-----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, TXXjexccfisyKxM9EcvSIB+59EhiWzbKxtWlTdUzRG+wA7zIrIgyhRHuPCiiMuWx vT3aAPpy6IJ38xzrlIu09w== 0001012870-97-001574.txt : 19970815 0001012870-97-001574.hdr.sgml : 19970815 ACCESSION NUMBER: 0001012870-97-001574 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 1934 Act SEC FILE NUMBER: 000-21127 FILM NUMBER: 97663222 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 FOR PERIOD ENDED 6/30/97 ================================================================================ 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 June 30, 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) (415) 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 August 11, 1997: 14,117,154. ================================================================================ VISIGENIC SOFTWARE, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets at June 30, 1997 and March 31, 1997 3 Condensed Consolidated Statements of Operations for the three months ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VISIGENIC SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) JUNE 30, MARCH 31, 1997 1997 (UNAUDITED) -------------------- CURRENT ASSETS: Cash and cash equivalents ....................... $ 17,653 $ 19,445 Accounts receivable, net ........................ 7,845 8,028 Prepaid compensation ............................ 290 696 -------- -------- Total current assets .................. 25,788 28,169 -------- -------- PROPERTY AND EQUIPMENT, NET ......................... 3,098 3,003 OTHER ASSETS, NET: Excess of purchase price over net assets acquired 771 1,078 Other ........................................... 83 83 -------- -------- TOTAL ASSETS ........................................ $ 29,740 $ 32,333 ======== ======== CURRENT LIABILITIES: Accounts payable ................................ $ 278 $ 684 Accrued liabilities - Payroll and related benefits .................. 1,786 1,406 Other ......................................... 944 923 Deferred revenue ................................ 2,423 2,407 -------- -------- Total current liabilities ............. 5,431 5,420 -------- -------- STOCKHOLDERS' EQUITY: Common stock .................................... 14 14 Additional paid-in-capital ...................... 58,730 58,691 Accumulated deficit ............................. (34,435) (31,792) -------- -------- Total stockholders' equity ............ 24,309 26,913 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $ 29,740 $ 32,333 ======== ========
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 ENDED JUNE 30, 1997 1996 -------- -------- REVENUE: Software licenses ................................................ $ 4,351 $ 2,505 Consulting services, maintenance and other ....................... 1,209 456 -------- -------- Total revenue .......................................... 5,560 2,961 -------- -------- COST OF REVENUE: Software licenses ............................................... 409 138 Consulting services, maintenance and other ...................... 1,022 295 -------- -------- Total cost of revenue .................................. 1,431 433 -------- -------- GROSS PROFIT .......................................................... 4,129 2,528 -------- -------- OPERATING EXPENSES: Product development .............................................. 2,841 1,657 Sales & marketing ................................................ 2,863 2,006 General & administrative ......................................... 855 473 Purchased in process product development ......................... -- 12,014 Amortization of excess of purchase price over net assets acquired 306 43 -------- -------- Total operating expenses ............................... 6,865 16,193 -------- -------- Loss from operations ................................... (2,736) (13,665) -------- -------- INTEREST AND OTHER INCOME, NET ........................................ 234 6 PROVISION FOR TAXES ................................................... (141) -- -------- -------- NET LOSS ............................................................. ($ 2,643) ($13,659) ======== ======== NET LOSS PER SHARE .................................................... ($ 0.19) ======== PRO FORMA NET LOSS PER SHARE .......................................... ($ 1.22) ======== SHARES USED IN PER SHARE CALCULATION .................................. 14,012 11,234 ======== ========
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) THREE MONTHS ENDED JUNE 30, 1997 1996 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................................. ($ 2,643) ($13,659) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................................... 527 164 Purchased in process product development .............................. -- 12,014 Provision for allowance for doubtful accounts ......................... -- 12 Changes in assets and liabilities, net of acquisition of PostModern and CustomWare: Decrease (increase) in accounts receivable ......................... 183 (2,375) Decrease (increase) in prepaid expenses and other current assets ... 406 (1,685) Increase (decrease) in accounts payable ............................ (406) 472 Increase in accrued liabilities .................................... 401 183 Increase in deferred revenue ....................................... 16 293 -------- -------- Net cash used in operating activities .......................... (1,516) (4,581) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Payment for purchase of PostModern, net of cash acquired .................. -- (2,182) Purchases of property and equipment ....................................... (315) (435) -------- -------- Net cash used in investing activities .......................... (315) (2,617) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on bank line of credit ..................................... -- 524 Proceeds from issuance of convertible notes ............................... -- 2,000 Net proceeds from issuance of preferred stock ............................. -- 4,000 Net proceeds from issuance of common stock ................................ 39 165 -------- -------- Net cash provided by financing activities ...................... 39 6,689 -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS .................................... (1,792) (509) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................ 19,445 2,399 ======== ======== CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................... $ 17,653 $ 1,890 ======== ========
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 Annual Report on Form 10-K 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 three-month period ended June 30, 1997. The results for the three-month period ended June 30, 1997 are not necessarily indicative of the results expected for the full fiscal year. 2. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE For periods after the Company's initial public offering in August 1996, net loss per share has been computed using the weighted average number of common shares outstanding. Common equivalent shares have not been included as their effect would be antidilutive. For the three-month period ended June 30,1996, prior to the Company's initial public offering, net loss per share has been computed on a pro forma basis. Pro forma net loss per share is computed using the pro forma 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). Common stock options are excluded from the computation if their effect is antidilutive. Convertible preferred stock outstanding during the period is included (using the if converted method) in the computation of common equivalent shares even though the effect is antidilutive. Also, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins and staff policy, such computations for the three-month period ended June 30, 1996, include all common and common equivalent shares issued within the 12 months preceding the Company's initial public offering as if they were outstanding for all periods presented. 3. 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. 6 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. Neither the Company nor Corel has responded to the complaint. The Company is currently investigating 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 an 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. 4. LINE OF CREDIT AND EQUIPMENT TERM LOAN As of June 30, 1997, the Company had a $3.0 million revolving line of credit agreement (the "Agreement") with a bank, which expired on July 15, 1997. Advances under the Agreement bore interest at the bank's prime lending rate plus 1.0% (8.5% at June 30, 1997), were limited to 80% of eligible accounts receivable and were secured by substantially all of the assets and contractual rights of the Company. The Agreement also contained certain financial restrictions and covenants which required, among other things, that the Company maintain a minimum monthly tangible net worth, and a minimum monthly ratio of debt to equity. In addition, the Agreement prohibited the Company from paying dividends without prior bank consent. As of June 30, 1997, the Company was in compliance with the financial covenants. There were no borrowings outstanding under the Agreement as of June 30, 1997. Subsequent to June 30, 1997, the Company entered into 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. 5. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements for earnings per share. SFAS No. 128 will become effective for the Company's year ending March 31, 1998. SFAS No. 128 will not have a material impact on the Company's historical reported results of operations, as the Company has reported operating losses to date. In February 1997, FASB issued 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. 7 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 risks and uncertainties, 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 Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. 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. The Company shipped version 1.0 of the VisiODBC Software Development Kit ("SDK") and the VisiODBC Drivers in November 1994, version 1.0 of its VisiChannel product in March 1996 and version 2.0 of its VisiODBC product line in June 1996. 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. 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, who include the Company's products in their own products, and to end users, who 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 been increasing and for the first three months of fiscal 1998 accounted for approximately 28% of the Company's total revenue. The Company's sales generally reflect a relatively high amount of revenue per order. For fiscal 1997, licenses to the Company's ten largest customers accounted for approximately 55% of the Company's total revenue. For the first three months of fiscal 1998, licenses to the Company's ten largest customers accounted for approximately 51% 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. International revenue accounted for approximately 11% of total revenue for fiscal 1997 and 16% of total revenue for the first three months of fiscal 1998. 8 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997 1996 % CHANGE -------------------------------- REVENUE: (IN THOUSANDS) SOFTWARE LICENSES $4,351 $2,505 74% Percentage of revenue 78% 85% CONSULTING SERVICES, MAINTENANCE AND OTHER 1,209 456 165% Percentage of revenue 22% 15% -------------------------------- TOTAL REVENUE $5,560 $2,961 88% -------------------------------- REVENUE Revenue for the first quarter of fiscal 1998 was $5.6 million, representing an 88% increase over revenue of $3.0 million recorded during the comparable period of fiscal 1997. Revenue from software licenses for the first quarter of fiscal 1998 was $4.4 million, representing a 74% increase over software license revenue of $2.5 million during the comparable period of fiscal 1997. The revenue increase was primarily due to an increased volume of licensing of distributed object products. License revenue for the first quarter 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 SmartSocketsTM middleware, which PLATINUM technology, Inc. returned during the quarter. PLATINUM technology remains a customer of the Company's distributed object technology and a stockholder of the Company. The decrease in license revenue as a percentage of total revenue is due to the growth in training, consulting and development activities and the one-time charge of $753,000 against license revenue discussed above. Consulting, maintenance and other revenue increased 165% in the first quarter of fiscal 1998 over the comparable period of the prior year and accounted for 22% and 15% of total revenue for the first quarter of fiscal 1998 and 1997, respectively. The increase in consulting, maintenance and other revenue was primarily due to the growth in training, consulting and development activities as well as increased licensing of products to customers under agreements with a maintenance component and increased maintenance renewals due to the increase in the Company's installed base. THREE MONTHS ENDED JUNE 30, 1997 1996 % CHANGE --------------------------------- COST OF REVENUE: (IN THOUSANDS) SOFTWARE LICENSES $409 $138 196% Percentage of revenue 8% 5% CONSULTING SERVICES, MAINTENANCE AND OTHER 1,022 295 246% Percentage of revenue 18% 10% --------------------------------- TOTAL COST OF REVENUE $1,431 $433 230% Percentage of revenue 26% 15% 9 COST OF REVENUE Cost of software license revenue includes product packaging, documentation, production and shipping costs as well as fees to third-party vendors. Cost of software license revenue increased from $138,000 in the first quarter of fiscal 1997 to $409,000 in the first quarter of fiscal 1998. The increase resulted from increased volume of licensing of the Company's products and increased use of products 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 $295,000 in the first quarter of fiscal 1997 to $1,022,000 in the first quarter of fiscal 1998. This increase reflects the effect of fixed costs resulting from the Company's investment in a larger professional services organization. The Company intends to continue investing resources in its professional services organization. OPERATING EXPENSES
THREE MONTHS ENDED JUNE 30, 1997 1996 % CHANGE ---------------------------- OPERATING EXPENSES: (IN THOUSANDS) PRODUCT DEVELOPMENT $2,841 1,657 71% Percentage of revenue 51% 56% SALES & MARKETING 2,863 2,006 43% Percentage of revenue 51% 68% GENERAL & ADMINISTRATIVE 855 473 81% Percentage of revenue 15% 16% PURCHASED IN PROCESS PRODUCT DEVELOPMENT - 12,014 - Percentage of revenue - 406% AMORTIZATION OF EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED 306 43 612% Percentage of revenue 6% 1% ---------------------------- TOTAL OPERATING EXPENSES $6,865 $16,193 (58%) PERCENTAGE OF REVENUE 123% 547%
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 increased by 71% from $1.7 million in the first quarter of fiscal 1997 to $2.8 million in the first quarter of fiscal 1998. 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 and, to a lesser extent, the licensing of existing technology from third parties which has been or will be incorporated into the Company's products. The Company anticipates that it will continue to devote substantial resources to product development, including acquiring or licensing technology from others, in order to introduce new products, enhance existing products or accelerate its time to market. 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. 10 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 and promotional expenses. Sales and marketing expenses increased by 43% from $2.0 million in the first quarter of fiscal 1997 to $2.9 million in the first quarter of fiscal 1998. The increase in sales and marketing expenditures reflects primarily the hiring of additional sales and marketing personnel, costs associated with expanded advertising and promotional activities, increased sales commissions and increased costs associated with field sales offices. The Company plans to hire a substantial number of sales and sales support personnel in fiscal 1998. The Company expects that sales and marketing expenses will continue to increase in absolute dollar amounts as the Company continues to expand its sales and marketing efforts domestically and internationally, establishes additional sales offices and increases advertising and promotional activities. 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 81% from $473,000 in the first quarter of fiscal 1997 to $855,000 in the first quarter of fiscal 1998. The increase in the absolute dollar amounts of general and administrative expenses were primarily due to increased staffing and associated expenses necessary to manage and support the Company's increased scale of operations and expenses associated with being a public company. The Company believes that the absolute dollar amount of its general and administrative expenses will continue to increase as a result of the anticipated expansion of the Company's administrative staff to support growing operations. 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 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. 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 will be amortized over one year. INTEREST AND OTHER INCOME, NET Interest and other income, net, is comprised primarily of interest income earned on the Company's cash and cash equivalents. The increase in interest and other income, net, from the first quarter of fiscal 1997 to the first quarter of fiscal 1998 was primarily due to income derived from the short-term investments of the proceeds from the Company's initial public offering completed August 8, 1996, and the Company's second public offering completed February 12, 1997. PROVISION FOR TAXES Provision for taxes consists of foreign withholding taxes on sales to Japanese customers. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity include cash and cash equivalents of $17.7 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 June 30, 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 11 outstanding. As of June 30, 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 June 30, 1997. See Note 4 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 as the Company's employee base grows. As of June 30, 1997, the Company did not have any material commitments for capital expenditures. 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. 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. 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 June 30, 1997, the Company had cumulative operating losses of $34.4 million, with net losses of $2.5 million, $4.6 million, $4.4 million , $20.3 million, and $2.6 million for fiscal 1994, fiscal 1995, fiscal 1996, fiscal 1997, and the three-months ended June, 30, 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 end of 1997. The Company experienced substantial growth in revenue in fiscal 1997 and the first three months of fiscal 1998. The Company expects that prior growth rates of the Company's software product revenue will 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 12 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 fiscal 1998. 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, and the Company currently anticipates that future quarters will continue to reflect this trend. 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." 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 development teams and its sales and marketing force. The timing of such expansion and the rate at which new development 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 disigned specifically for use in applications for the Internet and Intranets. Because critical issues concerning the Internet and Intranets -- including security, 13 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. 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, Oracle and Platinum technology. A relatively small number of VAR and ISV customers have accounted for a significant percentage of the Company's revenue. In fiscal 1997, ten VAR and ISV customers accounted for approximately 55% of the Company's revenue, while in the three months ended June 30, 1997, ten VAR and ISV customers accounted for approximately 46% 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 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 Open Database Connectivity ("ODBC") product line, and fees from related services. 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 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 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 very limited number of commercially significant Java-based products, and it is too early to determine whether Java will become a significant technology. Alternatives to Java have been announced by several companies, including Microsoft. 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. There can be no assurance that this will not be a compromise of or breach of the security technology used by the Company. 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 14 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 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. Potential Acquisitions. If appropriate opportunities present themselves, ---------------------- the Company intends to acquire businesses, products or technology that the Company believes are strategic, although the Company currently has no understandings, commitments or agreements with respect to any material acquisition and no material acquisition is currently being pursued. There can be no assurance that the Company will be able to successfully identify, negotiate or finance such acquisitions, or to integrate such 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. 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 export sales accounted for approximately ------------------- 10%, 11% and 16% of the Company's total revenue in fiscal 1996, fiscal 1997, and the first three months of fiscal 1998, respectively. The Company had no material export sales in fiscal 1995. The Company has increased its emphasis on export sales. Revenue derived from export 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 15 international market. Through the first quarter of fiscal 1998, the Company had only one international sales office, which is located in Paris, France. In July 1997, the Company terminated its distribution agreement with Valtech-iO, a European consultancy and software distributor. The Company has granted exclusive distribution rights in Japan for the Japanese versions of its ODBC products to ASCII Something Good Corporation ("ASCII"), a Japanese software distributor. The Company may not terminate these exclusive rights unless ASCII fails to meet certain minimum annual sales objectives commencing in fiscal year 1998 or otherwise breaches the agreement. There can be no assurance that ASCII will be successful selling the Company's products. The Company believes that its continued growth will require expansion of its international operations and export sales. To successfully expand export sales, the Company must 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 export 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, 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 firms 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. 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 16 securities issued by many companies for reasons unrelated to the operating performance of the specific 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. Neither the Company nor Corel has responded to the complaint. The Company is currently investigating 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 an 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 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 17 The following exhibits have been filed with this report: 27.1 Financial Data Schedule (EDGAR version only) b. No reports on Form 8-K were filed during the quarter to which this report relates. 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: August 11, 1997 By: /s/ Kevin C. Eichler _____________________________ KEVIN C. EICHLER Vice President, Finance, Chief Financial Officer, Treasurer and Secretary 18 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VISISGENIC SOFTWARE, INC. CONSOLIDATED BALANCE SHEET, JUNE 30, 1997 AND MARCH 31, 1997, VISIGENIC SOFTWARE, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997. 1,000 3-MOS MAR-31-1997 APR-01-1997 JUN-30-1997 17,653 0 7,989 (144) 47 25,788 4,484 (1,386) 29,740 5,431 0 0 0 14 24,295 29,740 5,560 5,560 1,431 6,865 0 0 234 (2,502) (141) (2,643) 0 0 0 (2,643) 0 (.19)
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