<PAGE>
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): June 30, 1999
--------------------
VIGNETTE CORPORATION
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
Delaware 000-25375 74-2769415
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification
No.)
901 South Mopac Expressway, Austin, Texas 78746
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(512) 306-4300 (Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
1
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective June 30, 1999, Vignette Corporation ("Vignette" or the "Company")
acquired 100 percent of the outstanding stock and assumed all outstanding stock
options of Diffusion, Inc. ("Diffusion"), a leader in multi-channel information
delivery solutions, in exchange for 393,271 shares of Vignette common stock. The
total cost of the acquisition, including transaction costs, was approximately
$31.2 million. The acquisition was accounted for as a purchase business
combination.
The foregoing description is qualified in its entirety by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission on July 15,
1999 (the "Prior 8-K") and to the Agreement which was attached as Exhibit 2.1 to
the Prior 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements and pro forma financial information are being
provided in accordance with the instructions to this item.
(a) Financial Statements of Business Acquired.
Report of Ernst & Young LLP, Independent Auditors
Balance sheets of Diffusion, Inc. at December 31, 1998 and 1997
and at June 30, 1999 (unaudited)
Statements of operations of Diffusion, Inc. for the years ended
December 31, 1998 and 1997 and for the six months ended June 30,
1999 and 1998 (unaudited)
Statement of shareholders' equity of Diffusion, Inc.
Statements of cash flows of Diffusion, Inc. for the years ended
December 31, 1998 and 1997 and for the six months ended June 30,
1999 and 1998 (unaudited)
(b) Pro Forma Financial Information.
Unaudited pro forma condensed balance sheet as of June 30, 1999*
Unaudited pro forma condensed statements of operations for the
year ended December 31, 1998 and the six months ended June 30,
1999 and accompanying explanatory notes
(c) Exhibits:
Exhibit
Number Description
------- -----------
2.1** Agreement between Vignette Corporation and
Diffusion, Inc. dated May 10, 1999
23.1 Consent of Ernst & Young LLP, Independent Auditors
99.1** Text of Press Release dated July 6, 1999
- -----------------------------
* A pro forma condensed balance sheet is not provided herein as the balance
sheet reported in the Company's Form 10-Q filed on August 13, 1999 reflects
the acquisition.
** Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on July 15, 1999.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VIGNETTE CORPORATION
Date: September 15, 1999 By: /s/ Gregory A. Peters
-------------------------------
Gregory A. Peters
President and
Chief Executive Officer
3
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Diffusion, Inc.
We have audited the accompanying balance sheets of Diffusion, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diffusion, Inc. at December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming Diffusion,
Inc. will continue as a going concern. As more fully described in Note 1, the
Company has incurred operating losses since inception and has insufficient cash
and cash equivalents on hand at December 31, 1998 to fund its operations for the
next fiscal year. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Palo Alto, California
February 27, 1999
4
<PAGE>
DIFFUSION, INC.
BALANCE SHEETS
(in thousands, except number of shares)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1997 1999
------------------------------------
Assets (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,864 $ 1,118 $ 30
Short-term investments 998 998 -
Accounts receivable, net of allowance of $24 and $22 at December 31, 1998 and 1997 212 196 115
Prepaid expenses and other current assets 149 191 332
------------------------------------
Total current assets 3,223 2,503 477
Property and equipment, net 240 442 156
Other assets 19 125 19
------------------------------------
$ 3,482 $ 3,070 $ 652
====================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 221 $ 367 $ 661
Accrued compensation 377 297 351
Deferred revenue 209 228 643
Other accrued liabilities 427 264 264
Current portion of capital lease obligations 233 264 174
------------------------------------
Total current liabilities 1,467 1,420 2,093
Long-term portion of capital lease obligations 130 229 82
Commitments
Shareholders' equity:
Redeemable convertible preferred stock: no par value; 14,000,000 shares
authorized, designated Series A; 3,161,500 shares issued and outstanding at
December 31, 1998 and 1997, at amounts paid in (aggregate liquidation
preference of $1,581); Series B; 3,075,000 shares issued and outstanding at
December 31, 1998 and 1997, at amounts paid in (aggregate liquidation
preference of $4,505); Series C; 2,857,144 shares issued and outstanding at
December 31, 1998 and 1997, at amounts paid in (aggregate liquidation
preference of $5,100); Series D; 3,375,870 shares issued and outstanding at
December 31, 1998 (none in 1997), at amounts paid in (aggregate liquidation
preference of $(6,042)) 17,094 11,088 17,094
Common stock: no par value; 25,000,000 shares authorized; 3,574,928 and
3,435,712 shares issued and outstanding at December 31, 1998 and 1997 278 266 336
Shareholder notes receivable (218) (218) -
Accumulated deficit (15,269) (9,715) (18,953)
------------------------------------
Shareholders' equity 1,885 1,421 (1,523)
------------------------------------
$ 3,482 $ 3,070 $ 652
====================================
</TABLE>
See accompanying notes.
5
<PAGE>
DIFFUSION, INC.
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Years ended Six months ended
December 31, June 30,
1998 1997 1999 1998
---------------------------- -------------------------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues:
Product revenues $ 752 $ 479 $ 190 $ 550
Service revenues 330 83 243 143
------------------------- -------------------------
Total net revenues 1,082 562 433 693
Costs and expenses:
Costs of revenues 218 297 86 173
Research and development 1,795 1,629 876 882
Sales and marketing 3,529 3,324 1,827 1,735
General and administrative 1,268 1,478 1,344 677
------------------------- -------------------------
Total costs and expenses 6,810 6,728 4,133 3,467
------------------------- -------------------------
Loss from operations (5,728) (6,166) (3,700) (2,774)
Other income, net 174 178 16 60
------------------------- -------------------------
Net loss $(5,554) $(5,988) $(3,684) $(2,714)
========================= =========================
</TABLE>
See accompanying notes.
6
<PAGE>
DIFFUSION, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Redeemable
Convertible Shareholder Total
Preferred Stock Common Stock Notes Accumulated Shareholders'
--------------------------------------------
Shares Amount Shares Amount Receivable Deficit Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1996 6,236,500 $ 6,022 1,885,978 $ 30 $ - $ (3,727) $ 2,325
Issuance of Series C redeemable convertible
preferred stock, net of $34 issuance costs 2,857,144 5,066 - - - - 5,066
Issuance of common stock to lessors - - 16,500 3 - - 3
Exercise of common stock options - - 180,234 30 (15) - 15
Issuance of common stock in exchange for
shareholder notes receivable - - 1,353,000 203 (203) - -
Net loss - - - - - (5,988) (5,988)
-----------------------------------------------------------------------------------
Balances as of December 31, 1997 9,093,644 11,088 3,435,712 266 (218) (9,715) 1,421
Issuance of Series D redeemable convertible
preferred stock, net of issuance costs
of $37 3,375,870 6,006 - - - - 6,006
Exercise of common stock options - - 139,216 12 - - 12
Net loss - - - - - (5,554) (5,554)
-----------------------------------------------------------------------------------
Balances as of December 31, 1998 12,469,514 $17,094 3,574,928 $278 $ (218) $ (15,269) $ 1,885
===================================================================================
</TABLE>
See accompanying notes.
7
<PAGE>
DIFFUSION, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended Six months ended
December 31, June 30,
1998 1997 1999 1998
-------------------- --------------------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss $ (5,554) $ (5,988) $ (3,684) $(2,714)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 355 398 137 204
Changes in operating assets and liabilities:
Accounts receivable (16) (196) 97 (302)
Prepaid expenses and other current assets 42 (135) (183) 66
Accounts payable (146) 157 440 (101)
Accrued compensation 80 242 (26) 90
Deferred revenue (19) 228 434 48
Other accrued liabilities 163 253 (163) 117
-------------------- --------------------
Net cash used in operating activities (5,095) (5,041) (2,948) (2,592)
-------------------- --------------------
Investing activities
Capital expenditures - (127) (53) -
Purchases of available-for-sale securities (14,663) (502) - -
Sale of available-for-sale securities 14,663 998 -
Proceeds from repayment of shareholder notes receivable - - 218 -
Other assets 106 (60) - 107
-------------------- --------------------
Net cash provided by (used in) investing activities 106 (689) 1,163 107
-------------------- --------------------
Financing activities
Principal payments under capital lease obligations (283) (208) (107) (108)
Proceeds from issuance of common stock 12 18 58 6
Net proceeds from issuance of preferred stock 6,006 5,066 - 6,006
-------------------- --------------------
Net cash provided by (used in) financing activities 5,735 4,876 (49) 5,904
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents 746 (854) (1,834) 3,419
Cash and cash equivalents at beginning of period 1,118 1,972 1,864 1,118
-------------------- --------------------
Cash and cash equivalents at end of period $ 1,864 $ 1,118 $ 30 $ 4,537
==================== ====================
Supplemental disclosure of cash flow information
Cash paid for interest $ 38 $ 43 $ 14 $ 21
==================== ====================
Supplemental schedule of noncash investing and financing activities
Property and equipment acquired under capital lease obligations $ 153 $ 308 $ - $ 30
==================== ====================
Issuance of common stock in exchange for shareholder notes receivable $ - $ 218 $ - $ -
==================== ====================
</TABLE>
See accompanying notes.
8
<PAGE>
DIFFUSION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Summary of the Company and Significant Accounting Policies
The Company
Diffusion, Inc. (the "Company") was incorporated on April 20, 1995. The Company
is a provider of Customer Relationship Management ("CRM") solutions for
automating personalized, closed-loop interactions between an enterprise and its
customers. The Diffusion CRM System is an "electronic relationship manager" that
delivers appropriate information such as transaction occurrence and status to
specific individuals via their preferred media: email, fax, pager, phone, Web,
or printer.
The Company is subject to a number of risks associated with companies in a
similar stage of development, including dependence on key employees for
technology development and support, volatility of the software industry,
potential competition from larger more established companies, the successful
development and marketing of its products, and the ability to obtain adequate
financing to support its growth.
At December 31, 1998, the Company has incurred an accumulated deficit of
approximately $15,269,000. The Company will require additional financing to fund
ongoing operations and to meet existing repayment obligations for 1998. While
the Company plans to obtain additional financing to meet these needs, the
additional financing sources have not yet been identified. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. See Note 8.
Interim Financial Statements
In the opinion of management, the unaudited interim financial statements at June
30, 1999 and for the six months ended June 30, 1999 and 1998 include all
adjustments, consisting only of normal recurring accruals, necessary to present
fairly the Company's financial position at June 30, 1999, and results of
operations and cash flows for the six months ended June 30, 1999 and 1998.
Results for the six months ended June 30, 1999 are not necessarily indicative of
the results to be expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ materially from those estimates.
Research and Development
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standard No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready for
general release have been insignificant. Accordingly, all research and
development costs have been charged to operations as incurred.
9
<PAGE>
DIFFUSION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), as amended by Statement of Position 98-4, "Deferral
of the Effective Date of a Provision of SOP 97-2." The Company derives revenue
from the sale of software licenses, post-contract support ("support"), and other
services. Support includes telephone technical support, bug fixes, and rights to
upgrades on a when-and-if-available basis. Services range from installation,
training, and basic postimplementation consulting to meet specific customer
needs.
Revenue from license fees is recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant Company obligations
with regard to implementation remain, the fee is fixed or determinable, and
collectibility is probable. Revenue allocable to support is recognized on a
straight-line basis over the period support is provided and revenue allocable to
the software services is recognized as the services are performed.
Cash Equivalents and Short-Term Investments
Cash equivalents and short-term investments consist of money market funds and
U.S. government obligations. For purposes of the accompanying statement of cash
flows, the Company considers all such liquid instruments with an original
maturity date of three months or less to be cash equivalents.
Available-for-Sale Securities
Management determines the appropriate classification of marketable debt
securities ("securities") at the time of purchase. At December 31, 1998 and
1997, the Company's securities are classified as available-for-sale and consist
of money market funds and short-term investments. The amortized cost of these
investments approximates their fair value. Fair values for investment securities
are based on quoted market prices. All marketable securities available-for-sale
mature within one year of date of purchase. Unrealized gains and losses are not
material, and have, therefore, not been shown separately. Gross realized gains
and losses on sales of available-for-sale securities were immaterial.
Depreciation and Amortization
The Company records property and equipment at cost and calculates depreciation
using the straight-line method over the estimated useful lives of the assets,
generally two years. Equipment held under capital leases is amortized on a
straight-line basis over the shorter of the lease term or the lives of the
respective assets, generally two years.
Stock-Based Compensation
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), the Company accounts for employee stock option grants
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant and, accordingly, recognizes no compensation expense for the
employee stock option grants.
10
<PAGE>
DIFFUSION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash investments. The Company's cash investments
generally consist of money market funds with qualified financial institutions,
commercial paper issued by companies with strong credit ratings, and U.S.
government obligations.
Revenues from distributors and customers representing 10% or more of total
revenue during fiscal 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------
<S> <C> <C>
Customer:
A 47% -
B - 52%
C - 17%
D - 17%
</TABLE>
Comprehensive Income
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board's Statement No. 130, "Reporting Comprehensive Income" ("Statement 130").
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components. Comprehensive loss is the same as net
loss for all periods presented as there are no adjustments reported in
shareholders' equity which are to be included in the computation. Accordingly,
the adoption of this statement had no impact on the Company's net loss or
shareholders' equity.
Recently Issued Accounting Standards
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires companies to
capitalize certain qualifying computer software costs which are incurred during
the application development stage and amortize them over the software's
estimated useful life. The Company is required to adopt SOP 98-1 effective
January 1, 1999. The Company does not currently expect the adoption of SOP 98-1
to be material to its consolidated financial position or results of operations.
In December 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9
requires use of the "residual method" for recognition of revenue when vendor-
specific objective evidence (VSOE) exists for undelivered elements but does not
exist for delivered elements of a software arrangement. The Company will be
required to comply with the provisions of SOP 98-9 for transactions entered into
beginning January 1, 2000.
11
<PAGE>
DIFFUSION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
-----------------------------------
(in thousands)
<S> <C> <C>
Computer hardware and software $ 941 $ 799
Office furniture and fixtures 243 232
-----------------------------------
1,184 1,031
Less accumulated depreciation and amortization 944 589
-----------------------------------
$ 240 $ 442
===================================
</TABLE>
As of December 31, 1998 and 1997, property and equipment includes amounts held
under capital leases of $937,000 and $784,000 and related allowance for
amortization of $887,000 and $490,000, respectively.
3. Commitments
Leases
The Company leases its principal office under a noncancelable operating lease
agreement that expires in October 1999. In 1997 and 1996, the Company entered
into a $500,000 and $700,000 equipment lease line of credit, respectively. In
total, approximately $243,000 and $396,000 remained available at December 31,
1998 and 1997, respectively. The borrowings under the form of notes payable bear
interest of approximately 8% and are secured by substantially all of the assets
held by the Company.
As of December 31, 1998, minimum lease payments under all noncancelable lease
agreements were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------------------------------------
(in thousands)
<S> <C> <C>
Year ended December 31,
1999 $252 $140
2000 106 -
2001 30 -
----------------------------------------
Total minimum lease payments 388 $140
=================
Less amount representing interest 25
----------------
Present value of minimum lease payments 363
Less current portion 233
----------------
Long-term capital lease obligations $130
================
</TABLE>
Rent expense was approximately $229,000, $196,000, and $608,000 for the years
ended December 31, 1998 and 1997, and for the period from inception (April 20,
1995) to December 31, 1998, respectively.
12
<PAGE>
DIFFUSION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Stockholders' Equity
Redeemable Convertible Preferred Stock
Each share of Series A, B, C, and D preferred stock is convertible into common
stock at the exchange rate in effect at the time of conversion, currently one-
to-one, and is subject to appropriate adjustment for common stock splits, stock
dividends, and similar transactions. Conversion is automatic upon the closing of
an initial public offering of common stock in which the aggregate gross proceeds
to the Company are at least $15,000,000 with a minimum offering price of $5.00
per share.
Each holder of Series A, B, C, and D preferred stock is entitled to the number
of votes equal to the number of shares of common stock into which such preferred
stock are convertible.
Each holder of preferred stock is entitled to receive, when and as declared by
the board of directors, noncumulative dividends at the annual rate of $0.04,
$0.12, $0.15, and $0.14 per share of Series A, B, C, and D preferred stock,
respectively, payable in preference and priority to any payment of any dividend
on common stock.
In the event of liquidation, the holders of preferred stock are entitled to a
liquidation preference equal to $0.50, $1.47, $1.79, and $1.79 for all Series A,
B, C, and D preferred stock, respectively, plus all declared but unpaid
dividends for each outstanding share of Series A, B, C, and D preferred stock,
respectively; then their pro rata share (determined as if all outstanding shares
of preferred stock are converted to common stock) until aggregate distributions
on each outstanding share of Series A, B, C, and D preferred stock total $1.13,
$3.30, $4.02, and $4.03 per share, respectively. Any remaining assets shall be
distributed on a pro rata basis among the holders of the common stock.
At any time after October 6, 2001, the holders of not less than 75% of the
preferred stock then outstanding may elect, by written notice to the Company, to
have the outstanding Series A, B, C, and D preferred stock redeemed, in whole or
in part, by paying in cash $0.50, $1.47, $1.79, and $1.79 per share,
respectively, for the preferred stock then outstanding (appropriately adjusted
for any dilution), plus an amount equal to all declared and unpaid dividends on
the outstanding shares of Series A, B, C, and D preferred stock.
Common Stock
In October 1995, under a stock purchase agreement, the Company issued 1,722,000
common shares to an employee and founder of the Company at a price of $0.0116
per share; 75% of these shares are subject to repurchase rights which expire
ratably over the 48 months following the date of the stock purchase agreement.
Upon termination of service, any unvested shares may be repurchased by the
Company at the issuance price. At December 31, 1998 and 1997, 269,063 and
591,938 shares were subject to repurchase, respectively.
In January 1997, under a stock purchase agreement, the Company issued 1,353,000
common shares to an employee of the Company at a price of $0.15 per share in
exchange for a promissory note bearing interest at not less than 5.63% per
annum. Following the date of the stock purchase agreement, 92% of these shares
are subject to repurchase rights which expire ratably over 44 months. A further
82,350 shares were issued upon immediate exercise of an option granted in
September 1997 at a price of $0.18 per share; 75% of these shares are subject to
repurchase rights which expire ratably over the 36 months following the date of
the stock purchase
13
<PAGE>
DIFFUSION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
agreement. These shares were also issued in exchange for a promissory note. Upon
termination of service, any unvested shares may be repurchased by the Company at
the issuance price. At December 31, 1998 and 1997, 515,239 and 874,063 shares
were subject to repurchase.
The Company has reserved 12,469,514 shares of its common stock for issuance upon
conversion of its Series A, B, C, and D preferred stock, and 3,544,636 common
shares for issuance under the option plans.
Stock Option Plans
As discussed in Note 1, the Company has elected to follow Accounting Principals
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
During 1997, the Company adopted the 1997 Stock Option Plan (the "1997 Plan").
Under the 1997 Plan, up to 1,800,000 shares of the Company's common stock may be
granted to eligible participants.
During 1995, the Company adopted the 1995 General Stock Option Plan (the "1995
Plan"). Under the 1995 Plan, up to 1,102,500 shares of the Company's common
stock may be granted to eligible participants. Also during 1995, the Company
adopted the 1995 Executive Stock Option Plan (the "Executive Plan," altogether
known as the "Plans"). Under the Executive Plan, up to 2,214,000 shares of the
Company's common stock may be granted to directors and/or executive officers of
the Company. Under the Plans, options to purchase common stock may be granted at
no less than 85% of the fair value on the date of the grant (110% of fair value
in certain instances), as determined by the board of directors. Options
generally are immediately exercisable, subject to repurchase rights of the
Company, which lapse over a 48-month period, and have a maximum term of 10
years.
Pro forma information regarding net income (loss) is required by Statement 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of that Statement. The fair value of these options
was estimated at the date of grant using the minimum value method option pricing
model with the following weighted-average assumptions for 1996 and 1997,
respectively: risk-free interest rates of 5.0% to 6.3% a dividend yield of 0%,
and a weighted-average expected life of the option of four years.
The effect of applying Statement 123 to the Company's stock option awards did
not result in pro forma net loss that was materially different from historical
amounts reported. Therefore, such pro forma information is not separately
presented herein. Future pro forma net income/loss results may be materially
different from actual amounts reported.
14
<PAGE>
DIFFUSION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of activity under the Plans is as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Average
Available for Options Price Per Exercise
Grant Outstanding Share Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 1,329,614 1,887,386 $0.03-$0.15 $0.07
Additional shares authorized, net of
reductions 647,086 - - -
Options granted (1,439,750) 1,439,750 $0.15-$0.18 $0.18
Options exercised - (180,234) $0.15-$0.18 $0.17
Options canceled 638,700 (638,700) $0.15-$0.18 $0.18
----------------------------------------
Balance at December 31, 1997 1,175,650 2,508,202 $0.03-$0.18
Options granted (1,320,813) 1,320,813 $ 0.18 $0.18
Options exercised - (139,216) $0.05-$0.18 $0.09
Options canceled 956,401 (956,401)
----------------------------------------
Balance at December 31, 1998 811,238 2,733,398 $0.03-$0.18
========================================
</TABLE>
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Options Price Options Price
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exercisable at end of year 2,733,398 $0.12 2,508,202 $0.10
===============================================================================
Weighted-average fair value of options granted
during the year $0.04 $0.04
==================== =================
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$0.05 to $0.18. The weighted-average remaining contractual life of those options
is 8 years. Options subject to repurchase by the Company total 48,857 and 84,809
at December 31, 1998 and 1997, respectively.
5. Employee Benefit Plans
The Company has a 401(k) plan which stipulates that all full-time employees can
elect to contribute to the 401(k) plan, subject to certain limitations, up to
18% of salary on a pretax basis. The Company has the option to provide matching
contributions but has not done so to date.
6. Income Taxes
As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $14,200,000. The Company also had federal
research and development tax credit carryforwards of approximately $200,000. The
net operating loss and credit carryforwards will expire at various dates
beginning on 2010 through 2018, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in expiration of net operating losses and credits before
utilization.
As of December 31, 1998 and 1997, the Company had deferred tax assets of
approximately $6,100,000 and $3,800,000, respectively. The net deferred tax
asset has been fully offset by a valuation allowance. The valuation allowance
for
15
<PAGE>
DIFFUSION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
deferred tax assets increased by approximately $2,300,000 during the year ended
December 31, 1997. Deferred tax assets primarily relate to net operating loss
carryforwards.
7. Year 2000 Issue (Unaudited)
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries in order to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies will need to be upgraded to
comply with Year 2000 requirements. Significant uncertainty exists concerning
the potential effects associated with this issue. Although the Company believes
that its products and services are Year 2000 compliant, there can be no
assurance that Year 2000 errors or defects will not be discovered in the
Company's current and future products or services. Any failure by the Company to
make its products Year 2000 compliant could result in a decrease in revenue and
an increase in the allocation of resources to address Year 2000 problems without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by the Company's
customers due to such Year 2000 problems.
The Company has conducted a preliminary assessment of its internal information
technology ("IT") and non-IT systems to identify the systems that could be
affected by the Year 2000 issue. Based on this preliminary assessment, the
Company currently has no reason to believe that its IT and non-IT systems are
not Year 2000 compliant. The Company intends to continue to assess the Year 2000
compliance of its internal systems.
To date, the Company has not made any material expenditures related to the Year
2000 compliance of its internal information technology systems and the Company
does not currently anticipate spending any material amounts for Year 2000
remediation. There can be no assurance that Year 2000 errors or defects will not
be discovered in the Company's internal IT and non-IT systems. In the event Year
2000 errors or defects are discovered in the Company's internal IT and non-IT
systems and the Company is not able to remedy such errors or defects in a timely
manner or the cost to remedy such errors or defects is significant, there would
be a material adverse effect on the Company's business, results of operation, or
financial condition.
The Company relies on third-party vendors and service providers for various
products and services. There can be no assurance that third parties' failure to
ensure Year 2000 compliance would not have an adverse impact on the Company's
financial condition or results of operations.
The Company currently does not have a specific contingency plan intended to
mitigate the effects of any potential Year 2000 disruption. However, the Company
would formulate such a plan in the future, if necessary.
8. Subsequent Event (Unaudited)
Effective June 30, 1999, Vignette Corporation ("Vignette") acquired 100 percent
of the outstanding stock and assumed all outstanding stock options of the
Company in exchange for 393,271 shares of Vignette common stock. The total cost
of the acquisition, including transaction costs, was approximately $31.2
million. The acquisition was accounted for as a purchase business combination.
16
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
Effective June 30, 1999, Vignette Corporation ("Vignette" or the "Company")
acquired 100 percent of the outstanding stock and assumed all outstanding stock
options of Diffusion, Inc. ("Diffusion"), a leader in multi-channel information
delivery solutions, in exchange for 393,271 shares of Vignette common stock. The
total cost of the acquisition, including transaction costs, was approximately
$31.2 million. The acquisition was accounted for as a purchase business
combination.
Attached are unaudited pro forma condensed statements of operations for Vignette
Corporation for the year ended December 31, 1998 and for the six months ended
June 30, 1999, including related notes thereto. These statements, including the
weighted average number of shares used in the calculation of the pro forma per
share data, assume the acquisition had been consummated on January 1, 1998. A
condensed balance sheet at June 30, 1999, which reflects the acquisition as of
the effective date of June 30, 1999, is included in the Company's Form 10-Q
filed on August 13, 1999.
The unaudited pro forma condensed statements of operations are based on the
historical financial statements of the Company and Diffusion. They are not
necessarily indicative of the combined entity's operations had the acquisition
actually occurred on the dates indicated, nor are they necessarily indicative of
future operations. The pro forma adjustments and the assumptions on which they
are based are described in the accompanying notes to the unaudited pro forma
condensed statements of operations.
These unaudited pro forma condensed statements of operations are based on and
should be read in conjunction with the historical consolidated financial
statements and related notes thereto of the Company and the financial statements
and notes thereto of Diffusion for the year ended December 31, 1998.
17
<PAGE>
VIGNETTE CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Vignette Diffusion Adjustments Pro Forma
Historical Historical (Note 2) Combined
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Revenue:
Product license $ 8,584 $ 752 $ - $ 9,336
Services 7,621 330 - 7,951
-------- ------- ----------- ---------
Total revenue 16,205 1,082 - 17,287
Cost of revenue:
Product license 964 43 - 1,007
Services 9,340 175 - 9,515
-------- ------- ----------- ---------
Total cost of revenue 10,304 218 - 10,522
Gross profit 5,901 864 - 6,765
Operating expenses:
Research and development 6,962 1,795 - 8,757
Sales and marketing 15,880 3,529 - 19,409
General and administrative 4,864 1,268 - 6,132
Charge for purchased in-process
research and development,
acquisition-related, and other
charges 2,089 - - 2,089
Amortization of deferred
stock compensation 2,475 - - 2,475
Amortization of intangibles - - 3,547(a) 3,547
-------- ------- ----------- ---------
Total operating expenses 32,270 6,592 3,547 42,409
-------- ------- ----------- ---------
Loss from operations (26,369) (5,728) (3,547) (35,644)
Other income, net 172 174 - 346
-------- ------- ----------- ---------
Net loss $(26,197) $(5,554) $(3,547) $(35,298)
======== ======= =========== =========
Basic net loss per share $ (9.20) $ (10.93)
======== =========
Shares used in computing
basic net loss per share 2,849 3,228
======== =========
</TABLE>
See accompanying notes.
18
<PAGE>
VIGNETTE CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Vignette Diffusion Adjustments Pro Forma
Historical Historical (Note 2) Combined
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Revenue:
Product license $ 12,198 $ 190 $ - $ 12,388
Services 11,807 243 - 12,050
-------- ------- ----------- ---------
Total revenue 24,005 433 - 24,438
Cost of revenue:
Product license 1,153 6 - 1,159
Services 10,234 80 - 10,314
-------- ------- ----------- ---------
Total cost of revenue 11,387 86 - 11,473
Gross profit 12,618 347 - 12,965
Operating expenses:
Research and development 5,717 876 - 6,593
Sales and marketing 16,580 1,827 - 18,407
General and administrative 3,349 1,344 - 4,693
Charge for purchased in-process
research and development,
acquisition-related, and other
charges 14,690 - (14,690)(b) -
Amortization of deferred
stock compensation 2,957 - - 2,957
Amortization of intangibles - - 1,774 (a) 1,774
-------- ------- ----------- ---------
Total operating expenses 43,293 4,047 (12,916) 34,424
-------- ------- ----------- ---------
Loss from operations (30,675) (3,700) 12,916 (21,459)
Other income, net 1,210 16 - 1,226
-------- ------- ----------- ---------
Net loss $(29,465) $(3,684) $ 12,916 $(20,233)
======== ======= =========== =========
Basic net loss per share $ (1.54) $ (1.04)
======== =========
Shares used in computing
basic net loss per share 19,088 19,466
======== =========
</TABLE>
See accompanying notes.
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
1. GENERAL
The Company accounted for the acquisition as a purchase business
combination. The accompanying unaudited pro forma condensed financial
statements reflect an aggregate purchase price of approximately $31.2
million, consisting of the fair value of common stock issued ($30.9 million)
as well as transaction costs ($313,000). The following table presents the
allocation of the purchase price (in thousands):
<TABLE>
<CAPTION>
<S> <C>
In-process research and development $11,600
Acquired technology 6,300
Workforce 900
Excess of cost over fair value of net assets acquired 14,750
Net fair value of tangible assets acquired and
liabilities assumed (2,316)
-------
$31,234
=======
</TABLE>
The allocation of in-process research and development, acquired technology
and workforce was based upon an independent valuation.
2. UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma condensed statements of operations
have been prepared as if the acquisition was consummated as of January 1,
1998. Pro forma adjustments were made to reflect the:
(a) Amortization of acquired intangibles, with amortization periods of
five years for amounts allocated to acquired technology and workforce
and seven years for the excess of cost over fair value of net assets
acquired.
(b) Exclusion of the one-time impact for the write-off of in-process
research and development, acquisition-related expenses and integration
costs recorded by the Company in connection with the acquisition.
20
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the Vignette Corporation 1999 Equity Incentive Plan,
Vignette Corporation Employee Stock Purchase Plan, Vignette Corporation
International Employee Stock Purchase Plan, and Vignette Corporation 1999 Non-
Employee Director Option Plan and in the Registration Statement (Form S-8)
pertaining to the Diffusion, Inc. 1995 General Stock Option Plan, Diffusion,
Inc. 1995 Executive Stock Option Plan and the Diffusion, Inc. 1997 Stock Option
Plan, of our report dated February 27, 1999, with respect to the financial
statements of Diffusion, Inc. included in Vignette Corporation's Form 8-K/A.
/s/ Ernst & Young LLP
Palo Alto, California
September 10, 1999
21
