporation. The complaint
alleged, among other things, breaches of fiduciary duties by the directors of
Inprise in connection with their approval of the Merger Agreement, dated as of
February 6, 2000, among Inprise, Corel Corporation ("Corel") and a subsidiary of
Corel (the "Merger Agreement"), which Merger Agreement subsequently was
terminated on May 15, 2000. In his complaint, the plaintiff sought, among other
things, a preliminary and permanent injunction against consummation of the
merger of Inprise and Corel, rescission or other equitable relief in the event
that the merger was consummated and other unspecified damages. On May 12, 2000,
Inprise and Messrs. Fuller, Miller, Hooper and Heller filed a Motion to Dismiss
and supporting brief asserting, among other things, that the complaint filed
failed to state a claim. On June 15, 2000, the parties to the suit entered into
a stipulation agreeing that the claims asserted in the suit had become moot
since the merger had been abandoned and agreed that the suit should be dismissed
with prejudice. In connection with such stipulation, (i) Inprise agreed to pay
the fees and expenses incurred by plaintiff's counsel in connection with the
lawsuit in an aggregate amount of $35,000; and (ii) plaintiff agreed to release
all claims, rights, causes of action, suits,
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matters and issues, known or unknown, that have been or could have been asserted
by plaintiff or his attorneys in the suit, either directly or individually,
derivatively, representatively or in any other capacity, against defendants, or
their respective present or former officers, directors, agents, employees,
attorneys, representatives, advisors, heirs, executors, administrators,
successors and assigns, and anyone else, in connection with or that arise out of
or relate in any way to the litigation or any matters, transactions or
occurrences referred to in the complaint, including any claim for plaintiffs'
attorneys' fees and expenses, with prejudice as to plaintiff and his counsel.
The Court entered a final order dismissing the case on the terms provided in the
parties' stipulation on August 31, 2000.
We are also involved in various other legal actions arising in the normal
course of our business. We believe that it is unlikely that any of these actions
will have a material adverse impact on our operating results. However, because
of the inherent uncertainties of litigation, the outcome of any of these actions
could be unfavorable and could have a material adverse effect on our financial
condition or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Inprise operates in a rapidly changing environment that involves many
risks, some of which are beyond our control. The following is a discussion that
highlights some of these risks.
WE DEPEND ON KEY PERSONNEL
We believe that our future success will depend, in large part, on our
ability to recruit and retain qualified employees, particularly highly skilled
software engineers and management personnel. Competition for such personnel is
intense, particularly in Northern California where our operations are based, and
we may not be successful in retaining or recruiting such personnel.
Our President and Chief Executive Officer, Dale L. Fuller, entered into an
employment agreement dated April 9, 1999, the term of which expired on October
9, 1999. There is no assurance that he will continue in his position or that we
would be able to find a replacement should he leave our employment.
To retain key employees, we have instituted retention programs. We have
increased compensation, bonuses, stock options and other fringe benefits in
order to attract and retain management and other key employees. We may be
required to further increase such compensation and benefits. We are not certain
that these efforts will succeed in retaining our key employees, and failure to
attract and retain key personnel could significantly harm our business.
UNPREDICTABILITY OF FUTURE REVENUES: POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS AND SEASONALITY
Our quarterly operating results have varied significantly in the past. We
expect that our operating results will continue to vary significantly from time
to time. We believe that these variations may result from many factors already
described in this Quarterly Report and may include, but may not be limited to,
any of the following factors:
o introduction of new products;
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o the overall level of demand for our products;
o the size and timing of significant orders and their fulfillment;
o the number, timing and significance of product enhancements and new
product announcements by us and our competitors;
o changes in pricing policies by us or our competitors;
o customer order deferrals in anticipation of enhancements or new
products offered by us or our competitors;
o deferral of customer orders based on their uncertainty about our
short-term and long-term prospects;
o product release cycles of existing products;
o product defects and other product quality problems;
o seasonal trends; and
o general domestic and international economic and political conditions.
An additional risk factor is the lengthening of our sales cycle. We expect
that a significant percentage of our future revenue will be from large orders.
These large sales typically contain multiple elements, including licenses for
development and deployment products, technical support, maintenance, consulting
and training services. A significant portion of the revenue from a large order
is typically recognized over time. For example, when the contract is signed, the
license and deployment fees may be recognized as revenue. However, revenue
related to further services, such as technical support and consulting services,
must be deferred until the services are rendered. The timing of recognition of
revenue associated with larger sales may have a material adverse effect on our
business, operating results and financial position.
Furthermore, many customers place orders toward the end of a given quarter.
Therefore revenues can be difficult to predict. Costs are based on projected
revenues and are relatively fixed in the short term. Therefore, if revenue
levels fall below projections, net income may be significantly reduced or we may
experience a loss.
We cannot be certain that we will be able to maintain profitability on a
quarterly or annual basis. It is likely that in some future quarters, our
operating results will be below our expectations as well as those of public
market analysts and investors. In such a case, the price of our common stock may
be materially and adversely affected.
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RISKS IN TRANSITION TO DIRECT SALES, LENGTHY SALES CYCLES AND SYSTEMS
INPLEMENTATION SELLING
Selling enterprise software products directly to our customers entails
sales cycles that are substantially more lengthy and more uncertain than those
associated with our traditional business of selling desktop software through
retail channels. Customers for enterprise products are predominately larger
companies, institutions and governmental entities. These customers generally
commit significant time and resources to evaluating enterprise software, and
they require us to expend substantial time, effort and money educating them
about our software products and solutions. As a result, sales to these types of
customers generally require an extensive sales effort throughout the customer's
organization, and they often require final approval by the customer's Chief
Information Officer or other senior level employee. All of these factors
substantially extend the sales cycle and increase the uncertainty of whether a
sale will be made. We have experienced and expect to continue to experience
delays and uncertainty in the sales cycle as well as increased expenses for
these sales.
We need to extensively train and effectively manage our sales personnel,
invest additional resources in the sales effort, and educate our authorized
resellers in international markets. Because we recently began making enterprise
sales in non-U.S. markets, there can be no assurance that we will successfully
complete our transition to the direct sales model outside of the U.S. Our
failure to do so could significantly harm our business.
We have added trained technical personnel to assist our customers in
implementing our enterprise software products. Personnel with sufficient
expertise and experience for these positions are in great demand, and we may not
be able to attract or retain a sufficient number of qualified personnel. Our
failure to do so could significantly harm our business.
We have made changes to our sales compensation programs in recent years in
an effort to increase sales. There can be no assurance, however, that they will
be successful in achieving this result in the long term, and such changes could
significantly harm our revenues and sales-related expenses.
RISKS RELATED TO NEW PRODUCT INTRODUCTIONS; RAPID TECHNOLOGICAL AND MARKET
CHANGES
The market for our products is highly competitive and is characterized by
continuous technological advancement, evolving industry standards and changing
customer requirements. Our ability to generate revenue in the future will depend
substantially on our ability to successfully design and market new products and
upgrades of our current products for existing and new computer platforms and
operating environments that anticipate the requirements of this market.
We face a number of inherent risks in the current market environment,
including, but not limited to, the following:
o we may introduce products later than we expect or later than
competitors' introductions;
o competitors may introduce competing products at lower prices;
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o product upgrades, which enable users to upgrade from earlier versions
of our products or competitors' products, have lower prices and
margins than new products; and/or
o the acceptance of our new products is highly dependent, in part, on
the continued adoption of the Internet as a new computing paradigm,
the increased use of the Java programming language, and the adoption
of the Linux operating system.
From time to time, we announce when we expect to begin shipping a new
product. In the past, some of our products have shipped later, and sometimes
substantially later, than when we originally expected. The loss of key employees
may increase the risk of these delays. Some of our products are based on
technology licensed from third parties. We have limited control over when and
whether these technologies are upgraded. The failure or delay in enhancements of
technology licensed from third parties could have a material adverse effect on
our ability to develop and enhance our products. Due to these uncertainties
inherent in software development, it is likely that these risks will materialize
from time to time in the future. We could lose customers as a result of
substantial delays in the shipment of new products or product upgrades.
Substantial delays could also render our products technologically obsolete and
significantly harm our business.
RISKS OF ENTERING A NEW BUSINESS AREA
Our strategy is to focus on enterprise customers, software developers, and
the Internet and corporate intranet markets. Our sales are dependent on
enterprise customers adopting distributed object technology for information
processing and the Internet and corporate intranets for commerce and
communications. Concerns about the Internet and corporate intranets, including
security, reliability, cost, ease of use and access and quality of service, may
inhibit the adoption of this technology by potential customers, thereby harming
our business.
Our distributed object software products, such as VisiBroker(R),
AppCenter(TM) and Application Server(TM), are based on several emerging
standards, including the Common Object Request Broker Architecture or CORBA(R),
Extended Markup Language or XML, Enterprise JavaBeans(R) (EJB(TM)) and Java Two
Enterprise Edition (J2EE). These standards guide the development and management
of applications created in object oriented programming languages such as C++ and
Java. These emerging standards are just beginning to gain widespread acceptance,
and they compete with proprietary solutions such as ActiveX(R) and DCOM, each of
which is marketed by Microsoft Corporation. The distributed object software
market is relatively young, and there are few proven products. If CORBA does not
continue to be a strategically important technology for our customers, or if it
declines in importance, resulting in our customers selecting products based on
other standards, our business would be harmed.
We are investing time and resources in developing products for the Linux
operating system. Linux is a new operating system and has yet to be adopted on a
widespread basis. At this time, there are relatively few commercially viable
products that operate on the Linux operating system. If Linux is not adopted, or
is adopted more slowly than anticipated, our investments in Linux compatible
products may not generate the anticipated return, and as a result our business
could be materially adversely affected. As a newcomer to these markets, we face
a number of risks including:
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o the new and evolving nature of the markets themselves;
o our need to make choices regarding the operating systems, database
management systems and server software on which to focus;
o the ongoing transition and investment of our resources for this
segment;
o our limited experience in this area; and
o the presence of several very large and well-established businesses, as
well as a number of smaller successful companies, which are already
competing in this market.
There can be no assurance that we will be successful in these new markets.
EXTREMELY COMPETITIVE INDUSTRY
The computer software industry is an intensely competitive industry. Rapid
change, new and emerging technologies and fierce competition characterize the
industry. The pace of change has accelerated due to the emergence of the
Internet and corporate intranets, programming languages, such as Java, and
operating systems such as Linux.
Our development tools and distributed objects products compete with
products offered by a number of companies, including, but not limited to,
Microsoft, Sun Microsystems, Oracle, Sybase, IBM, Webgain and Computer
Associates. In the distributed object market, we compete primarily with IBM, BEA
Systems and Iona Technologies PLC.
In addition, we compete with, and in some cases are dependent upon,
operating systems vendors such as Microsoft, Sun Microsystems, Hewlett-Packard,
IBM, Red Hat and Apple Computer. To the extent that we are unable to obtain
information regarding existing and future operating systems from the developers
of such systems, the release of our products for such systems may be delayed or
may not be competitive. For example, Microsoft, a significant competitor, is the
developer of the Windows(R) operating environment. Microsoft has also introduced
a product that includes certain basic application server functionality. The
bundling of competing functionality in versions of Windows products requires us
to compete with Microsoft in the Windows marketplace where Microsoft has certain
inherent advantages due to its significantly greater financial, technical,
marketing and other resources, greater name recognition, substantial installed
base and the integration of its middleware functionality with Windows. We need
to differentiate our products from Microsoft's, based on scalability,
functionality, interoperability with non-Microsoft platforms, performance and
reliability as well as to establish that our products provide more effective
solutions to customers' needs. There can be no assurance that we will be able to
differentiate our products successfully from those offered by Microsoft, or that
Microsoft's entry into the middleware market will not harm this portion of our
business.
Some of our competitors have substantially greater financial, management,
marketing and technical resources than we have. Many of our competitors have
well-established relationships with our current and potential customers. They
also have extensive knowledge of the market, and extensive development, sales
and marketing resources, and they are capable of
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offering single vendor solutions. In particular, operating system vendors such
as those mentioned above may offer similar products bundled with their own
operating systems. For example,Microsoft has introduced DCOM for Microsoft
operating systems. In addition, in the past, some of our competitors have
utilized their greater resources to provide substantial signing bonuses and
other inducements to lure away our management and other key personnel.
Some of our products are targeted at the emerging market for
standards-based distributed object software products. These markets are
intensely competitive. We believe that our product quality, performance and
price, vendor and product reputation, product architecture and quality of
support make us competitive in these markets. However, because there are
relatively low barriers to entry in these markets, we expect additional
competition from other established and emerging companies. Increased competition
could result in price reductions, fewer customer orders, reduced gross margins
and loss of market share. Any one of these results could materially adversely
affect our business, operating results and financial condition.
It is possible that current and new competitors may form alliances to gain
significant market share. Some of our competitors have offered to license
software for free to gain competitive advantage. This kind of competition could
materially adversely affect our ability to sell additional licenses and
maintenance and support renewals on profitable terms. Competitive pressures
could require us to reduce the price of our products and related services. We
are not certain that we will be able to compete successfully against current and
future competition. The failure to compete successfully would have a material
adverse effect on our business, operating results and financial condition.
We need to differentiate our products from our competitors' products based
on functionality, interoperability, developer productivity, performance and
reliability. There can be no assurance that we will be able to successfully
differentiate our products from those of our competitors.
Commercial acceptance of our products and services is also dependent on the
market's perception of Inprise. Successful marketing of our products and the
promotion of Inprise are both important to our success. There can be no
assurance that our efforts will be successful. In addition, critical or negative
statements made by brokerage firms, industry and financial analysts, and
industry periodicals about Inprise, our products, or our business could
negatively impact customer perception. Similarly, negative advertising or
marketing efforts conducted by our competitors could affect customer perception.
If the customers' perception of us becomes negative, this could have a
materially adverse impact on our business, operating results and financial
condition.
We face intense competition in the development and marketing of Internet
and corporate intranets, middleware and development software. We are not certain
that we will be able to compete effectively for Internet and corporate
intranets, on-line services, electronic commerce and other business
opportunities as they arise.
DEPENDENCE ON THIRD PARTY LICENSES
We are dependent on licenses from third party suppliers for some elements
of our products. If any of these licenses were terminated or were not renewed,
or these third parties failed to develop new or updated products in a timely
manner, we might not be able to ship some of our products. We would then have to
develop an alternative to the third party's
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product. This could result in delays, increased costs or reduced functionality
of our products and could have a material and adverse effect on our business,
operating results and financial condition.
PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS
As a software company, our intellectual property rights are among our most
valuable assets. We rely on a combination of patent, copyright, trademark, trade
secret laws, contractual arrangements, domain name registrations and other
methods to protect our intellectual property rights. The protective steps we
have taken may be inadequate to deter misappropriations of our intellectual
property rights. In addition, it may be possible for an unauthorized third party
to reverse engineer or decompile our software products. We may be unable to
detect the unauthorized use of, or take appropriate steps to enforce, our
intellectual property rights. In addition, the intellectual property laws of
some foreign countries are not as protective as the laws of the United States.
Accordingly, we cannot be certain that we will be able to protect our
intellectual property rights against unauthorized third party copying or use
that could materially and adversely affect our competitive position.
From time to time, we receive a notice claiming that we have infringed a
third party's patent or other intellectual property right. We expect that
software products in general will increasingly be subject to such claims as the
number of products and competitors increase and the functionality of products
overlap. Regardless of the merits of a claim, responding to any claim can be
time consuming and costly and divert the efforts of Inprise's technical and
management personnel from productive tasks. In the event of a successful claim
against us, Inprise may be required to pay significant monetary damages,
discontinue use and sale of the infringing products, expend significant
resources to develop non-infringing technology and/or enter into royalty and
licensing agreements that might not be offered or available on acceptable terms.
If a successful claim were made against us and we failed to commercially develop
or license a substitute technology, our business could be materially harmed.
WE HAVE A HISTORY OF OPERATING LOSSES
Despite the fact that we have experienced an operating profit in our most
recently completed quarter and the immediately proceeding quarter, we have had
operating losses in five of the past six fiscal years. Our ability to achieve
revenue growth and profitability in the future is dependent on our success in
selling our products and services while, at the same time, reducing our
operating expenses. Our future profitability is dependent, among other things,
upon our ability to:
o introduce new products and services successfully;
o achieve market acceptance of our products and services;
o implement restructuring and cost control measures from time to time;
and
o integrate the products and operations of acquired companies
successfully.
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If we are unable to accomplish these objectives, we will be unable to
achieve revenue growth and profitability in future periods.
EXTREME VOLATILITY OF STOCK PRICE
Like the publicly-traded securities of other high technology companies, the
market price of our common stock has experienced significant fluctuations and
may continue to be extremely volatile. During the period from January 1, 1999 to
September 30, 2000, the price of Inprise common stock has ranged from a low of
$2.69 to a high of $20.00. On November 8, 2000, the most recent practicable date
prior to the filing of this Quarterly Report, the close price of Inprise common
stock was $6.25. The market price of our common stock may be significantly
affected by factors such as the following:
o announcements of new products or product enhancements by us or our
competitors;
o technological innovation by us or our competitors;
o quarterly variations in our results of operations or those of our
competitors;
o changes in the prices of our products or those of our competitors;
o changes in revenue and revenue growth rates for us as a whole or for
specific geographic areas, business units, products or product
categories;
o changes in our earnings estimates by market analysts;
o speculation in the press or analyst community;
o actual or anticipated changes in interest rates; and
o general market conditions or market conditions specific to particular
industries.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against the company. The institution of similar litigation against us
could result in substantial costs and a diversion of our management's attention
and resources, which could materially adversely affect our business, results of
operations and financial condition.
RISKS OF REGULATION OF THE INTERNET AND ELECTRONIC COMMERCE
We intend to expand our business through, among other channels, e-commerce
on the Internet. The electronic commerce market is new and rapidly evolving.
While this is an evolving area of the law in the U.S. and overseas, currently
there are relatively few laws or regulations that directly apply to access or
commerce on the Internet. Changes in laws or regulations governing the Internet
and electronic commerce, including, without limitation,
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those governing an individual's privacy rights, could have a material adverse
effect on our business, operating results and financial condition.
RISKS ASSOCIATED WITH OUR DEPENDENCE ON JAVA AND ENCRYPTION TECHNOLOGY
Some of our products are based on Java, an object-oriented software
programming language developed by Sun Microsystems. Java was developed primarily
for Internet and corporate intranet applications. It is still too early to
determine whether Java will become a widely adopted platform. At this time,
there are a limited number of Java-based products. If Java is not adopted
widely, or is adopted more slowly than anticipated, there could be a material
adverse effect on our business.
We will use encryption technology in some of our future products to provide
security 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 our security technology. If such a breach were to
occur, it could have a material adverse effect on our business.
RISKS OF USING RETAIL DISTRIBUTION CHANNELS
A significant portion of our sales are made through retail distribution
channels. Demand in these channels fluctuate based on customer demand. Our
retail distributors also carry the products of competitors. Some of our retail
distributors have limited capital to invest in inventory. Their decision to
purchase our products is based on a combination of demand for our products, our
pricing, and the terms and special promotions we offer.
Our net revenues and earnings may be affected by a practice called "channel
fill." Channel fill occurs when a distributor purchases more products than it
expects to sell in anticipation of price changes, sales promotions or
incentives. After we announce a new version or new product and prior to the date
of product availability, distributors, dealers and end users often delay
purchases, cancel orders or return products in anticipation of the availability
of the new version or product. We try to mitigate the negative effect of this
pattern by deferring recognition of revenue associated with distributors' and
resellers' inventories that are in excess of appropriate levels. However,
channel fill may still affect our net revenues, particularly during periods
where we announce several new products at the same time.
When we introduce new versions of our products, our distributors return
their inventories of the older versions. Our return policy allows our
distributors, with some limitations, to return products in exchange for credit
toward new products. Similarly, end users may return products through dealers
and distributors within a reasonable period from the date of purchase for a full
refund. Retailers may then return the older versions to us. We estimate and
maintain reserves for product returns. However, future product returns could
exceed our reserves, and this could have a material adverse effect on our
business.
RISKS OF RELIANCE ON VARs & ISVs
A part of our strategy is to embed and bundle our technology in the
products offered by value-added-resellers, or VARs and independent software
vendors, or ISVs, such as Cisco Systems, Hewlett-Packard, Hitachi, Microsoft,
Netscape, Novell, and Oracle. In the past, a
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small number of VAR and ISV customers accounted for a significant percentage of
enterprise product revenue.
For these sales, the pricing and discount terms and conditions of our
license agreements are negotiated and vary among our customers. Most of our
license agreements with these customers are non-exclusive and do not require
them to recommend or offer our products exclusively. Many of our agreements do
not require our customers to make a minimum number of purchases. We have
virtually no control over the shipping dates or volumes of systems shipped by
our customers. Many of the markets for the VAR and ISV products are new and
evolving. Therefore, we cannot predict that these customers will purchase our
technology for their products in the future. If we are not successful in
securing additional licenses with our current or new customers on profitable
terms, our business, financial condition and results of operations could be
materially adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND SALES
A substantial portion of our revenue is from international sales. There are
inherent risks in doing business internationally. Some of these risks include
the following:
o general economic conditions in each country;
o seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world;
o the difficulty of managing an organization spread over various
countries;
o fluctuations in currency exchange rates;
o longer payment cycles in certain countries;
o export restrictions, tariffs and other trade barriers;
o changes in regulatory requirements;
o compliance with different laws and regulations;
o overlap of different tax structures; and
o political instability.
One or more of these risk factors could have a material adverse effect on
our future international operations and, consequently, on our business,
operating results and financial condition. In addition, our subsidiaries
generally operate in local currencies, and their results are translated monthly
into U.S. dollars. If the value of the U.S. dollar increases significantly
relative to foreign currencies, our business, operating results and financial
condition could be materially adversely affected.
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RISKS OF SOFTWARE DEFECTS AND LIABILITY CLAIMS
Software products occasionally contain errors or defects, especially when
they are first introduced or when new versions are released. We have not
experienced any substantial problems to date from potential defects and errors.
We routinely test our new products and new versions for defects and errors. We
cannot be certain, however, that our products are completely free of defects and
errors. The discovery of a defect or error in a new version or product may
result in the following consequences, among others:
o delayed shipping of the product;
o immediate loss of revenue;
o delay in market acceptance;
o diversion of development resources;
o damage to our reputation; and
o increased service and warranty costs.
These factors could materially and adversely affect our business, operating
results and financial condition.
Most of our license agreements contain provisions designed to limit our
liability for potential product liability claims. It is possible, however, that
these provisions may not protect us because of existing or future federal, state
or local laws or ordinances or judicial decisions. A successful product
liability claim for large damages brought against us could have a material
adverse effect on our business, operating results and financial condition.
RISKS OF ANTI-TAKEOVER PROVISIONS
In December 1991, we implemented a stockholder rights plan to protect our
stockholders in the event of a proposed takeover that has not been recommended
or approved by our Board of Directors. Under our stockholder rights plan, each
share of our outstanding common stock has attached to it one preferred share
purchase right. Each preferred share purchase right entitles the holder, under
certain circumstances, to purchase shares of our common stock at a 50% discount
from its then current market price. The preferred share purchase rights are
redeemable at a nominal price and expire in 2001.
Our stockholder rights plan and certain provisions of our Restated
Certificate of Incorporation and Amended and Restated Bylaws may discourage or
prevent an actual or potential change in control of Inprise even if such a
change in control would be beneficial to our stockholders. These limitations may
limit our stockholders' ability to approve transactions that they may deem to be
in their best interests. In addition, our Board of Directors has the authority
to fix the rights and preferences of, and issue shares of, preferred stock
without action by our stockholders. This may have the effect of delaying or
preventing a change in control of Inprise.
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POTENTIAL DILUTIVE EFFECT OF CONVERSION AND ADDITIONAL ISSUANCE OF SERIES C
PREFERRED STOCK ("SERIES C STOCK")
Each share of our Series C Stock is convertible, at the option of the
holder, after a two year holding period, or, automatically, in the event of a
fundamental transaction such as a merger. The shares are convertible, based on a
fixed conversion ratio, into fully-paid and non-assessable shares of Inprise
common stock. The conversion ratio is subject to adjustments for stock splits or
other capital reorganizations. As of September 30, 2000, 6,720,430 shares of our
common stock were reserved for issuance upon the conversion of the Series C
Stock into shares of Inprise common stock.
RISKS ASSOCIATED WITH POTENTIAL BUSINESS COMBINATIONS
As a part of our business strategy, we may make acquisitions of businesses,
products or technologies in the future. We will review potential acquisition
prospects to determine if they:
o complement our existing product offerings;
o augment our market coverage;
o enhance our technological capabilities; or
o offer growth opportunities.
There may be substantial costs associated with acquisitions including the
potential dilution to our earnings per share, the incurrence or assumption of
debt, the assumption of contingent liabilities, and the amortization of expenses
related to goodwill and other intangible assets. Acquisitions entail numerous
risks, including difficulty in the assimilation of operations, technologies,
products and personnel. Acquisitions also divert the attention of management
from other business concerns. An acquisition in a new area risks entering
markets where we have limited or no prior experience as well as potential loss
of key employees of the acquired organization. Any one of these risks, if
realized, could negatively impact our operating results and/or the market price
of our common stock. We cannot be certain of our ability to successfully
integrate any businesses, products, technologies or personnel acquired. Failure
to do so in an acquisition could negatively affect our business, financial
condition and operating results.
IMPACT OF YEAR 2000 DATE TRANSITION
This section is a Year 2000 Readiness Disclosure pursuant to the Year 2000
Information and Readiness Disclosure Act of 1998.
We currently know of no significant year 2000-related failures occurring in
either our products or our internal systems as a result of the date change from
December 31, 1999 to January 1, 2000.
Costs for our efforts to address Year 2000 readiness have not been
substantial and are largely absorbed within our existing engineering
expenditures. To date, these costs have not been reported separately.
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We believe that the most of our newly introduced products are Year 2000
ready. Some of our older products are not Year 2000 ready or will not be tested.
Where possible, we encouraged our customers to migrate to current product
versions. However, despite our analysis and review, it is possible that our
products may contain undetected errors or defects associated with Year 2000 date
functions, that may result in material costs. Furthermore, use of our products
in connection with other products, that 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
that our products or third party products that include our products prove not to
be Year 2000 ready or in the event of disputes with customers regarding whether
our products are ready, our business, results of operations and financial
condition could be materially adversely affected.
RISK OF NATURAL DISASTERS
Our corporate headquarters, including most of our research and development
operations, are located in Scotts Valley, California, an area known for
significant seismic activity. Seismic activity, such as a major earthquake,
could have a material adverse effect on our business, financial condition and
operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our 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 we enter into various
hedging transactions as described below. We do not use financial instruments for
trading purposes.
FOREIGN CURRENCY RISK
We conduct business in a number of foreign countries, including Japan,
Canada, Latin America and certain countries throughout Europe and Southeast
Asia. We have established a foreign currency program utilizing foreign currency
forward exchange contracts to minimize foreign currency risk for intercompany
balances and other monetary assets denominated in foreign currencies. A forward
foreign exchange contract obligates us to exchange predetermined amounts of
specified foreign currencies at specified exchange rates on specified dates or
to make an equivalent U.S. Dollar payment equal to the value of such exchange.
We do not use foreign currency forward exchange contracts for trading purposes.
The goal of the program is to offset the earnings impact of foreign denominated
balances. At the end of a given month, the foreign denominated balances and the
forward exchange contracts are marked-to-market, and unrealized gains and losses
are included in current period net income.
During the nine months ended September 30, 2000, we recorded foreign
exchange losses of $1.0 million on intercompany receivables primarily due to the
dollar strengthening against the Euro and Australian Dollar. To the extent that
Inprise has entered into a hedging contract for the receivables denominated in
these currencies, the losses have been offset by our foreign exchange contracts.
We cannot be certain that these currency trends will continue. If the U.S.
Dollar continues to strengthen against these or other foreign currencies, we may
experience foreign exchange losses to the extent that we have not limited our
exposure with foreign currency forward exchange contracts. Future foreign
exchange losses could have a material adverse effect on our operating results
and cash flows.
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<PAGE>
The table below sets forth information about our derivative financial
instruments, that are comprised of foreign currency forward exchange contracts
outstanding as of September 30, 2000. The information is provided in U.S. Dollar
equivalent amounts, as presented in our financial statements. For foreign
currency forward exchange contracts, the table presents the notional amounts (at
the contract exchange rates) and the weighted average contractual foreign
currency exchange rates. All instruments mature within a period of twelve months
or less.
<TABLE>
<CAPTION>
September 30, 2000
------------------------------------------------
Notional Average Estimated
Amount Contract Rate Fair Value
--------------- -------------- ---------------
Foreign currency forward exchange contracts:
<S> <C> <C> <C>
Australian Dollar.............................. $ 7,166,293 1.85 $ 33,949
Canadian Dollar................................ 1,321,615 1.49 (11,078)
Italian Lira................................... 531,750 2271.00 19,174
Hong Kong Dollar............................... 1,807,229 7.80 463
Dutch Guilder.................................. (2,140,093) 2.58 262,971
Singapore Dollar............................... 6,016,535 1.75 27,992
British Pound ................................. (214,086) 0.70 (4,583)
--------------- ---------------
Total $14,489,243 $ 328,888
=============== ===============
</TABLE>
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We place our cash equivalents and short-term
investments in a variety of financial instruments such as commercial paper. Our
investment policy limits the amount of our credit exposure to any one financial
institution or commercial issuer.
We mitigate default risks by investing in only investment grade credit
quality securities and by positioning our portfolio to respond appropriately to
a significant reduction in the credit rating of any investment issuer. Our
portfolio includes only marketable securities with active secondary and resale
markets to ensure portfolio liquidity.
We have no interest rate exposure from rate changes for our fixed rate
long-term debt obligations. We primarily enter into debt and capital lease
obligations to finance capital expenditures. Such debt and capital lease
obligations have a fixed rate of interest.
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<PAGE>
The table below presents principal (or notional) amounts (in thousands) and
related weighted average interest rates by year of maturity for our investment
portfolio and debt obligations.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash equivalents........ $ 214,415 $ 214,415
Fixed rate............ 6.16% 6.16%
Short-term investments.. $ 4,179 $32,093 $ 36,272
Fixed rate............ 1.40% 6.51% 5.92%
Long-term debt:
Debt.................... $ 84 $ 180 $200 $222 $247 $ 8,094 $ 9,027
Fixed Rate............ 10.75% 10.75%
</TABLE>
CREDIT RISKS
Our financial instruments that are exposed to concentrations of credit risk
consist primarily of cash, cash equivalents, investments and trade receivables.
We position our cash equivalents in high quality securities placed with major
banks and financial institutions. With respect to receivables, our risk is
limited due to the large number of customers and their dispersion across
geographic areas. We perform periodic credit evaluations of our customers'
financial condition and generally do not require collateral. Currently, one
customer located in the United States accounts for approximately 14% of net
accounts receivable. No other single group or customer represents greater than
10% of net accounts receivable.
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<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
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-Legal Proceedings, of this Quarterly Report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 3, 2000, Inprise completed the acquisition of all of the
outstanding capital stock of Chicago-based Bedouin, Inc. ("Bedouin") to
accelerate its previously announced plans to enter the developer services
market.
The total purchase price for the Bedouin stock consisted of a cash payment
equal to $1.6 million and the issuance of up to 250,000 shares of Inprise common
stock (the "Stock Consideration") to be paid and distributed to the former
stockholders of Bedouin in accordance with the terms of an escrow agreement (the
"Escrow Agreement"). Additionally, Inprise previously provided a $300,000 loan
to Bedouin in the form of a convertible Promissory Note. The escrowed stock
vests over a four year period, based upon retention of certain key employees of
Bedouin, as set forth in the Escrow Agreement. Inprise may pay to the former
stockholders of Bedouin cash in lieu of vested shares, based upon a 20-day
moving average value of Inprise common stock.
Inprise has relied on the exemption contained in Section 4(2) of the
Securities Act of 1933, as amended, in connection with the issuance of the Stock
Consideration to the former stockholders of Bedouin. The Stock Consideration is
being issued pursuant to a private placement and the stockholders of Bedouin
were given access to all relevant information necessary to evaluate an
investment in Inprise common stock.
Bedouin, together with its product management and software development
team, will form the foundation of Inprise's newest business unit, Borland
Developer Services which will be based in Chicago. Patrick J. Kerpan, the
founder of Bedouin, has joined Inprise as Vice President and General Manager of
the new business unit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 11, 2000, Inprise filed a Quarterly Report on Form 10-Q with the
Securities and Exchange Commission which reported the matters voted upon at the
annual meeting of Inprise stockholders held on July 25, 2000. The text of Item 4
of such Quarterly Report is incorporated by reference into this Quarterly
Report.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The following exhibits are filed as part of, or incorporated by reference
into, this Quarterly Report.
Exhibit No. Description of Exhibit
10.1 Amendment to Employment Agreement between Roger A.
Barney and Inprise Corporation dated as of September
11, 2000. * ++
27.1 Financial Data Schedule*
--------------------
* Filed herewith.
++ Management contract or compensatory plan or arrangement.
A copy of any exhibit will be furnished (at a reasonable cost) to any
stockholder of Inprise upon receipt of a written request. Such request should be
sent to Inprise Corporation, 100 Enterprise Way, Scotts Valley, California
95066-3249, Attention: Investor Relations.
B. Reports on Form 8-K
1. On September 21, 2000, Inprise filed a Current Report on Form 8-K with
the Securities and Exchange Commission. The purpose of the filing was to report
that, on September 19, 2000, the Board of Directors of Inprise adopted certain
amendments to Inprise's Bylaws.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INPRISE CORPORATION
(Registrant)
Date: November 13, 2000
/ s / Frederick A. Ball
Frederick A. Ball
Senior Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
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