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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1998
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: 001-11807
UNIFY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-2710559
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
181 METRO DRIVE, THIRD FLOOR
SAN JOSE, CALIFORNIA 95110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE: (408) 346-1100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of
the Act: Common Stock, $0.001 par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on June 30,
1998 as reported on the Nasdaq National Market, was approximately $16,102,000.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes. As of June 30,
1998, the Registrant had 8,422,555 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders are incorporated by reference in Part III of the Form
10-K to the extent stated herein.
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PART I
THE DISCUSSION IN THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT HAVE
BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS,
ESTIMATES AND PROJECTIONS ABOUT THE SOFTWARE INDUSTRY AND CERTAIN ASSUMPTIONS
MADE BY THE COMPANY'S MANAGEMENT. WORDS SUCH AS "ANTICIPATES", "EXPECTS",
"INTENDS", "PLANS", "BELIEVES", "SEEKS", "ESTIMATES", VARIATIONS OF SUCH WORDS
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH HEREIN UNDER "RISK FACTORS."
UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS
SET FORTH IN OTHER REPORTS OR DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), PARTICULARLY THE COMPANY'S
QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT REPORTS ON FORM 8-K.
ITEM 1. BUSINESS
THE COMPANY
Unify Corporation ("Unify" or the "Company") develops, markets and supports
application server solutions that enable corporations to deliver enterprise
networked applications by integrating legacy, custom-built, and packaged
applications with the Internet. The Company was initially incorporated in
California in 1980 and was reincorporated in Delaware in 1996.
The Company introduced version 4.0 of its flagship product, Unify VISION,
in May 1998. Unify VISION is an open, standards-based application server coupled
with an object-oriented component development system. Unify also continues to
enhance, market and support Unify DataServer, a family of database management
system products, and to market and support Unify ACCELL, a family of fourth
generation language ("4GL") application development tools. In addition to
software products, the Company offers training, consulting and maintenance
services to its customers.
The principal geographic markets for the Company's products are in North
America, Europe, Japan, Latin America and Asia Pacific. The Company's customers
consist primarily of end-users, value added resellers ("VARs") and distributors.
The Company markets its products directly to end-users through its sales
organizations in the United States, the United Kingdom, France and Japan and
indirectly to end-users through its VARs and distributors in the Americas,
Europe, Japan, Africa, the Middle East and Asia Pacific. Unify's products are
being utilized by customers in a wide range of industries, including
telecommunications, financial services, commercial industries and government.
PRODUCTS
The Company's products include Unify VISION and the Unify DataServer and
ACCELL product families. Unify VISION is comprised of Unify VISION AppServer
("VISION AppServer") and Unify VISION AppBuilder ("VISION AppBuilder"). VISION
AppServer is an open, standards-based application server that enables customers
to integrate legacy, custom-built, and packaged applications with the Internet.
The development environment for VISION AppServer is VISION AppBuilder, an object
oriented component development system. Unify DataServer is a family of database
management system products and Unify ACCELL is a family of 4GL application
development tools. Since the introduction of Unify VISION 2.0 in
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March 1995, license revenues from Unify VISION products have increased from
12% of license revenues in fiscal 1995 to 49% of license revenues in fiscal
1998.
UNIFY VISION APPSERVER
VISION AppServer is an open, standards-based application server that
enables customers to integrate legacy, custom-built, and packaged applications
with the Internet. Its universal client architecture enables users to access
server-based application services from leading client technologies, including
Windows and HTML-based and Java-based browsers. VISION AppServer's dynamic
scalable architecture delivers a high level of performance, availability and
scalability by offering server replication, load balancing, fail-over and
recovery and publish-and-subscribe capabilities all based on a high performance,
fully asynchronous messaging architecture. VISION AppServer lowers total cost of
ownership by allowing organizations to effectively manage their applications
from a single point of control.
UNIVERSAL ACCESS. With Unify VISION AppServer, information technology
("IT") departments can deploy application services across a common, robust
environment and make those services available to clients across and outside of
the enterprise. Unify VISION AppServer provides universal access to a broad
range of clients, whether it be an Internet browser running HTML or Java for
order entry, a Windows desktop running Active-X-enabled financial applications,
or a UNIX workstation running a CORBA-based manufacturing system.
CENTRAL CONTROL. New business solutions need to integrate with existing
systems. VISION AppServer eases the burden of enterprise integration by
providing a central coordination function for performing as well as managing
application integration systems in production. VISION AppServer provides
administration and management of network-wide services from a central management
console ("CMC"). The CMC allows operators to view the configuration of every
application server on the network as well as dynamically start, stop and manage
application services on those servers. Reconfiguration of and modifications to
underlying systems, applications and network topologies as business needs change
is handled through simple deployment-time configuration settings.
DYNAMIC SCALABLE SERVICES. VISION AppServer is based on a unique system
architecture that provides scalability at every level of the system. VISION
AppServer provides high performance peer-to-peer asynchronous messaging as well
as an integrated publish-and-subscribe event model across heterogeneous
platforms. Applications services are managed using a method called dynamic
binding. Application services are dynamically registered as well as located by
utilizing Distributed Name Services ("DNS"). DNS acts like an on-line directory,
tracking each of the services that are running on application servers. This
allows application services to be located, added and moved to other servers
without requiring reconfiguration at either the client or application server
level. Application services can also be replicated both within a server, taking
full advantage of multiprocessor systems, and across servers. By replicating
services, total throughput can be scaled up effectively by either adding
processors or adding new applications servers to the network. VISION AppServer
provides load balancing between the available servers automatically. And since
services can be added dynamically, replicated services can be expanded without
the reconfiguration of clients and without interrupting the operation of on-line
systems. Continuous availability of applications is provided by allowing
services to be replicated across multiple servers. In the event of server or
network failure, VISION AppServer automatically reroutes messages to available
servers. VISION AppServer also provides asynchronous messaging capabilities so
that services can perform several operations in parallel, thereby minimizing
transaction response time and maximizing server resource utilization. Finally,
VISION AppServer provides a powerful business event model based on the
underlying publish-and-subscribe technology. Any service can define a business
event and make that event available to the network. When an event occurs, as
defined by specific business rules, a service can "publish" that event and its
associated information to registered clients or "subscribers." Subscribing
clients are asynchronously notified of the event and can take appropriate
action. VISION AppServer tracks the location of publishers and subscribers and
manages the event notification process. By utilizing business events, costly
polling, and thus excessive network and CPU utilization, is eliminated. In
addition, business components can be
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developed autonomously and event publishers are independent of subscribing
clients. Thus, as new business components are deployed, existing components
remain unaffected.
SUPPORT FOR ENTERPRISE ENVIRONMENTS. In order to effectively integrate
computing environments in which a multitude of products and standards are used
and deployed, VISION AppServer's architecture embraces existing and emerging
industry standards. For example, networking protocols such as TCP/IP and HTTP,
database systems such as Oracle, IBM DB2 and Sybase Adaptive server, as well as
application management protocols such as ARM and SNMP are supported standards
within the VISION AppServer environment. Many corporations have adopted an
enterprise-wide systems management strategy. VISION AppServer provides built-in
application instrumentation coupled with seamless integration to leading
enterprise management systems, including Tivoli TME10, BMC Patrol, Hewlett
Packard OpenView, Microsoft SMS and SNMP-based systems. By integrating
application services with the enterprise management infrastructure, IT
departments can view and manage the entire system (networks, platforms,
databases and applications) from a single central management console. Finally,
as distributed environments become mission-critical, security and access are
some of the most critical issues facing organizations today. VISION AppServer
ensures that services are properly configured, deployed and accessible to
authorized users across the network. VISION AppServer supports this requirement
by adapting to SS1.3 and Secure HTTP for browser-based computing, DBMS-provided
security systems and existing security infrastructure.
PROTECTING PREVIOUS INVESTMENTS. VISION AppServer allows the development of
business components that leverage and integrate with legacy applications. For
example, VISION AppServer utilizes IBM's popular MQSeries messaging technology
to perform integration with a broad set of solutions including legacy IMS and
CICS applications, IBM AS/400-based application packages and ERP packages such
as SAP R/3. VISION AppServer enables services to integrate with any
MQSeries-compliant application, allowing immediate access to those systems
throughout the rest of the enterprise. In most cases, this integration can be
performed without modification to the existing legacy applications. By
insulating application services from the underlying technology, VISION AppServer
also enables system reconfigurations and adoption of new technologies without
the need for costly redesign and re-implementation. For example, application
services can be migrated from UNIX servers to Windows NT servers without
modification or recompilation. Similarly, application services can be accessed
from Windows desktop applications today and HTML browsers tomorrow without
modification.
UNIFY VISION APPBUILDER
VISION AppBuilder is an object oriented component development system that
enables application development teams to rapidly create and easily modify
application components. The component framework provided by VISION AppBuilder
contains many powerful, pre-built classes for constructing server-based as well
as client-based business components. For example, a service class is provided
that is network-aware without additional coding. Interfaces to services are
automatically generated without the need for developers to define and maintain
Interface Definition Language. For client component development, a GUI class is
provided which can perform database operations directly. In addition to
supporting components developed in C, C++ and Java, VISION AppBuilder provides a
high-level business language that allows developers to focus on defining
business rules rather than on the complexity of the underlying technologies. The
business language abstracts the notions of distributed computing as well as
databases, operating systems, and user interfaces. For example, simple
statements within the business language allow a business event to be defined,
published and subscribed to. Similarly, database operations are implemented
using standard SQL with support for native vendor-specific operation. By
providing this high-level programming paradigm, components can be developed
using dramatically fewer lines of code. To enable the sharing and reuse of
components, VISION AppBuilder stores component definitions in a shared object
repository. Access to components can be restricted to a particular project or
shared across multiple projects. Simultaneous access to component definitions is
controlled automatically. For supporting configuration management, VISION
AppBuilder integrates with popular version control systems such as Intersolv
PVCS, SCCS and RCS. VISION AppBuilder supports the software distribution
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process by automatically generating configuration management information for
the distribution systems found in products such as Microsoft SMS and Tivoli
TME10.
UNIFY DATASERVER
Unify DataServer is a family of database management products that is
designed to scale from small systems to large, high volume, on-line transaction
processing systems. At the entry level, Unify DataServer is designed to be a
high performance, easy-to-use product with minimal maintenance and memory
requirements. The DataServer family of products is designed so that the growth
of user requirements over time can be quickly accommodated. Unify DataServer
supports the ANSI SQL standard and an industry-standard ODBC interface to
provide access to hundreds of third-party tools and products. Unify DataServer
products provide a variety of database access methods which deliver high
performance across a wide variety of environments and deployment configurations.
Unify DataServer products support all major UNIX platforms.
UNIFY ACCELL
Unify ACCELL is a family of UNIX-based application development products for
building complex, core business applications targeted for character-based
platforms. They are designed to maximize developer productivity through tight
integration of 4GL technologies and optimized database features in a flexible
development environment. Unify ACCELL's modular architecture combines an
application generator, 4GL, and an interactive debugging facility with
database-server connectivity.
Developers can use the Unify ACCELL application generator to create forms
from scratch or can use an automatically-created default form. Unify ACCELL's
4GL is an event-driven programming language with powerful features supporting
more than 250 4GL statements, data types and functions. Unify ACCELL's database
independent technology supports native interfaces to leading database products
including Oracle, Sybase, Informix and Unify DataServer. Unify ACCELL
applications are also portable across industry leading UNIX platforms and
databases.
CUSTOMERS AND MARKETS
As of April 30, 1998, the Company had licensed Unify VISION to over 300
customers worldwide and Unify DataServer and ACCELL products to over 2,000
customers worldwide. The Company's target end-user customers include large
commercial and government organizations with a need to improve their customer
service by quickly integrating legacy, custom-built, and packaged applications
with the Internet. No customer accounted for more than 10% of the Company's
total revenues for fiscal 1998, 1997 or 1996.
SALES AND MARKETING
Unify markets its products and professional services domestically through a
combination of direct sales and indirect sales channels, including VARs,
distributors, system integrators ("SIs") and business alliance partners. The
Company's marketing efforts are primarily directed at broadening the market for
VISION AppServer and VISION AppBuilder by increasing awareness of the unique
application integration solution which these products provide and at supporting
the Company's direct and indirect sales channels. Marketing activities include
conducting public relations and product seminars, publishing newsletters, direct
mailings, preparing other marketing materials, coordinating the Company's
participation in industry programs and forums, establishing and maintaining
close relationships with business alliance partners, and establishing and
maintaining close relationships with recognized industry analysts. The Company
also maintains a site on the Internet at www.unify.com.
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The Company markets its products internationally through subsidiaries in
the United Kingdom, France and Japan and through VARs and distributors in Latin
America, Europe, Japan, Africa, the Middle East and Asia Pacific. International
revenues accounted for 54%, 60% and 56% of total revenues in fiscal 1998, 1997
and 1996, respectively.
The Company intends to compliment its domestic and international direct
sales efforts with the expansion of its indirect sales channels. Indirect sales
channels include VARs, SIs, independent software vendors ("ISVs"), business
alliance partners, original equipment manufacturers ("OEMs") and distributors.
Such indirect sales channels leverage the Company's own sales, support and
consulting resources in providing complete solutions to customers. The Company
believes that the features of Unify VISION which facilitate rapid development
and deployment of complex applications are particularly well-suited for use by
VARs, SIs, and ISVs, for which time to market is a principal concern. The
Company currently has approximately 400 VAR, SI, and ISV customers and intends
to recruit selected new customers, particularly VARs. Unify also has business
alliances with, among others, Sun Microsystems, Inc. ("Sun"), Sun's JavaSoft
division, IBM, Hewlett-Packard Company ("HP"), Microsoft Corporation
("Microsoft") and Netscape Communications Corporation ("Netscape"). The Company
plans to continue to actively participate in joint marketing programs with its
current business alliance partners as well as to selectively recruit new
business alliance partners and OEMs. Finally, the Company has an extensive
network of international distributors which supplements its targeted direct
sales presence. Unify intends to strategically expand this distribution network
as well.
The Company also plans to continue to leverage its installed base of over
2,000 Unify DataServer and ACCELL customers. The Company's sales and marketing
strategy in part targets this installed base with the objective of generating
Unify VISION revenues as this customer base migrates to enterprise network and
Internet applications. The Company also continues to market its Unify DataServer
and Unify ACCELL product families, thereby serving those of its customers that
are not yet ready to move to high-end client/server environments.
As of April 30, 1998, the Company had 41 employees engaged in sales and
marketing activities, 20 in North America, 17 in Europe, and 4 in Japan. The
Company intends to expand its sales and marketing staff and make additional
investments in marketing and advertising during fiscal 1999.
PROFESSIONAL SERVICES
The Company believes that superior professional services, including product
support and maintenance, consulting services and customer training are critical
for achieving and maintaining customer satisfaction and for assisting customers
to successfully integrate enterprise applications with the Internet. Due to the
complexity of client/server computing and the emergence of the Internet, support
services must be able to address issues which arise from components of the
client/server system beyond the Company's products such as multiple databases,
computing platforms and operating systems. The Company has extensive experience
in supporting database and application development products. The Company's
professional service revenues for fiscal 1998 were $9.2 million or 37% of total
revenues for that period.
SUPPORT
The Company offers modular customer support programs which can be modified
to match the customers' development cycles and can be customized as needs
change. All support levels provide telephone, e-mail and facsimile access,
enabling customers to log inquiries for resolution by the Company's support
staff. Service levels can be tailored by customers to select preferred call
response time, information reporting, and other features including 24-hour a
day, seven day a week support. The Company currently has annual maintenance
contracts with approximately 900 customers. During each of the past three fiscal
years, over 80% of the Company's support customers have renewed their support
contracts.
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CONSULTING
The full range of consulting services which the Company provides through
its own consulting organization as well as through partnerships with third party
solution providers is an important part of the Company's strategy of delivering
complete customer solutions. The objective of Unify's consulting services
organization ("UCS") is to help first-time as well as experienced users derive
the maximum value from their investment in the Company's technologies. UCS
provides the level of consulting support necessary to meet customer-defined
needs. This means that UCS is prepared to guide customers on development plans,
assist with hands-on development tasks or take complete responsibility for
project completion. Engagement terms can range from the use of a single
consultant for completion of a one week task to a full project team engaged to
complete an effort that stretches over several months.
In addition to the customized services offered by UCS, a group of
pre-packaged service offerings are available to assist Unify customers. One
example of such offerings is the VISION Readiness Review. Based on a
comprehensive on-site analysis of the customer's business, UCS produces a
detailed project plan for building or migrating customer applications to Unify
VISION which includes project tasks, staffing requirements, duration and cost.
This review also includes an assessment of the customer's current staff and an
individualized education plan as well as a review of the customer's current
technology environment and precise recommendations for modifying that
environment in preparation for the project, if necessary.
TRAINING
The Company is committed to offering its customers a comprehensive
selection of training courses and materials. Customers may attend a broad range
of courses provided on a regularly scheduled basis at Unify training centers
located in Sacramento, California; Reston, Virginia; Surrey, England; Paris,
France; and Tokyo, Japan. The Company also offers on-site training at customers'
facilities.
As of April 30, 1998, the Company had 19 employees engaged in support and
13 in consulting and training. The Company intends to expand its support,
consulting and training staff and make additional investments in its support
infrastructure during fiscal 1999.
PRODUCT DEVELOPMENT
Since its inception, the Company has made substantial investments in
product development and anticipates that it will continue to commit significant
resources to product development in the future. The Company's principal
development projects currently include application integration, DCOM, advanced
CORBA integration, component architecture and enhanced Unify VISION programming
features. In addition, the Company continues to invest in maintenance of and
selective enhancements to its Unify DataServer product family, such as porting
Unify DataServer to Windows NT, and maintenance of its Unify ACCELL product
family.
The software market in which the Company competes is characterized by rapid
technological change, frequent introductions of new and enhanced products,
changes in customer demands and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company's future
success will depend upon its ability to address the increasingly sophisticated
needs of its customers by supporting existing and emerging hardware, software,
database and networking platforms and by developing and introducing enhancements
to Unify VISION and new products on a timely basis that keep pace with such
technological developments, emerging industry standards and customer
requirements. There can be no assurance that the Company will be successful in
developing and marketing enhancements to Unify VISION and new products that
respond to technological change, evolving industry standards or customer
requirements, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and sale of such
enhancements or products or that such enhancements or products will adequately
meet the requirements of the
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marketplace and achieve any significant degree of market acceptance. If the
release dates of any future Unify VISION enhancements or new products are
delayed or if when released they fail to achieve market acceptance, the
Company's business, operating results, financial condition and cash flows
could be materially adversely affected. In addition, the introduction or
announcement of new product offerings or enhancements by the Company or the
Company's competitors may cause customers to defer or forgo purchases of
current versions of Unify VISION, which could have a material adverse effect
on the Company's business, operating results, financial condition and cash
flows.
The Company's product development activities are conducted primarily at its
Sacramento, California facility. As of April 30, 1998, the Company had a total
of 48 employees and contractors in product development and porting, including 23
development engineers. The Company's product development expenditures for fiscal
1998, 1997, and 1996 were $5.7 million, $7.0 million and $5.8 million,
respectively. The Company expects to continue to devote significant resources to
product development in fiscal 1999.
COMPETITION
The Company has experienced and expects to continue to experience intense
competition from current and future competitors. With the introduction of
VISION/Web in January 1997 and VISION AppServer and VISION AppBuilder in May
1998, the Company began competing with Internet application development vendors,
including NetDynamics, Inc. ("NetDynamics") and Netscape's KIVA Software
Corporation ("KIVA"). The Company also continues to compete with vendors of
traditional high-end client/server development tools including, among others,
Forte Software, Inc. ("Forte"), Oracle Corporation ("Oracle") and Sybase, Inc.
("Sybase").
For its Unify DataServer and ACCELL products, the Company's business
generally derives from sales of license upgrades or additional deployment
licenses. As a result, the competitive factors are generally the consideration
by a customer as to whether to develop a new application rather than whether to
use a competitor's products with the existing application built using the
Company's products. Vendors of products competitive to the Company's Unify
DataServer and ACCELL products include companies such as Oracle, Sybase and
Informix Corporation ("Informix"), among others.
Many of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than the Company. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged. The Company also expects to
face additional competition as other established and emerging companies enter
the client/server and Internet application development market and new products
and technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share, any one of which could materially adversely affect the Company's
business, operating results, financial condition and cash flows. In addition,
current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third parties, thereby
increasing the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Such competition could materially adversely affect the
Company's ability to sell additional licenses and maintenance and support
renewals on terms favorable to the Company. Further, competitive pressures could
require the Company to reduce the price of its products and related services,
which could materially adversely affect the Company's business, operating
results, financial condition and cash flows. There can be no assurance that the
Company will be able to compete successfully against current and future
competition, and the failure to do so would have a material adverse effect upon
the Company's business, operating results, financial condition and cash flows.
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The Company believes that the most significant competitive factors include
ease of application development and deployment; application management
functionality; product performance and quality; product architecture; customer
support; consulting and training services; and price. The Company believes that
it presently competes favorably with respect to each of these factors. However,
the Company's market is still evolving and there can be no assurance that the
Company will be able to compete successfully against current and future
competitors; the failure to do so would have a material adverse effect upon the
Company's business, operating results, financial condition and cash flows.
INTELLECTUAL PROPERTY
The Company relies on a combination of copyright, trademark and
trade-secret laws, non-disclosure agreements and other methods to protect its
proprietary technology. 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. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary
rights in the United States or abroad will be adequate or that competition will
not independently develop similar technology.
Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any notices that the Company is infringing the intellectual property rights of
others, there can be no assurance that such infringement claims will not be
asserted by third parties in the future. If any such claims are asserted, there
can be no assurance that the Company will be able to defend such claim or obtain
licenses on reasonable terms. The Company's involvement in any patent dispute or
other intellectual property dispute or action to protect trade secrets and
know-how may have a material adverse effect on the Company's business, operating
results, financial condition and cash flows. Adverse determinations in any
litigation may subject the Company to significant liabilities to third parties,
require the Company to seek licenses from third parties and prevent the Company
from developing and selling its products. Any of these situations could have a
material adverse effect on the Company's business, operating results, financial
condition and cash flows.
The Company is dependent on third-party suppliers for software which is
embedded in certain of its products. Although the Company believes that the
functionality provided by software which is licensed from third parties is
obtainable from multiple sources or could be developed by the Company, if any
such third-party licenses were terminated or not renewed or if these third
parties fail to develop new products in a timely manner the Company could be
required to develop an alternative approach to developing its products, which
could require payment of substantial fees to third parties, internal development
costs and delays and might not be successful in providing the same level of
functionality. Such delays, increased costs or reduced functionality could
materially adversely affect the Company's business, operating results, financial
condition and cash flows.
EMPLOYEES
As of April 30, 1998, the Company had a total of 138 employees, including
43 in product development, 32 in support, consulting, and training, 41 in sales
and marketing, and 22 in finance, information systems, operations and general
administration. Of these employees, 99 were located in the United States, 27
were located in Europe, and 12 were located in Japan.
The success of the Company depends in large part upon its ability to
attract and retain qualified employees, particularly senior management,
engineering, direct sales and support personnel. The competition for such
employees is intense. There can be no assurance that the Company will be
successful in attracting or retaining
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key employees. Any failure by the Company to attract and retain qualified
senior management, engineering, direct sales and support personnel could
materially adversely affect the Company's business, operating results,
financial condition and cash flows. None of the Company's employees are
represented by a collective bargaining agreement, nor has the Company
experienced any work stoppage. The Company considers its relations with its
employees to be good.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
executive officers:
Name Age Position with the Company
- ---- --- ----------------------------------------------------------
Reza Mikailli 46 President, Chief Executive Officer, Acting Vice President,
Finance and Administration, and Director
Walter Kopp 40 Vice President, Product Development
Richard Medeiros 55 Vice President, Americas Sales and Services
Frank Verardi 49 Vice President, Product Delivery and Customer Support
REZA MIKAILLI has been President and Chief Executive Officer and a Director
of the Company since November 1994, after serving as Senior Vice President of
Products from October 1992 to November 1994. Mr. Mikailli has also been serving
as the Company's Acting Vice President of Finance and Administration since April
1998. From 1989 to 1992, Mr. Mikailli was Vice President of Server and
Connectivity Products at Informix Corporation, a manufacturer of computer
database and application development tool products. Mr. Mikailli received an
M.S. degree in computer science from Santa Clara University, and a B.S. degree
in computer science and an M.S. degree in mathematics from the University of
Tehran, Iran.
WALTER KOPP joined the Company in 1987 as Engineering Manager. In 1992, Mr.
Kopp was named Director of Software Development, in January 1995 he was
appointed Director of Product Development and in February 1997 he became Vice
President of Product Development. Previously, he was Manager of Software Tools
at ROLM Corporation, a manufacturer of telecommunications equipment, and a
Systems Engineer and Systems Programmer at Data General, a computer
manufacturer. Mr. Kopp holds a B.S. degree from Cornell University and an M.S.
degree in computer science from the University of Massachusetts.
RICHARD MEDEIROS joined the Company in February 1997 as Vice President of
Americas Sales and Services. From November 1992 to February 1997, Mr. Medeiros
was Vice President of North America Sales for Synon Corporation, an application
development tools company. From April 1989 to November 1992, he was Vice
President and Area Manager of direct sales and Latin American sales for Cognos
Corporation, a 4GL and end-user software products company. Mr. Medeiros has also
held senior sales and sales management positions with IBM, Harris Corporation,
Olivetti and Computer Corporation of America. He received a B.S. degree in
marketing and an M.B.A. from San Jose State University.
FRANK VERARDI joined the Company in August 1988 as Manager of Consulting
Services and was named Director of Client Services in 1989. In November 1995,
Mr. Verardi was appointed Vice President of Product Delivery and Customer
Support. Before joining Unify, Mr. Verardi held various positions with Computer
Sciences Corporation where his most recent assignment was Director of Commercial
Professional Services. Mr. Verardi received a B.S. degree in Computer Sciences
from California State University, Chico.
Each executive officer serves at the discretion of the Board of Directors.
There are no family relationships among any of the executive officers or
directors of the Company.
10
RISK FACTORS
IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS
WITH THE SEC.
HISTORY OF OPERATING LOSSES; TRANSITION OF BUSINESS
The Company has incurred net losses in five of the last eight fiscal
quarters and in each of the past five fiscal years. Revenues from the Company's
DataServer database products and Unify ACCELL application development tools
decreased in four of the last five fiscal years. These declines were in part
offset by sales of Unify VISION. The Company's ability to achieve revenue growth
and profitability are substantially dependent upon the success of Unify VISION
and new products. License revenues from Unify VISION were $7.6 million, $5.3
million and $5.0 million for fiscal 1998, 1997 and 1996, respectively, and
represented 49%, 36% and 25% of total license revenues for those years,
respectively. No assurance can be given that Unify VISION or new products will
achieve market acceptance or that the Company will achieve and maintain
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
FLUCTUATING QUARTERLY RESULTS AND SEASONALITY; UNCERTAINTY OF OPERATING RESULTS
IN FIRST FISCAL QUARTER
The Company's quarterly operating results have varied significantly in the
past, and the Company expects that its operating results are likely to vary
significantly from time to time in the future. Such variations result from,
among other factors, the following: the size and timing of significant orders
and their fulfillment; demand for the Company's products; the number, timing and
significance of product enhancements and new product announcements by the
Company and its competitors; ability of the Company to attract and retain key
employees; seasonality; changes in pricing policies by the Company or its
competitors; realignments of the Company's organizational structure; changes in
the level of the Company's operating expenses; changes in the Company's sales
incentive plans; budgeting cycles of the Company's customers; customer order
deferrals in anticipation of enhancements or new products offered by the Company
or its competitors; product life cycles; product defects and other product
quality problems; the results of international expansion; currency fluctuations;
and general domestic and international economic and political conditions.
Because a significant portion of the Company's revenues have been, and the
Company believes will continue to be, derived from orders ranging in size from
several hundred thousand dollars to approximately $1 million, the timing of such
orders and their fulfillment has caused and is expected to continue to cause
material fluctuations in the Company's operating results, particularly on a
quarterly basis.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. Revenues are also difficult to forecast because the
market for client/server and Internet application development software is
rapidly evolving, and the Company's sales cycle, from initial evaluation to
purchase and the provision of maintenance services, is lengthy and varies
substantially from customer to customer. In particular, with the fiscal 1997
release of Unify VISION 3.0 and VISION/Web as well as the May 1998 release of
VISION 4.0, the Company has experienced new opportunities to compete for larger,
enterprise-level sales transactions. These transactions have even longer sales
cycles than the Company has experienced in the past. Because the Company
normally ships products within a short time after it receives an order, it
typically does not have any material backlog. As a result, to achieve its
quarterly revenue objectives, the Company is dependent upon obtaining orders in
any given quarter for shipment in that quarter. Furthermore, because many
customers place orders toward the end of a fiscal quarter, the Company generally
recognizes a substantial portion of its revenues at the end of a quarter. As the
Company's expense levels are based in significant part on the Company's
expectations as to future revenues and are therefore relatively fixed in the
short term, if revenue levels fall below expectations operating results are
likely to be disproportionately adversely affected.
The Company also expects that its operating results will be affected by
seasonal trends. The Company believes that, in general, it is likely it will
experience relatively higher revenues in fiscal quarters ending April 30
11
and relatively lower revenues in fiscal quarters ending July 31 as a result of
efforts by its direct sales force to meet fiscal year-end sales quotas. The
Company also anticipates that it may experience relatively weaker demand in
fiscal quarters ending July 31 and October 31 as a result of reduced business
activity in Europe during the summer months. In particular, due to the
foregoing factors and due to longer sales cycles associated with Unify VISION
3.0 and 4.0, the operating results of the Company for the quarter ending July
31, 1998 are subject to significant uncertainty. The Company has incurred net
losses in five of the last eight fiscal quarters and in each of the last five
fiscal years. Although the Company recorded small operating profits for the
quarters ending January 31, 1998 and April 30, 1998, there can be no assurance
regarding the Company's continued profitability. See "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
LENGTHY SALES CYCLE
The Company's products are typically used to develop applications that are
critical to a customer's business, and the purchase of the Company's products is
often part of a customer's larger business process re-engineering initiative or
implementation of client/server or Internet computing. As a result, the
licensing and implementation of the Company's software products generally
involve a significant commitment of management attention and resources by
prospective customers. Accordingly, the Company's sales process is subject to
delays associated with the long approval process that typically accompanies
significant initiatives or capital expenditures. The Company's business,
operating results, financial condition and cash flows could be materially
adversely affected if customers reduce or delay orders. There can be no
assurance that the Company will not continue to experience these and additional
delays in the future. Such delays may contribute to significant fluctuations of
quarterly operating results in the future and may adversely affect those
results.
DEPENDENCE ON NEW PRODUCT ACCEPTANCE; DEPENDENCE ON GROWTH OF HIGH-END
CLIENT/SERVER AND INTERNET TOOLS MARKET
The Company currently expects Unify VISION and related services to account
for an increasingly significant percentage of the Company's future revenues and
accordingly the Company is devoting an increasing level of its resources to
these products. As a result, factors adversely affecting the pricing of or
demand for Unify VISION such as, but not limited to, competition or
technological change, would have a material adverse effect on the Company's
business, operating results, financial condition and cash flows. The Company's
future financial performance will depend in significant part on the successful
development, introduction and customer acceptance of new and enhanced versions
of Unify VISION. There can be no assurance that the Company will timely and
successfully develop, introduce and sell such new or enhanced versions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview;" "Business - Products" and "- Product Development."
To date, a limited number of the Company's customers have completed the
development and deployment of high-end transaction-based Internet applications
using Unify VISION products. If the Company's customers are not able to
successfully develop and deploy high-end Internet applications with Unify
VISION, the viability of Unify VISION could be questioned and the Company's
reputation could be damaged, which could have material adverse effects on the
Company's business, operating results, financial condition and cash flows. In
addition, the Company expects that a significant percentage of its future
revenues will be derived from sales to existing customers of its Unify
DataServer and ACCELL products. If these existing customers fail to migrate to
high-end client/server and Internet applications, purchase competitive products,
or have difficulty deploying applications built with Unify VISION, the Company's
relationships with these customers, revenues from sales of Unify VISION and the
Company's other products, and the Company's business, operating results,
financial condition and cash flows could be materially adversely affected. See
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Despite the growth in sales of Unify VISION, there can be no assurance that
the market for high-end client/server and Internet applications and associated
development tools will continue to grow. If the high-end
12
client/server and Internet market fails to grow, or grows more slowly than the
Company currently anticipates, the Company's business, operating results,
financial condition and cash flows could be materially adversely affected.
ANTICIPATED DECLINE IN REVENUE FROM MATURE PRODUCTS
A significant portion of the Company's revenues to date have been
attributable to its Unify DataServer database products and Unify ACCELL
application development tools. Revenues derived from the sales of these products
declined four of the last five fiscal years. While the Company expects that this
decline may continue, revenues from the sales of these products will continue to
represent an important portion of the Company's revenues for at least the next
few years. Although the Company is continuing to selectively invest in the
development, sales, marketing and support of such products, there can be no
assurance that revenues from such products will not decline faster than
expected. If revenues from such products decline materially or at a more rapid
rate than the Company currently anticipates, the Company's business, operating
results, financial condition and cash flows would be materially adversely
affected. See "Business Products;" "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
INTENSE COMPETITION
The Company has experienced and expects to continue to experience intense
competition from current and future competitors. With the introduction of
VISION/Web in January 1997 and VISION AppServer and VISION AppBuilder in May
1998, the Company began competing with Internet application development vendors,
including NetDynamics and KIVA. The Company also continues to compete with
vendors of traditional high-end client/server development tools including, among
others, Forte, Oracle and Sybase. Companies offering products competitive with
the Company's Unify DataServer and ACCELL products include Oracle, Sybase and
Informix, among others.
Many of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than the Company. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged. The Company expects to face
additional competition as other established and emerging companies enter the
client/server and Internet application development market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share, any one of which could materially adversely affect the Company's
business, operating results, financial condition and cash flows. In addition,
current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third parties, thereby
increasing the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Such competition could materially adversely affect the
Company's ability to sell additional licenses and maintenance and support
renewals on terms favorable to the Company. Further, competitive pressures could
require the Company to reduce the price of its products and related services,
which could materially adversely affect the Company's business, operating
results, financial condition and cash flows. There can be no assurance that the
Company will be able to compete successfully against current and future
competition, and the failure to do so would have a material adverse effect upon
the Company's business, operating results, financial condition and cash flows.
See "Business - Competition."
RAPID TECHNOLOGICAL CHANGE
The software market in which the Company competes is characterized by rapid
technological change, frequent introductions of new and enhanced products,
changes in customer demands and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company's future
success will depend in
13
part upon its ability to address the increasingly sophisticated needs of its
customers by supporting existing and emerging hardware, software, database and
networking platforms and by developing and introducing enhancements to Unify
VISION and new products on a timely basis that keep pace with such
technological developments, emerging industry standards and customer
requirements. There can be no assurance that the Company will be successful in
developing and marketing enhancements to Unify VISION and new products that
respond to technological change, evolving industry standards or customer
requirements, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and sale of such
enhancements or products or that such enhancements or products will adequately
meet the requirements of the marketplace and achieve any significant degree of
market acceptance. If the release dates of any future Unify VISION
enhancements or new products are delayed or if when released they fail to
achieve market acceptance, the Company's business, operating results,
financial condition and cash flows would be materially adversely affected. In
addition, the introduction or announcement of new product offerings or
enhancements by the Company or the Company's competitors may cause customers
to defer or forgo purchases of current versions of Unify VISION, which could
have a material adverse effect on the Company's business, operating results,
financial condition and cash flows. See "Business - Product Development."
DEPENDENCE ON INDIRECT SALES CHANNELS
A significant portion of the Company's total revenues are derived from
indirect sales channels, including VARs and distributors. Revenues from VARs and
distributors accounted for approximately 57%, 48%, and 60% of the Company's
software license revenues for fiscal 1998, 1997 and 1996, respectively. The
success of the Company therefore depends in part upon the performance of its
indirect sales channels, over which the Company has limited influence. The
Company's ability to achieve significant revenue growth in the future will
depend in part on its success in maintaining and expanding its indirect sales
channels worldwide. The loss of any of the Company's major channel partners,
either to competitive products offered by other companies or to products
developed internally by those partners, or the failure to attract effective new
channel partners could have a material adverse effect on the Company's business,
operating results, financial condition and cash flows. See "Business - Sales and
Marketing."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND SALES
Revenues derived from international customers accounted for 54%, 60% and
56% of total revenues in fiscal 1998, 1997 and 1996, respectively. A key
component of the Company's longer-term strategy is its planned further expansion
into international markets. If the revenues generated by international
operations are not adequate to offset the expense of establishing, expanding and
maintaining such operations, the Company's business, operating results,
financial condition and cash flows will be materially adversely affected.
Although the Company has had international operations for a number of years,
there can be no assurance that the Company will be able to successfully market,
sell and deliver its products in these markets. In addition to the uncertainty
as to the Company's ability to expand its international presence, there are
certain risks inherent in doing business on an international level, such as:
unexpected changes in regulatory requirements; export restrictions, tariffs and
other trade barriers; difficulties in staffing and managing foreign operations;
longer payment cycles; problems in collecting accounts receivable; political
instability; fluctuations in currency exchange rates; seasonal reductions in
business activity during the summer months in Europe and certain other parts of
the world; and potentially adverse tax consequences, any of which could
adversely impact the success of the Company's international operations. There
can be no assurance that one or more of these factors will not have a material
adverse effect on the Company's future international operations and,
consequently, on the Company's business, operating results, financial condition
and cash flows. In addition, the Company's subsidiaries in Europe and Japan
operate in local currencies. Foreign currency gains and losses on local currency
intercompany accounts held in the U.S. have been immaterial to date; however, if
the value of the U.S. dollar increases relative to foreign currencies, the
Company's business, operating results, financial condition and cash flows could
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business - Sales and Marketing"
and Note 12 of Notes to Consolidated Financial Statements.
14
SOFTWARE DEFECTS AND POTENTIAL RELEASE DELAYS
Software products frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Although the
Company has not experienced material adverse effects resulting from any such
defects or errors to date, there can be no assurance that, despite testing by
the Company and by current and potential customers, defects and errors will not
be found in current versions, new versions or enhancements after commencement of
commercial shipments, resulting in loss of revenues, delay in market acceptance,
or unexpected re-programming costs, which could have a material adverse effect
upon the Company's business, operating results, financial condition and cash
flows. See "Business - Product Development."
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective as
a result of existing or future federal, state or local laws or ordinances or
unfavorable judicial decisions. In fiscal 1990, the Company was subject to two
claims regarding its database product notwithstanding such provisions. In fiscal
1995, one of the claims was settled and the second resulted in a substantial
arbitration judgment award against the Company. The sale and support of Unify
VISION by the Company may involve the risk of such claims, any of which are
likely to be substantial in light of the use of Unify VISION in the development
of core business applications. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results, financial condition and cash flows. See Note 11 of
Notes to Consolidated Financial Statements.
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL PERSONNEL
The Company's success depends largely on the efforts and abilities of
certain key personnel. The loss of the services of one or more of the Company's
executive officers or the inability to attract and retain additional senior
management could have a material adverse effect on the Company's business,
operating results, financial condition and cash flows. In particular, the loss
of the services of Mr. Reza Mikailli, the Company's Chief Executive Officer,
would materially adversely affect the Company. The Company does not have key man
insurance on the life of Mr. Mikailli. Loss of other key management personnel
could also have a material adverse effect on the Company's business, operating
results, financial condition and cash flows. See "Business - Employees."
The success of the Company depends in large part upon the ability of the
Company to attract and retain qualified employees, particularly highly skilled
engineering, direct sales and support personnel. The competition for such
employees is intense. There can be no assurance that the Company will be
successful in attracting or retaining key personnel. Any failure by the Company
to attract and retain engineering, direct sales and support personnel would
materially adversely affect the Company's business, operating results, financial
condition and cash flows. See "Business - Employees."
MANAGEMENT OF GROWTH
The Company's potential expansion may significantly strain the Company's
management, financial, customer support, operational and other resources. If the
Company achieves successful market acceptance of Unify VISION and new products,
the Company may undergo a period of rapid growth. To accommodate this growth,
the Company is continuing to implement a variety of new and upgraded operating
and financial systems, procedures and controls, including the improvement of its
internal management systems. There can be no assurance that such efforts can be
accomplished successfully. Any failure to expand these areas in an efficient
manner could have a material adverse effect on the Company's business, operating
results, financial condition and cash flows. Moreover, there can be no assurance
that the Company's systems, procedures and controls will
15
be adequate to support the Company's future operations. Any rapid growth could
require that the Company secure additional facilities or expand in its current
facilities. Any move to new facilities or expansion of its present facilities
could be disruptive and could have a material adverse effect on the Company's
business, operating results, financial condition and cash flows.
THIRD-PARTY LICENSES
The Company is dependent on third-party suppliers for software which is
embedded in certain of its products. Although the Company believes that the
functionality provided by software which is licensed from third parties is
obtainable from multiple sources or could be developed by the Company, if any
such third-party licenses were terminated or not renewed or if these third
parties fail to develop new products in a timely manner the Company could be
required to develop an alternative approach to developing its products, which
could require payment of substantial fees to third parties, internal development
costs and delays and might not be successful in providing the same level of
functionality. Such delays, increased costs or reduced functionality could
materially adversely affect the Company's business, operating results, financial
condition and cash flows. See "Business - Intellectual Property."
FUTURE CAPITAL NEEDS
The Company believes that current cash, cash equivalents and short-term
investments will be sufficient to meet its cash requirements during the next 12
months. Thereafter, depending on its operating results, the Company may require
additional equity or debt financing to meet its working capital or capital
equipment requirements. There can be no assurance that additional financing will
be available when required or, if available, that it will be on terms
satisfactory to the Company. The sale of additional equity or other securities
will result in dilution of the Company's stockholders. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of copyright, trademark and trade
secret laws, non-disclosure agreements and other intellectual property
protection methods to protect its proprietary technology. 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. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem. In addition, the laws of some foreign countries do
not protect the Company's proprietary rights as fully as do the laws of the
United States. There can be no assurance that the Company's means of protecting
its proprietary rights in the United States or abroad will be adequate or that
competition will not independently develop similar technology.
Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any notices that the Company is infringing the intellectual property rights of
others, there can be no assurance that such infringement claims will not be
asserted by third parties in the future. If any such claims are asserted, there
can be no assurance that the Company will be able to defend such claim or obtain
licenses on reasonable terms. The Company's involvement in any patent dispute or
other intellectual property dispute or action to protect trade secrets and
know-how may have a material adverse effect on the Company's business, operating
results, financial condition and cash flows. Adverse determinations in any
litigation may subject the Company to significant liabilities to third parties,
require the Company to seek licenses from third parties and prevent the Company
from developing and selling its products. Any of these situations could have a
material adverse effect on the Company's business, operating results, financial
condition and cash flows. See "Business - Intellectual Property."
16
VOLATILITY OF STOCK PRICE
The Company's common stock price has been and is likely to continue to be
subject to significant volatility. A variety of factors could cause the price of
the Company's common stock to fluctuate, perhaps substantially, including:
announcements of developments related to the Company's business; fluctuations in
the Company's or its competitors' operating results and order levels; general
conditions in the computer industry or the worldwide economy; announcements of
technological innovations; new products or product enhancements by the Company
or its competitors; changes in financial estimates by securities analysts;
developments in patent, copyright or other intellectual property rights; and
developments in the Company's relationships with its customers, distributors and
suppliers. In addition, in recent years the stock market in general, and the
market for shares of equity securities of many high technology companies in
particular, has experienced extreme price fluctuations which have often been
unrelated to the operating performance of those companies. Such fluctuations may
adversely affect the market price of the Company's common stock.
ITEM 2. PROPERTIES
The Company maintains its headquarters in San Jose, California in a 2,000
square foot facility under a lease which expires in September 1998. The Company
also leases 30,000 square feet of administrative and engineering space in
Sacramento, California under a lease which expires in October 2000. In addition,
the Company leases domestic sales and support offices in Irving, Texas and
Reston, Virginia as well as international sales and support offices in the
United Kingdom, France and Japan. The Company believes that its existing
facilities are adequate for its current needs and that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock is traded on the Nasdaq National Market tier of
the Nasdaq Stock Market ("Nasdaq") under the symbol UNFY. Unify Corporation's
common stock was first traded on Nasdaq on June 14, 1996, concurrent with the
underwritten initial public offering ("IPO") of shares of the Company's common
stock at an initial price to the public of $12.00 per share. Prior to the IPO
there was no established public trading market for the Company's shares. The
following table sets forth the high and low closing sales prices for shares of
the Company's common stock from June 14, 1996, the date of the IPO, through the
end of the first quarter of
17
fiscal 1997 and for each full quarter thereafter in fiscal 1997 and 1998. This
information is based on closing sales prices as reported by Nasdaq.
High Low
------ ------
FISCAL 1997
First Quarter $14.25 $ 8.00
Second Quarter 13.75 8.31
Third Quarter 9.38 4.13
Fourth Quarter 4.50 2.38
FISCAL 1998
First Quarter 3.00 2.06
Second Quarter 4.00 2.13
Third Quarter 3.00 2.00
Fourth Quarter 2.31 1.75
COMMON STOCKHOLDERS OF RECORD
At June 30, 1998, there were approximately 185 stockholders of record of
the Company's common stock, as shown in the records of the Company's transfer
agent, excluding stockholders whose stock was held in nominee or street name by
brokers.
DIVIDENDS
The Company has never paid dividends on its common stock and its present
policy is to retain anticipated future earnings for use in its business.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto in Item 8 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7.
Years Ended April 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses $ 15,580 $ 14,856 $ 20,444 $ 17,995 $ 19,048
Services 9,229 9,380 9,721 10,854 11,501
---------- --------- --------- --------- ---------
Total revenues 24,809 24,236 30,165 28,849 30,549
---------- --------- --------- --------- ---------
Cost of revenues:
Software licenses 647 1,266 2,059 2,787 3,262
Services 4,389 4,493 4,332 5,786 6,215
---------- --------- --------- --------- ---------
Total cost of revenues 5,036 5,759 6,391 8,573 9,477
---------- --------- --------- --------- ---------
Gross margin 19,773 18,477 23,774 20,276 21,072
---------- --------- --------- --------- ---------
Operating expenses:
Product development 5,733 6,974 5,805 5,324 5,598
Selling, general and administrative 16,389 23,604 18,920 15,431 20,365
---------- --------- --------- --------- ---------
Total operating expenses 22,122 30,578 24,725 20,755 25,963
---------- --------- --------- --------- ---------
Loss from operations (2,349) (12,101) (951) (479) (4,891)
Other income (expense), net 118 538 176 392 (1,830)
---------- --------- --------- --------- ---------
Loss before income taxes (2,231) (11,563) (775) (87) (6,721)
Provision for income taxes (182) (192) (163) (392) (342)
---------- --------- --------- --------- ---------
Net loss $ (2,413) $ (11,755) $ (938) $ (479) $ (7,063)
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Net loss per share, basic and diluted $ (0.29) $ (1.68) $ (0.89) $ (0.49) $ (7.41)
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Shares used in computing net loss per share,
basic and diluted 8,206 7,008 1,049 973 953
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
April 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(In thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 10,739 $ 16,646 $ 3,028 $ 3,776 $ 2,495
Working capital (deficit) 6,561 7,635 (3,183) (3,116) (4,518)
Total assets 19,099 24,438 12,997 12,681 13,081
Long-term debt, net of current portion 4 58 2,456 1,488 471
Redeemable preferred stock - - 26,726 24,973 23,219
Total stockholders' equity (deficit) 8,295 9,962 (29,173) (26,628) (24,287)
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO IN ITEM 8. THIS ANNUAL REPORT ON FORM
10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "BUSINESS - RISK FACTORS" IN
PART I OF THIS ANNUAL REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS
WITH THE SEC.
OVERVIEW
The Company develops, markets and supports Unify VISION, an application
server solution that enables corporations to deliver enterprise networked
applications by integrating legacy, custom-built, and packaged applications with
the Internet. The Company also continues to enhance, market and support Unify
DataServer, a family of database management system products, and to market and
support Unify ACCELL, a family of fourth generation language application
development tools. In addition to software products, the Company offers
training, consulting and maintenance services to its customers.
The Company was founded in 1980 to develop a UNIX-based database and in
1990 began focusing on the development of application development tools
compatible with the Company's database as well as databases offered by other
companies such as Oracle and Informix. In response to the expected growth in
client/server computing, the Company determined in 1992 to concentrate its
product development efforts on advanced client/server development tools. This
resulted in the introduction of an initial version of Unify VISION in December
1993 which was directed at entry-level workgroup applications. In March 1995,
the Company introduced Unify VISION 2.0, an advanced application development
environment for the development, deployment and management of high-end, business
critical client/server applications. With the introduction of Unify VISION 3.0
in September 1996 and its companion product, VISION/Web, in January 1997, the
Company began to compete at the enterprise level with a strong intranet and
Internet focus. In May 1998, the Company introduced Unify VISION 4.0's component
products, VISION AppServer and VISION AppBuilder, and began targeting large
organizations with a need to quickly integrate legacy, custom-built, and
packaged applications with the Internet.
With the introduction of Unify VISION 3.0 and VISION/Web in fiscal 1997 and
Unify VISION 4.0 in May 1998, the Company increasingly has been in a position to
compete for larger, enterprise-level sales transactions. However, such
transactions tend to have much longer sales cycles which, in the short term,
have adversely impacted the Company's revenues. Although the Company believes
that these developments represent a significant opportunity for the Company, it
cannot predict whether or when the Company will be able to capitalize on this
opportunity.
The Company's strategy is to aggressively market and enhance its graphical
product, Unify VISION. The Company continues to support its extensive installed
base of Unify DataServer and Unify ACCELL character products, which the Company
believes represents a significant source of potential customers for Unify
VISION. The Company also generates significant revenues from services, including
customer maintenance, consulting and training. The following table sets forth
revenues from licenses of its graphical and character products and from services
for the periods indicated:
20
Years Ended April 30,
----------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands)
License revenues:
Graphical $ 7,627 $ 5,332 $ 5,009
Character 7,953 9,524 15,435
----------- ----------- -----------
Total license revenues 15,580 14,856 20,444
Services revenues 9,229 9,380 9,721
----------- ----------- -----------
Total revenues $ 24,809 $ 24,236 $ 30,165
----------- ----------- -----------
----------- ----------- -----------
The Company is currently focusing its product development and sales and
marketing resources principally on Unify VISION. The Company expects that its
ability to achieve significant revenue growth in the future will be
substantially dependent upon the success of Unify VISION. The Company also
expects that revenues from Unify DataServer and ACCELL may continue to decline.
As a result, factors adversely affecting the pricing of or demand for Unify
VISION could have a material adverse effect on the Company's business, operating
results, financial condition and cash flows.
The Company licenses its software through its direct sales force in the
United States, Europe and Japan and through distributors and VARs worldwide.
Revenues from distributors and VARs accounted for approximately 57%, 48%, and
60% of the Company's software license revenues for fiscal 1998, 1997 and 1996,
respectively. The Company's ability to achieve significant revenue growth in the
future will depend in part on its success in maintaining existing and
establishing additional relationships with distributors and VARs worldwide.
The Company recognizes software license revenue when a noncancelable
license agreement has been executed, the product has been shipped, all
significant contractual obligations have been satisfied and collection of the
resulting receivable is deemed probable by management. Software licenses include
both development and deployment licenses, with pricing for graphical products
generally based upon the number of developers or end users, as applicable.
Customer maintenance revenues are recognized ratably over the maintenance
period. Payments for maintenance fees are generally received in advance and are
nonrefundable. Revenues from consulting and training services are recognized as
the services are performed.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations
data of the Company expressed as a percentage of total revenues for the periods
indicated.
21
Years Ended April 30,
-------------------------------------------
1998 1997 1996
-------- ------- --------
Revenues:
Software licenses 62.8% 61.3% 67.8%
Services 37.2 38.7 32.2
-------- ------- --------
Total revenues 100.0 100.0 100.0
-------- ------- --------
Cost of revenues:
Software licenses 2.6 5.2 6.8
Services 17.7 18.5 14.4
-------- ------- --------
Total cost of revenues 20.3 23.7 21.2
-------- ------- --------
Gross margin 79.7 76.3 78.8
-------- ------- --------
Operating expenses:
Product development 23.1 28.8 19.3
Selling, general and administrative 66.1 97.4 62.7
-------- ------- --------
Total operating expenses 89.2 126.2 82.0
-------- ------- --------
Loss from operations (9.5) (49.9) (3.2)
Other income, net 0.5 2.2 0.6
-------- ------- --------
Loss before income taxes (9.0) (47.7) (2.6)
Provision for income taxes (0.7) (0.8) (0.5)
-------- ------- --------
Net loss (9.7)% (48.5)% (3.1)%
-------- ------- --------
-------- ------- --------
COMPARISON OF YEARS ENDED APRIL 30, 1998 AND 1997
TOTAL REVENUES
The Company's total revenues include software license revenues from sales
of its graphical and character products and service revenues for customer
maintenance, consulting and training. Total revenues for fiscal 1998 increased
2% to $24.8 million from $24.2 million for fiscal 1997. Growth in graphical
license revenues of $2.3 million more than offset the $1.6 million decline in
character license revenues while service revenues remained stable during fiscal
1998 as compared to fiscal 1997. The Company expects that revenues from its
character products may continue to decline in future periods and is currently
focusing its product development and sales and marketing resources principally
on its graphical products. The Company also expects that it will continue to
experience extended customer evaluation and decision-making processes for large,
complex Unify VISION sales transactions over the next several quarters. The
Company expects that in the near term it is possible that a significant portion
of Unify VISION sales to new customers may be for pilot programs and therefore
modest in size.
International revenues include all software license and service revenues
from customers located outside the United States. International revenues from
the Company's direct sales organizations in Europe and Japan and from
distributors and resellers in all international locations accounted for 54% of
total revenues in fiscal 1998 and 60% of total revenues in fiscal 1997.
SOFTWARE LICENSES. Total software license revenues for fiscal 1998
increased 5% to $15.6 million from $14.9 million for fiscal 1997. Graphical
license revenues increased 43% to $7.6 million in fiscal 1998 from $5.3 million
in fiscal 1997, primarily due to Unify VISION sales to a single customer
totaling $2.1 million in fiscal 1998. Character license revenues decreased 16%
to $8.0 million in fiscal 1998 from $9.5 million in fiscal 1997, principally due
to the general decline in demand for character products and the Company's focus
on its graphical products in fiscal 1998.
22
SERVICES. Service revenues for fiscal 1998 decreased 2% to $9.2 million
from $9.4 million for fiscal 1997. Fiscal 1998 customer maintenance revenues
declined $0.6 million while consulting and training revenues grew $0.5 million.
The decrease in service revenues during this period was primarily the result of
the continuing impact of the fiscal 1997 decline in initial customer maintenance
contracts relating to significantly lower character license revenues in that
year. The Company expects customer maintenance revenues to continue to decline
until significant growth in graphical license revenues is achieved. The increase
in consulting and training revenues was due to the Company's focus on providing
complete customer solutions during fiscal 1998.
COST OF REVENUES
COST OF SOFTWARE LICENSES. Cost of software licenses consists primarily of
product documentation, packaging and production costs in the U.S. and Japan,
royalties paid for licensed technology, costs related to funded development
contracts, and amortization of capitalized software development costs. Cost of
software licenses for fiscal 1998 decreased to $0.6 million, or 4% of software
license revenues, as compared to $1.3 million, or 9% of software license
revenues, for fiscal 1997. The decreases in cost of software licenses in
absolute dollars and as a percentage of license revenues were due to production
efficiencies achieved in the U.S. and Japan. The Company does not expect to
achieve significant additional production efficiencies in fiscal 1999. There was
no amortization of capitalized software development costs in fiscal 1998 or
1997.
COST OF SERVICES. Cost of services consists primarily of employee,
facilities and travel costs incurred in providing customer support under
software maintenance contracts and consulting and training services. Total cost
of services for fiscal 1998 of $4.4 million, or 48% of service revenues, were
comparable to total cost of services for fiscal 1997. Customer support costs
decreased $0.3 million or 12% while consulting and training costs increased $0.2
million or 12% in fiscal 1998 as compared to fiscal 1997. As the Company
continues to increase its emphasis on providing comprehensive application
development solutions in fiscal 1999, it expects that consulting service costs
may increase.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses consist primarily of
employee and facilities costs incurred in the development and testing of new
products and in the porting of new and existing products to additional hardware
platforms and operating systems. Product development expenses for fiscal 1998
decreased to $5.7 million, or 23% of total revenues, as compared to $7.0
million, or 29% of total revenues, for fiscal 1997. The decreases in product
development expenses in absolute dollars and as a percentage of total revenues
were primarily due to a fiscal 1998 decrease in contract staffing from the level
of staffing required to complete Unify VISION 3.0 and VISION/Web in a timely
manner in fiscal 1997 and to the purchase of third party source code for $0.5
million during fiscal 1997. The Company believes that substantial investment in
product development is critical to maintaining technological leadership and
therefore expects to continue to devote significant resources to product
development in fiscal 1999.
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. See Note 1 of Notes
to Consolidated Financial Statements. In accordance with this policy, there were
no capitalizable software development costs in fiscal 1998 or 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries, bonuses and commissions,
promotional and travel expenses, professional services, facilities expenses and
bad debt. SG&A expenses for fiscal 1997 included charges totaling $2.4 million
for bad debt, staff realignments and related asset write-offs (see "Comparison
of Years Ended April 30, 1997 and 1996 - Operating Expenses"). Excluding these
charges, SG&A expenses for fiscal 1998 decreased to $16.4 million, or 66% of
total revenues, as compared to $21.2 million, or 87% of total revenues, for
fiscal 1997. The fiscal 1998 decreases in SG&A expenses in absolute dollars and
as a percentage of total revenues were primarily due to the Company's continuing
close management of expenses and realignment of staff during fiscal 1998. The
23
Company expects that fiscal 1999 SG&A expenses will fluctuate from quarter to
quarter primarily due to variability in marketing program spending and sales
commission expense.
OTHER INCOME, NET. Other income, net, consists of the minority interest in
the Company's Japanese joint venture, exchange gains and losses, and interest
earned by the Company on its cash, cash equivalents and short-term investments,
offset by interest expense on long-term debt. Other income was $0.1 million in
fiscal 1998 and $0.5 million in fiscal 1997, with the decrease consisting
principally of lower interest income relating to the decline in the Company's
cash balances during fiscal 1998 and losses on liquidation of the Company's
Benelux and German subsidiaries, offset by lower interest expense relating to
the retirement of the Company's stockholder line of credit in July 1997. The
Company's subsidiaries in Europe and Japan operate in local currencies. Foreign
currency gains and losses on local currency intercompany accounts held in the
U.S. have been immaterial to date; however, if the value of the U.S. dollar
increases relative to foreign currencies, the Company's business, operating
results, financial condition and cash flows could be materially adversely
affected.
PROVISION FOR INCOME TAXES. The Company recorded no federal income tax
provision for fiscal 1998 and 1997 due to net losses in those periods. The
Company recorded tax provisions in those years which related primarily to
foreign income tax withholding on software license royalties paid to the Company
by certain foreign licensees. At April 30, 1998, the Company had available
federal net operating loss carryforwards of approximately $26.0 million.
Under current tax legislation, the availability of the Company's net
operating loss carryforwards will be subject to an annual limitation in future
periods if a change of ownership of more than 50% should occur over a three-year
period. Such a change could substantially limit the eventual utilization of
these tax carryforwards. After utilization of its net operating loss
carryforwards, the Company expects that its effective tax rate will approximate
the statutory rate.
The Company recognizes deferred tax assets and liabilities for the expected
future consequences of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and for income tax
purposes. The Company has provided a full valuation allowance against its net
deferred tax assets as it has determined that it is more likely than not that
the deferred tax assets will not be realized. The Company's accounting for
deferred taxes involves the evaluation of a number of factors concerning the
realizability of the Company's deferred tax assets. To support the Company's
conclusion that a 100% valuation allowance was required, management primarily
considered such factors as the Company's history of operating losses and
uncertainty regarding future operating results, the nature of the Company's
deferred tax assets, the lack of significant firm sales backlog, no significant
excess of appreciated asset value over the tax basis of the Company's net assets
and the absence of taxable income in prior carryback years.
COMPARISON OF YEARS ENDED APRIL 30, 1997 AND 1996
TOTAL REVENUES
Total revenues for fiscal 1997 decreased 20% to $24.2 million from $30.2
million for fiscal 1996. A significant decline in character license revenues was
only slightly offset by growth in graphical license revenues while service
revenues remained relatively stable during fiscal 1997 as compared to fiscal
1996. International revenues accounted for 60% and 56% of total revenues for
fiscal 1997 and 1996, respectively.
SOFTWARE LICENSES. Total software license revenues for fiscal 1997
decreased 27% to $14.9 million from $20.4 million for fiscal 1996. Graphical
license revenues increased 6% to $5.3 million in fiscal 1997 from $5.0 million
in fiscal 1996. Fiscal 1997 graphical license revenues included a single $1.1
million order from a customer based in China. The related receivable was
subsequently written off as a bad debt. Excluding this order, the decline in
fiscal 1997 graphical license revenues primarily reflects the longer sales
cycles for Unify VISION which the Company began experiencing in the second half
of fiscal 1997. Character license revenues
24
decreased 38% to $9.5 million in fiscal 1997 from $15.4 million in fiscal
1996, principally due to the general decline in demand for character products
and the Company's focus on its graphical products in fiscal 1997.
SERVICES. Service revenues for fiscal 1997 decreased 4% to $9.4 million
from $9.7 million for fiscal 1996. The decrease in service revenues during this
period was primarily the result of a decline in initial customer maintenance
contracts relating to significantly lower fiscal 1997 character license
revenues.
COST OF REVENUES
COST OF SOFTWARE LICENSES. Cost of software licenses for fiscal 1997
decreased to $1.3 million, or 9% of software license revenues, as compared to
$2.1 million, or 10% of software license revenues, for fiscal 1996. There was no
amortization of capitalized software development costs in fiscal 1997, as
compared to $0.6 million of such costs in fiscal 1996.
COST OF SERVICES. Cost of services for fiscal 1997 increased slightly to
$4.5 million, or 48% of service revenues, as compared to $4.3 million, or 45% of
service revenues, for fiscal 1996.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses for fiscal 1997 increased
to $7.0 million, or 29% of total revenues, as compared to $5.8 million, or 19%
of total revenues, for fiscal 1996. The increase in product development expenses
in absolute dollars was primarily due to an increase in contract staff required
to complete Unify VISION 3.0 and VISION/Web and to the purchase of third party
source code for $0.5 million during fiscal 1997. The increase in product
development expenses as a percentage of total revenues was the result of lower
total revenues and higher product development expenses in fiscal 1997. There
were no capitalizable software development costs in fiscal 1997 or 1996.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses for fiscal 1997 included
charges totaling $2.4 million for bad debt, staff realignments and related asset
write-offs. Of this amount, $1.1 million represented bad debt expense for the
write-off of a receivable from a customer based in China, for which payment was
in default. The remaining charges of $1.3 million were for staff realignments
and related asset retirements, including expenses for closing down the
operations of the Company's Benelux subsidiary.
Excluding the above-mentioned charges for bad debt, staff realignments and
related asset write-offs, SG&A expenses for fiscal 1997 increased to $21.2
million, or 87% of total revenues, as compared to $18.9 million, or 63% of total
revenues, for fiscal 1996. The fiscal 1997 increase in SG&A expenses in absolute
dollars was primarily due to higher spending for marketing programs targeted at
increasing the Company's visibility, promotional activities for the introduction
of Unify VISION 3.0 and VISION/Web, and additional professional services costs
incurred as a result of becoming a publicly traded company. These higher fiscal
1997 SG&A costs were partially offset by lower sales commission expense relating
to the fiscal 1997 decline in software license revenues. The increase in SG&A
expenses as a percentage of total revenues is attributable to the fiscal 1997
decline in total revenues combined with the increase in SG&A expenses in
absolute dollars compared to fiscal 1996.
OTHER INCOME, NET. Other income, net, was $0.5 million in fiscal 1997 and
$0.2 million in fiscal 1996, with the increase consisting principally of
interest income on net proceeds from the Company's June 1996 initial public
offering of common stock.
PROVISION FOR INCOME TAXES. The Company recorded no federal income tax
provision for fiscal 1997 and 1996 due to net losses in those periods. The
Company recorded tax provisions in those years which related primarily to
foreign income tax withholding on software license royalties paid to the Company
by certain foreign licensees.
25
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company had cash, cash equivalents and short-term
investments of $10.7 million, compared to $16.6 million at April 30, 1997.
Working capital decreased to $6.6 million at April 30, 1998 from $7.6 million at
April 30, 1997.
The Company's operating activities used cash of $3.7 million in fiscal
1998, $8.9 million in fiscal 1997 and $1.1 million in fiscal 1996. Cash used in
operating activities in all three periods was primarily for operating losses. In
fiscal 1998, the Company's investing activities consisted primarily of net sales
of short-term investments and purchases of property and equipment. In fiscal
1997, the Company's investing activities consisted principally of investment of
the net proceeds from its IPO in corporate debt securities and purchases of
property and equipment. In fiscal 1996, the Company's investing activities
consisted principally of purchases of property and equipment. Cash used by
financing activities represented primarily retirement of the stockholder line of
credit partially offset by sales of common stock in fiscal 1998. Cash provided
by financing activities consisted principally of net proceeds from the Company's
IPO in fiscal 1997 and advances under its stockholder line of credit in fiscal
1996.
The Company believes that current cash, cash equivalents and short-term
investments will be sufficient to meet its cash requirements during the next 12
months. Thereafter, depending on its operating results, the Company may require
additional equity or debt financing to meet its working capital or capital
equipment requirements. There can be no assurance that additional financing will
be available when required or, if available, that it will be on terms
satisfactory to the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
Statements of Financial Accounting Standards ("SFAS"s). SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, requires that an enterprise report, by major components
and as a single total, the change in its net assets from nonowner sources during
the period. SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. The Company has not yet
identified its SFAS No. 131 reporting segments. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") Nos. 97-2, SOFTWARE REVENUE
RECOGNITION and 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION OF SOP 97-2,
SOFTWARE REVENUE RECOGNITION. These statements provide guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. SOP Nos. 97-2 and 98-4 supercede SOP 91-1 and are effective for
transactions entered into for fiscal years beginning after December 15, 1997.
SOP 97-2 addresses software revenue recognition matters primarily at a
conceptual level. Based on its reading and interpretation of this statement, the
Company believes it is currently in compliance with the provisions of SOP 97-2.
However, detailed implementation guidelines for this statement have not yet been
issued. Once issued, such detailed implementation guidelines could lead to
unanticipated changes in the Company's current revenue accounting practices and
these changes could be material to the Company's revenues and operating results.
26
YEAR 2000 COMPLIANCE
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to business disruption (the "Year 2000" issue).
The Company sought to identify all significant internal applications and
business processes that would require modification to ensure Year 2000
compliance during fiscal 1996 and believes that all appropriate modification and
testing of those applications and business processes were completed by the end
of fiscal 1997. An assessment of the readiness of significant vendors and other
external entities with which the Company electronically interacts is ongoing.
The total cost to the Company of these Year 2000 compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not required to provide disclosures regarding market risk in
this Annual Report on Form 10-K as its market capitalization is less than $2.5
billion. Such disclosures will be provided in the Company's Annual Report on
Form 10-K for the year ending April 30, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the financial statements and supplementary
financial information which are filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 30, 1996, the Audit Committee of the Company's Board of Directors
approved a change in the Company's independent accountants for the fiscal year
ending April 30, 1997, from KPMG Peat Marwick LLP ("KPMG") to Deloitte & Touche
LLP ("Deloitte & Touche"). The report of KPMG for the fiscal year ended April
30, 1996 contained no adverse opinion, disclaimer of opinion or qualification or
modification as to uncertainty, audit scope or accounting principles. During the
fiscal year ended April 30, 1996 and the interim period from May 1, 1996 through
August 29, 1996 there were no disagreements between the Company and KPMG on any
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of KPMG, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report. No event described in paragraph (a)(1)(v) of Item
304 of Regulation S-K occurred during the Company's fiscal year ended April 30,
1996 or the period from May 1, 1996 through August 29, 1996.
The Company did not consult with Deloitte & Touche during the fiscal year
ended April 30, 1996 or the period from May 1, 1996 through August 29, 1996 on
any matter which was the subject of any disagreement or any reportable event or
on the application of accounting principles to a specified transaction, either
completed or proposed.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item which relates to the Company's
directors and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's proxy statement for the 1998 annual meeting of stockholders (the "1998
Annual Meeting of Stockholders") and is incorporated herein by reference. The
information required by this item which relates to the Company's executive
officers and key employees is included under the caption "Executive Officers" in
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation and Other Matters" in the Company's proxy statement for
the 1998 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the Company's proxy
statement for the 1998 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"Executive Compensation and Other Matters Certain Relationships and Related
Transactions" in the Company's proxy statement for the 1998 Annual Meeting of
Stockholders and is incorporated herein by reference.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS ANNUAL REPORT ON FORM
10-K:
1. FINANCIAL STATEMENTS Page Number
-----------
Report of Deloitte & Touche LLP, Independent Auditors 32
Report of KPMG Peat Marwick LLP, Independent Auditors 33
Consolidated Balance Sheets as of April 30, 1998 and 1997 34
Consolidated Statements of Operations for the years ended April 30, 1998,
1997 and 1996 35
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
April 30, 1998, 1997 and 1996 36
Consolidated Statements of Cash Flows for the years ended April 30, 1998,
1997 and 1996 37
Notes to Consolidated Financial Statements 38
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts 50
All other schedules are omitted because they are not applicable, or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
3. EXHIBITS - See Item 14(c) below.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended April 30, 1998.
(c) EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Registrant (1)
4.1 Form of Stock Certificate (1)
4.2 Series E Stock Purchase Agreement by and among the Company and the
purchasers named therein, dated April 2, 1992 (1)
10.1* Employment Agreement by and between Reza Mikailli and the Registrant
dated March 31, 1995 (1)
10.2* 1991 Stock Option Plan, as amended (1)
10.3* 1996 Employee Stock Purchase Plan (1)
10.4 Form of Indemnification Agreement (1)
29
10.5 Joint Venture Agreement, dated September 3, 1990, as amended, by and
among the Registrant, Unify Japan Corporation, Sumitomo Metals
Industries, Ltd. and Artificial Intelligence Research (1)
16.0 Letter Regarding Change in Certifying Accountant (2)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of KPMG Peat Marwick LLP, Independent Auditors
27.0 Financial Data Schedule
_________________________________
(1) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form S-1 Registration Statement (No. 333-3834) declared
effective by the Securities and Exchange Commission on June 14, 1996.
(2) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form 8-K/A on September 20, 1996.
* Exhibit pertains to a management contract or compensatory plan or
arrangement.
(d) FINANCIAL STATEMENT SCHEDULE
See Item 14(a)(2) above.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIFY CORPORATION
By: /s/ REZA MIKAILLI
-----------------------------------------------
Reza Mikailli
PRESIDENT, CHIEF EXECUTIVE OFFICER, ACTING VICE
PRESIDENT, FINANCE AND ADMINISTRATION, AND DIRECTOR
(PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL OFFICER)
Dated: July 17, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Reza Mikailli his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments to this report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purpose as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ REZA MIKAILLI President, Chief Executive Officer, Acting July 17, 1998
- ----------------------------------------------- Vice President, Finance and Administration,
Reza Mikailli and Director (Principal Executive and
Principal Financial Officer)
/s/ ARTHUR C. PATTERSON Director July 17, 1998
- -----------------------------------------------
Arthur C. Patterson
/s/ ROEL PIEPER Director July 17, 1998
- -----------------------------------------------
Roel Pieper
/s/ STEVEN D. WHITEMAN Director July 17, 1998
- -----------------------------------------------
Steven D. Whiteman
31
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Unify Corporation:
We have audited the accompanying consolidated balance sheets of Unify
Corporation and subsidiaries (the "Company") as of April 30, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the years then ended. Our audits also included the
financial statement schedule for the years ended April 30, 1998 and 1997
listed in the Index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Unify Corporation and
subsidiaries as of April 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
May 18, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Unify Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of Unify Corporation and subsidiaries for
the year ended April 30, 1996. In connection with our audit of the consolidated
financial statements, we also have audited the financial statement schedule for
the year ended April 30, 1996 as listed in the index at Item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Unify Corporation and subsidiaries for the year ended April 30, 1996 in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule when considered in relation to the
basic consolidated financial statements taken as a whole presents fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Mountain View, California
May 17, 1996
33
UNIFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
April 30, April 30,
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 5,279 $ 9,513
Short-term investments 5,460 7,133
Accounts receivable, net of allowances of $563 in 1998 and $485
in 1997 5,568 4,557
Prepaid expenses and other current assets 779 526
----------- -----------
Total current assets 17,086 21,729
Property and equipment, net 1,925 2,415
Other assets 88 294
----------- -----------
Total assets $ 19,099 $ 24,438
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 18 $ 2,378
Accounts payable 1,041 1,586
Amounts due to minority interest stockholders 756 830
Accrued compensation and related expenses 1,889 1,972
Other accrued liabilities 3,076 3,797
Deferred revenue 3,745 3,531
----------- -----------
Total current liabilities 10,525 14,094
Long-term debt, net of current portion 4 58
Commitments and contingencies (Note 11)
Minority interest 275 324
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
no shares issued or outstanding in 1998 and 1997 - -
Common stock, $0.001 par value; 40,000,000 shares authorized;
8,345,257 and 8,064,434 shares outstanding in 1998 and 1997,
respectively 8 8
Additional paid-in capital 53,474 52,965
Notes receivable from stockholders (216) (207)
Cumulative translation adjustments (521) (767)
Accumulated deficit (44,450) (42,037)
----------- -----------
Total stockholders' equity 8,295 9,962
----------- -----------
Total liabilities and stockholders' equity $ 19,099 $ 24,438
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
34
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended April 30,
----------------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues:
Software licenses $ 15,580 $ 14,856 $ 20,444
Services 9,229 9,380 9,721
----------- ----------- -----------
Total revenues 24,809 24,236 30,165
----------- ----------- -----------
Cost of revenues:
Software licenses 647 1,266 2,059
Services 4,389 4,493 4,332
----------- ----------- -----------
Total cost of revenues 5,036 5,759 6,391
----------- ----------- -----------
Gross margin 19,773 18,477 23,774
----------- ----------- -----------
Operating expenses:
Product development 5,733 6,974 5,805
Selling, general and administrative 16,389 23,604 18,920
----------- ----------- -----------
Total operating expenses 22,122 30,578 24,725
----------- ----------- -----------
Loss from operations (2,349) (12,101) (951)
Other income, net 118 538 176
----------- ----------- -----------
Loss before income taxes (2,231) (11,563) (775)
Provision for income taxes (182) (192) (163)
----------- ----------- -----------
Net loss $ (2,413) $ (11,755) $ (938)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share, basic and diluted $ (0.29) $ (1.68) $ (0.89)
----------- ----------- -----------
----------- ----------- -----------
Shares used in computing net loss per share,
basic and diluted 8,206 7,008 1,049
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
35
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Notes Total
Additional Receivable Cumulative Accum- Stockholders'
Common Stock Paid-In from Translation ulated Equity
Shares Amount Capital Stockholders Adjustments Deficit (Deficit)
--------- ------ --------- ------------ ----------- ---------- -------------
Balances at May 1, 1995 1,340,344 $ 1 $ 2,159 $ (515) $ (682) $ (27,591) $ (26,628)
Exercise of stock options 776,897 1 341 (182) - - 160
Exercise of warrants 13,571 - 48 - - - 48
Repurchase of common stock (246,737) - (432) 432 - - -
Redeemable preferred stock
dividend accrual - - - - - (1,753) (1,753)
Imputed interest on stock-
holder line of credit - - 72 - - - 72
Translation adjustments - - - - (134) - (134)
Net loss - - - - - (938) (938)
--------- ---- -------- ------- ------- --------- ---------
Balances at April 30, 1996 1,884,075 2 2,188 (265) (816) (30,282) (29,173)
Public offering of common
stock, net of offering
expenses of $3,046 2,187,000 2 23,196 - - - 23,198
Conversion of redeemable
preferred stock and accrued
dividends to common stock 3,566,297 4 26,722 - - - 26,726
Exercise of warrants 183,790 - 35 - - - 35
Exercise of stock options 225,143 - 144 - - - 144
Issuance of common stock
under employee stock
purchase plan 107,550 - 526 - - - 526
Repurchase of common stock (89,421) - (40) - - - (40)
Imputed interest on stock-
holder line of credit - - 194 - - - 194
Collection of notes receivable
from stockholders, net of
interest accrual - - - 58 - - 58
Translation adjustments - - - - 49 - 49
Net loss - - - - - (11,755) (11,755)
--------- ---- -------- ------- ------- --------- ---------
Balances at April 30, 1997 8,064,434 8 52,965 (207) (767) (42,037) 9,962
Exercise of stock options 70,945 - 43 - - - 43
Issuance of common stock
under employee stock
purchase plan 222,522 - 469 - - - 469
Repurchase of common stock (12,644) - (3) - - - (3)
Accrual of interest on notes
receivable from stockholders - - - (9) - - (9)
Liquidation of subsidiaries - - - - 332 - 332
Translation adjustments - - - - (86) - (86)
Net loss - - - - - (2,413) (2,413)
--------- ---- -------- ------- ------- --------- ---------
Balances at April 30, 1998 8,345,257 $ 8 $ 53,474 $ (216) $ (521) $ (44,450) $ 8,295
--------- ---- -------- ------- ------- --------- ---------
--------- ---- -------- ------- ------- --------- ---------
See accompanying notes to consolidated financial statements.
36
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended April 30,
---------------------------------------------
1998 1997 1996
---------- ---------- ---------
Cash flows from operating activities:
Net loss $ (2,413) $ (11,755) $ (938)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 1,155 1,235 979
Loss on disposal of property and equipment - 774 -
Amortization of capitalized software - - 582
Provision for losses on accounts receivable 237 1,551 (42)
Minority interest (49) (171) (366)
Imputed interest on stockholder line of credit - 194 72
Liquidation of subsidiaries 332 - -
Changes in operating assets and liabilities:
Accounts receivable (1,300) (1,133) (1,008)
Prepaid expenses and other current assets (262) 315 (184)
Accounts payable (559) (245) 1,068
Amounts due to minority interest stockholders (24) (391) (336)
Accrued compensation and related expenses (78) 363 292
Litigation settlements - (148) (226)
Other accrued liabilities (919) 1,474 (472)
Deferred revenue 225 (989) (491)
--------- --------- ---------
Net cash used in operating activities (3,655) (8,926) (1,070)
--------- --------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (6,981) (12,695) -
Sales of available-for-sale securities 8,655 5,562 -
Purchases of property and equipment (666) (1,058) (784)
Other assets 234 (33) 8
--------- --------- --------
Net cash provided by (used in) investing activities 1,242 (8,224) (776)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 509 23,863 208
Borrowings under stockholder line of credit - - 1,000
Principal payments under debt obligations (2,414) (294) (428)
Collection of notes receivable from stockholders, net of interest accrual (9) 58 -
Additional investment in subsidiary by minority interest stockholders - - 591
--------- --------- --------
Net cash provided by (used in) financing activities (1,914) 23,627 1,371
---------- --------- --------
Effect of exchange rate changes on cash 93 8 (273)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (4,234) 6,485 (748)
Cash and cash equivalents, beginning of year 9,513 3,028 3,776
--------- --------- --------
Cash and cash equivalents, end of year $ 5,279 $ 9,513 $ 3,028
--------- --------- --------
--------- --------- --------
Supplemental schedule of noncash investing and financing activities:
Conversion of redeemable preferred stock and accrued dividends
to common stock $ - $ 26,726 $ -
--------- --------- --------
--------- --------- --------
Common stock canceled in return for notes receivable from stockholders $ - $ - $ (250)
--------- --------- --------
--------- --------- --------
Unify VISION software, maintenance and training exchanged for
financial applications software, support and training $ - $ - $ 1,050
--------- --------- --------
--------- --------- --------
Cash paid during the year for:
Interest $ 330 $ 77 $ 167
--------- --------- --------
--------- --------- --------
Income taxes $ 162 $ 186 $ 232
--------- --------- --------
--------- --------- --------
See accompanying notes to consolidated financial statements.
37
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Unify Corporation (the "Company") develops, markets and supports Unify
VISION, an application server solution that enables corporations to deliver
enterprise networked applications by integrating legacy, custom-built, and
packaged applications with the Internet. The Company also enhances, markets
and supports Unify DataServer, a family of database management system
products, and markets and supports Unify ACCELL, a family of fourth
generation language application development tools.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries and Unify Japan KK, which is
51% owned by the Company. All significant intercompany balances and
transactions have been eliminated. Net income or loss applicable to minority
interest stockholders is included in other income, net (see Note 7).
The functional currencies of the Company's foreign subsidiaries are
their local currencies. Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at period-end exchange rates.
Income and expense accounts are translated at average rates of exchange in
effect during the reporting period. Foreign currency transaction gains or
losses are included in other income, net. Foreign currency adjustments
resulting from the translation process are excluded from net income and
accumulated in a separate component of stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates made in preparing these consolidated
financial statements include the degree of certainty of collection for
revenue recognition and allowances for potential credit losses.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturities
of three months or less and are stated at cost, which approximates fair
value. Cash equivalents consist primarily of demand deposits with banks,
certificates of deposit and corporate debt securities.
SHORT-TERM INVESTMENTS
The Company's short-term investments are classified as
available-for-sale under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. The investments are carried at fair value, which
approximated cost at April 30, 1998 and 1997. Material unrealized gains or
losses are reported as a separate component of stockholders' equity. Realized
gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income, net. The cost of
securities sold is based on the specific identification method.
38
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable
and accounts payable approximate fair value because of the short-term
maturity of these instruments. The fair value of long-term debt is based upon
current interest rates for debt instruments with comparable maturities and
characteristics and materially approximate their carrying values. It is not
practicable to determine the fair value of amounts due to minority interest
stockholders because of the nature of the related party relationships.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments potentially subjecting the Company to
concentrations of credit risk consist primarily of temporary cash
investments, including corporate debt securities. The Company places its
temporary cash investments primarily with three financial institutions.
The Company licenses its products principally to companies in North
America, Europe and Japan and no customer accounted for more than 10% of
consolidated revenues in the years ended April 30, 1998, 1997 and 1996. The
Company performs periodic credit evaluations of its customers and generally
does not require collateral. Allowances are maintained for potential credit
losses.
REVENUE RECOGNITION
Software license revenue is recognized when a noncancelable license
agreement has been executed, the product has been shipped, all significant
contractual obligations have been satisfied and collection of the resulting
receivable is probable. Service revenue includes maintenance revenue, which
is recognized ratably over the maintenance period, and revenue from
consulting and training services, which is recognized as services are
performed. Fees for maintenance are billed in advance and included in
deferred revenue until recognized. The Company's revenue recognition policies
are in compliance with the provisions of the American Institute of Certified
Public Accountants' Statement of Position No. 91-1, SOFTWARE REVENUE
RECOGNITION. See also RECENTLY ISSUED ACCOUNTING STANDARDS below.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is recorded on a
straight-line basis over the estimated useful lives of the related assets,
generally three to five years.
CAPITALIZED SOFTWARE
Software development costs are accounted for in accordance with SFAS No.
86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED. Under this standard, capitalization of software
development costs begins upon the establishment of technological feasibility,
which for the Company is usually upon completion of a working model.
Amortization of capitalized software development costs is computed on a
product-by-product basis as the greater of the ratio of current product
revenues to the total of current and anticipated product revenues or the
straight-line method over the software's estimated economic life, generally
one to three years.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
39
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
INCOME TAXES
Deferred taxes are recorded for the difference between the financial
statement and tax basis of the Company's assets and liabilities. A valuation
allowance is recorded to reduce deferred tax assets to an amount whose
realization is more likely than not. U.S. income taxes are not provided on
the undistributed earnings of foreign subsidiaries as they are considered to
be permanently invested.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, EARNINGS PER
SHARE. In accordance with the provisions of this statement, the Company
adopted SFAS No. 128 in the third quarter of fiscal 1998 and restated
earnings per share data for prior periods to conform with the provisions of
SFAS No. 128.
SFAS No. 128 requires a dual presentation of basic and diluted earnings
per share ("EPS"). Basic EPS excludes dilution and is computed by dividing
net income attributable to common stockholders by the weighted average of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock (e.g. convertible preferred stock, warrants, and common stock options)
were exercised or converted into common stock. Potential common shares in the
diluted EPS computation are excluded for all years presented as their effect
would be antidilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
SFASs. SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires that an
enterprise report, by major components and as a single total, the change in
its net assets from nonowner sources during the period. SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. The Company has not yet identified its
SFAS No. 131 reporting segments. Adoption of these statements will not impact
the Company's consolidated financial position, results of operations or cash
flows. Both statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
In October 1997 and March 1998, the American Institute of Certified
Public Accountants issued Statement of Position ("SOP") Nos. 97-2, SOFTWARE
REVENUE RECOGNITION and 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION
OF SOP 97-2, SOFTWARE REVENUE RECOGNITION. These statements provide guidance
on applying generally accepted accounting principles in recognizing revenue
on software transactions. SOP Nos. 97-2 and 98-4 supercede SOP 91-1 and are
effective for transactions entered into for fiscal years beginning after
December 15, 1997.
SOP 97-2 addresses software revenue recognition matters primarily at a
conceptual level. Based on its reading and interpretation of this statement,
the Company believes it is currently in compliance with the provisions of SOP
97-2. However, detailed implementation guidelines for this statement have not
yet been issued. Once issued, such detailed implementation guidelines could
lead to unanticipated changes in the Company's current revenue accounting
practices and these changes could be material to the Company's revenues and
operating results.
RECLASSIFICATIONS
Certain items in the fiscal 1997 and 1996 consolidated financial
statements have been reclassified to conform to the fiscal 1998 presentation.
These reclassifications had no effect on net loss or stockholders' equity.
40
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SHORT-TERM INVESTMENTS
Short-term investments at April 30, 1998 consisted of $1,900,000 and
$1,560,000 in U.S. government and corporate debt securities, respectively,
maturing within one year and $2,000,000 in municipal bonds maturing after 10
years. Short-term investments at April 30, 1997 consisted entirely of
corporate debt securities maturing within one year. There were no material
realized or unrealized gains or losses on short-term investments during
fiscal 1998 or 1997.
3. PROPERTY AND EQUIPMENT
Property and equipment at April 30 consisted of the following (in
thousands):
1998 1997
----------- -----------
Equipment $ 5,108 $ 7,024
Furniture and leasehold improvements 1,435 1,463
----------- -----------
6,543 8,487
Less accumulated depreciation and amortization (4,618) (6,072)
----------- -----------
Property and equipment, net $ 1,925 $ 2,415
----------- -----------
----------- -----------
In December 1995, the Company entered into an agreement with a customer
whereby the Company exchanged licenses for its Unify VISION software,
maintenance and training for licenses for the customer's financial
applications software, support and training. The Company recorded the
transaction using the fair value of the assets exchanged. The Company
recognized revenue of approximately $514,000 and $262,000 in fiscal 1997 and
1996, respectively, for software development licenses and related maintenance
services delivered to the customer. As part of the realignment of
organizational structure and operating expense levels which took place in
fiscal 1997, the Company determined that the carrying value of the financial
applications software was not recoverable and consequently wrote off the
asset's net book value of $691,000.
4. LONG-TERM DEBT
Long-term debt at April 30 consisted of the following (in thousands):
1998 1997
----------- -----------
Unsecured line of credit with redeemable preferred stockholders,
interest at 3.75%, due July 1997 $ - $ 2,217
Other long-term debt 22 219
----------- -----------
22 2,436
Less current portion (18) (2,378)
----------- -----------
Long-term debt, net of current portion $ 4 $ 58
----------- -----------
----------- -----------
41
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
PUBLIC STOCK OFFERING AND REDEEMABLE PREFERRED STOCK
In June 1996, the Company completed an initial public offering of
2,187,000 shares of common stock at $12.00 per share with net proceeds to the
Company of $23.2 million. In connection with the IPO, all of the redeemable
preferred stock and related accrued dividends outstanding at April 30, 1996
automatically converted into 2,876,136 and 690,161 shares of common stock,
respectively.
PREFERRED STOCK
The Company may issue up to 5,000,000 shares of preferred stock in one
or more series upon authorization by the Company's board of directors. The
board of directors, without further approval of the stockholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and any other
rights, preferences, privileges and restrictions applicable to each series of
preferred stock.
STOCK OPTION PLAN
Under the 1991 Stock Option Plan (the "Option Plan"), the Company may
grant options to purchase up to 2,700,000 shares of common stock to eligible
employees, directors, and consultants at prices not less than the fair market
value at the date of grant for incentive stock options and not less than 85%
of the fair market value at the date of grant for non-statutory stock
options. Options granted under the Option Plan generally vest over four
years, are exercisable to the extent vested, and expire 10 years from the
date of grant.
A summary of stock option activity under the Option Plan is as follows:
Weighted
Number Average
of Exercise
Shares Price
---------- ----------
Outstanding at May 1, 1995 825,790 $ 0.69
Granted (weighted average fair value of $0.42) 1,083,075 1.70
Exercised (776,897) 0.44
Canceled/expired (253,511) 1.03
----------
Outstanding at April 30, 1996 878,457 2.00
Granted (weighted average fair value of $1.80) 543,665 4.06
Exercised (225,143) 0.64
Canceled/expired (286,123) 4.76
----------
Outstanding at April 30, 1997 910,856 2.70
Granted (weighted average fair value of $1.25) 356,750 2.54
Exercised (70,945) 0.60
Canceled/expired (259,641) 2.87
----------
Outstanding at April 30, 1998 937,020 2.75
----------
----------
42
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At April 30, 1998 and 1997, 14,293 and 76,515 shares of common stock
were subject to repurchase by the Company at weighted average exercise prices
of $0.92 and $0.58 per share, respectively. During fiscal 1997, options to
purchase 124,653 shares of common stock were repriced from a weighted average
exercise price of $7.15 to a weighted average exercise price of $3.17, which
was equal to fair market value at the dates of repricing.
Additional information regarding options outstanding at April 30, 1998
is as follows:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
------------ ----------- ------------ -------- ----------- --------
$0.35 - 1.40 190,744 7.29 $ 1.08 120,906 $ 1.00
1.75 - 2.38 199,812 5.42 2.33 82,512 2.37
2.44 - 3.00 213,895 9.97 2.82 37,529 2.79
3.38 - 3.56 154,000 8.81 3.55 42,811 3.56
4.20 178,569 7.77 4.20 104,460 4.20
--------- ---------
0.35 - 4.20 937,020 7.84 2.75 388,218 2.61
--------- ---------
--------- ---------
Options to purchase 224,600 and 253,205 shares at weighted average
prices of $1.84 and $0.63 were exercisable at April 30, 1997 and 1996. At
April 30, 1998, 706,081 shares were reserved for future grants under the
Option Plan.
STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the "Purchase Plan"),
eligible employees may purchase the Company's common stock through payroll
deductions of up to 15% of their base compensation. Offering periods under
the Purchase Plan are of 24 months' duration with purchases occurring every
six months. Common stock is purchased for the accounts of participating
employees at a price per share equal to the lower of (i) 85% of the fair
market value of a share of common stock at the beginning of the offering
period or (ii) 85% of the fair market value of a share of common stock on the
date of purchase. Common stock issued under the Purchase Plan during fiscal
1998 and 1997 totaled 222,522 and 107,550 shares at weighted average prices
of $2.10 and $4.89, respectively. The weighted average fair values of the
fiscal 1998 and 1997 awards were $0.91 and $2.98 per share, respectively. No
shares were issued under the Purchase Plan during fiscal 1996. At April 30,
1998, 519,928 shares were reserved for future issuances under the Purchase
Plan.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
No. 25. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net loss and loss per share had the Company adopted
the fair value method as of the beginning of fiscal 1996. Under SFAS No. 123,
the fair value of stock-based awards to employees is calculated through the
use of option pricing models which were developed to estimate the fair value
of freely tradeable, fully transferable options without vesting restrictions.
Such options differ significantly from the Company's stock-based awards.
These models also
43
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value method for the
periods prior to the Company's IPO and the Black-Scholes option pricing model
for subsequent periods, with the following weighted average assumptions:
expected option life, 12 months following vesting; stock volatility, 67% in
fiscal 1998 and 60% in fiscal 1997; risk-free interest rates, 5.8% in fiscal
1998, 6.1% in fiscal 1997 and 5.9% in fiscal 1996; and no dividends during
the expected term. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the fiscal 1998, 1997 and 1996 awards had been
amortized to expense over the vesting period of the awards, pro forma net
loss would have been $3,029,000 or $0.37 per share in fiscal 1998,
$12,399,000 or $1.77 per share in fiscal 1997 and $979,000 or $0.93 per share
in fiscal 1996. In accordance with SFAS No. 123, the impact of outstanding
non-vested stock options granted prior to fiscal 1996 has been excluded from
the pro forma calculation. Consequently, the fiscal 1998, 1997 and 1996 pro
forma adjustments are not indicative of pro forma adjustments for future
periods, when the calculation will apply to all applicable stock options.
NOTES RECEIVABLE FROM STOCKHOLDERS
At April 30, 1995, the Company held notes from four of its officers
which were non-recourse, non-interest bearing and due upon the earlier of the
sale of the related shares or the year 2000. In fiscal 1996, 246,737 shares
owned by one of these officers, who had left the Company, were reacquired by
the Company in exchange for cancellation of the related $432,000 note. In
fiscal 1997, two former officers sold a total of 31,712 shares of common
stock in connection with the IPO and the Company received $70,000 in full
payment of the related notes.
In fiscal 1996, one of the Company's current officers exercised stock
options to purchase 346,931 shares of common stock at prices ranging from
$0.35 to $1.40 per share and exchanged his $13,000 non-recourse, non-interest
bearing note for 37,800 common shares originally purchased in fiscal 1994 for
a full recourse note totaling $195,000 which bears interest at 5% annually
and is secured by the shares of common stock. The note and accrued interest
are due upon the earlier of the sale of the related shares by the officer or
the year 1999. Notes receivable from stockholders at April 30, 1998 consists
of the principal amount of this note and accrued interest thereon.
WARRANTS
In connection with a line of credit provided in November 1993 by certain
redeemable preferred stockholders, the Company issued warrants which were
exercisable into 190,459 shares of common stock at an exercise price of $1.75
per share. In December 1995, the exercise price for these warrants was
reduced to $0.35 per share in conjunction with a one year extension of the
line of credit. In June 1996, warrants to purchase 183,790 shares of common
stock were exercised in connection with the Company's IPO and the balance of
the warrants expired pursuant to their terms.
6. PROVISION FOR INCOME TAXES
The Company recorded no federal income tax provision for the years ended
April 30, 1998, 1997 and 1996 due to net losses in those periods. The Company
recorded tax provisions in those years which were primarily related to
foreign income tax withholding on software license royalties paid to the
Company by certain licensees. Operating loss before income taxes and income
tax expense, which consisted of current tax expense, for the years ended
April 30 were as follows (in thousands):
44
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1998 1997 1996
----------- ----------- ------------
Domestic $ (1,537) $ (10,989) $ 1,243
Foreign (694) (574) (2,018)
----------- ----------- ------------
Total operating loss before income taxes $ (2,231) $ (11,563) $ (775)
----------- ----------- ------------
----------- ----------- ------------
Foreign withholding taxes $ 108 $ 189 $ 151
State income taxes 74 3 12
----------- ----------- -----------
Total income tax expense $ 182 $ 192 $ 163
----------- ----------- -----------
----------- ----------- -----------
Income tax expense for the years ended April 30, 1998, 1997 and 1996
differs from the amounts computed by applying the statutory U.S. federal
income tax rate to pretax loss as a result of the following (in thousands):
1998 1997 1996
----------- ----------- -----------
Computed tax benefit $ (781) $ (4,047) $ (264)
Increases (reductions) in tax expense resulting from:
Foreign losses subject to foreign income tax
expense not subject to U.S. tax - - 382
Foreign withholding taxes 108 189 151
Benefit from utilization of federal net operating
loss deduction - - (136)
Increase in valuation allowance for deferred tax
assets - nonutilization of U.S. tax loss 921 3,874 -
Other (66) 176 30
----------- ----------- -----------
Actual income tax expense $ 182 $ 192 $ 163
----------- ----------- -----------
----------- ----------- -----------
The Company provides deferred income taxes which reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
at April 30 were as follows (in thousands):
1998 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 11,884 $ 10,481
Reserves and other accruals 617 1,620
Deferred maintenance revenue 902 791
Foreign tax credits 941 833
Other 561 343
----------- -----------
Total deferred tax assets 14,905 14,068
Deferred tax liabilities, principally depreciation (83) (167)
Valuation allowance (14,822) (13,901)
----------- -----------
Net deferred tax assets $ - $ -
----------- -----------
----------- -----------
Due primarily to an increase in the deferred tax asset recorded for net
operating loss carryforwards, the valuation allowance increased by $921,000 in
the year ended April 30, 1998. Due primarily to increases in the deferred tax
assets recorded for net operating loss carryforwards and for reserves and other
accruals, the valuation allowance increased by $3,874,000 in the year ended
April 30, 1997.
45
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At April 30, 1998, the Company had approximately $26,048,000 in federal
net operating loss carryforwards, approximately $6,738,000 in state net
operating loss carryforwards, approximately $7,081,000 in foreign net
operating loss carryforwards and approximately $941,000 in foreign tax credit
carryforwards which expire in various years through fiscal 2013.
NOTE 7. OTHER INCOME, NET
Other income, net for the years ended April 30 consisted of the
following (in thousands):
1998 1997 1996
----------- ----------- -----------
Interest income $ 509 $ 923 $ 81
Interest expense (113) (407) (234)
Foreign currency loss (46) (149) (37)
Minority interest 49 171 366
Loss on liquidation of subsidiaries (332) - -
Other 51 - -
----------- ----------- -----------
Other income, net $ 118 $ 538 $ 176
----------- ----------- -----------
----------- ----------- -----------
NOTE 8. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years ended April 30:
1998 1997 1996
----------- ----------- -----------
NET LOSS (NUMERATOR):
Net loss, basic and diluted $ (2,413) $ (11,755) $ (938)
----------- ----------- -----------
----------- ----------- -----------
SHARES (DENOMINATOR):
Weighted average shares of common stock outstanding 8,251 7,212 1,297
Weighted average common shares subject to repurchase (45) (204) (248)
----------- ----------- -----------
Average shares outstanding, basic and diluted 8,206 7,008 1,049
----------- ----------- -----------
----------- ----------- -----------
PER SHARE AMOUNT:
Net loss per share, basic and diluted $ (0.29) $ (1.68) $ (0.89)
----------- ----------- -----------
----------- ----------- -----------
ANTIDILUTIVE SHARES: 1,075 1,469 4,811
----------- ----------- -----------
----------- ----------- -----------
NOTE 9. RELATED PARTY TRANSACTIONS
The Company, Sumitomo Metals Industries, Ltd. ("SMI") and Artificial
Intelligence Research, Ltd. ("AIR") are related parties as they own 51%, 34%
and 15% interests, respectively, in Unify Japan KK ("Unify Japan").
TRANSACTIONS WITH AIR
Unify Japan has been exclusive distributor and master licensee for the
Company's products in Japan since July 1994. From that time until January
1998, AIR purchased software licenses from Unify Japan as a
46
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
nonexclusive subdistributor. In January 1998, Unify Japan purchased AIR's
subdistributor rights in exchange for the cancellation of 30 million yen
(approximately $230,000) of receivables due from AIR. This amount was
recorded as a prepaid asset as the value of the distributor rights acquired
and is being amortized as certain OEM revenues occur. Accumulated
amortization was 5.5 million yen (approximately $42,000) at April 30, 1998.
Total revenues include revenues from AIR of $492,000, $1,170,000 and
$1,870,000 in the years ended April 30, 1998, 1997 and 1996, respectively.
Cost of software licenses includes charges from AIR to duplicate and ship the
Japanese versions of all Unify products sold in Japan totaling $106,000 and
$384,000 in fiscal 1997 and 1996, respectively. Cost of services includes
contract labor from AIR to provide customer support totaling $333,000 in
fiscal 1996. Product development expense includes contract labor from AIR to
provide software porting and translation services totaling $1,160,000 in
fiscal 1996. Amounts due from minority interest stockholders of $405,000 at
April 30, 1997 (none at April 30, 1998) represent amounts payable by AIR to
Unify Japan for the purchase of software licenses and related services and
are included in accounts receivable, net.
TRANSACTIONS WITH SMI
Total fiscal 1998 revenues include revenues from SMI of $722,000. In
fiscal 1995, SMI advanced Unify Japan 45 million yen, or $543,000, for the
translation of Unify VISION software and related documentation from English
to Japanese. Under the terms of the joint development agreement, SMI receives
a 40% discount from list price on purchases of the translated software for
its internal use. The agreement also granted SMI a 10% royalty on sales of
the Japanese version of Unify VISION from its release for shipment to regular
customers, which occurred in August 1995, through December 1996. Software
license revenues for fiscal 1996 include approximately $450,000 in funded
development revenue relating to this translation project, recognized ratably
as the related product development expenses of approximately $880,000 were
incurred. Royalties due SMI under the joint development agreement were not
significant. In fiscal 1995, SMI also made a refundable prepayment of 72
million yen to Unify Japan for the purchase of software licenses for the
Japanese version of Unify VISION; revenue for this prepayment was deferred
until shipment of product. Unify Japan shipped SMI 48 million yen
(approximately $424,000) and 24 million yen (approximately $236,000) of
Japanese product against this prepayment during fiscal 1997 and 1996,
respectively.
Unify Japan leases office space from SMI; rent expense for this office
space totaled approximately $112,000, $143,000 and $150,000 in fiscal 1998,
1997 and 1996, respectively. Unify Japan also paid SMI approximately $169,000
and $143,000 for the services of SMI employees in fiscal 1998 and 1997,
respectively.
In September 1995, Unify Japan entered into a 100 million yen, loan
agreement with a bank affiliated with SMI. The loan bears interest at the
Japanese prime rate (approximately 1% at April 30, 1998), is secured by the
assets of Unify Japan and is due in September 1998. At April 30, 1998, 100
million yen, or $756,000, was outstanding under this loan agreement. Amounts
due to minority interest stockholders at April 30, 1998 and 1997 consisted
primarily of the balances due under this loan agreement.
10. EMPLOYEE RETIREMENT PLAN
The Company maintains a 401(k) profit sharing plan (the "401(k) Plan").
Eligible employees may contribute up to 15% of their pre-tax annual
compensation to the 401(k) Plan, subject to certain statutory limitations.
The Company voluntarily matches 35% of participating employees' contributions
up to 6% of each employee's annual compensation. In fiscal 1998 and 1997, the
Company contributed $99,000 and $84,000 to the 401(k) Plan. The Company did
not contribute to the 401(k) Plan in fiscal 1996.
47
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and equipment under noncancelable
operating lease arrangements. Future minimum rental payments under these
leases as of April 30, 1998 were as follows (in thousands):
Years Ending April 30,
1999 $1,277
2000 956
2001 559
2002 61
2003 22
------
$2,875
------
------
Rent expense under operating leases was $1,561,000, $1,648,000 and
$1,622,000 for the years ended April 30, 1998, 1997 and 1996, respectively.
LITIGATION
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the consolidated financial position of the Company.
12. SEGMENT INFORMATION
The Company operates in one industry segment: developing, marketing and
supporting application server solutions that enable corporations to deliver
enterprise networked applications by integrating legacy, custom-built, and
packaged applications with the Internet. The distribution of revenues,
operating loss and assets by geographic area for the years ended April 30 was
as follows (in thousands):
1998 1997 1996
----------- ----------- -----------
Revenues:
United States $ 14,865 $ 13,283 $ 15,858
Japan 3,057 3,181 4,913
Europe 6,887 7,772 9,394
----------- ----------- -----------
Total revenues $ 24,809 $ 24,236 $ 30,165
----------- ----------- -----------
----------- ----------- -----------
Operating loss:
United States $ (1,040) $ (9,322) $ 965
Japan (161) (294) (543)
Europe (1,148) (2,485) (1,373)
----------- ----------- ------------
Total operating loss $ (2,349) $ (12,101) $ (951)
----------- ----------- -----------
----------- ----------- -----------
48
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Identifiable assets:
United States $ 5,056 $ 3,032 $ 7,686
Japan 1,089 1,295 1,692
Europe 4,194 3,526 3,660
----------- ----------- -----------
Subtotal identifiable assets 10,339 7,853 13,038
Corporate assets 10,231 17,292 4,784
Eliminations (1,471) (707) (4,825)
----------- ----------- -----------
Total assets $ 19,099 $ 24,438 $ 12,997
----------- ----------- -----------
----------- ----------- -----------
United States revenues include export sales of approximately $3,500,000,
$3,600,000 and $2,700,000 in the years ended April 30, 1998, 1997 and 1996,
respectively. Export sales have been made primarily to customers in
Australia, the Pacific Rim and Latin America. Intercompany sales are at
prices intended to provide a profit after marketing, support and general and
administrative costs. United States operating income (loss) is net of
corporate product development and administrative expenses. Corporate assets
consist primarily of cash and cash equivalents, short-term investments and
property and equipment.
49
SCHEDULE II
UNIFY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
Additions
Additions Deductions: (Deductions): Balance
Balance at Charged to Write-offs Transfers at
Beginning Operating of Between End of
of Period Expenses Accounts Accounts Period
---------- ---------- ---------- ----------- ---------
Allowance for doubtful accounts
receivable
Year ended April 30, 1996 $ 1,043 $ (42) $ (232) $ (286) $ 483
Year ended April 30, 1997 483 1,551 (1,698) 149 485
Year ended April 30, 1998 485 237 (159) - 563
Allowance for amounts due from
minority interest stockholders
Year ended April 30, 1996 492 - - (110) 382
Year ended April 30, 1997 382 - - (56) 326
Year ended April 30, 1998 326 - - - 326
Allowance for long-term accounts
receivable
Year ended April 30, 1996 - - - 396 396
Year ended April 30, 1997 396 - - (93) 303
Year ended April 30, 1998 303 - (46) - 257
50
UNIFY CORPORATION
INDEX TO EXHIBITS
PRIOR FILING
OR SEQUENTIAL
EXHIBIT PAGE NUMBER
NO. DESCRIPTION HEREIN
- ------- ----------- -------------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Registrant (1)
4.1 Form of Stock Certificate (1)
4.2 Series E Stock Purchase Agreement by and among the Company and the purchasers
named therein, dated April 2, 1992 (1)
10.1* Employment Agreement by and between Reza Mikailli and the Registrant dated
March 31, 1995 (1)
10.2* 1991 Stock Option Plan, as amended (1)
10.3* 1996 Employee Stock Purchase Plan (1)
10.4 Form of Indemnification Agreement (1)
10.5 Joint Venture Agreement, dated September 3, 1990, as amended, by and among the
Registrant, Unify Japan Corporation, Sumitomo Metals Industries, Ltd. and
Artificial Intelligence Research (1)
16.0 Letter Regarding Change in Certifying Accountant (2)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Deloitte & Touche LLP, Independent Auditors 52
23.2 Consent of KPMG Peat Marwick LLP, Independent Auditors 53
27.0 Financial Data Schedule 54
- ----------------------
(1) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form S-1 Registration Statement (No. 333-3834) declared
effective by the Securities and Exchange Commission on June 14, 1996.
(2) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form 8-K/A on September 20, 1996.
* Exhibit pertains to a management contract or compensatory plan or
arrangement.
51