-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M7a5dwSO/dFMfVA6guPAZwR3YDSBPnqPj4S36wyvOtXXoQtd7b4sHVk0pg0VSWDs h3ewmY1fkjm1dRDjJ60omA== 0001012870-98-000229.txt : 19980209 0001012870-98-000229.hdr.sgml : 19980209 ACCESSION NUMBER: 0001012870-98-000229 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980206 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VISIGENIC SOFTWARE INC CENTRAL INDEX KEY: 0000917062 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943173927 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21127 FILM NUMBER: 98524609 BUSINESS ADDRESS: STREET 1: 951 MARINERS ISLAND BLVD STREET 2: SUITE 120 CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4152861900 MAIL ADDRESS: STREET 1: 951 MARINERS ISLAND BLVD STREET 2: SUITE 120 CITY: SAN MATEO STATE: CA ZIP: 94404 10-Q 1 FORM 10-Q ================================================================================ 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 quarterly period ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ------------- --------------- Commission file number: 0-21127 VISIGENIC SOFTWARE, INC. (Exact name of registrant as specified in its charter) Delaware 94-3173927 (State or other jurisdiction of (I.R.S. Employee incorporation or organization) Identification No.) 951 Mariner's Island Blvd. Suite 120 San Mateo, CA 94404 (Address of principal executive offices including zip code) (650) 286-1900 (Registrant's telephone number, including area code) 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 --- --- Number of shares of registrant's common stock outstanding as of January 30, 1998: 14,663,232 ================================================================================ VISIGENIC SOFTWARE, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets at December 31, 1997 and March 31, 1997 3 Condensed Consolidated Statements of Operations for the three months and nine months ended December 31, 1997 and December 31, 1996 4 Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 1997 and December 31, 1996 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults upon Senior Securities 19 Item 4 Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 20 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VISIGENIC SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, MARCH 31, 1997 1997 (UNAUDITED) ------------------------ CURRENT ASSETS: Cash and cash equivalents $ 15,539 $ 19,679 Accounts receivable, net 6,807 8,324 Prepaid compensation 427 709 ------------------------ Total current assets 22,773 28,712 ------------------------ PROPERTY AND EQUIPMENT, NET 3,222 3,143 OTHER ASSETS, NET: Excess of purchase price over net assets acquired 217 1,078 Other 128 110 ------------------------ TOTAL ASSETS $26,340 $33,043 ======================== CURRENT LIABILITIES: Accounts payable $ 599 $ 846 Accrued liabilities - Payroll and related benefits 2,185 1,458 Other 1,458 1,222 Deferred revenue 2,746 2,519 ------------------------ Total current liabilities 6,988 6,045 ------------------------ STOCKHOLDERS' EQUITY: Common stock 14 14 Additional paid-in-capital 59,411 58,723 Accumulated deficit (40,054) (31,747) Accumulated translation adjustment (19) 8 ------------------------ Total stockholders' equity 19,352 26,998 ------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,340 $ 33,043 ========================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 VISIGENIC SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 ----------------------- ----------------------- REVENUE: Software licenses $ 4,374 $ 4,602 $ 12,460 $ 10,768 Consulting services, maintenance and other 2,303 937 5,991 2,581 ----------------------- ----------------------- Total revenue 6,677 5,539 18,451 13,349 ----------------------- ----------------------- COST OF REVENUE: Software licenses 696 391 1,726 922 Consulting services, maintenance and other 1,571 961 4,348 2,094 ----------------------- ----------------------- Total cost of revenue 2,267 1,352 6,074 3,016 ----------------------- ----------------------- GROSS PROFIT 4,410 4,187 12,377 10,333 ----------------------- ----------------------- OPERATING EXPENSES: Product development 2,151 2,512 7,533 6,650 Sales & marketing 3,135 2,697 9,298 7,304 General & administrative 1,056 787 3,308 1,950 Purchased in process product development - 350 - 12,364 Amortization of excess of purchase price over net assets acquired 247 189 859 361 ----------------------- ----------------------- Total operating expenses 6,589 6,535 20,998 28,629 ----------------------- ----------------------- Loss from operations (2,179) (2,348) (8,621) (18,296) ----------------------- ----------------------- INTEREST AND OTHER INCOME, NET 183 142 614 190 PROVISION FOR TAXES (100) (57) (311) (96) ----------------------- ----------------------- NET LOSS ($2,096) ($2,263) ($8,318) ($18,202) ======================= ======================= BASIC AND DILUTED NET LOSS PER SHARE ($0.14) ($0.58) ========= ========= PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE ($0.17) ($1.46) ========= ========= SHARES USED IN PER SHARE CALCULATION 14,527 12,976 14,450 12,494 ======================= =======================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 VISIGENIC SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, 1997 1996 ------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($ 8,318) ($ 18,202) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,653 897 Purchased in process product development - 12,364 Provision for allowance for doubtful accounts 250 85 Adjustment to conform year-end of pooled company 126 - Changes in assets and liabilities, net of acquisition of PostModern and CustomWare: Decrease (increase) in accounts receivable 1,267 (4,621) Decrease (increase) in prepaid expenses and other current assets 282 (887) Decrease in accounts payable (247) (186) Increase in accrued liabilities 936 1,075 Increase in deferred revenue 227 388 --------- ---------- Net cash used in operating activities (3,824) (9,087) --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Payment for purchase of PostModern, net of cash acquired - (1,919) Purchases of property and equipment (871) (1,691) Organizational costs and other assets (18) (34) --------- ---------- Net cash used in investing activities (889) (3,644) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of convertible notes - 2,000 Net proceeds from issuance of preferred stock - 4,000 Net proceeds from issuance of common stock 688 13,431 Cash dividends of iO declared prior to merger (115) - --------- ---------- Net cash provided by financing activities 573 19,431 --------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,140) 6,700 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,679 2,433 --------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,539 $ 9,133 ========= ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 VISIGENIC SOFTWARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The condensed consolidated financial statements included herein have been prepared by Visigenic Software, Inc. (the "Company") without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's definitive proxy on Schedule 14A filed on January 28, 1998 which included the Annual Report for the fiscal year ended March 31, 1997. The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the nine-month period ended December 31, 1997. The results for the nine-month period ended December 31, 1997 are not necessarily indicative of the results expected for the full fiscal year. 2. MERGER On November 18, 1997 the Company and Borland International, Inc. ("Borland") announced that the two companies had signed a definitive agreement for the Company to be acquired by Borland. The board of directors of both companies have approved the acquisition, which is subject to approval by the stockholders of both companies, as well as to customary regulatory approvals and other closing conditions. Pursuant to the terms of the definitive agreement, shareholders of the Company will receive .81988 shares of Borland common stock for each share of the Company's common stock they currently hold. 3. BUSINESS COMBINATION On September 5, 1997 the Company merged with Interactive Objects Software GmbH ("iO"), a leading German consulting company that specializes in distributed object computing, which resulted in iO becoming a wholly-owned subsidiary of the Company. In connection therewith, the Company issued 353,767 shares of the Company's common stock. The merger was accounted for as a pooling of interests. Accordingly, the Company's consolidated financial statements for all periods presented have been restated to include the financial statements of iO. iO's year end was December 31. In accordance with Securities and Exchange Commission rules and regulations, iO's year end of December 31, 1996 was combined with the consolidated financial statements of the Company for the year ended March 31, 1997. iO's financial statements for the years ended December 31, 1994 and December 31, 1995 were combined with the Company's financial statements for the years ended March 31, 1995 and March 31, 1996, respectively. The net revenue and net income of iO for the quarter ended March 31, 1997 of $951,000 and $126,000, respectively, have been excluded from the Condensed Consolidated Statement of Operations for the nine month period ended December 31, 1997 as a result of the combination referred to above. Adjustments to account for the exclusion of the income have been made to retained earnings in fiscal 1998. 6 Total revenue and net income (loss) of the separate companies were (in thousands):
VISIGENIC INTERACTIVE OBJECTS SOFTWARE, INC. SOFTWARE GMBH COMBINED -------------- ------------------- -------- NINE MONTHS ENDED DECEMBER 31, 1997: TOTAL REVENUE $ 15,620 $2,831 $ 18,451 NET INCOME (LOSS) (8,649) 331 (8,318) NINE MONTHS ENDED DECEMBER 31, 1996: TOTAL REVENUE 11,534 1,815 13,349 NET INCOME (LOSS) (18,271) 69 (18,202)
Costs associated with the merger were expensed in the quarter ended September 30, 1997. The expenses associated with the merger were approximately $300,000. 4. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE In the quarter ended December 31, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which specifies the computation, presentation and disclosure requirements of per share information. The statement was applied on a retroactive basis, however, there were no changes necessary to the historical per share information. Basic net loss per share has been computed using the weighted average number of common shares outstanding. Basic and diluted per share amounts are substantially the same. Common equivalent shares would be antidilutive and have therefore been excluded from the diluted per share calculation. Pro forma net loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of convertible preferred stock (using the if converted method) and stock options (using the treasury stock method). As the Company has incurred losses since inception, common equivalent shares have been excluded from the computation of diluted weighted average shares, as their effect is antidilutive; however, pursuant to Securities and Exchange Commission requirements, such computations include all common and common equivalent shares issued within the twelve months preceding the filing date as if they were outstanding for all periods presented using the treasury stock method. Convertible preferred stock outstanding during the period are included (using the "if converted" method) in the computation of basic and diluted shares even though the effect is antidilutive. 5. CONTINGENCIES On April 10, 1997, Western Imaging, Inc. ("Western Imaging") filed a complaint in the U.S. District Court for the Northern District of California against the Company and Corel Corporation ("Corel"), a licensee of the Company, alleging breach of contract, intentional and negligent misrepresentation, copyright infringement, trademark infringement, misappropriation of trade secrets and other related claims. The lawsuit claims that in a May 1994 agreement with Western Imaging, the Company sold to Western Imaging all right, title and interest not only to its Lumena product, but also to its Color Tools, Creative License, Oasis and Signature products as well. As a result, Western Imaging asserts that the Company breached the terms of the agreement with Western Imaging when, among other things, it licensed Creative License, Color Tools, Oasis and Signature to Corel. Western Imaging is seeking injunctive relief, unspecified damages, impoundment of the disputed software during the pendency of the litigation, and punitive damages. The Company has not sold or marketed the disputed software products since January 1995. The Company does not utilize this technology in any current product offering. 7 The Company has agreed to defend Corel pursuant to the terms of its license to Corel. The Company and Corel have filed an answer to the complaint denying Western Imaging's allegations. The court has issued an order compelling the parties to participate in non-binding mediation by the end of February 1998. The Company is currently investigating and conducting discovery regarding the allegations and believes it has meritorious defenses to such claims and intends to defend the litigation vigorously. However, due to the nature of the litigation and because the lawsuit is at a relatively early stage, the Company cannot determine the total expense or possible loss, if any, that may ultimately be incurred either in the context of a trial or as a result of a negotiated settlement. Regardless of the ultimate outcome of the litigation, it could result in significant diversion of time by the Company's technical and managerial personnel. 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. 6. LINE OF CREDIT AND EQUIPMENT TERM LOAN The Company has a $5.0 million revolving line of credit agreement which expires on July 14, 1998, and a $2.0 million equipment term loan with a draw down period ending April 15, 1998 and equipment borrowings to be amortized over thirty-six months thereafter. Both the line of credit and the equipment term loan are incorporated in a loan agreement (the "Agreement") dated July 15, 1997. Advances under the Agreement bear interest at the bank's prime lending rate. Line of credit advances are limited to 80% of eligible accounts receivable. All advances are secured by substantially all of the assets and contractual rights of the Company. The Agreement also contains certain financial restrictions and covenants which require, among other things, for the line of credit, that the Company maintain a minimum monthly tangible net worth and a minimum quick ratio; and for the equipment term loan, a minimum liquidity ratio or debt service coverage. There were no borrowings outstanding under the Agreement as of December 31, 1997. 7. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information about Capital Structure," which will be adopted by the Company in the fourth quarter of 1998. SFAS No. 129 requires companies to disclose certain information about their capital structure. SFAS No. 129 will not have a material impact on the Company's financial statement disclosures. In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income," which establishes standards for reporting and presentation of comprehensive income and its components. SFAS No. 130 will become effective for the Company's year ending March 31, 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for disclosure of segment information. SFAS No. 131 will become effective for the Company's year ending March 31, 1999. SFAS No. 131 will not have a material impact on the Company's financial statement disclosures. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In addition to historical information, this discussion contains forward-looking statements. Readers are cautioned not to place undue reliance on these forward- looking statements. Due to a number of risks and uncertainties, actual events and the Company's actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in Factors ------- That May Affect Future Results. - ------------------------------- The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with management's discussion and analysis of financial condition and results of operations included in the management's discussion and analysis of financial conditions and results of operations included in the Company's definitive Proxy Statement on Schedule 14A as filed on January 28, 1998. OVERVIEW The Company commenced operations in February 1993 and was engaged principally in product and market research and product development until the launch of its initial products in November 1994. The Company first recognized material revenue in the fourth quarter of fiscal 1995. In May 1996, the Company acquired PostModern Computing Technologies Inc. ("PostModern"), a supplier of distributed object technology, and began selling VisiBroker for C++ and VisiBroker for Java, distributed object products based on technology acquired from PostModern. On September 5, 1997 the Company merged with Interactive Objects Software GmbH ("iO"), a leading German consulting company that specializes in distributed object computing, which resulted in iO becoming a wholly-owned subsidiary of the Company. See Note 3 of Notes to Condensed Consolidated Financial Statements. On October 21, 1997 the Company announced that in order to focus its efforts on its business related to its Object Request Broker ("ORB") technology, the Company would be transitioning out of its business relating to Open Database Connectivity ("ODBC") data access products, which include VisiODBC Software Development Kits ("SDKs"), VisiODBC Drivers and VisiChannel for ODBC and would not be further enhancing such products. As part of this transition, the Company and Intersolv entered into an agreement in August 1997 under which the Company's customers for these products are being offered a plan to transition to comparable products provided by Intersolv. On November 18, 1997, the Company and Borland International, Inc. ("Borland") announced that the two companies had signed a definitive agreement for the Company to be acquired by Borland (the "Merger Agreement"). The board of directors of both companies have approved the acquisition, which is subject to approval by the stockholders of both companies, as well as to customary regulatory approvals and other closing conditions. The Special Meeting of the Company's stockholders to vote on approval of the Merger Agreement and the transaction by which the Company will become a wholly-owned subsidiary of Borland (the "Merger") is currently scheduled for February 27, 1998. See Note 2 of Notes to Condensed Consolidated Financial Statements. The Company's revenue is derived from license fees from licensing its products, royalties from value added resellers ("VARs"), independent software vendors ("ISVs") and distributors, and fees for services related to its products, including software maintenance, development contracts, consulting and training. License fees for the Company's products vary according to the specific products licensed. The Company licenses its products to VARs and ISVs, which include the Company's products in their own products, and to end users, which deploy the Company's products in their own computing environments. A substantial portion of the Company's license revenue to date is attributable to licenses to VARs and ISVs. A relatively small number of VAR and ISV customers have accounted for a significant percentage of the Company's license revenue. Licenses to end users have increased and for the first nine months of fiscal 1998 accounted for approximately 46% of the Company's total license revenue. The Company's VAR and ISV sales have generally reflected a relatively high amount of revenue per order. For fiscal 1997, licenses to the Company's ten largest customers accounted for approximately 48% of the Company's total revenue. However, as the numbers of the Company's end user customers have grown, the number of orders has increased and the amount of revenue per order 9 has significantly decreased. For the first nine months of fiscal 1998, licenses to the Company's ten largest customers accounted for approximately 19% of the Company's total revenue. The Company markets its products in North America through its direct sales and telesales organizations and through VARs and ISVs. Throughout the rest of the world, the Company markets its products through distributors, VARs and ISVs, and also direct sales in western Europe. RESULTS OF OPERATIONS REVENUE Revenue for the third quarter of fiscal 1998 was $6.7 million, representing a 21% increase over revenue of $5.5 million recorded during the comparable period of fiscal 1997. For the nine months ended December 31, 1997, Visigenic's revenue grew 38% to $18.5 million from $13.3 million reported for the comparable period of the prior fiscal year. Total software license revenue decreased 4.9% in comparison with the third quarter of fiscal 1997 due primarily to the Company's announcement in October 1997 that it discontinued its ODBC based database access product line in order to focus its efforts on its business related to its ORB technology. Software license revenue from the Company's ORB products increased 95% in the third quarter of fiscal 1998 when compared to the third quarter of fiscal 1997. License revenue for the first nine months of fiscal 1998 was adversely impacted by a one-time charge of $753,000 for certain client-side ODBC driver products and a discontinued version of VisiChannel based on SmartSockets/TM /middleware, which Platinum technology, Inc. returned during the first quarter. Platinum technology remains a customer of the Company's distributed object technology and a stockholder of the Company. Consulting, maintenance and other revenue increased 146% in the third quarter of fiscal 1998 over the comparable period of the prior year and accounted for 34% and 17% of total revenue for the third quarter of fiscal 1998 and fiscal 1997, respectively. For the nine month period ended December 31, 1997, the increase was 132% over the comparable period of the prior fiscal year. The increase in revenue was primarily due to the greater licensing of products to customers under agreements with maintenance components, growth in training and consulting activities and the inclusion of iO's results as a result of the Company's acquisition of iO in September 1997. See Note 3 of Notes to Condensed Consolidated Financial Statements. COST OF REVENUE Cost of software license revenue includes product packaging, documentation, production and shipping. Cost of software license revenue increased from $391,000 in the third quarter of fiscal 1997 to $696,000 in the third quarter of fiscal 1998 and from $922,000 for the nine months ended December 31, 1996 to $1.7 million for the nine months ended December 31, 1997. The increases resulted from increased volume of licensing of the Company's products as well as additional technology and products licensed from third parties for inclusion in the Company's product line. Cost of consulting, maintenance and other revenue consists primarily of personnel and personnel-related overhead allocation, facility and systems costs incurred in providing consulting, training, customer support and engineering development services. Cost of consulting, maintenance and other revenue increased from $961,000 in the third quarter of fiscal 1997 to $1.6 million in the third quarter of fiscal 1998 and from $2.1 million for the nine months ended December 31, 1996 to $4.3 million for the nine months ended December 31, 1997. These increases reflect the effect of fixed costs resulting from the Company's investment during the first half of fiscal 1998 in a larger professional services organization, 10 including the acquisition of iO in Germany, which was accounted for as a pooling of interests. See Note 3 of Notes to Condensed Consolidated Financial Statements. The Company intends to continue investing resources to its professional services organization. OPERATING EXPENSES Product Development. Product development expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities, and consist primarily of employee salaries, personnel-related overhead allocation, benefits, consulting costs, the cost of technology licensed from other software companies and the cost of software development tools. Product development expenses decreased by 14% from $2.5 million in the third quarter of fiscal 1997 to $2.2 million in the third quarter of fiscal 1998 primarily due to reduced licensing of technology from third parties. Product development expenses increased by 13% from $6.7 million for the nine months ended December 31, 1996 to $7.5 million for the nine months ended December 31, 1997. The increase in the dollar amount of product development expenses was primarily attributable to costs of additional personnel and full-time contractors in the Company's product development operations. In accordance with Statement of Financial Accounting Standards No. 86, the Company has charged all software development costs to product development expense as incurred because expenditures which were eligible for capitalization were insignificant. Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, personnel-related overhead allocation, field office rent and related expenses, travel and entertainment, advertising, seminars, and promotional expenses. Sales and marketing expenses increased by 16% from $2.7 million in the third quarter of fiscal 1997 to $3.1 million in the third quarter of fiscal 1998 and by 27% from $7.3 million for the nine months ended December 31, 1996 to $9.3 million for the nine months ended December 31, 1997. The increase in sales and marketing expenditures reflects primarily the hiring of additional sales and marketing personnel, costs associated with expanded advertising, seminars, and promotional activities, increased sales commissions and increased costs associated with field sales offices. The Company expects that sales and marketing expenses will continue to increase in absolute dollar amounts to the extent the Company expands its sales and marketing efforts domestically, and internationally establishes additional sales offices and increases advertising and promotional activities; however, such expenses may continue to vary as a percentage of revenue. General and Administrative. General and administrative expenses consist primarily of salaries and occupancy costs for administrative, executive and finance personnel and personnel related overhead allocation. General and administrative expenses increased by 34% from $787,000 in the third quarter of fiscal 1997 to $1.1 million in the third quarter of fiscal 1998 and by 70% from $2.0 million for the nine months ended December 31, 1996 to $3.3 million for the nine months ended December 31, 1997. The increase in general and administrative expenses was primarily due to increased staffing and associated expenses necessary to manage and support the Company's increased scale of operations, costs associated with the acquisition of iO and an increase in reserves associated with the Company's decision to discontinue enhancement of the ODBC data access product line. Purchased In Process Product Development and Amortization. In May 1996, the Company completed the acquisition of PostModern, which was accounted for as a purchase in the quarter ended June 30, 1996. In December 1996, the Company completed the acquisition of CustomWare, Inc. ("CustomWare") which was accounted for as a purchase in the quarter ended December 31, 1996. In connection with the acquisition of PostModern, the Company recorded a write-off in the quarter ended June 30, 1996 of approximately $12.0 11 million related to in process product development which had not reached technological feasibility and, in the opinion of management, had no alternative future use. The remaining excess of purchase price over net assets acquired of approximately $1.1 million will be amortized over two years ending May 1998. In connection with the acquisition of CustomWare, the Company recorded a write-off in the quarter ended December 31, 1996 of approximately $350,000 related to in process product development which had not reached technological feasibility and, in the opinion of management, had no alternative future use. The remaining excess of purchase price over net assets acquired of approximately $700,000 was amortized over one year. PROVISION FOR TAXES Provision for taxes consists of foreign withholding taxes on sales to Japanese customers and German income taxes related to the acquisition of iO. See Note 3 of Notes to Condensed Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity include cash and cash equivalents of $15.5 million, a $5.0 million revolving line of credit which expires on July 14, 1998, and a $2.0 million equipment term loan with a draw down period ending April 15, 1998 with equipment borrowings to be amortized over thirty-six months thereafter. Advances under the revolving line of credit and term loan bear interest at the bank's prime lending rate (8.5% at December 31, 1997). Line of credit advances are limited to 80% of eligible accounts receivable. All advances are secured by substantially all of the assets and contractual rights of the Company. Both the line of credit and the equipment term loan contain certain financial restrictions and covenants when borrowings are outstanding. As of December 31, 1997, the Company was in compliance with these financial restrictions and covenants. There were no borrowings outstanding under the line of credit or equipment term loan as of December 31, 1997. See Note 6 of Notes to Condensed Consolidated Financial Statements. Deferred revenue consists primarily of the unrecognized portion of revenue under maintenance and support contracts (which revenue is deferred and recognized ratably over the term of such contracts) and advance payment of software development fees and software license fees. Capital expenditures were primarily for computers, furniture and equipment. The Company expects that its capital expenditures will increase the extent the Company's employee base grows. As of December 31, 1997, the Company did not have any material commitments for capital expenditures. As noted above, the Company has entered into the Merger Agreement, pursuant to which the Company will be acquired by Borland, subject to approval by the stockholders of both companies as well as to customary regulatory approvals and other closing conditions. As an independent company, the Company believes that its existing sources of liquidity and cash generated from operations will satisfy the Company's projected working capital and other cash requirements for at least the next twelve months. Although operating activities may provide cash in certain periods, to the extent the Company experiences growth in the future, the Company anticipates that its operating and investing activities will use cash. Any such future growth and any acquisitions of other technologies, products or companies may require the Company to obtain additional equity or debt financing, which may not be available or may be dilutive. If adequate funds are not available to satisfy either short or long-term capital requirements, the Company may be required to limit its operations significantly. FACTORS THAT MAY AFFECT FUTURE RESULTS: The Company operates in a rapidly changing environment that involves numerous risks, a number of which are beyond the Company's control. The following discussion highlights some of those risks. A comprehensive summary of the risks can be found in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 and the Company's definitive Proxy Statement on Schedule 14A as filed on January 28, 1998. For purposes of the discussion below, the post-Merger Borland resulting from the combination of Borland and the Company is sometimes referred to as the "combined company". 12 Limited Operating History and History of Losses. The Company was incorporated in 1993 and commenced shipment of its initial products in November 1994. In May 1996, the Company acquired PostModern. PostModern was founded in 1991, commenced shipment of its initial products in 1992 and had very limited product sales prior to the acquisition. In December 1996, the Company acquired Customware. CustomWare was founded in 1994 and had very limited operations prior to the acquisition. In September 1997, the Company acquired iO. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its future operating results can be based. Since inception, the Company has incurred significant losses and negative cash flow. At December 31, 1997, the Company had cumulative operating losses of $40.1 million, with net losses of $2.4 million, $4.6 million, $4.4 million , $20.3 million, and $8.3 million for fiscal 1994, fiscal 1995, fiscal 1996, fiscal 1997, and the nine months ended December, 31, 1997, respectively. A substantial portion of the accumulated deficit is due to the significant commitment of resources to the Company's product development and sales and marketing activities and the write-off of approximately $12.0 million of in process product development in the quarter ended June 30, 1996 in connection with the acquisition of PostModern. The Company expects to continue to devote substantial resources in these areas and as a result will need to generate significant revenue in order to achieve profitability. The Company currently anticipates that it will operate at a loss through at least the middle of 1998. The Company experienced substantial growth in revenue in fiscal 1997. The Company expects that prior growth rates of the Company's software product revenue may not be sustainable in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Potential Fluctuations in Operating Results. The Company's revenue and results of operations have varied on a quarterly basis in the past and are expected to vary significantly in the future. Accordingly, the Company believes that period to period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. The Company's revenue and results of operations are difficult to forecast and could be adversely affected by many factors including, among others, the size, timing and terms of individual license transactions, the relatively long sales and implementation cycles for the Company's products; the delay or deferral of customer implementations; changes in the Company's operating expenses; the ability of the Company to develop and market new products and control costs; market acceptance of new products; timing of introduction or enhancement of products by the Company or its competitors; the level of product and price competition; the ability of the Company to expand its direct sales and telesales forces, its indirect distribution channels and its customer support capabilities; activities of and acquisitions by competitors; changes in database access and distributed object software, database technology and industry standards; changes in the mix of products and services sold; changes in the mix of channels through which products and services are sold; levels of international sales; personnel changes and difficulties in attracting and retaining qualified sales, marketing and technical personnel; changes in customers' budgeting cycles; foreign currency exchange rates; quality control of products sold; and general economic conditions. In particular, the ability of the Company to achieve revenue growth in the future will depend on its success in adding a substantial number of sales and sales support personnel in 1998 and the release of a number of new products that have been under development. Competition for such personnel is intense and there can be no assurance the Company will be able to attract and retain these personnel. Licensing of the Company's software products historically has accounted for the substantial majority of the Company's revenue, and the Company anticipates that this trend will continue for the foreseeable future. The Company's software products revenue is difficult to forecast for a number of reasons. The Company typically does not have a material backlog of unfilled orders, and revenue in any quarter is substantially dependent on contracts received in that quarter. A significant portion of the Company's revenue in prior periods has been derived from relatively large sales to a limited number of customers. Accordingly, the cancellation or deferral of even a small number of purchases of the Company's products has in the past and could in the future have a material adverse effect on the Company's business, results of operations and financial condition in any particular quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview." 13 A significant portion of the Company's revenue has been and is expected in the future to continue to be based upon sales to third party vendors, who will incorporate the Company's products in their own products. This revenue depends upon the success of third parties, and as a result is difficult for the Company to predict and may be subject to extreme fluctuation. The Company's expense levels are based, in part, on its expectations as to future revenue and to a large extent are fixed in the short term. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall of revenue in relation to the Company's expectations would have an almost immediate adverse effect on the Company's business, financial condition and results of operations. Further, the Company intends to continue to expand its sales and marketing force and professional services organization. The timing of such expansion and the rate at which new professional services and sales and marketing personnel become productive could cause material fluctuations in quarterly results of operations. Dependence on Emerging Markets and Evolving Standards; Acceptance of the Company's Products. The Company's future financial performance will depend on the growth in demand for distributed computing software products. This market is new and emerging, rapidly evolving, and characterized by an increasing number of market entrants and will be subject to frequent and continuing changes in customers' preferences and technology. As is typical in new and evolving markets, demand and market acceptance for products are subject to a high level of uncertainty. With the acquisition of PostModern in May 1996, the Company began to offer standards-based distributed object products. The Company's current distributed object products are based on several standards, including the Common Object Request Broker Architecture and the Internet Inter-ORB Protocol. These standards are intended to facilitate the management and communication of applications created in object-oriented programming languages such as C++ and Java. These standards are new, are just beginning to gain widespread acceptance and compete with proprietary solutions such as Microsoft's ActiveX and Distributed Component Object Model. The distributed object software market is relatively young and there are few proven products. Further, some of the Company's distributed object products are designed specifically for use in applications for the Internet and Intranets. Because critical issues concerning the Internet and Intranets -- including security, reliability, cost, ease of use and access and quality of service -- remain unresolved, the growth of applications targeted at the Internet and Intranets is uncertain and difficult to predict. The Company's VisiChannel for JDBC database access product is based on the Java Database Connectivity ("JDBC") standard, which was developed to enable applications to access data from JDBC-compliant data sources. While the JDBC standard is supported by most of the major database and software vendors, it is a recent standard that has not yet gained widespread acceptance and currently it co-exists with proprietary database access solutions from many of these same database and software vendors. Because the markets for the Company's products are new and evolving, it is difficult to assess or predict with any assurance the size or growth rate, if any, of these markets. There can be no assurance that the markets for the Company's products will develop, or that the Company's products will be adopted. If these markets fail to develop, develop more slowly than expected, or attract new competitors, or if the Company's products do not achieve market acceptance, the Company's business, results of operations and financial condition could be materially adversely affected. Reliance on VARs and ISVs. A significant element of the Company's strategy is to embed its technology in products offered by the Company's VAR and ISV customers, such as Borland, Cisco, Compuware, Healtheon, Hewlett-Packard, Microsoft, Netscape, Novell, Oracle, Platinum technology and Sybase, Inc. A relatively small number of VAR and ISV customers have accounted for a significant percentage of the Company's revenue. The Company intends to seek similar distribution arrangements with other VARs and ISVs to embed the Company's technology in their products and expects that these arrangements will account for a significant portion of the Company's revenue in future periods. If the Company is unsuccessful in securing license agreements with additional VARs and ISVs on commercially reasonable terms or at all, or if the 14 Company's VAR and ISV customers are unsuccessful in selling their products, this would have a material adverse effect on the Company's business, results of operations and financial condition. Product Concentration. Prior to the acquisition of PostModern in May 1996, the Company derived substantially all of its revenue from the licensing of its database access products, particularly its ODBC product line, and fees from related services. In October 1997, the Company announced that in order to focus its efforts on its business relating to distributed object technology, the Company would be transitioning out of its business relating to ODBC database access products and would not be further enhancing such products which included its VisiODBC SDKs, VisiODBC drivers and VisiChannel for ODBC products. As part of this transition, the Company and Intersolv entered into an agreement under which the Company's customers for these products are being offered a plan to transition to comparable products provided by Intersolv. The Company does not anticipate that it will derive significant revenues from those products in future periods. Despite its decision to transition out of its ODBC-product business, the Company remains contractually committed under many of its agreements with customers to provide them with service and support. The Company continues to offer VisiChannel for JDBC, its JDBC-based database access product. Since the acquisition of PostModern, the Company has also derived a significant portion of its revenue from its distributed object products. The Company's distributed computing products and related services are expected to continue to account for a significant portion of the Company's revenue for the foreseeable future. As a result, a reduction in demand or increase in competition for these distributed object products, or a decline in sales of such products, would have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on the Internet and Intranets. The Company believes that sales of its products, particularly its distributed object products, will depend in large part upon the adoption by businesses and end-users of the Internet and Intranets for commerce and communications. Critical issues concerning the Internet and Intranets, including security, reliability, cost, ease of use and access and quality of service, remain unresolved at this time, inhibiting adoption by many enterprises and end-users. If the Internet and Intranets are not widely used by businesses and end-users, this will have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Java; Risks Associated with Encryption Technology. Certain of the Company's products are based on Java, an object-oriented programming language developed by JavaSoft, a subsidiary of Sun Microsystems. Java was developed primarily for Internet and Intranet applications. Java was only recently introduced and does not yet have sufficient history to establish its reliability, thereby inhibiting adoption of Java. To date, there have been only a 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. To the extent that Java is not adopted or is adopted more slowly than anticipated, this could have a material adverse effect on the Company's business, results of operations and 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. Need to Develop New Software Products and Enhancements. The markets for the Company's products are characterized by rapid technological developments, evolving industry standards, swift changes in customer requirements, computer operating environments and software applications, and frequent new product introductions and enhancements. As a result, the Company's success depends substantially upon its ability to anticipate changes and continue to enhance its existing products, develop and introduce in a timely manner new products incorporating technological advances, comply with emerging industry standards and meet increasing customer expectations. There can be no assurance that the Company will be successful in developing and 15 marketing new products or enhancements to its existing products on a timely basis or at all or that any new or enhanced products will adequately address the changing needs of the marketplace. The Company has in the past incurred product development expenses and sales and marketing expenses in connection with product development activities that did not result in commercially introduced products. Some of the Company's products are based on technology from third parties and the Company therefore has limited control over whether and when these technologies are enhanced. The failure or delay in enhancements of technology from third parties used in the Company's products could have a material adverse effect on the Company's ability to develop and enhance its own products. The Company has in the past experienced delays in the development of new products and product versions. If the Company is unable to develop and introduce new products or enhancements to existing products in a timely manner in response to changing market conditions or customer requirements, the Company's business, results of operations and financial condition would be materially and adversely affected. Dependence on Key Personnel. The Company's future performance depends to a significant extent upon the continued service of its key technical, development, sales and marketing and management personnel. The loss of the services of any of these individuals would have a material adverse effect on the Company. The Company's future success also depends on its continuing ability to attract, train and retain highly qualified technical, sales and marketing and managerial personnel. Risks Relating to the Merger. The success of the Merger will depend in substantial part upon whether the integration of the Company's and Borland's businesses is accomplished in an efficient and effective manner. The combination of the two companies will require among other things, integration of the companies' respective product offerings and technology and the coordination of their research and development, sales and marketing efforts, and administrative functions. There can be no assurance that such integration will be accomplished smoothly or successfully. If significant difficulties are encountered in the integration of the companies' existing product lines and technology, resources could be diverted from new product development resulting in delays in new product introductions. The integration of the companies' product lines could also cause confusion or dissatisfaction among existing customers of Borland and the Company. The integration of certain operations following the Merger will require the dedication of management and other personnel resources which may distract attention from the day-to-day business of the combined company. Failure to successfully accomplish the integration of the two companies' operations could have a material adverse effect on the combined company's business, operating results or financial condition. Achieving any beneficial synergies which may result from the Merger will depend on a number of factors, including, without limitation, general and industry-specific economic factors. Even if Borland and the Company are able to successfully integrate their operations and economic conditions remain stable, there can be no assurance that the anticipated synergies will be achieved. The failure to achieve such synergies could have a material adverse effect on the combined company's business, operating results or financial condition. There also can be no assurance that distributors, resellers and present and potential customers of Borland or the Company will continue their current buying patterns without regard to the announced Merger. Certain customers may defer purchasing decisions as they evaluate the combined company's future product strategy. Further, certain customers of the Company are competitors of Borland, and, on that basis, may elect either to defer or cancel planned purchases from the Company or to discontinue their relationship with the combined company. In the aggregate these customers may represent a material portion of the Company's revenues. Any such deferral, cancellation or discontinuance could have a material adverse effect upon the combined company's business, operating results or financial condition. There can be no assurance that the Merger will occur and the failure of the Merger to occur could have a material adverse effect upon the Company's business, operating results or financial condition and may adversely effect the market price of the Company's common stock. Potential Acquisitions. If appropriate opportunities present themselves, the Company intends to acquire businesses, products or technology that the Company believes are strategic. There can be no assurance that the Company will be able to successfully identify, negotiate or finance such acquisitions, or to integrate such 16 acquisitions with its current business. The process of integrating an acquired business, product or technology into the Company may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of the Company's business. Moreover, there can be no assurance that the anticipated benefits of any acquisition will be realized. Acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's business, results of operations and financial condition. Any such future growth and any acquisitions of other technologies, products or companies may require the Company to obtain additional equity or debt financing, which may not be available or may be dilutive. Intense Competition. The Company's products are targeted at the emerging market for standards-based distributed computing software. The market for the Company's products are intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The Company believes that the principal competitive factors in these markets are product quality, performance and price, vendor and product reputation, product architecture and quality of support. The Company expects that it will face increasing pricing pressures from its current competitors and new market entrants. In the standards-based distributed object market, the Company competes principally against Iona Technologies, Expersoft and BEA. The Company's distributed object 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 Company's 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, which could reduce or eliminate the need for CORBA compliant ORB's such as those offered by the Company for Microsoft operating systems. Many of these current and potential competitors have well-established relationships with current and potential customers of the Company, have extensive knowledge of the markets serviced by the Company, have 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. Increased price competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, financial condition or results of operations. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures will not materially and adversely affect its business, results of operations and financial condition. International Sales. The Company's international sales accounted for approximately 26%, 23% and 23% of the Company's total revenue in fiscal 1996, fiscal 1997, and the first nine months of fiscal 1998, respectively. The Company has increased its emphasis on international sales. Revenue derived from international sales may account for a growing percentage of the Company's revenue in future periods, although there can be no assurance that the Company will achieve significant penetration in any international market. In July 1997, the Company terminated its distribution agreement with Valtech-iO, a European consultancy and software distributor. In September 1997, the Company entered into a new distributor agreement with Valtech and merged with iO, a leading German consulting company that specializes in distributed object computing, which resulted in iO becoming a wholly-owned subsidiary of the Company. See Note 3 of Notes to Condensed Consolidated Financial Statements. There are a number of risks inherent in the assimilation of iO's consulting business, including the expense related to such assimilation. 17 The Company believes that its continued growth will require expansion of its international operations. To successfully expand international sales, the Company must, among other things, establish additional foreign sales offices, hire additional personnel and recruit additional international distributors and resellers. To the extent the Company is unable to do so in a timely manner, the Company's growth in international sales, if any, will be limited, and the Company's business, results of operations and financial condition could be materially adversely affected. There are a number of risks inherent in the Company's international business activities, including unexpected changes in regulatory requirements, tariffs and other trade barriers, costs and risks of localizing and internationalizing products for foreign countries, longer accounts receivable payment cycles, potentially adverse tax consequences, repatriation of earnings and the burdens of complying with a wide variety of foreign laws. None of the Company's products is currently a "double byte" product, which is required to localize these products in certain non-English character set markets such as Asia. The Company believes that it will be required to develop double byte versions of its products and engage in other internationalization and localization activities. There can be no assurance the Company will successfully complete these activities in a timely manner. All of the Company's sales are currently denominated in U.S. dollars and, therefore, increases in the value of the U.S. dollar relative to foreign currencies could make the Company's products less competitive in foreign markets. In addition, revenue of the Company earned in various countries where the Company does business may be subject to taxation by more than one jurisdiction, thereby adversely affecting the Company's earnings. There can be no assurance that such factors will not have an adverse effect on the revenue from the Company's future international sales and, consequently, on the Company's financial condition or results of operations. Dependence on Company and Third Party Proprietary Technology. The Company's success is dependent in part upon its proprietary technology. While the Company relies on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights, the Company believes that factors such as the technical and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable products and product support are more essential to establishing and maintaining a technology leadership position, particularly because the Company is supplying standards-based products. The Company seeks to protect its software, published data, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company has granted limited access to its source code to third parties under confidentiality obligations. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. In addition, the Company relies on certain software that it licenses from third parties, including software that is integrated with internally developed software and used in the Company's products to perform key functions. There can be no assurance that such third parties will remain in business, that they will continue to support their technology or that their technology will otherwise continue to be available to the Company on commercially reasonable terms. If such third-party licenses were terminated or not renewed or if these third parties fail to develop new products in a timely manner, the Company could be required to develop an alternative approach to developing its products which could require payment of substantial fees to third parties or additional internal development cost and delays. Furthermore such products may not be successful in providing the same level of functionality. Such delays, increased cost or reduced functionality could materially adversely affect the Company's business, operating results and financial condition. Possible Volatility of Stock. The market price of the Company's Common Stock has been, and is likely to continue to be, volatile. Factors such as new product announcements or changes in product pricing policies by the Company or its competitors, quarterly fluctuations in the Company's operating results, announcements of technical innovations, announcements relating to strategic relationships or acquisitions, changes in earnings estimates by analysts and general conditions in the software development tools market, among other factors, may have a significant impact on the market price of the Company's Common Stock. Should the Company fail to introduce products on the schedule expected, the Company's stock price could be adversely affected. In addition, in recent years the stock market in general, and the shares of technology companies in particular, have experienced extreme price fluctuations. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the specific 18 companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 10, 1997, Western Imaging, Inc. ("Western Imaging") filed a complaint in the U.S. District Court for the Northern District of California against the Company and Corel Corporation ("Corel"), a licensee of the Company, alleging breach of contract, intentional and negligent misrepresentation, copyright infringement, trademark infringement, misappropriation of trade secrets and other related claims. The lawsuit claims that in a May 1994 agreement with Western Imaging, the Company sold to Western Imaging all right, title and interest not only to its Lumena product, but also to its Color Tools, Creative License, Oasis and Signature products as well. As a result, Western Imaging asserts that the Company breached the terms of the agreement with Western Imaging when, among other things, it licensed Creative License, Color Tools, Oasis and Signature to Corel. Western Imaging is seeking injunctive relief, unspecified damages, impoundment of the disputed software during the pendency of the litigation, and punitive damages. The Company has not sold or marketed the disputed software products since January 1995. The Company does not utilize this technology in any current product offering. The Company has agreed to defend Corel pursuant to the terms of its license to Corel. The Company and Corel have filed an answer to the complaint denying Western Imaging's allegations. The court has issued an order compelling the parties to participate in non-binding mediation by the end of February 1998. The Company is currently investigating and conducting discovery regarding the allegations and believes it has meritorious defenses to such claims and intends to defend the litigation vigorously. However, due to the nature of the litigation and because the lawsuit is at a relatively early stage, the Company cannot determine the total expense or possible loss, if any, that may ultimately be incurred either in the context of a trial or as a result of a negotiated settlement. Regardless of the ultimate outcome of the litigation, it could result in significant diversion of time by the Company's technical and managerial personnel. 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. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit 2.1 Agreement and Plan of Merger by and among Borland International, Inc., Vixen Acquisition Corporation and the Company, dated November 17, 1997 (incorporated by reference herein to identically- numbered exhibit to Company's Current Report on Form 8-K filed November 21, 1997) Exhibit 27.1 Financial Data Schedule (EDGAR version only) b. Reports on Form 8-K The Company filed a report on Form 8-K on November 21, 1997, stating under Item 5, that the Company had entered into the Merger Agreement. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Visigenic Software, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VISIGENIC SOFTWARE, INC. Dated: February 6, 1998 By: /s/ KEVIN C. EICHLER ----------------------------- KEVIN C. EICHLER Vice President, Finance, Chief Financial Officer, Treasurer and Secretary 20 VISIGENIC SOFTWARE, INC EXHIBIT INDEX Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger by and among Borland International, Inc., Vixen Acquisition Corporation and the Company, dated November 17, 1997 (incorporated by reference herein to identically-numbered exhibit to Company's Current Report on Form 8-K filed November 21, 1997) 27.1 Financial Data Schedule (EDGAR version only) 21 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VISIGENIC SOFTWARE INC., CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1997 AND MARCH 31, 1997 VISIGENIC SOFTWARE INC., CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND 9 MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 9-MOS MAR-31-1998 MAR-31-1998 OCT-01-1997 APR-01-1997 DEC-31-1997 DEC-31-1997 15,539 15,539 0 0 7,201 7,201 (394) (394) 40 40 22,773 22,773 5,450 5,450 (2,228) (2,228) 26,340 26,340 6,988 6,988 0 0 0 0 0 0 14 14 19,338 19,338 26,340 26,340 6,677 18,451 6,677 18,451 2,267 6,074 8,856 27,072 0 0 0 0 183 614 (1,996) (8,007) 100 311 0 0 0 0 0 0 0 0 (2,096) (8,318) 0 0 0 0
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