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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended December 31, 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. Employee
incorporation or organization) Identification No.)
951 Mariner's Island Blvd.
Suite 120
San Mateo, CA 94404
(Address of principal executive offices including zip code)
(415) 286-1900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
------ ------
Number of shares of registrant's common stock outstanding as of February 11,
1997: 13,991,751.
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VISIGENIC SOFTWARE, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at December 31, 1996 and
March 31,1996....................................................... 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended December 31, 1996 and December 31, 1995....... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended December 31, 1996 and December 31, 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.................................................... 17
Item 2. Changes in Securities................................................ 17
Item 3. Defaults upon Senior Securities...................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................. 17
Item 5. Other Information.................................................... 17
Item 6. Exhibits and Reports on Form 8-K..................................... 17
Signatures .......................................................... 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VISIGENIC SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
DEC. 31, MARCH 31,
1996 1996
----------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,064 $ 2,399
Accounts receivable, net 5,605 760
Prepaid compensation 645 -
Prepaid expenses and other current assets 597 257
---------------------
Total current assets 15,911 3,416
---------------------
PROPERTY AND EQUIPMENT, NET 2,543 1,349
OTHER ASSETS, NET:
Excess of purchase price over net assets
acquired 1,384 -
Other 83 55
---------------------
TOTAL ASSETS $ 19,921 $ 4,820
=====================
CURRENT LIABILITIES:
Accounts payable $ 716 $ 811
Accrued liabilities -
Payroll and related benefits 1,320 347
Other 916 301
Deferred revenue 1,673 1,141
---------------------
Total current liabilities 4,625 2,600
---------------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock - 4
Common stock 12 3
Additional paid-in-capital 45,017 13,675
Accumulated deficit (29,733) (11,462)
---------------------
Total stockholders' equity 15,296 2,220
---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,921 $ 4,820
=====================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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VISIGENIC SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
-------------------- ---------------------
<S> <C> <C> <C> <C>
REVENUE:
Software licenses $ 4,168 $ 840 $ 9,895 $ 2,417
Consulting services, maintenance and other 583 253 1,639 888
-------------------- ---------------------
Total revenue 4,751 1,093 11,534 3,305
-------------------- ---------------------
COST OF REVENUE:
Software licenses 131 107 399 212
Consulting services, maintenance and other 733 200 1,430 526
-------------------- ---------------------
Total cost of revenue 864 307 1,829 738
-------------------- ---------------------
GROSS PROFIT 3,887 786 9,705 2,567
-------------------- ---------------------
OPERATING EXPENSES:
Product development 2,512 1,429 6,650 3,130
Sales & marketing 2,574 732 6,977 2,138
General & administrative 713 371 1,814 1,042
Purchased in process product development 350 - 12,364 -
Amortization of excess of purchase price over
net assets acquired 189 - 361 -
-------------------- ---------------------
Total operating expenses 6,338 2,532 28,166 6,310
-------------------- ---------------------
Loss from operations (2,451) (1,746) (18,461) (3,743)
-------------------- ---------------------
INTEREST AND OTHER INCOME, NET 142 48 190 77
-------------------- ---------------------
NET LOSS ($2,309) ($1,698) ($18,271) ($3,666)
==================== =====================
PRO FORMA NET LOSS PER SHARE ($0.18) ($0.15) ($1.51) ($0.33)
==================== =====================
PRO FORMA WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 12,622 11,234 12,141 11,008
==================== =====================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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VISIGENIC SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1996 1995
----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($18,271) ($3,666)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 795 199
Purchased in process product development 12,364 -
Provision for allowance for doubtful accounts 85 45
Changes in net assets and liabilities, net of acquisition of
PostModern and CustomWare:
Increase in accounts receivable (4,584) (1,317)
Increase in prepaid expenses and other current assets (887) (56)
Increase in accounts payable (186) 417
Increase in accrued liabilities 1,075 170
Increase in deferred revenue 349 655
--------------------
Net cash used in operating activities (9,260) (3,553)
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of PostModern and CustomWare,
net of cash acquired (1,919) -
Purchases of property and equipment (1,553) (778)
Organizational costs and other assets (34) (18)
--------------------
Net cash used in investing activities (3,506) (796)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes 2,000 -
Net proceeds from issuance of preferred stock 4,000 5,469
Net proceeds from issuance of common stock 13,431 -
--------------------
Net cash provided by financing activities 19,431 5,469
--------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,665 1,120
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,399 553
--------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,064 $ 1,673
====================
</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. 333-20583).
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
nine-month period ended December 31, 1996. The results for the nine-month
period ended December 31, 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 pro forma weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of convertible preferred stock (using
the "if converted" method) and stock options (using the treasury stock method).
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 initial public offering date as if they were
outstanding for all periods presented using the treasury stock method.
Convertible preferred stock outstanding during the period is 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 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
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4. PUBLIC OFFERINGS
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.
On February 11, 1997, the Company consummated an additional public offering of
1,600,000 shares of its common stock which was comprised of 1,180,000 shares
sold by the Company and 420,000 shares sold by selling shareholders. The net
proceeds to the Company was approximately $13.1 million.
5. CUSTOMWARE ACQUISITION
In December 1996, the Company completed the acquisition of CustomWare, Inc.
("CustomWare"), a training and consulting organization that specializes in
distributed object technology. In the acquisition, which was structured as a
merger, the Company issued 125,000 shares of its common stock to the sole
shareholder of CustomWare, resulting in a total purchase price of approximately
$1.5 million. The acquisition of CustomWare was accounted for as a purchase in
the quarter ended December 31, 1996.
In connection with the purchase price allocation, the Company received an
appraisal of the intangible assets which indicated that approximately $350,000
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 of the CustomWare products or that the acquired
technology has any alternative future use, the acquired in process product was
charged to expense by the Company in its quarter ended December 31, 1996.
As a result of the purchase price allocation, the excess of the purchase price
over net assets acquired is $700,000 which is being amortized on a straight-line
basis over a period of one year. Management believes that the unamortized
balance is recoverable through future operating results.
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.
333-20583).
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 nine months of
fiscal 1997, licenses to the Company's ten largest customers accounted for
approximately 55% of the Company's total revenue and licenses to two customers
accounted for 14% 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 NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 % CHANGE 1996 1995 % CHANGE
--------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
SOFTWARE LICENSES $4,168 $ 840 396% $ 9,895 $2,417 309%
Percentage of revenue 88% 77% 86% 73%
CONSULTING SERVICES, MAINTENANCE AND OTHER 583 253 130% 1,639 888 85%
Percentage of revenue 12% 23% 14% 27%
--------------------------- ---------------------------
TOTAL REVENUE $4,751 $1,093 335% $11,534 $3,305 249%
=========================== ===========================
</TABLE>
REVENUE
Revenue for the third quarter of fiscal 1997 was $4.8 million, representing a
335% increase over revenue of $1.1 million recorded during the comparable period
of fiscal 1996. For the nine months ended December 31, 1996, Visigenic's revenue
grew 249% to $11.5 million from $3.3 million reported for the comparable period
of the prior fiscal year.
Revenue from software licenses increased both in absolute dollars and as a
percentage of total revenue during the three and nine month periods ended
December 31, 1996 over the comparable periods of 1995. The revenue increases
were primarily due to an increased volume of licensing of distributed object
products resulting from the acquisition of PostModern and the Company's database
access products.
Consulting, maintenance and other revenue increased 130% in the third quarter
of fiscal 1997 over the comparable period of the prior year and accounted for
12% and 23% of total revenue for the third quarter of fiscal 1997 and 1996,
respectively. For the nine month period ended December 31, 1996 the increase
was 85% 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 a maintenance component and growth in training, consulting and
development activities.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 % CHANGE 1996 1995 % CHANGE
-------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
COST OF REVENUE: (IN THOUSANDS)
SOFTWARE LICENSES $ 131 $ 107 22% $ 399 $ 212 88%
Percentage of revenue 3% 10% 4% 6%
CONSULTING SERVICES, MAINTENANCE AND OTHER 733 200 267% 1,430 526 172%
Percentage of revenue 15% 18% 12% 16%
-------------------------- ----------------------------
TOTAL COST OF REVENUE $ 864 $ 307 181% 1,829 $ 738 148%
Percentage of revenue 18% 28% 16% 22%
</TABLE>
9
<PAGE>
COST OF REVENUE
Cost of software license revenue includes product packaging, documentation,
production and shipping. Cost of software license revenue increased from
$107,000 in the third quarter of fiscal 1996 to $131,000 in the third quarter of
fiscal 1997 and from $212,000 for the nine months ended December 31, 1995 to
$399,000 for the nine months ended December 31, 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 $200,000 in the third quarter of fiscal 1996 to $733,000 in the
third quarter of fiscal 1997 and from $526,000 for the nine months ended
December 31, 1995 to $1.4 million for the nine months ended December 31, 1996.
These increases reflect the effect of fixed costs resulting from the Company's
investment during the first nine months of fiscal 1997 in a larger professional
services organization. The Company intends to continue investing resources in
its professional services organization and anticipates that the cost of
consulting services, maintenance and other revenue may exceed consulting
services, maintenance and other revenue in future periods.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 % CHANGE 1996 1995 % CHANGE
--------- --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES: (IN THOUSANDS)
PRODUCT DEVELOPMENT $2,512 1,429 76% $ 6,650 $3,130 112%
Percentage of revenue 53% 131% 58% 95%
SALES & MARKETING 2,574 732 252% 6,977 2,138 226%
Percentage of revenue 54% 67% 60% 65%
GENERAL & ADMINISTRATIVE 713 371 92% 1,814 1,042 74%
Percentage of revenue 15% 34% 16% 32%
PURCHASED IN PROCESS PRODUCT DEVELOPMENT 350 - - 12,364 - -
Percentage of revenue 7% - 107% -
AMORTIZATION OF EXCESS PURCHASE PRICE OVER 189 - - 361 - -
NET ASSETS ACQUIRED
Percentage of revenue 4% - 3% -
------ ------ --- ------- ------ ---
TOTAL OPERATING EXPENSES $6,338 $2,532 150% $28,166 $6,310 346%
PERCENTAGE OF REVENUE 133% 232% 244% 191%
</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 76% from $1.4
million in the third quarter of fiscal 1996 to $2.5 million in the third quarter
of fiscal 1997 and by 112% from $3.1 million for the nine months ended December
31, 1995 to $6.7 million for the nine months ended December 31, 1996. The
increase in the dollar amount of product development expenses was primarily
attributable to costs of additional personnel, including the engineering
personnel from PostModern beginning in June 1996, and full-time contractors in
10
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the Company's product development operations and, to a lesser extent, the
licensing of existing technology from third parties which has been or will be
incorporated into the Company's products. The Company anticipates that it will
continue to devote substantial resources to product development, including
acquiring or licensing technology from others, in order to introduce new
products, enhance existing products or accelerate its time to market.
In accordance with Statement of Financial Accounting Standards No. 86, the
Company has charged all software development costs to product development
expense as incurred because expenditures which were eligible for capitalization
were insignificant.
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 252% from $732,000 in the third quarter of
fiscal 1996 to $2.6 million in the third quarter of fiscal 1997 and by 226% from
$2.1 million for the nine months ended December 31, 1995 to $7.0 million for the
nine months ended December 31, 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 1997. The Company expects that sales and marketing
expenses will continue to increase in absolute dollar amount 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 92% from $371,000 in the third quarter of
fiscal 1996 to $713,000 in the third quarter of fiscal 1997 and by 74% from $1.0
million for the nine months ended December 31, 1995 to $1.8 million for the nine
months ended December 31, 1996. The increase in the absolute dollar amounts of
general and administrative expenses were primarily due to increased staffing and
associated expenses necessary to manage and support the Company's increased
scale of operations and expenses associated with being a public company. The
Company believes that the absolute dollar amount of its general and
administrative expenses will continue to increase as a result of the anticipated
expansion of the Company's administrative staff to support growing operations.
Purchased In-Process Product Development and Amortization. In May 1996, the
Company completed the acquisition of PostModern which was accounted for as a
purchase in the quarter ended June 30, 1996. In December 1996, the Company
completed the acquisition of CustomWare which was accounted for as a purchase in
the quarter ended December 31, 1996. In connection with the acquisition of
PostModern, the Company recorded a write-off in the quarter ended June 30, 1996
of approximately $12.0 million of in process product development. The remaining
excess of purchase price over net assets acquired of approximately $1.1 million
will be amortized over two years. In connection with the acquisition of
CustomWare, the Company recorded a write-off in the quarter ended December 31,
1996 of $350,000 of in process product development. The remaining excess of
purchase price over net assets acquired of approximatley $700,000 will be
amortized over one year.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, is comprised primarily of interest income
earned on the Company's cash and cash equivalents. The increase in the third
quarter of fiscal 1996 to the third quarter of fiscal 1997 and for the nine
months ended December 31, 1995 to the nine months ended December 31, 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
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LIQUIDITY AND CAPITAL RESOURCES
In August 1996, the Company completed the initial public offering of its
common stock. The Company sold 2,015,000 shares of common stock for net
proceeds of approximately $13.2 million. At December 31, 1996 the Company's
principal sources of liquidity included cash and cash equivalents of $9.1
million and a $3.0 million revolving line of credit agreement which expires on
July 15, 1997. Advances under the agreement, which bear interest at the bank's
prime lending rate plus 1.0%, are limited to 80% of the Company's eligible
accounts receivable and are secured by substantially all of the assets and
contractual rights of the Company. The line of credit agreement also contains
certain financial restrictions and covenants. As of December 31, 1996, the
Company was in compliance with these financial restrictions and covenants.
The Company's operating activities used cash of $3.6 million in the first nine
months of fiscal 1996 and $9.3 million in the first nine months of fiscal 1997.
The increased use of cash in the first nine months of fiscal 1997 was primarily
due to an increase in accounts receivable.
The Company used $796,000 and $3.5 million in the first nine months of fiscal
1996 and 1997, respectively, for investing activities, due primarily to
purchases of property and equipment. Financing activities provided $5.5 million
and $19.4 million of net cash during the first nine months of fiscal 1996 and
1997, respectively, due to the issuance of Preferred and Common Stock and
convertible notes and debt financing.
Deferred revenue consists primarily of the unrecognized portion of revenue
under maintenance and support contracts (which revenue is deferred and
recognized ratably over the term of such contracts) and advance payment of
software development fees and software license fees. Capital expenditures were
primarily for computers, furniture and equipment. The Company expects that its
capital expenditures will increase as the Company's employee base grows. As of
December 31, 1996, the Company did not have any material commitments for capital
expenditures.
On February 11, 1997, the Company consummated an additional public offering of
1,600,000 shares of its common stock which was comprised of 1,180,000 shares
sold by the Company and 420,000 shares sold by selling shareholders. The net
proceeds to the Company was approximately $13.1 million.
The Company believes that its existing sources of liquidity and cash generated
from operations will satisfy the Company's projected working capital and other
cash requirements for at least the next twelve months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, the Company anticipates that its operating and
investing activities will use cash. Any such future growth and any acquisitions
of other technologies, products or companies may require the Company to obtain
additional equity or debt financing, which may not be available or may be
dilutive. If adequate funds are not available to satisfy either short or long-
term capital requirements, the Company may be required to limit its operations
significantly.
FACTORS THAT MAY AFFECT FUTURE RESULTS:
The Company operates in a rapidly changing environment that involves numerous
risks, a number of which are beyond the Company's control. The following
discussion highlights some of those risks. A comprehensive summary of the risks
can be found in the Company's Registration Statement on Form S-1 which was filed
with the Securities and Exchange Commission on January 28, 1997.
Limited Operating History and History of Losses. The Company was incorporated
in 1993 and commenced shipment of its initial products in November 1994. In May
1996, the Company acquired PostModern, a developer of distributed object
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
12
<PAGE>
acquired distributed object 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 December 31, 1996, the Company had cumulative operating losses of $29.8
million, with net losses of $2.5 million, $4.6 million, $4.4 million and $18.3
million for fiscal 1994, fiscal 1995, fiscal 1996 and the nine-months ended
December 31, 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 and the first nine months of fiscal 1997. The Company
expects that prior growth rates of the Company's software product revenue will
not be sustainable in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Potential Fluctuations in Operating Results. The Company's revenue and results
of operations have varied on a quarterly basis in the past and are expected to
vary significantly in the future. Accordingly, the Company believes that period
to period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company's revenue and results of operations are difficult to forecast and
could be adversely affected by many factors including, among others, the size,
timing and terms of individual license transactions, the relatively long sales
and implementation cycles for the Company's products; the delay or deferral of
customer implementations; changes in the Company's operating expenses; the
ability of the Company to develop and market new products and control costs;
market acceptance of new products; timing of introduction or enhancement of
products by the Company or its competitors; the level of product and price
competition; the ability of the Company to expand its direct sales and
telesales forces, its indirect distribution channels and its customer support
capabilities; activities of and acquisitions by competitors; changes in database
access and distributed object software, database technology and industry
standards; changes in the mix of products and services sold; changes in the mix
of channels through which products and services are sold; levels of
international sales; personnel changes and difficulties in attracting and
retaining qualified sales, marketing and technical personnel; changes in
customers' budgeting cycles; foreign currency exchange rates; quality control of
products sold; and general economic conditions. In particular, the ability of
the Company to achieve revenue growth in the future will depend on its success
in adding a substantial number of sales and sales support personnel in the next
twelve months. Competition for such personnel is intense and there can be no
assurance the Company will be able to attract and retain these personnel.
Licensing of the Company's software products historically has accounted for
the substantial majority of the Company's revenue, and the Company anticipates
that this trend will continue for the foreseeable future. The Company's
software products revenue is difficult to forecast for a number of reasons. The
Company typically does not have a material backlog of unfilled orders, and
revenue in any quarter is substantially dependent on contracts received in that
quarter. A significant portion of the Company's revenue in prior periods has
been derived from relatively large sales to a limited number of customers, and
the Company currently anticipates that future quarters will continue to reflect
this trend. Accordingly, the cancellation or deferral of even a small number of
purchases of the Company's products has in the past and could in the future have
a material adverse effect on the Company's business, results of operations and
financial condition in any particular quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
A significant portion of the Company's revenue has been and is expected in the
future to continue to be based upon sales to third party vendors, who will
incorporate the Company's products in their own
13
<PAGE>
products. This revenue depends upon the success of third parties, and as a
result is difficult for the Company to predict and may be subject to extreme
fluctuation.
The Company's expense levels are based, in part, on its expectations as to
future revenue and to a large extent are fixed in the short term. The Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall of revenue
in relation to the Company's expectations would have an almost immediate adverse
effect on the Company's business, financial condition and results of operations.
Further, the Company intends to continue to expand its development teams and its
sales and marketing force. The timing of such expansion and the rate at which
new development and sales and marketing personnel become productive could cause
material fluctuations in quarterly results of operations.
Dependence on Emerging Markets and Evolving Standards; Acceptance of the
Company's Products. The Company's future financial performance will depend on
the growth in demand for standards-based database access and distributed object
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 products. The Company's current distributed
object products are based on several standards, including the Common Object
Request Broker Architecture and the Internet Inter-ORB Protocol. These
standards are intended to facilitate the management and communication of
applications created in object-oriented programming languages such as C++ and
Java. These standards are new, are just beginning to gain widespread acceptance
and compete with proprietary solutions such as Microsoft's ActiveX and
Distributed Component Object Model. The distributed object software market is
relatively young and there are few proven products. Further, some of the
Company's distributed object products are disigned specifically for use in
applications for the Internet and Intranets. Because critical issues concerning
the Internet and Intranets -- including security, reliability, cost, ease of use
and access and quality of service -- remain unresolved, the growth of
applications targeted at the Internet and Intranets is uncertain and difficult
to predict.
Because the markets for the Company's products are new and evolving, it is
difficult to assess or predict with any assurance the size or growth rate, if
any, of these markets. There can be no assurance that the markets for the
Company's products will develop, or that the Company's products will be adopted.
If these markets fail to develop, develop more slowly than expected, or attract
new competitors, or if the Company's products do not achieve market acceptance,
the Company's business, results of operations and financial condition could be
materially adversely affected.
Reliance on VARs and ISVs. A significant element of the Company's strategy is
to embed its technology in products offered by the Company's VAR and ISV
customers, such as Borland, Cisco, Compuware, Healtheon, Hewlett-Packard,
Microsoft, Netscape, Oracle and Platinum technology. A relatively small number
of VAR and ISV customers have accounted for a significant percentage of the
Company's revenue. In fiscal 1996, ten VAR and ISV customers accounted for
approximately 78% of the Company's revenue, while in the nine months ended
December 31, 1996, ten VAR and ISV customers accounted for approximately 55% of
the Company's revenue. The Company intends to seek similar distribution
arrangements with other VARs and ISVs to embed the Company's technology in their
products and expects that these arrangements will account for a significant
portion of the Company's revenue in future periods. If the Company is
unsuccessful in securing license agreements with additional VARs and ISVs on
commercially reasonable terms or at all, or if the Company's VAR and ISV
customers are unsuccessful in selling their products, this would have a material
adverse effect on the Company's business, results of operations and financial
condition.
14
<PAGE>
Product Concentration. Prior to the acquisition of PostModern in May 1996, the
Company derived substantially all of its revenue from the licensing of its
database access products, particularly its Open Database Connectivity ("ODBC")
product line, and fees from related services. Since the acquisition of
PostModern, the Company has also derived a significant portion of its revenue
from its distributed object products. The Company's database access and
distributed object products and services are each expected to continue to
account for a significant portion of the Company's revenue for the foreseeable
future. As a result, a reduction in demand or increase in competition for these
products, or a decline in sales of such products, would have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on the Internet and Intranets. The Company believes that sales of
its products, particularly its distributed object products, will depend in
large part upon the adoption by businesses and end-users of the Internet and
Intranets for commerce and communications. Critical issues concerning the
Internet and Intranets, including security, reliability, cost, ease of use and
access and quality of service, remain unresolved at this time, inhibiting
adoption by many enterprises and end-users. If the Internet and Intranets are
not widely used by businesses and end-users, this will have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Java; Risks Associated with Encryption Technology. Certain of
the Company's products are based on Java, an object-oriented programming
language developed by JavaSoft, a subsidiary of Sun Microsystems. Java was
developed primarily for Internet and Intranet applications. Java was only
recently introduced and does not yet have sufficient history to establish its
reliability, thereby inhibiting adoption of Java. To date, there have been only
a very limited number of commercially significant Java-based products, and it is
too early to determine whether Java will become a significant technology.
Alternatives to Java have been announced by several companies, including
Microsoft. To the extent that Java is not adopted or is adopted more slowly than
anticipated, this could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company plans to
use encryption technology in certain of its future products to provide the
security required for the exchange of confidential information. There can be no
assurance that this will not be a compromise of or breach of the security
technology used by the Company.
Need to Develop New Software Products and Enhancements. The markets for the
Company's products are characterized by rapid technological developments,
evolving industry standards, swift changes in customer requirements, computer
operating environments and software applications, and frequent new product
introductions and enhancements. As a result, the Company's success depends
substantially upon its ability to anticipate changes and continue to enhance its
existing products, develop and introduce in a timely manner new products
incorporating technological advances, comply with emerging industry standards
and meet increasing customer expectations. There can be no assurance that the
Company will be successful in developing and marketing new products or
enhancements to its existing products on a timely basis or at all or that any
new or enhanced products will adequately address the changing needs of the
marketplace.
The Company has in the past incurred product development expenses and sales
and marketing expenses in connection with product development activities that
did not result in commercially introduced products. Some of the Company's
products are based on technology from third parties and the Company therefore
has limited control over whether and when these technologies are enhanced. The
failure or delay in enhancements of technology from third parties used in the
Company's products could have a material adverse effect on the Company's ability
to develop and enhance its own products. The Company has in the past
experienced delays in the development of new products and product versions. If
the Company is unable to develop and introduce new products or enhancements to
existing products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, results of operations and
financial condition would be materially and adversely affected.
15
<PAGE>
Dependence on Key Personnel. The Company's future performance depends to a
significant extent upon the continued service of its key technical, development,
sales and marketing and management personnel. The loss of the services of any
of these individuals would have a material adverse effect on the Company. The
Company's future success also depends on its continuing ability to attract,
train and retain highly qualified technical, sales and marketing and managerial
personnel.
Intense Competition. The Company's products are targeted at the emerging
markets for standards-based database access software and standards-based
distributed object 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.
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.
In addition, the Company relies on certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that such firms will remain in business, that they will continue
to support their technology or that their technology will otherwise continue to
be available to the Company on commercially reasonable terms.
Possible Volatility of Stock. The market price of the Company's Common Stock
has been, and is likely to continue to be, volatile. Factors such as new
product announcements or changes in product pricing policies by the Company or
its competitors, quarterly fluctuations in the Company's operating results,
announcements of technical innovations, announcements relating to strategic
relationships or acquisitions, changes in earnings estimates by analysts and
general conditions in the software development tools market, among other
factors, may have a significant impact on the market price of the Company's
Common Stock. Should the Company fail to introduce products on the schedule
expected, the Company's stock price could be adversely affected. In addition,
in recent years the stock market in general, and the shares of technology
companies in particular, have experienced extreme price fluctuations. This
volatility has had a substantial effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect
the market price of the Company's Common Stock.
16
<PAGE>
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. Reports on Form 8-K.
On December 17, 1996, the Company filed a Report on Form 8-K
reporting under Item 5 the execution of an Agreement and Plan of
Reorganization between the Company and CustomWare, Inc. Under the
Agreement, dated December 3, 1996, CustomWare merged with and into
the Company. The acquisition was accounted for in the quarter ended
December 31, 1996, using the purchase method of accounting.
Financial statements of CustomWare were not required to be filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Visigenic
Software, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VISIGENIC SOFTWARE, INC.
Dated: February 12, 1997 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.
STATEMENTS OF COMPUTATION OF PRO FORMA COMMON
SHARES AND EQUIVALENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
YEAR ENDED ---------------------
MARCH 31, 1996 1995 1996
-------------- ---------- ----------
<S> <C> <C> <C>
PRIMARY
Net loss................................... $ (4,379) $ (3,666) $(18,271)
======== ======== ========
Weighted average common shares
outstanding.............................. 2,779 2,780 6,085
Weighted average common equivalent shares:
Weighted average preferred stock
outstanding............................ 2,875 2,818 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 1,876
Preferred stock issuances.............. 1,069 1,069 594
Common stock option grants............. 965 965 536
-------- -------- --------
Pro forma total weighted average
common shares and equivalents............ 11,064 11,008 12,141
======== ======== ========
Pro forma net loss per share............... $ (0.40) $ (0.33) $ (1.51)
======== ======== ========
FULLY DILUTED
Net loss................................... $ (4,379) $ (3,666) $(18,271)
======== ======== ========
Weighted average common shares
outstanding.............................. 2,779 2,780 6,085
Weighted average common equivalent shares:
Weighted average preferred stock
outstanding............................ 2,875 2,818 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 1,876
Preferred stock issuances.............. 1,069 1,069 594
Common stock option grants............. 965 965 536
-------- -------- --------
Pro forma total weighted average common
shares and equivalents................... 11,064 11,008 12,141
======== ======== ========
Pro forma net loss per share............... $ (0.40) $ (0.33) $ (1.51)
======== ======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VISIGENIC SOFTWARE,
INC. CONSOLIDATED BALANCE SHEET, AT DECEMBER 31, 1996 AND VISIGENIC SOFTWARE,
INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1996
<PERIOD-START> OCT-01-1996 APR-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 9,064 9,064
<SECURITIES> 0 0
<RECEIVABLES> 5,750 5,750
<ALLOWANCES> 145 145
<INVENTORY> 39 39
<CURRENT-ASSETS> 15,911 15,911
<PP&E> 3,501 3,501
<DEPRECIATION> 958 958
<TOTAL-ASSETS> 19,921 19,921
<CURRENT-LIABILITIES> 4,625 4,625
<BONDS> 0 0
0 0
0 0
<COMMON> 12 12
<OTHER-SE> 15,284 15,284
<TOTAL-LIABILITY-AND-EQUITY> 19,921 19,921
<SALES> 4,751 11,534
<TOTAL-REVENUES> 4,751 11,534
<CGS> 864 1,829
<TOTAL-COSTS> 6,338 28,166
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 142 190
<INCOME-PRETAX> (2,309) (18,271)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,309) (18,271)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,309) (18,271)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (0.18) (1.51)
</TABLE>
