<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1996
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. Employe
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 September
30,1996: 12,579,267.
================================================================================
<PAGE>
VISIGENIC SOFTWARE, INC.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1996
and March 31,1996....................................................3
Condensed Consolidated Statements of Operations for
the three months and six months ended September 30, 1996
and September 30, 1995...............................................4
Condensed Consolidated Statements of Cash Flows for
the six months ended September 30, 1996 and September 30, 1995.......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...................................................16
Item 2. Changes in Securities...............................................16
Item 3. Defaults upon Senior Securities.....................................16
Item 4. Submission of Matters to a Vote of Security Holders.................16
Item 5. Other Information...................................................16
Item 6. Exhibits and Reports on Form 8-K....................................16
Signatures..........................................................17
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VISIGENIC SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
Sept. 30, March 31,
1996 1996
------------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $13,602 $2,399
Accounts receivable, net 2,462 760
Prepaid compensation 1,061 -
Prepaid expenses and other current assets 552 257
------------------------------
Total current assets 17,677 3,416
------------------------------
PROPERTY AND EQUIPMENT, net 2,139 1,349
OTHER ASSETS, net:
Excess of purchase price over net assets 870 -
acquired
Other 79 55
------------------------------
TOTAL ASSETS $20,765 $4,820
==============================
CURRENT LIABILITIES:
Accounts payable $1,090 $811
Accrued liabilities -
Payroll and related benefits 711 347
Other 1,506 301
Deferred revenue 1,357 1,141
------------------------------
Total current liabilities 4,664 2,600
------------------------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock - 4
Common stock 13 3
Additional paid-in-capital 43,513 13,675
Accumulated deficit (27,425) (11,462)
------------------------------
Total stockholders' equity 16,101 2,220
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,765 $4,820
==============================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
VISIGENIC SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended
September 30, September 30,
1996 1995 1996 1995
------------------ ------------------
<S> <C> <C> <C> <C>
REVENUE:
Software licenses $3,222 $1,033 $5,727 $1,577
Consulting services, maintenance
and other 600 268 1,056 635
------------------ ------------------
Total revenue 3,822 1,301 6,783 2,212
------------------ ------------------
COST OF REVENUE:
Software licenses 130 62 268 105
Consulting services, maintenance
and other 402 180 697 326
------------------ ------------------
Total cost of revenue 532 242 965 431
------------------ ------------------
GROSS PROFIT 3,290 1,059 5,818 1,781
------------------ ------------------
OPERATING EXPENSES:
Product development 2,481 972 4,138 1,701
Sales & marketing 2,397 770 4,403 1,406
General & administrative 628 336 1,101 671
Purchased in process product
development - - 12,014 -
Amortization of excess of
purchase price over net assets
acquired 129 - 172 -
------------------ ------------------
Total operating expenses 5,635 2,078 21,828 3,778
------------------ ------------------
Loss from operations (2,345) (1,019) (16,010) (1,997)
------------------ ------------------
INTEREST AND OTHER INCOME, net 42 28 48 29
------------------ ------------------
NET LOSS ($2,303) ($991) ($15,962) ($1,968)
================== ==================
PRO FORMA NET LOSS PER SHARE ($0.18) ($0.09) ($1.34) ($0.18)
================== ==================
PRO FORMA WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 12,565 11,240 11,900 11,241
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
VISIGENIC SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
1996 1995
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($15,962) ($1,968)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 434 122
Purchased in process product development 12,014 -
Provision for allowance for doubtful accounts 37 30
Changes in net assets and liabilities, net of acquisition of PostModern
Increase in accounts receivable (1,599) (718)
Increase in prepaid expenses (1,269) (129)
and other current assets
Increase in accounts payable 188 188
Increase in accrued liabilities 1,064 117
Increase in deferred revenue 33 391
-------- -------
Net cash used in operating activities (5,060) (1,967)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of PostModern, net of cash acquired (2,182) -
Purchases of property and equipment (982) (544)
Organizational costs and other assets (31) (28)
-------- -------
Net cash used in investing activities (3,195) (572)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes 2,000 -
Net proceeds from issuance of preferred stock 4,000 5,463
Net proceeds from issuance of common stock 13,458 -
-------- -------
Net cash provided by financing activities 19,458 5,463
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,203 2,924
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,399 553
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $13,602 $3,477
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
VISIGENIC SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Visigenic Software, Inc. (the "Company") without audit pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in its Registration
Statement on Form S-1 (Registration No. 333-06285).
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
six-month period ended September 30, 1996. The results for the six-month period
ended September 30, 1996 are not necessarily indicative of the results expected
for the full fiscal year.
2. PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the "if
converted" method) and stock options (using the treasury stock method). As the
Company has incurred losses since inception, common equivalent shares have been
excluded from the computation, as their effect is antidilutive; however,
pursuant to Securities and Exchange Commission requirements, such computations
include all common and common equivalent shares issued within the twelve months
preceding the filing date as if they were outstanding for all periods presented
using the treasury stock method. Convertible preferred stock outstanding during
the period are included (using the "if converted" method) in the computation as
common equivalent shares, even though the effect is antidilutive.
3. POSTMODERN ACQUISITION
In May 1996, the Company completed the acquisition of PostModern Computing
Technologies Inc. ("PostModern"), a developer of distributed object connectivity
software. In the acquisition, which was structured as a merger, the Company
issued 3,099,821 shares of its Common Stock, valued at $3.00 per share, and paid
a total of $2.3 million in exchange for all of PostModern's outstanding shares.
The Company also assumed PostModern's outstanding stock options and reserved
361,785 shares of the Company's Common Stock for issuance upon exercise of such
options. The Company also incurred acquisition-related costs of approximately
$450,000, resulting in a total purchase price of approximately $13.1 million. In
addition, the Company made cash payments, subject to one-year vesting and
totaling $1.5 million, to certain PostModern employees. The acquisition of
PostModern was accounted for as a purchase in the quarter ended June 30, 1996.
The Company recorded a write-off in the quarter ended June 30, 1996 of
approximately $12.0 million of in-process product development that had not
reached technological feasibility and, in management's opinion, had no probable
alternative future use. The remaining purchase price of approximately $1.1
million will be amortized over two years.
6
<PAGE>
4. CAPITAL STOCK
In August 1996, the Company completed the initial public offering of its
common stock. The Company sold 2,015,000 shares for net proceeds of $13.2
million. Concurrent with the closing of the initial public offering, 4,119,069
shares of convertible preferred stock were converted into an equivalent number
of shares of common stock and $2,000,000 of convertible notes plus accrued
interest of $31,526 converted into 270,871 shares of common stock.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In addition to historical information, this discussion contains forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements. Due to 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 Registration Statement on Form S-1 (Registration No.
333-06285).
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 shipped version 1.0 of the
VisiODBC Software Development Kit ("SDK") and the VisiODBC Drivers and
DriverSets 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. The Company
first recognized material revenue in the fourth quarter of fiscal 1995.
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. For fiscal 1996,
licenses to the Company's ten largest customers accounted for approximately 78%
of the Company's total revenue and licenses to one customer accounted for
approximately 25% of the Company's total revenue. For the first and second
quarter of fiscal 1997, licenses to the Company's ten largest customers
accounted for approximately 75% and 74%, respectively, of the Company's total
revenue. For the second quarter of fiscal 1997 and six months ended September
30, 1996, two customers accounted for 24% and 13%, and 22% and 13%,
respectively, of the Company's total revenue. The Company expects that licenses
to a limited number of VAR and ISV customers will continue to account for a
large percentage of revenue for the foreseeable future.
The Company's sales generally reflect a relatively high amount of revenue per
order. The loss or delay of individual orders, therefore, can have a significant
impact on the revenue and quarterly results of the Company. Because the
Company's operating expenses are relatively fixed, a delay in the recognition of
revenue from a limited number of license transactions could cause significant
variations in operating results from quarter to quarter and could result in
significant losses. To the extent such expenses precede, or are not subsequently
followed by, increased revenue, the Company's operating results would be
materially adversely affected.
8
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 % Change 1996 1995 % Change
----------------------------- --------------------------
REVENUE: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Software license $3,222 $1,033 212% $5,727 $1,577 263%
Percentage of revenue 84% 79% 84% 71%
Consulting services, maintenance and other 600 268 124% 1,056 635 66%
Percentage of revenue 16% 21% 16% 29%
----------------------------- --------------------------
Total Revenue $3,822 $1,301 194% $6,783 $2,212 207%
----------------------------- --------------------------
</TABLE>
Revenue
Revenue for the second quarter of fiscal 1997 was $3.8 million, representing
a 194% increase over revenue of $1.3 million recorded during the comparable
period of fiscal 1996. For the six months ended September 30, 1996, Visigenic's
revenue grew 207% to $6.8 million from $2.2 million reported for the comparable
period of the prior year.
Revenue from software licenses increased both in absolute dollars and as a
percentage of total revenues during the three and six month periods ended
September 30, 1996 over the comparable periods of 1995. The revenue increases
were primarily due to an increased volume of licensing of the Company's database
connectivity products, resulting from an increase in the number of products
offered and the expansion of the Company's direct sales and telesales
organizations.
Consulting, maintenance and other revenue increased 124% in the second
quarter of fiscal 1997 over the comparable period of the prior year and
accounted for 16% and 21% of total revenue for the second quarter of fiscal
1997 and 1996, respectively. For the six month period ended September 30, 1996
the increase was 66% over the comparable period of the prior year. The
increase in revenue was primarily due to the greater licensing of products to
customers under agreements with maintenance components and growth in training,
consulting and development activities.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 % Change 1996 1995 % Change
--------------------------- -------------------------
COST OF REVENUE: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Software licenses $130 $ 62 110% $268 $105 155%
Percentage of revenue 3% 5% 4% 5%
Consulting services, maintenance and other 402 180 123% 697 326 114%
Percentage of revenue 11% 14% 10% 14%
--------------------------- -------------------------
Total cost of revenue $532 $242 120% $965 $431 124%
Percentage of revenue 14% 19% 14% 19%
</TABLE>
Cost of Revenue
Cost of software license revenue includes product packaging, documentation,
production and shipping. Cost of software license revenue increased from $62,000
in the second quarter of fiscal 1996 to $130,000 in the second quarter of fiscal
1997 and from $105,000 for the six months ended September 30,
9
<PAGE>
1995 to $268,000 for the six months ended September 30, 1996. The increases
resulted from increased volume of licensing of the Company's products.
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 $180,000 in the second quarter of fiscal 1996 to $402,000 in the
second quarter of fiscal 1997 and from $326,000 for the six months ended
September 30, 1995 to $697,000 for the six months ended September 30, 1996.
These increases reflect the effect of fixed costs resulting from the Company's
investment during the first half of fiscal 1997 in a larger customer support
organization. The Company intends to continue investing resources in its
customer support organization. The Company currently expects that costs of
service and other revenue will increase in absolute dollar amounts from the
level for fiscal 1997.
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 % Change 1996 1995 % Change
------------------------------ ---------------------------
OPERATING EXPENSES: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Product development $2,481 $972 155% $4,138 $1,701 143%
Percentage of revenue 65% 75% 61% 77%
Sales & marketing 2,397 770 211% 4,403 1,406 213%
Percentag e of revenue 63% 59% 65% 64%
General & administrative 628 336 87% 1,101 671 64%
Percentage of revenue 16% 26% 16% 30%
Purchased in process product development - - - 12,014 - -
Percentage of revenue - - 177% -
Amortization of excess purchase price over net assets acquired 129 - - 172 - -
Percentage of revenue 3% - 3% -
------------------------------ ---------------------------
Total operating expenses $5,635 $2,078 171% $21,828 $3,778 478%
Percentage of revenue 147% 160% 322% 171%
</TABLE>
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 155% from $972,000
in the second quarter of fiscal 1996 to $2.5 million in the second quarter of
fiscal 1997 and by 143% from $1.7 million for the six months ended September 30,
1995 to $4.1 million for the six months ended September 30, 1996. 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.
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
<PAGE>
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 211% from $770,000 in the second quarter of
fiscal 1996 to $2.4 million in the second quarter of fiscal 1997 and by 213%
from $1.4 million for the six months ended September 30, 1995 to $4.4 million
for the six months ended September 30, 1996. 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 1997. 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 87% from $336,000 in the second quarter of
fiscal 1996 to $628,000 in the second quarter of fiscal 1997 and by 64% from
$671,000 for the six months ended September 30, 1995 to $1.1 million for the six
months ended September 30, 1996. The increase in the absolute dollar amounts of
general and administrative expenses was primarily due to increased staffing and
associated expenses necessary to manage and support the Company's increased
scale of operations. 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 and expenses associated with being a public company.
Purchased In-Process Product Development. In connection with the purchase of
PostModern, the company received an appraisal of the intangible assets which
indicated that approximately $12.0 million of the acquired intangible assets
consisted of in-process product development. Because there can be no assurance
that the Company will be able to successfully complete the development and
integration of the PostModern products or that the acquired technology has any
alternative future use, the acquired in-process development was charged to
expense by the Company in its quarter ended June 30, 1996.
Amortization of Excess Purchase Price over Net Assets Acquired. As a result
of the purchase price allocation in connection with the purchase of PostModern
in May 1996, the excess of the purchase price over net assets acquired was $1.1
million, which is being amortized on a straight-line basis over a period of two
years. Management believes that the unamortized balance of $870,000 is
recoverable through future operating results.
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 the second
quarter of fiscal 1996 to the second quarter of fiscal 1997 and for the six
months ended September 30, 1995 to the six months ended September 30, 1996 is
primarily due to income derived from the short-term investments of the proceeds
from the Company's initial public offering, which was completed in August 1996.
11
<PAGE>
Liquidity and Capital Resources
<TABLE>
<CAPTION>
(In thousands) Six Months Ended
September 30,
1996 1995 % Change
-----------------------------
<S> <C> <C> <C>
Working capital $ 13,013 $ 3,519 270%
Cash and cash equivalents $ 13,602 $ 3,477 291%
Net cash used in operating activities $ 4,515 $ 1,967 130%
Net cash used in investing activities $ 4,294 $ 572 651%
Net cash provided by financing $ 20,012 $ 5,463 266%
activities
</TABLE>
Working capital and cash and cash equivalents increased 270% and 291%,
respectively, in the first six months of fiscal 1997 over the comparable
period of fiscal 1996, primarily due to the completion of the Company's initial
public offering in August 1996. The net proceeds to the Company, after
underwriting discounts and offering expenses, were $13.2 million.
Net cash used in operating activities increased 130% as a result of the
increase in the net loss plus changes in working capital balances. Net cash
used in investing activities increased 651% to $4.3 million due to the
PostModern acquisition and increased capital expenditures to support the
Company's growing employee base.
The Company currently has a $3.0 million revolving line of credit agreement
which expires on July 15, 1997. Advances under this agreement, which bear
interest at the bank's prime lending rate plus 1.0%, are limited to 80% of
eligible accounts receivable and are secured by substantially all of the assets
and contractual rights of the Company. At September 30, 1996, there were no
borrowings outstanding under this agreement. The line of credit agreement
contains certain financial restrictions and covenants with which the Company is
in compliance.
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 September 30, 1996, 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 at least through fiscal 1997. 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.
12
<PAGE>
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 registration statement on Form S-1 which was
declared effective on August 7, 1996.
Limited Operating History; History of Losses; Recent Acquisition of
Distributed Object Connectivity Business. The Company was incorporated in 1993
and commenced shipment of its initial products in November 1994. In May 1996,
the Company acquired PostModern, a developer of distributed object connectivity
software. PostModern was founded in 1991, commenced shipment of its initial
products in 1992 and had very limited product sales prior to the acquisition.
Accordingly, the Company has only a limited operating history, particularly with
respect to its newly acquired distributed object connectivity business, 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 September 30, 1996, the Company had cumulative operating losses of
$27.5 million, with net losses of $2.5 million, $4.6 million, $4.4 million and
$16.0 million for fiscal 1994, fiscal 1995, fiscal 1996 and the six-months ended
September 30, 1996, 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 has experienced substantial growth
in revenue in fiscal 1996. 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."
The process of integrating PostModern 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 this acquisition will be realized.
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 timing
and terms of individual license transactions, the relatively long sales and
implementation cycles for the Company's products; the delay or deferral of
customer implementations; the ability of the Company to develop and market new
products and control costs and the ability of the Company to expand its direct
sales and telesales forces, its indirect distribution channels and its customer
support capabilities.
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview."
13
<PAGE>
A significant portion of the Company's revenue has been and is expected in the
future to continue to be based upon sales to third party vendors, who will
incorporate the Company's products in their own products. This revenue depends
upon the success of third parties, and as a result is difficult for the Company
to predict and may be subject to extreme fluctuation.
The Company's expense levels are based, in part, on its expectations as to
future revenue and to a large extent are fixed in the short term. The Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall of revenue
in relation to the Company's expectations would have an almost immediate adverse
effect on the Company's business, financial condition and results of operations.
Further, the Company intends to continue to expand its 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.
Product Concentration. Prior to the acquisition of PostModern in May 1996, the
Company derived all of its revenue from the licensing of its database
connectivity software products, particularly its Open Database Connectivity
("ODBC") product line, and fees from related services. These products and
services are expected to continue to account for a significant amount 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 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 standards-based database connectivity and distributed
object connectivity software products. These markets are new and emerging, are
rapidly evolving, are 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 connectivity products. The Company's current
distributed object connectivity 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, have not yet gained widespread
acceptance and compete with proprietary solutions such as Microsoft's ActiveX
and Distributed Component Object Model. The distributed object connectivity
software market is relatively young and there are few proven products. 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 Cisco, 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 1996, ten VAR and ISV customers accounted for approximately 78% of the
Company's revenue, while in the first and second quarters of fiscal 1997, ten
VAR and ISV customers accounted for approximately 75% and 74%, respectively, 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.
Dependence on the Internet and Intranets. The Company believes that sales of
its connectivity products, particularly its distributed object connectivity
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.
14
<PAGE>
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 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. 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.
Need to Develop New Software Products and Enhancements. The markets for the
Company's products are characterized by rapid technological developments,
evolving industry standards, swift changes in customer requirements, computer
operating environments and software applications, and frequent new product
introductions and enhancements. As a result, the Company's success depends
substantially upon its ability to anticipate changes and continue to enhance its
existing products, develop and introduce in a timely manner new products
incorporating technological advances, comply with emerging industry standards
and meet increasing customer expectations. There can be no assurance that the
Company will be successful in developing and 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.
Dependence on Key Personnel. The Company's future performance depends to a
significant extent upon the continued service of its key technical, sales and
marketing and senior 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.
Intense Competition. The Company's products are targeted at the emerging
markets for standards-based database connectivity software and standards-based
distributed object connectivity software. The markets 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.
15
<PAGE>
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.
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.
Possible Volatility of Stock. The stock market has from time to time
experienced significant price and volume fluctuations which have particularly
affected the market prices of the stocks of high technology companies, and which
may be unrelated to the operating performance of particular companies. There
has been particular volatility in the market prices of securities of companies
which, like Visigenic, are still engaged in product development. Factors such
as technology and product announcements by the Company and its licensees or by
competitors, disputes relating to patents and proprietary rights, and failures
or delays in the Company's development program may have a significant effect on
the market price of the common stock. Since the Company's initial public
offering in August 1996, the price of the Company's Common Stock has
experienced volatility.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
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
The following exhibits have been filed with this report:
11.1 Statements of computation of pro forma common shares and
equivalents.
27.1 Financial Data Schedule
b. No reports on Form 8-K were filed during the quarter to which this
report relates.
16
<PAGE>
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: November 12, 1996 By: /s/ KEVIN C. EICHLER
------------------------------
KEVIN C. EICHLER
Vice President, Finance, Chief
Financial Officer, Treasurer and
Secretary
17
<PAGE>
EXHIBIT 11.1
VISIGENIC SOFTWARE, INC.
STATEMENT OF COMPUTATION OF PRO FORMA COMMON
SHARES AND EQUIVALENTS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
1996 1995 1996 1995
------- ------ -------- -------
<S> <C> <C> <C> <C>
Primary
Net loss $(2,303) $ (991) $(15,962) $(1,968)
======= ====== ======== =======
Weighted average common shares outstanding 6,138 2,780 4,457 2,781
Weighted average common equivalent share:
Weighted average preferred stock outstanding 1,017 3,050 2,033 3,050
Adjustments to reflect requirements of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 83:
Common stock issuances 3,376 3,376 3,376 3,376
Preferred stock issuances 1,069 1,069 1,069 1,069
Common stock option grants 965 965 965 965
Pro forma total weighted average common shares and equivalents 12,565 11,240 11,900 11,241
======= ====== ======== =======
Pro forma net loss per share $ (0.18) $(0.09) $ (1.34) $( 0.18)
Fully Diluted
Net loss $(2,303) $ (991) $(15,962) $(1,968)
======= ====== ======== =======
Weighted average common shares outstanding 6,138 2,780 4,457 2,781
Weighted average common equivalent shares
Weighted average preferred stock outstanding 1,017 3,050 2,033 3,050
Adjustments to reflect requirements of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 83:
Common stock issuances 3,376 3,376 3,376 3,376
Preferred stock issuances 1,069 1,069 1,069 1,069
Common stock option grants 965 965 965 965
Pro forma total weighted average common shares and equivalents 12,565 11,240 11,900 11,241
======= ====== ======== =======
Pro forma net loss per share $ (0.18) $(0.09) $ (1.34) $ (0.18)
======= ====== ======== =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VISIGENIC
SOFTWARE, INC. CONSOLIDATED BALANCE SHEET, SEPTEMBER 30, 1996 AND MARCH
31, 1996, VISIGENIC SOFTWARE, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1996
<PERIOD-START> JUL-01-1996 APR-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 13,602 13,602
<SECURITIES> 0 0
<RECEIVABLES> 2,559 2,559
<ALLOWANCES> 97 97
<INVENTORY> 35 35
<CURRENT-ASSETS> 17,677 17,677
<PP&E> 2,924 2,924
<DEPRECIATION> 785 785
<TOTAL-ASSETS> 20,765 20,765
<CURRENT-LIABILITIES> 4,664 4,664
<BONDS> 0 0
0 0
0 0
<COMMON> 13 13
<OTHER-SE> 16,088 16,088
<TOTAL-LIABILITY-AND-EQUITY> 20,765 20,765
<SALES> 3,822 6,783
<TOTAL-REVENUES> 3,822 6,783
<CGS> 532 965
<TOTAL-COSTS> 6,167 22,793
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 43 49
<INCOME-PRETAX> (2,303) (15,962)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,303) (15,962)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,303) (15,962)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (.18) (1.34)
</TABLE>
