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<SEC-DOCUMENT>0001012870-98-000229.txt : 19980209
<SEC-HEADER>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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>

<PAGE>
 
================================================================================

                      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

================================================================================
<PAGE>
 
                            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
<PAGE>
 
PART I.     FINANCIAL INFORMATION
ITEM 1.          FINANCIAL STATEMENTS


                            VISIGENIC SOFTWARE, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE> 
<CAPTION> 
                                                      DECEMBER 31,   MARCH 31,
                                                          1997          1997
                                                      (UNAUDITED) 
                                                      ------------------------
<S>                                                   <C>            <C> 
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
                                                      ========================
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       3
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (IN THOUSANDS, EXCEPT  PER SHARE AMOUNTS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         THREE MONTHS                 NINE MONTHS
                                                                             ENDED                       ENDED
                                                                          DECEMBER 31,                DECEMBER 31,
                                                                       1997           1996         1997          1996
                                                                    -----------------------     -----------------------
<S>                                                                 <C>            <C>          <C>           <C>
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
                                                                    =======================     =======================
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       4
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                  NINE MONTHS ENDED
                                                                                                     DECEMBER 31,
                                                                                                1997              1996
                                                                                            ------------------------------
<S>                                                                                         <C>                <C>
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
                                                                                            =========          ========== 
</TABLE>


  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       5
<PAGE>
 
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
<PAGE>
 
          Total revenue and net income (loss) of the separate companies
were (in thousands):

<TABLE>
<CAPTION>
                                          VISIGENIC         INTERACTIVE OBJECTS 
                                        SOFTWARE, INC.         SOFTWARE GMBH        COMBINED
                                        --------------      -------------------     --------
<S>                                     <C>                 <C>                     <C>
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)
</TABLE>

          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
<PAGE>
 
          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
<PAGE>
 
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
<PAGE>
 
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
<PAGE>
 
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
<PAGE>
 
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
<PAGE>
 
          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
<PAGE>
 
          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
<PAGE>
 
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
<PAGE>
 
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
<PAGE>
 
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
<PAGE>
 
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
<PAGE>
 
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
<PAGE>
 
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
<PAGE>
 
                            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
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<PAGE>
<ARTICLE> 5
<LEGEND>
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
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<PERIOD-END>                               DEC-31-1997             DEC-31-1997
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<RECEIVABLES>                                    7,201                   7,201
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