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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, 1999
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
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
100 CENTURY CENTER COURT, SUITE 302
SAN JOSE, CALIFORNIA 95112
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE: (408) 451-2000
(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,
1999 as reported on the Nasdaq National Market, was approximately
$108,436,000. 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, 1999, the Registrant had
8,841,771 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders are incorporated by reference in Part III of the Form
10-K to the extent stated herein.
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
Internet application server solutions that enable information technology
("IT") organizations to deliver electronic commerce ("e-commerce")
applications by integrating enterprise, 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 tremendous success of Amazon.com, eBay, and other e-commerce pioneers has
provided a compelling incentive for companies both large and small to develop
their own strategies for conducting business over the Internet. E-commerce is
fast becoming a competitive reality. According to Forrester Research, Inc.,
the market for business-to-business e-commerce is expected to grow from $43
billion during 1998 to $1.3 trillion in 2003. In spite of this immense
potential, serious technological challenges exist. To date, companies seeking
to implement sophisticated e-commerce solutions have generally needed to
develop costly and complex applications which require the integration of many
different vendor components. Unify believes that the market is urgently in
need of open, standards-based solutions that simplify the decision to move to
e-commerce.
Unify is strategically positioned to address these market demands with
solutions that are based on a long-term commitment to open, standards-based
computing. The Company currently offers two products targeted toward the
e-commerce application development market. Unify VISION is an open,
standards-based Internet application server coupled with an object oriented,
repository-based application component framework. In June 1999, the Company
announced Unify eWave Engine, an enterprise-caliber pure Java application
server. Unify eWave Engine is scheduled for general shipment in August 1999
and represents the first in a family of Java-based Unify eWave products that
will be designed to deliver a robust foundation for e-commerce application
development. Unify VISION and the Unify eWave product family are referred to
in this document as the Company's "Internet" products.
The Company also continues to enhance, market and support Unify DataServer, a
family of database management system products, and to market and support
ACCELL/SQL, a family of application development tools. Collectively, these
products are referred to in this document as the Company's "client/server"
products. 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 the
Americas, Europe, Japan, Asia Pacific and Australasia. The Company's
customers consist primarily of end-users, vertical application partners
("VAPs")
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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
distributors and VAPs in the Americas, Europe, Japan, Asia Pacific,
Australasia, South Africa, India, and Russia. 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 its Internet products, Unify VISION and Unify
eWave Engine, and its client/server products, Unify DataServer and the
ACCELL/SQL product family. Unify VISION is comprised of Unify VISION
AppServer ("VISION AppServer") and Unify VISION AppBuilder ("VISION
AppBuilder"). VISION AppServer is an open, standards-based Internet
application server that is designed to enable IT organizations to integrate
enterprise, custom-built, and packaged applications with the Internet. The
development environment for VISION AppServer is VISION AppBuilder, an object
oriented, repository-based component framework designed to enable developers
to rapidly create and easily modify application components. Unify eWave
Engine is an enterprise-caliber pure Java application server. Unify
DataServer is a family of database management system products and ACCELL/SQL
is a family of application development tools. Unify's Internet products
support the development of applications and the storage of data in most major
foreign languages.
UNIFY VISION APPSERVER
VISION AppServer is an open, standards-based Internet application server that
is designed to enable IT organizations to bridge enterprise, custom-built, and
packaged applications to create e-commerce and Internet solutions. Its
universal client architecture enables users to access server-based
application services from all leading client technologies, including Windows
and HTML-based and Java-based applications. VISION AppServer's Parallel
Dynamic Scaleable 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. Integrated
application management services lower total cost of ownership by allowing
organizations to effectively manage their applications from a single point of
control. VISION AppServer is available for Microsoft Windows NT/98/95, Red
Hat Linux, and for all leading UNIX server platforms.
UNIVERSAL ACCESS. With VISION AppServer, IT departments can deploy
application services across a common, robust environment and make those
services available to clients across and outside of the enterprise. 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,
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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 application 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 for 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 significantly reduced. In addition, business components can
be 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 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 crucial 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 SSL3 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 AppServer's companion product, VISION AppBuilder, is an object
oriented, repository-based component framework that is designed to enable
developers to rapidly create and easily modify application
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components. Its powerful, pre-built components reduce the need for developers
to address the complexities of the underlying technologies, enabling them to
focus on the business components and processes that make up the heart of
their applications. 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 operations. 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 process by automatically
generating configuration management information for the distribution systems
found in products such as Microsoft SMS and Tivoli TME10.
UNIFY EWAVE ENGINE
As an Enterprise JavaBeans 1.1 compliant Java application server, Unify eWave
Engine is designed to provide maximum throughput, performance and reliability
to accommodate high-volume, enterprise-strength applications. Unify eWave
Engine is equipped with replication capabilities that allow application
services to be duplicated across multiple servers. Load balancing
capabilities automatically distribute the workload across each application
server hosting replicated services, thus optimizing available resources and
transaction response time. Unify eWave Engine's publish and subscribe
services allow client applications to be asynchronously notified when events
that the applications are interested in occur, thereby increasing system
efficiency.
Role-based security, database connection pooling, thread pooling, and the
incorporation of a transaction manager in Unify eWave Engine serve to
simplify security, enhance Internet site performance, and improve
transactional integrity. The ability to multiplex all messages between two
machines across a single network socket to limit the network resources used
for communication adds to the overall performance and scalability of Unify
eWave Engine. Support for COM, DCOM, RMI, and HTTP, coupled with an
integrated Java Server Pages Engine, enable Unify eWave Engine to provide
universal access to clients. Unify eWave Engine is designed to automatically
provide performance management metrics such as response times, data flow, and
resource utilization. This information allows system administrators and
performance analysts to resolve response time issues quickly. Developed
purely in Java, Unify eWave Engine offers support across all leading server
platforms, including UNIX, Windows NT/98/95, and Red Hat Linux. Unify eWave
Engine is scheduled to be available for general shipment in August 1999.
UNIFY DATASERVER
Unify DataServer is a family of database management products that is designed
to scale from small departmental systems to large, high volume, on-line
transaction processing (OLTP) systems. At the entry level, Unify DataServer
is designed to be a high performance, easy-to-use product with minimal
maintenance and memory requirements that can quickly accommodate the growth
of user requirements over time. When used with Unify VISION, Unify DataServer
allows developers to create graphical applications and migrate existing
database applications to enterprise network and Internet environments.
Unify DataServer contains several features found only in the most advanced
database systems. These features include on-line backup, synchronous and
asynchronous disk transfers, stored procedures, and multiple-optimized
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access methods such as direct key, hashing, record-to-record links, and
b-trees. Its scaleable architecture is effective on both single and
multi-processor platforms, in systems ranging from small departmental systems
to large on-line transaction processing systems.
Unify DataServer supports the ANSI SQL standard and industry-standard ODBC
and JDBC interfaces to provide access to hundreds of third-party tools and
products. Unify DataServer products provide a variety of database access
methods that deliver high performance across a wide variety of environments
and deployment configurations. Unify DataServer products support Red Hat
Linux and all major UNIX platforms.
ACCELL/SQL
Unify's ACCELL/SQL is a family of UNIX-based and Linux-based application
development tools designed for the cost-effective development of
mission-critical enterprise network applications. They are designed to
maximize developer productivity through tight integration of fourth
generation language ("4GL") technologies and optimized database features in a
flexible development environment. ACCELL/SQL's modular architecture combines
an application generator, a 4GL, and an interactive debugging facility with
an ANSI standard database interface and network connectivity components.
Developers can use the ACCELL/SQL application generator to create forms from
scratch or can use automatically created default forms. Through ACCELL/SQL's
powerful 4GL, logic can be added to a form quickly and easily, building
intelligence into the application. With ACCELL/SQL's "programming by
exception" feature, developers can use the application generator to create
the majority of the application without coding and use the 4GL to complete
only the most sophisticated features. ACCELL/SQL's 4GL is an event-driven
programming language with powerful features supporting more than 250 4GL
statements, data types and functions. ACCELL/SQL provides the flexibility to
run a single application on both character and graphical user interfaces
without coding changes. For example, while some users run the character-based
application on terminals, others can run the same application in Motif on
UNIX and Linux or Microsoft Windows from workstations or PCs. ACCELL/SQL's
database independent technology supports native interfaces to leading
database products including Oracle, Informix, Sybase and Unify DataServer.
CUSTOMERS AND MARKETS
As of April 30, 1999, the Company had licensed Unify VISION to over 300
customers worldwide and Unify DataServer and ACCELL/SQL products to over
2,000 customers worldwide. Unify has licensed its products to industry
leaders such as:
Telecommunications: AT&T, Air Touch Cellular, GTE, Lucent, NTT Group
Financial Services: Bear Stearns, Citicorp, Credit Lyonnais, Fannie Mae,
Merrill Lynch
Commercial: American Airlines, Disney, Hewlett Packard,
Motorola, Sony, Westinghouse
Government: General Dynamics, Lockheed Martin, National Security
Agency, U.S. Air Force
The Company's target end-user customers currently include large commercial
and government organizations with a need to deliver e-commerce applications
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 1999, 1998 or 1997. The Company's segment data is
presented in Note 11 of Notes to Consolidated Financial Statements.
SALES AND MARKETING
Unify markets its products and professional services domestically through a
combination of direct sales and indirect sales channels, including VAPs,
distributors, system integrators ("SIs") and business alliance partners.
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The Company's marketing efforts are primarily directed at broadening the
market for Unify VISION and Unify eWave Engine 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.
The Company markets its products internationally through subsidiaries in the
United Kingdom, France and Japan and through distributors and VAPs in Europe,
Japan, Asia Pacific, Australasia, Latin America, South Africa, India, and
Russia. International revenues accounted for 51%, 54% and 60% of total
revenues in fiscal 1999, 1998 and 1997, respectively.
The Company intends to complement its domestic and international direct sales
efforts with the expansion of its indirect sales channels. Indirect sales
channels include VAPs, 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 and Unify
eWave Engine which facilitate rapid development and deployment of complex
applications are particularly well-suited for use by VAPs, SIs, and ISVs, for
which time to market is a principal concern. The Company currently has
approximately 400 VAP, SI, and ISV customers and intends to recruit selected
new customers, particularly VAPs. Unify has also developed business alliances
with hardware partners, database vendors, and complementary technology
partners that include, among others, International Business Machines
Corporation ("IBM"), Sun Microsystems, Inc. ("Sun"), Hewlett-Packard Company
("HP"), Microsoft Corporation ("Microsoft"), Oracle Corporation ("Oracle"),
Informix Corporation ("Informix"), Sybase, Inc. ("Sybase"), Red Hat Software,
Inc. ("Red Hat"), and The Santa Cruz Operation, Inc. ("SCO"). 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 a network of
international distributors which supplements its targeted direct sales
presence. Unify intends to strategically expand this distribution network as
well.
In addition, the Company plans to continue to leverage its installed base of
over 2,000 Unify DataServer and ACCELL/SQL customers. The Company's sales and
marketing strategy in part targets this installed base with the objective of
generating Unify VISION and Unify eWave Engine revenues as this customer base
migrates to enterprise network and Internet applications. The Company also
continues to market its Unify DataServer and ACCELL/SQL product families,
thereby serving those of its customers that are not yet ready to move to
enterprise network and Internet environments.
As of April 30, 1999, the Company had 42 employees engaged in sales and
marketing activities, 19 in North America, 16 in Europe, and 7 in Japan. The
Company intends to expand its sales and marketing staff and make additional
investments in marketing and advertising during fiscal 2000.
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 in successfully integrating enterprise applications with
the Internet. Due to the complexity of enterprise network computing and the
emergence of the Internet, support services must be able to address issues
which arise from components of the customer's 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.
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SUPPORT
The Company offers modular customer support programs which can be customized
to match the customers' development cycles and modified 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.
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. The rapid emergence of the Internet has created new consulting
opportunities which the Company intends to pursue in fiscal 2000.
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, 1999, the Company had a total of 30 employees engaged in
providing professional services, 19 in support and 11 in consulting and
training. Of those employees, 18 were located in the United States, 7 were
located in Europe and 5 were located in Japan. The Company intends to expand
its professional services staff during fiscal 1999.
PRODUCT DEVELOPMENT
The computer software industry is highly competitive and rapidly changing.
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 to enhance its existing
product lines and to develop new products to meet new market opportunities.
Most of the Company's current software products have been developed
internally; however, the Company has acquired certain software components
from third parties in the past and expects that it will do so again in the
future.
The Company's principal fiscal 1999 development projects included work on
Unify eWave Engine as well as several Unify VISION projects such as enhanced
access for clients, secure transactions on the Internet, support for new
operating environments and third party products, and enhanced Unify VISION
programming features. The Company's principal development projects for fiscal
2000 currently include completion of Unify eWave Engine and additional
Java-based software development for the Unify eWave product family as well as
Unify VISION projects such as enhanced CORBA support, integration of third
party graphical components, automated data access through the Internet,
improved conversion from ACCELL/SQL applications, and enhanced programming
features. Due to various factors, the Company may change the development
projects that it pursues
8
in fiscal 2000 or may not be successful in completing these projects. Even if
completed, the Company cannot be sure that such projects will be completed
without errors or that the products which result from such projects will
achieve market acceptance.
The Company's product development activities are conducted primarily at its
Sacramento, California facility. As of April 30, 1999, the Company had a
total of 45 employees and contractors in product development and porting,
including 26 development engineers. The market for qualified development
engineers remains highly competitive. The Company's product development
expenditures for fiscal 1999, 1998, and 1997 were $5.9 million, $5.7 million
and $7.0 million, respectively, representing approximately 19%, 23% and 29%
of total revenues for those periods. The Company intends to continue to
devote significant resources to product development in fiscal 2000.
COMPETITION
The Company has experienced and expects to continue to experience intense
competition from current and future competitors. With the introduction of
VISION AppServer and VISION AppBuilder in May 1998, the Company began
competing with Internet application server vendors including Allaire
Corporation ("Allaire") and SilverStream Software, Inc. ("SilverStream"),
among others. In addition, Unify competes with e-commerce solution providers,
among them IBM, Oracle, and Informix. The Company also continues to compete
with vendors of traditional enterprise network development tools including,
among others, Forte Software, Inc. ("Forte"), Oracle, and Sybase.
For its Unify DataServer and ACCELL/SQL 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/SQL products include companies such as
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 also
expects to face additional competition as other established and emerging
companies enter the Internet application server, e-commerce, and enterprise
network development tools markets 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, and financial condition. 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, and financial condition. 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, and financial condition.
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
9
favorably with respect to each of these factors. However, the Company's
market is continually 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, and financial condition.
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, and financial condition. 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, and financial condition.
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, and financial condition.
EMPLOYEES
As of April 30, 1999, the Company had a total of 133 employees, including 38
in product development, 42 in sales and marketing, 30 in support, consulting,
and training, and 23 in finance, information systems, operations and general
administration. Of these employees, 92 were located in the United States, 26
were located in Europe, and 15 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 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, and financial condition. 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.
10
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
executive officers:
Name Age Position with the Company
- ---- --- ----------------------------------------------
Reza Mikailli 47 President, Chief Executive Officer, and Director
John Davis 39 Vice President, Business Development
Jeremy Jackson 38 Vice President, Europe and International Operations
Walter Kopp 41 Vice President, Product Development
Richard Medeiros 56 Vice President, Americas Sales
Gary Pado 36 Vice President, Finance and Chief Financial Officer
Frank Verardi 50 Vice President, Professional Services
- ----------------
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. From 1989 to 1992, Mr. Mikailli
was Vice President of Product Development at Informix Corporation, a
manufacturer of computer database and application development tool products.
Mr. Mikailli holds an M.S. in Computer Science from Santa Clara University,
and a B.S. in Computer Science and an M.S. in Mathematics from the University
of Tehran, Iran.
JOHN DAVIS joined the Company in February 1999 as Vice President of Business
Development. From October 1996 to February 1999, Mr. Davis served as Vice
President of Marketing at Transamerica Intellitech, a provider of software
and data products for the real estate, lending and direct marketing
industries. From June 1993 to October 1996, he was Chief Executive Officer
and President of IntelleCapital, Inc., a professional services firm
specializing in brand marketing and sales expertise. Mr. Davis was Senior
Product and Marketing Manager at Nike, Inc., an athletic products
manufacturer, from 1990 to 1993. He received a B.A. in Political Science from
Stanford University and an M.B.A. from the Columbia University Graduate
School of Business.
JEREMY JACKSON has been Vice President of Europe and International Operations
since November 1998, after serving as Managing Director of Europe and
International Operations from February 1997 to November 1998 and European
Marketing Director from May 1995 to February 1997. From January 1992 to May
1995, Mr. Jackson held local board level positions in the United Kingdom and
later served as Regional Manager, Middle East and Africa Operations at
Informix Corporation, a manufacturer of computer database and application
development tool products. From May 1990 to January 1992, he served as Senior
Marketing Manager, United Kingdom at Unisys, a computer manufacturer. Mr.
Jackson received a B.Sc. in Operational Research and Computational Science
from Leeds University, United Kingdom.
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. in Computer Science from Cornell
University and an M.S. in Computer Science from the University of
Massachusetts.
RICHARD MEDEIROS joined the Company in February 1997 as Vice President of
Americas Sales. From November 1992 to February 1997, Mr. Medeiros was Vice
President of North America Sales for Synon Corporation, an application
development tools company. From 1989 to 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. in Marketing and an
M.B.A. from San Jose State University.
11
GARY PADO has been Vice President of Finance and Chief Financial Officer at
Unify since November 1998, after serving as Corporate Controller from April
1998 to November 1998 and Accounting Director from August 1997 to April 1998.
From July 1996 to August 1997, Mr. Pado was Controller at Vanir Development
Company, Inc., a real estate development company, and from September 1991 to
July 1996 he was Controller at Sacramento Cable Television, a cable
television provider. Previously, he was Division Controller at Camray
Construction, Inc., a home builder, and an accountant at Ernst & Whinney and
Price Waterhouse. Mr. Pado received a B.A in Business and Economics from the
University of California at Santa Barbara and is a Certified Public
Accountant.
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 Worldwide Product Delivery and
Customer Support and in May 1999 he became Vice President of Professional
Services. 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. in Computer
Science 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.
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 four of the past five fiscal years and
revenues from the Company's older client/server products decreased in four of
the last five fiscal years. These declines were partially or wholly offset by
sales of Unify VISION. The Company's ability to achieve revenue growth and
profitability are substantially dependent upon the success of its current and
future Internet products. License revenues from Unify's Internet products
were $11.8 million, $7.6 million, and $5.3 million for fiscal 1999, 1998 and
1997, respectively, and represented 58%, 49% and 36% of total license
revenues for those years, respectively. No assurance can be given that
Unify's current or future Internet products will achieve market acceptance or
that the Company will 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 $250,000 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.
12
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. Revenues are also difficult to forecast because the
market for Internet and e-commerce 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. 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 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.
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 enterprise network 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, and financial condition 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 INTERNET AND
E-COMMERCE TOOLS MARKET
The Company currently expects its Internet products and related services to
account for an increasingly significant percentage of the Company's future
revenues and accordingly the Company is devoting a substantial portion of its
resources to these products. As a result, factors adversely affecting the
pricing of or demand for Unify's Internet products such as, but not limited
to, competition or technological change, would have a material adverse effect
on the Company's business, operating results, and financial condition. 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 its Internet products. 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 Internet and e-commerce applications using its
Internet products. If the Company's customers are not able to successfully
develop and deploy Internet and e-commerce applications with Unify VISION and
Unify eWave Engine, the viability of these products could be questioned and
the Company's reputation could be damaged, which could have material adverse
effects on the Company's business, operating results, and financial
condition. In addition, the Company expects that a significant percentage of
its future revenues will be derived from sales to
13
existing customers of its client/server products. If these existing customers
fail to migrate to Internet and e-commerce applications, purchase competitive
products, or have difficulty deploying applications built with Unify's
Internet products, the Company's relationships with these customers, revenues
from sales of the Company's Internet products and other products, and the
Company's business, operating results, and financial condition 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's Internet products, there can be no
assurance that the market for Internet and e-commerce applications and
associated development tools will continue to grow. If the Internet and
e-commerce market fails to grow, or grows more slowly than the Company
currently anticipates, the Company's business, operating results, and
financial condition 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 client/server products. Revenues derived from the sales
of these products declined in 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, and
financial condition 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 AppServer and VISION AppBuilder in May 1998, the Company began
competing with Internet application server vendors including Allaire and
SilverStream, among others. In addition, Unify competes with e-commerce
solution providers, among them IBM, Oracle, and Informix. The Company also
continues to compete with vendors of traditional enterprise network
development tools including, among others, Forte, Oracle and Sybase.
Companies offering products competitive with the Company's Unify DataServer
and ACCELL/SQL 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 Internet application server, e-commerce, and enterprise
network development tools markets 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, and financial condition. 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, and financial condition. There can be no assurance that
the Company will be able to compete
14
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, and financial condition. 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 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, and financial condition 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, and financial condition. 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 VAPs and distributors. Revenues from VAPs
and distributors accounted for approximately 59%, 57%, and 48% of the
Company's software license revenues for fiscal 1999, 1998 and 1997,
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, and financial
condition. See "Business - Sales and Marketing."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND SALES
Revenues derived from international customers accounted for 51%, 54% and 60%
of total revenues in fiscal 1999, 1998 and 1997, 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, and financial condition 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
15
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, and financial condition. 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, and financial condition could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business - Sales and Marketing" and
Note 11 of Notes to Consolidated Financial Statements.
EUROPEAN MONETARY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Economic Community ("EEC") entered into a three-year transition phase during
which a common currency, the "Euro," was introduced. Between January 1, 1999
and January 1, 2002, governments, companies and individuals may conduct
business in these countries in both the Euro and existing national
currencies. On January 1, 2002, the Euro will become the sole currency in
these countries.
During the transition phase, the Company will continue to evaluate the impact
of conversion to the Euro on its business. In particular, Unify is reviewing
whether its internal software systems can process transactions denominated
either in current national currencies or in the Euro, including converting
currencies using computation methods specified by the EEC. The Company is
also reviewing the potential cost if it must modify or replace any of its
internal software systems. Finally, Unify is analyzing the effect of the
conversion to the Euro on the prices of its products in the affected
countries.
Based on current information and the Company's initial evaluation, it does
not expect the cost of any necessary corrective action to have a material
adverse effect on its business. However, the Company will continue to
evaluate the impact of these and other possible effects of the conversion to
the Euro on its business. There can be no guarantee that the costs associated
with conversion to the Euro will not have a material adverse effect on the
Company's business, operating results, and financial position in the future.
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, and
financial condition. 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. The sale and support of current and future
Internet products by the Company may involve the risk of such claims, any of
which are likely to be substantial in light of the use of these products 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, and financial condition.
16
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 believes that its current products are fully Year
2000 compliant. All current Unify products use four-digit years for all
internal manipulations and representations. The Company has informed its
customers that it will be phasing out support for certain older versions of
Unify products that are not Year 2000 compliant by December 15, 1999.
However, the Company's products are generally integrated with other systems
involving sophisticated computer hardware and software products that the
Company cannot adequately evaluate for Year 2000 compliance. There can be no
assurance that the Company's products will function properly with other
potentially non-compliant products, including such third party software and
hardware. Additionally, there can be no assurance that the Company's products
contain or will contain all features and functionality considered necessary
by customers, VAPs, system integrators, and distributors to be Year 2000
compliant. If Unify's products cannot manage and manipulate data related to
the Year 2000, the result could be a material adverse effect on the Company's
business. The Company may face claims based on Year 2000 problems in other
companies' products or issues arising from the integration of multiple
products within an overall system.
Although the Company has not been a party to any litigation or arbitration
proceeding involving its products or services related to Year 2000 compliance
issues, the Company may in the future be required to defend its products or
services in such proceedings or to negotiate resolutions of claims based on
Year 2000 issues. The costs of defending and resolving Year 2000 issues,
regardless of the merits of such disputes, and any liability the Company may
have for such Year 2000 related damages, could materially adversely affect
the Company's business, operating results, and financial condition.
The Company believes that the purchasing patterns of customers and potential
customers may be affected by the Year 2000 issue in a variety of ways. Many
companies are expending significant resources to correct their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase e-commerce and Internet application
software products such as those offered by the Company. The impact of the
foregoing on the Company's business, operating results and financial
condition is not determinable.
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, with the exception of its
accounting systems and certain older equipment and software, all appropriate
modification and testing of those applications and processes were completed
by the end of fiscal 1997. With regard to its accounting systems, the
reprogramming necessary for Year 2000 compliance has been identified and is
underway; the Company expects that reprogramming and testing of these systems
will be complete by the end of the second quarter of fiscal 2000. With regard
to the older equipment and software, primarily personal computers and related
software, upgrades and replacements have been identified and are in the
process of being ordered and installed. The Company expects that installation
and testing of new equipment and software will be complete by the end of the
second quarter of fiscal 2000. However, no assurance can be given that the
Company will not experience unanticipated material costs caused by undetected
errors or defects in its internal systems.
An assessment of the readiness of significant suppliers and service providers
with which the Company electronically interacts is ongoing. To date, the
Company is not aware of any significant supplier or service provider with a
Year 2000 issue that would materially impact the Company's business,
operating results or financial condition. However, the Company has no means
of ensuring that suppliers and service providers will be Year 2000 compliant.
The inability of suppliers and service providers to complete their Year 2000
resolution process in a timely fashion could materially and adversely impact
the Company.
17
DEPENDENCE UPON KEY 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, and financial condition. In particular, the loss of the
services of Mr. Reza Mikailli, the Company's President and 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, and financial condition. See "Business
- - Employees."
The success of the Company also 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,
and financial condition. 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 its current and future
Internet 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, and financial condition.
Moreover, there can be no assurance that the Company's systems, procedures
and controls will 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, and financial condition.
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, and financial condition. See "Business - Intellectual
Property."
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.
18
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, and financial condition. 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, and financial condition. 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."
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 August 2003. 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 a domestic sales and support office in 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.
19
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 1999.
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. The following table
sets forth the high and low closing sales prices as reported by Nasdaq for
shares of the Company's common stock for the periods indicated.
High Low
-------- ---------
FISCAL 1999
Fourth Quarter $ 16.56 $ 12.00
Third Quarter 12.63 3.00
Second Quarter 3.00 2.13
First Quarter 3.50 2.16
FISCAL 1998
Fourth Quarter 2.31 1.75
Third Quarter 3.00 2.00
Second Quarter 4.00 2.13
First Quarter 3.00 2.06
COMMON STOCKHOLDERS OF RECORD
At June 30, 1999, there were approximately 145 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.
20
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,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses $ 20,320 $ 15,580 $ 14,856 $ 20,444 $ 17,995
Services 10,490 9,229 9,380 9,721 10,854
---------- --------- --------- --------- ---------
Total revenues 30,810 24,809 24,236 30,165 28,849
---------- --------- --------- --------- ---------
Cost of revenues:
Software licenses 849 647 1,266 2,059 2,787
Services 4,404 4,389 4,493 4,332 5,786
---------- --------- --------- --------- ---------
Total cost of revenues 5,253 5,036 5,759 6,391 8,573
---------- --------- --------- --------- ---------
Gross margin 25,557 19,773 18,477 23,774 20,276
---------- --------- --------- --------- ---------
Operating expenses:
Product development 5,928 5,733 6,974 5,805 5,324
Selling, general and administrative 15,151 16,389 23,604 18,920 15,431
---------- --------- --------- --------- ---------
Total operating expenses 21,079 22,122 30,578 24,725 20,755
---------- --------- --------- --------- ---------
Income (loss) from operations 4,478 (2,349) (12,101) (951) (479)
Other income, net 175 118 538 176 392
---------- --------- --------- --------- ---------
Income (loss) before income taxes 4,653 (2,231) (11,563) (775) (87)
Provision for income taxes (231) (182) (192) (163) (392)
---------- --------- ---------- --------- ---------
Net income (loss) $ 4,422 $ (2,413) $ (11,755) $ (938) $ (479)
========== ========= ========== ========= =========
Net income (loss) per share:
Basic $ 0.52 $ (0.29) $ (1.68) $ (0.89) $ (0.49)
========== ========= ========= ========= =========
Diluted $ 0.49 $ (0.29) $ (1.68) $ (0.89) $ (0.49)
========== ========= ========= ========= =========
Shares used in computing net income (loss) per share:
Basic 8,555 8,206 7,008 1,049 973
========== ========= ========= ========= =========
Diluted 9,051 8,206 7,008 1,049 973
========== ========= ========= ========= =========
April 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(In thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 11,387 $ 10,739 $ 16,646 $ 3,028 $ 3,776
Working capital (deficit) 11,932 6,561 7,635 (3,183) (3,116)
Total assets 22,934 19,099 24,438 12,997 12,681
Long-term debt, net of current portion - 4 58 2,456 1,488
Redeemable preferred stock - - - 26,726 24,973
Total stockholders' equity (deficit) 13,326 8,295 9,962 (29,173) (26,628)
21
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
Founded in 1980, the Company develops, markets and supports Internet
application server solutions that enable information technology organizations
to deliver e-commerce applications by integrating enterprise, custom-built, and
packaged applications with the Internet. The Company offers two products
targeted toward the e-commerce application development market. Unify VISION
is an open, standards-based Internet application server coupled with an
object oriented, repository-based application component framework. Since the
introduction of Unify VISION 3.0 in September 1996, the Company has focused
on application server products for the Internet. VISION 5.0 was released in
January 1999 and marked the beginning of the Company's emphasis on
application server solutions for the e-commerce market. In June 1999, the
Company announced Unify eWave Engine, an enterprise-caliber pure Java
application server. Unify eWave Engine is scheduled for general shipment in
August 1999 and represents the first in a family of Java-based Unify eWave
products that will be designed to deliver a robust foundation for e-commerce
application development. Unify VISION and the Unify eWave product family are
referred to in this document as the Company's "Internet" products.
The Company also continues to enhance, market and support Unify DataServer, a
family of database management system products, and to market and support
ACCELL/SQL, a family of fourth generation language application development
tools. Collectively, these products are referred to in this document as the
Company's "client/server" products. In addition to software products, the
Company offers training, consulting and maintenance services to its customers.
The Company's strategy is to aggressively market and enhance its Internet
products. The Company continues to support its extensive installed base of
client/server products, which the Company believes represents a significant
source of potential customers for its Internet products. The Company also
generates significant revenues from services, including customer maintenance,
consulting and training. The following table sets forth revenues from
licenses of its Internet and client/server products and from services for the
periods indicated:
Years Ended April 30,
----------------------------------------------
1999 1998 1997
----------- ----------- -----------
(In thousands)
License revenues:
Internet products $ 11,816 $ 7,627 $ 5,332
Client/server products 8,504 7,953 9,524
----------- ----------- -----------
Total license revenues 20,320 15,580 14,856
Services revenues 10,490 9,229 9,380
----------- ----------- -----------
Total revenues $ 30,810 $ 24,809 $ 24,236
=========== =========== ===========
The Company is currently focusing its product development and sales and
marketing resources principally on its Internet products. The Company expects
that its ability to achieve significant revenue growth in the future will be
substantially dependent upon the success of its current and future Internet
products. The Company also expects that revenues from its older client/server
products may continue to decline. As a result, factors adversely affecting
the pricing of or demand for Unify VISION, Unify eWave Engine, and future
products could have a material adverse effect on the Company's business,
operating results, and financial condition.
22
The Company licenses its software through its direct sales force in the
United States, Europe and Japan and through vertical application partners,
distributors and other partners worldwide. Revenues from partners accounted
for approximately 59%, 57% and 48% of the Company's software license revenues
for fiscal 1999, 1998 and 1997, 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 partners worldwide.
The Company recognizes software license revenue when a noncancelable license
agreement has been executed, delivery has occurred, fees are fixed and
determinable, and collection of the resulting receivable is deemed probable
by management. Software licenses include both development and deployment
licenses, with pricing for Unify VISION 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:
Years Ended April 30,
---------------------------------------------
1999 1998 1997
---------- --------- ----------
Revenues:
Software licenses 66.0 % 62.8 % 61.3 %
Services 34.0 37.2 38.7
-------- ------- --------
Total revenues 100.0 100.0 100.0
-------- ------- --------
Cost of revenues:
Software licenses 2.8 2.6 5.2
Services 14.3 17.7 18.5
-------- ------- --------
Total cost of revenues 17.1 20.3 23.7
-------- ------- --------
Gross margin 82.9 79.7 76.3
-------- ------- --------
Operating expenses:
Product development 19.2 23.1 28.8
Selling, general and administrative 49.2 66.1 97.4
-------- ------- --------
Total operating expenses 68.4 89.2 126.2
-------- ------- --------
Income (loss) from operations 14.5 (9.5) (49.9)
Other income, net 0.6 0.5 2.2
-------- ------- --------
Income (loss) before income taxes 15.1 (9.0) (47.7)
Provision for income taxes (0.7) (0.7) (0.8)
-------- ------- --------
Net income (loss) 14.4 % (9.7) % (48.5) %
======== ======= ========
REVENUES
TOTAL REVENUES. The Company's total revenues include software license
revenues from sales of its Internet and client/server products and service
revenues for customer maintenance, consulting and training. Total revenues
for fiscal 1999 grew 24% to $30.8 million from $24.8 million for fiscal 1998.
License revenues from Internet products were $4.2 million or 55% higher in
fiscal 1999 while license revenues from client/server products remained
relatively stable and service revenues increased $1.3 million or 14% as
compared to fiscal 1998. Total
23
revenues for fiscal 1998 increased 2% to $24.8 million from $24.2 million for
fiscal 1997. Growth in Internet product license revenues of $2.3 million more
than offset the $1.6 million decline in client/server product license
revenues while service revenues remained stable during fiscal 1998 as
compared to fiscal 1997. The Company expects that revenues from its older,
client/server products may decline in future periods and is currently
focusing its product development and sales and marketing resources
principally on its Internet products.
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 vertical
application partners, distributors, and other partners in all international
locations accounted for 51%, 54% and 60% of total revenues in fiscal 1999,
1998 and 1997, respectively.
SOFTWARE LICENSES. Total software license revenues for fiscal 1999 increased
30% to $20.3 million from $15.6 million for fiscal 1998. License revenues
from Internet products increased 55% to $11.8 million in fiscal 1999 from
$7.6 million for fiscal 1998, reflecting improved customer acceptance of
Unify VISION. Improved penetration of Unify VISION was particularly strong in
vertical application partner accounts as a result of a renewed focus on those
customers in fiscal 1999. License revenues from client/server products
increased modestly to $8.5 million for fiscal 1999 from $8.0 million for
fiscal 1998. The results for client/server products were better than expected
in light of the age of these product lines and the Company's primary focus on
marketing and selling its Internet products. Because of these factors, the
Company anticipates that revenues from its client/server products may decline
in the future.
Total software license revenues for fiscal 1998 increased 5% to $15.6 million
from $14.9 million for fiscal 1997. License revenues from Internet products
increased 43% to $7.6 million for fiscal 1998 from $5.3 million for fiscal
1997, primarily due to Unify VISION sales to a single customer totaling $2.1
million in fiscal 1998. License revenues from client/server products
decreased 16% to $8.0 million for fiscal 1998 from $9.5 million for fiscal
1997, principally due to the general decline in demand for these older
products and the Company's focus on its Internet products in fiscal 1998.
SERVICES. Total service revenues for fiscal 1999 increased 14% to $10.5
million from $9.2 million for fiscal 1998 after declining 2% from $9.4
million for fiscal 1997. Customer maintenance revenues increased $0.8 million
in fiscal 1999, primarily due to an increase in initial customer maintenance
contracts associated with higher license revenues in that period. Customer
maintenance revenues decreased $0.6 million in fiscal 1998, principally due
to the continuing impact of the fiscal 1997 decline in initial customer
maintenance contracts relating to significantly lower client/server license
revenues in that year. Consulting and training revenues grew $0.5 million in
fiscal 1999 and in fiscal 1998, primarily due to the Company's focus on
providing comprehensive application development solutions during those
periods.
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
and royalties paid for licensed technology. Cost of software licenses were
stable at 4% of software license revenues for fiscal 1999 and 1998, as
compared to 9% of software license revenues for fiscal 1997. The decrease in
cost of software licenses as a percentage of license revenues from fiscal
1997 to 1998 was due to production efficiencies achieved in the U.S. and
Japan.
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 in absolute dollars has remained stable at approximately $4.4
million for fiscal 1999, 1998 and 1997, with customer maintenance costs
decreasing slightly and consulting and training costs increasing slightly
during those periods. Due to the growth in service revenues in fiscal 1999,
total cost of services declined to 42% of service revenues in fiscal 1999
from 48% of service revenues in fiscal 1998 and 1997. The rapid emergence of
the Internet has created new consulting opportunities. The Company plans to
expand its expertise in e-commerce and Internet application development
solutions in fiscal 2000 in order to capitalize on these opportunities and as a
24
result it expects that its consulting service costs may increase. Because
there is generally a delay between the time additional consulting personnel
are hired and when they become fully productive, the Company's results of
operations may be adversely affected by the expansion of the Company's
consulting services.
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 1999 increased slightly to $5.9 million, or 19% of total revenues, as
compared to $5.7 million, or 23% of total revenues, for fiscal 1998. The
decline in product development expenses as a percentage of total revenues was
principally due to the increase in total revenues in fiscal 1999. 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 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 2000.
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 1999, 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 expense. SG&A expenses for fiscal 1999 decreased to $15.2
million, or 49% of total revenues, as compared to $16.4 million, or 66% of
total revenues, for fiscal 1998. SG&A expenses for fiscal 1999 were lower in
absolute dollars compared to the prior year primarily due to the continuation
of the cost control program adopted in the second quarter of fiscal 1998.
SG&A expenses decreased as a percentage of total revenues as a result of
lower expenses in absolute dollars and higher total revenues in fiscal 1999
as compared to fiscal 1998.
SG&A expenses for fiscal 1997 included charges totaling $2.4 million for bad
debt, staff realignments and related asset write-offs. Excluding these
charges, SG&A expenses for fiscal 1998 declined 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 principally due to a cost control
program which began in the second quarter of fiscal 1998 and included lower
headcount and a flattening of the management structure in sales, marketing
and finance. The Company expects that fiscal 2000 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
net income or loss of the Company's Japanese subsidiary, exchange gains and
losses, interest earned by the Company on its cash, cash equivalents and
short-term investments, and interest expense on long-term debt. Other income
was $0.2 million in fiscal 1999, $0.1 million in fiscal 1998, and $0.5
million in fiscal 1997. The increase in other income between fiscal 1998 and
1999 was principally due to losses on liquidation of the Company's Benelux
and German subsidiaries totaling $0.3 million in fiscal 1998 offset by $0.1
million in lower interest income relating to the Company's lower cash
balances in the first part of fiscal 1999. The decrease in other income
between fiscal 1997 and 1998 was primarily due to a decline of $0.4 million
in interest income relating to the decrease in the Company's cash balances
during fiscal 1998 and losses on liquidation of the Company's Benelux and
German subsidiaries totaling $0.3 million, offset by a decrease of $0.3
million in interest expense relating to the retirement of the Company's
stockholder line of credit in July 1997.
25
The Company's subsidiaries in the United Kingdom, France 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, and financial condition could be
materially adversely affected.
PROVISION FOR INCOME TAXES. The Company recorded no significant federal
income tax provisions for fiscal 1999, 1998 and 1997 due to the availability
of federal net operating loss carryforwards in fiscal 1999 and to net losses
in fiscal 1998 and 1997. 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,
1999, the Company had available federal net operating loss carryforwards of
approximately $21.2 million.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, the Company had cash, cash equivalents and short-term
investments of $11.4 million, compared to $10.7 million at April 30, 1998.
Working capital increased to $11.9 million at April 30, 1999 from $6.6
million at April 30, 1998.
OPERATING CASH FLOWS. The Company generated positive cash flows from
operations totaling $0.9 million for fiscal 1999 as compared to cash used in
operations of $3.7 million and $8.9 million in fiscal 1998 and 1997,
respectively. This increase in operating cash flows was due primarily to
improved profitability in fiscal 1999, offset by the effect of a significant
increase in accounts receivable. Net income for fiscal 1999 was $4.4 million
as compared to net losses of $2.4 million and $11.8 million in fiscal 1998
and 1997, respectively. The increase in accounts receivable at April 30, 1999
as compared to April 30, 1998 was due in part to an increase of $2.0 million
in total revenues in the fourth quarter of fiscal 1999 over the same quarter
of fiscal 1998.
INVESTING CASH FLOWS. Net cash and cash equivalents used in investing
activities totaled $1.4 million as compared to cash generated of $1.2 million
in fiscal 1998 and cash used of $8.2 million in fiscal 1997. The Company
invested $0.6 million in excess cash generated from profitable operations in
fiscal 1999 while it liquidated investments of $1.7 million to support
operating losses in fiscal 1998. In fiscal 1997, the Company's investing
activities consisted principally of investment of a portion of the net
proceeds from its IPO in corporate debt securities and liquidation of some of
those investments to support operating losses. Due to the cost control
program which began in the second quarter of fiscal 1998, capital
expenditures declined from $1.1 million in fiscal 1997 to $0.7 million and
$0.6 million in fiscal 1998 and 1999, respectively.
FINANCING CASH FLOWS. Financing activities generated net cash and cash
equivalents of $0.6 million in fiscal 1999, used cash of $1.9 million in
fiscal 1998, and generated cash of $23.6 million in fiscal 1997. Cash
generated by financing activities for fiscal 1999 consisted primarily of the
proceeds from the sales of common stock under the Company's stock option and
stock purchase plans. In fiscal 1998, cash used in financing was principally
for the retirement of a $2.4 million stockholder line of credit offset by
proceeds from the sales of common stock totaling $0.5 million. Cash generated
by financing activities in fiscal 1997 consisted primarily of the receipt of
$23.2 million in net proceeds from the Company's IPO.
SUMMARY. 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.
26
DISCLOSURES ABOUT MARKET RATE RISK
INTEREST RATE RISK. The Company's exposure to market rate risk for changes in
interest rates relates primarily to its investment portfolio, which consists
of cash equivalents and short-term investments. Cash equivalents are highly
liquid investments with original maturities of three months or less and are
stated at cost. Cash equivalents are generally maintained in money market
accounts which have as their objective preservation of principal and which
hold investments with maturity dates of less than 90 days. The Company does
not believe its exposure to interest rate risk is material for these
balances, which totaled $5.3 million at April 30, 1999. The securities in the
Company's short-term investment portfolio are generally classified as
available for sale and, consequently, are recorded on the consolidated
balance sheet at fair value with unrealized gains or losses reported as a
separate component of stockholders' equity. Short-term investments totaled
$6.1 million at April 30, 1999 and there were no material realized or
unrealized gains or losses on short-term investments during fiscal 1999.
Unify does not use derivative financial instruments in its short-term
investment portfolio, places its investments with high quality issuers and,
by policy, limits the amount of credit exposure to any one issuer. The
Company is averse to principal loss and attempts to ensure the safety of its
invested funds by limiting default, market and reinvestment risk. Unify's
short-term investments at April 30, 1999 consisted of $2.1 million in money
market funds, which the Company does not believe carry any material interest
rate exposure, and $4.0 million in municipal bonds maturing after 20 years,
which are exposed to changes in market interest rates as an indicator of
changes in the level of long-term bond interest rates. If market interest
rates were to change immediately and uniformly by ten percent from levels at
April 30, 1999, the fair value of the Company's cash equivalents and
short-term investments would change by an insignificant amount.
FOREIGN CURRENCY EXCHANGE RATE RISK. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company's business, operating results and
financial position. Historically, the Company's primary exposures have
related to local currency denominated sales and expenses in Europe, Japan and
Australia. For example, throughout calendar 1997 the U.S. dollar strengthened
against the major European currencies, which resulted in lower revenues and
expenses recorded for those regions when translated into U.S. dollars. Due to
the substantial volatility of currency exchange rates, among other factors,
the Company cannot predict the effect of exchange rate fluctuations on its
future operating results. Although Unify takes into account changes in
exchange rates over time in its pricing strategy, it does so only on an
annual basis, resulting in substantial pricing exposure as a result of
foreign exchange volatility during the period between annual pricing reviews.
The Company also has currency exchange rate exposures on intercompany
accounts receivable owed to the Company as a result of local currency sales
of software licenses by the Company's international subsidiaries in the
United Kingdom, France and Japan. At April 30, 1999, the Company had $0.8
million, $0.4 million and $0.5 million in such receivables denominated in
British pounds, French francs and Japanese yen, respectively. The Company
encourages prompt payment of these intercompany balances in order to minimize
its exposure to currency fluctuations, but it engages in no hedging
activities to reduce the risk of such fluctuations. A hypothetical ten
percent change in foreign currency rates would have an insignificant impact
on the Company's business, operating results and financial position. The
Company has not experienced material exchange losses on intercompany balances
in the past; however, due to the substantial volatility of currency exchange
rates, among other factors, it cannot predict the effect of exchange rate
fluctuations on its future business, operating results and financial position.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The statement requires balance sheet recognition of derivatives as
assets or liabilities measured at fair value. Accounting for gains and losses
resulting from changes in the values of derivatives is dependent on the use
of the derivative and whether it qualifies for hedge
27
accounting. The Company believes that the adoption of SFAS No. 133 will not
have a material impact on its financial statements.
YEAR 2000 COMPLIANCE
INTRODUCTION. 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).
STATE OF READINESS. The Company believes that its current products are fully
Year 2000 compliant. All current Unify products use four-digit years for all
internal manipulations and representations. The Company has informed its
customers that it will be phasing out support for certain older versions of
Unify products that are not Year 2000 compliant by December 15, 1999.
However, the Company's products are generally integrated with other systems
involving sophisticated computer hardware and software products that the
Company cannot adequately evaluate for Year 2000 compliance. There can be no
assurance that the Company's products will function properly with other
potentially non-compliant products, including third party software and
hardware. Additionally, there can be no assurance that the Company's products
contain or will contain all features and functionality considered necessary
by customers and partners to be Year 2000 compliant. If Unify's products
cannot manage and manipulate data related to the Year 2000, the result could
be a material adverse effect on the Company's business. The Company may face
claims based on Year 2000 problems in other companies' products or issues
arising from the integration of multiple products within an overall system.
Although the Company has not been a party to any litigation or arbitration
proceeding involving its products or services related to Year 2000 compliance
issues, the Company may in the future be required to defend its products or
services in such proceedings or to negotiate resolutions of claims based on
Year 2000 issues. The costs of defending and resolving Year 2000 issues,
regardless of the merits of such disputes, and any liability the Company may
have for such Year 2000 related damages, could materially adversely affect
the Company's business, operating results, and financial condition.
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, with the exception of its
accounting systems and certain older equipment and software, all appropriate
modification and testing of those applications and processes were completed
by the end of fiscal 1997. With regard to its accounting systems, the
reprogramming necessary for Year 2000 compliance has been identified and is
underway; the Company expects that reprogramming and testing of these systems
will be complete by the end of the second quarter of fiscal 2000. With regard
to the older equipment and software, primarily personal computers and related
software, upgrades and replacements have been identified and are in the
process of being ordered and installed. The Company expects that installation
and testing of new equipment and software will be complete by the end of the
second quarter of fiscal 2000. However, no assurance can be given that the
Company will not experience unanticipated material costs caused by undetected
errors or defects in its internal systems.
An assessment of the readiness of significant suppliers and service providers
with which the Company electronically interacts is ongoing. To date, the
Company is not aware of any significant supplier or service provider with a
Year 2000 issue that would materially impact the Company's business,
operating results or financial condition. However, the Company has no means
of ensuring that suppliers and service providers will be Year 2000 compliant.
The inability of suppliers and service providers to complete their Year 2000
resolution process in a timely fashion could materially and adversely impact
the Company.
COSTS. The costs incurred in addressing the Year 2000 issue are being
expensed as incurred in compliance with generally accepted accounting
principles. The total cost to date of these Year 2000 compliance activities
is approximately $700,000 and the cost of future Year 2000 compliance
activities is estimated to be approximately
28
$250,000. Funding of these costs will come from existing cash resources and
anticipated future operating cash flows.
RISKS. See STATE OF READINESS. Also, the Company believes that the purchasing
patterns of customers and potential customers may be affected by the Year
2000 issue in a variety of ways. Many companies are expending significant
resources to correct their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase
e-commerce and Internet application software products such as those offered
by the Company. The impact of the foregoing on the Company's business,
operating results and financial condition is not determinable.
CONTINGENCY PLANS. The Company currently expects that the Year 2000 issue
will not pose significant internal operational problems. However, a delay in
implementing new information systems, or a failure to fully identify all Year
2000 dependencies in Unify's internal systems or in the systems of the
Company's suppliers and service providers could have material adverse
consequences, including delays in the delivery of products. Therefore, the
Company is developing contingency plans for continuing operations should
these types of problems arise. The Company believes that its contingency
plans will be complete and tested by the end of the second quarter of fiscal
2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth in Item 6 of this report
in the section of Management's Discussion and Analysis of Financial Condition
and Results of Operations captioned "Disclosures about Market Rate Risk."
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
Not applicable.
29
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 1999 annual meeting of stockholders
(the "1999 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 1999 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 1999 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 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
30
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
-----------
Independent Auditors' Report 34
Consolidated Balance Sheets as of April 30, 1999 and 1998 35
Consolidated Statements of Operations for the years ended April 30, 1999,
1998 and 1997 36
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
April 30, 1999, 1998 and 1997 37
Consolidated Statements of Cash Flows for the years ended April 30, 1999,
1998 and 1997 38
Notes to Consolidated Financial Statements 39
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts 51
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, 1999.
(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 May 1, 1998 (2)
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)
21.1 Subsidiaries of the Registrant (1)
23.1 Independent Auditors' Consent
27.0 Financial Data Schedule
-------------------------------------
31
(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 10-Q on December 15, 1998.
* Exhibit pertains to a management contract or compensatory plan or
arrangement.
(d) FINANCIAL STATEMENT SCHEDULE
See Item 14(a)(2) above.
32
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, AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
Dated: July 19, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Reza Mikailli and Gary Pado and each one of
them, acting individually and without the other, as his true and lawful
attorney-in-fact and agent, each 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 each
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 each 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, July 19, 1999
----------------------------------- and Director (Principal Executive Officer)
Reza Mikailli
/s/ GARY PADO Vice President, Finance and Chief July 19, 1999
----------------------------------- Financial Officer (Principal Financial
Gary Pado and Accounting Officer)
/s/ ARTHUR C. PATTERSON Director July 19, 1999
-----------------------------------
Arthur C. Patterson
/s/ STEVEN D. WHITEMAN Director July 19, 1999
-----------------------------------
Steven D. Whiteman
33
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, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
April 30, 1999. Our audits also included the financial statement schedule
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended April 30, 1999 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, 1999
UNIFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
April 30, April 30,
ASSETS 1999 1998
----------- -----------
Current assets:
Cash and cash equivalents $ 5,315 $ 5,279
Short-term investments 6,072 5,460
Accounts receivable, net of allowances of $941 in 1999
and $563 in 1998 9,156 5,568
Prepaid expenses and other current assets 732 779
----------- -----------
Total current assets 21,275 17,086
Property and equipment, net 1,417 1,925
Other assets 242 88
----------- -----------
Total assets $ 22,934 $ 19,099
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 18
Accounts payable 1,138 1,041
Amounts due to minority interest stockholders 608 756
Accrued compensation and related expenses 1,650 1,889
Other accrued liabilities 2,621 3,076
Deferred revenue 3,326 3,745
----------- -----------
Total current liabilities 9,343 10,525
Long-term debt, net of current portion - 4
Commitments and contingencies (Note 10)
Minority interest 265 275
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
no shares issued or outstanding in 1999 and 1998 - -
Common stock, $0.001 par value; 40,000,000 shares authorized;
8,733,586 and 8,345,257 shares outstanding in 1999 and 1998,
respectively 9 8
Additional paid-in capital 54,123 53,474
Note receivable from stockholder (125) (216)
Accumulated other comprehensive income (653) (521)
Accumulated deficit (40,028) (44,450)
----------- -----------
Total stockholders' equity 13,326 8,295
----------- -----------
Total liabilities and stockholders' equity $ 22,934 $ 19,099
=========== ===========
See accompanying notes to consolidated financial statements.
35
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended April 30,
----------------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Software licenses $ 20,320 $ 15,580 $ 14,856
Services 10,490 9,229 9,380
----------- ----------- -----------
Total revenues 30,810 24,809 24,236
----------- ----------- -----------
Cost of revenues:
Software licenses 849 647 1,266
Services 4,404 4,389 4,493
----------- ----------- -----------
Total cost of revenues 5,253 5,036 5,759
----------- ----------- -----------
Gross margin 25,557 19,773 18,477
----------- ----------- -----------
Operating expenses:
Product development 5,928 5,733 6,974
Selling, general and administrative 15,151 16,389 23,604
----------- ----------- -----------
Total operating expenses 21,079 22,122 30,578
----------- ----------- -----------
Income (loss) from operations 4,478 (2,349) (12,101)
Other income, net 175 118 538
----------- ----------- -----------
Income (loss) before income taxes 4,653 (2,231) (11,563)
Provision for income taxes (231) (182) (192)
----------- ----------- -----------
Net income (loss) $ 4,422 $ (2,413) $ (11,755)
=========== =========== ===========
Net income (loss) per share:
Basic $ 0.52 $ (0.29) $ (1.68)
=========== =========== ===========
Diluted $ 0.49 $ (0.29) $ (1.68)
=========== =========== ===========
Shares used in computing net income (loss) per share:
Basic 8,555 8,206 7,008
=========== =========== ===========
Diluted 9,051 8,206 7,008
=========== =========== ===========
See accompanying notes to consolidated financial statements.
36
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Accumulated
Note Other Total Compre-
Common Stock Additional Receivable Compre- Accum- Stockholders' hensive
------------ Paid-In from hensive ulated Equity Income
Shares Amount Capital Stockholder Income Deficit (Deficit) (Loss)
--------- ------ ---------- ----------- ------------ -------- -------------- ---------
Balances at May 1, 1996 1,884,075 $ 2 $ 2,188 $ (265) $ (816) $(30,282) $(29,173)
Comprehensive income (loss)
Net loss - - - - - (11,755) (11,755) $(11,755)
Translation adjustments - - - - 49 - 49 49
--------
Total comprehensive income (loss) $(11,706)
========
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
--------- --- -------- ----- ------- -------- --------
Balances at April 30, 1997 8,064,434 8 52,965 (207) (767) (42,037) 9,962
Comprehensive income (loss)
Net loss - - - - - (2,413) (2,413) $ (2,413)
Translation adjustments - - - - (86) - (86) (86)
Liquidation of subsidiaries - - - - 332 - 332 332
--------
Total comprehensive income (loss) $ (2,167)
========
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 note
receivable from stockholder - - - (9) - - (9)
--------- --- -------- ----- ------- -------- --------
Balances at April 30, 1998 8,345,257 8 53,474 (216) (521) (44,450) 8,295
Comprehensive income (loss)
Net income - - - - - 4,422 4,422 $ 4,422
Translation adjustments - - - - (132) - (132) (132)
--------
Total comprehensive income (loss) $ 4,290
========
Exercise of stock options 322,876 1 580 - - - 581
Issuance of common stock
under employee stock
purchase plan 117,953 - 228 - - - 228
Repurchase of common stock (52,500) - (159) - - - (159)
Forgiveness of note receivable
from stockholder, net of
interest accrual - - - 91 - - 91
--------- --- -------- ----- ------- -------- --------
Balances at April 30, 1999 8,733,586 $ 9 $ 54,123 $(125) $ (653) $(40,028) $ 13,326
========= === ======== ===== ======= ======== ========
See accompanying notes to consolidated financial statements.
37
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended April 30,
---------------------------------------------
1999 1998 1997
--------- ---------- ---------
Cash flows from operating activities:
Net income (loss) $ 4,422 $ (2,413) $(11,755)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation 1,099 1,155 1,235
Loss on disposal of property and equipment - - 774
Provision for losses on accounts receivable 698 237 1,551
Minority interest (10) (49) (171)
Imputed interest on stockholder line of credit - - 194
Forgiveness of note receivable from stockholder,
net of interest accrual 91 (9) -
Liquidation of subsidiaries - 332 -
Changes in operating assets and liabilities:
Accounts receivable (4,273) (1,300) (1,133)
Prepaid expenses and other current assets 54 (262) 315
Accounts payable 85 (559) (245)
Amounts due to minority interest stockholders (216) (24) (391)
Accrued compensation and related expenses (242) (78) 363
Other accrued liabilities (441) (919) 1,326
Deferred revenue (414) 225 (989)
--------- --------- --------
Net cash provided by (used in) operating activities 853 (3,664) (8,926)
--------- --------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (4,072) (6,981) (12,695)
Sales of available-for-sale securities 3,460 8,655 5,562
Purchases of property and equipment (596) (666) (1,058)
Other assets (156) 234 (33)
--------- --------- --------
Net cash provided by (used in) investing activities (1,364) 1,242 (8,224)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 649 509 23,863
Principal payments under debt obligations (22) (2,414) (294)
Collection of notes receivable from stockholders,
net of interest accrual - - 58
--------- --------- --------
Net cash provided by (used in) financing activities 627 (1,905) 23,627
--------- --------- --------
Effect of exchange rate changes on cash (80) 93 8
--------- --------- --------
Net increase (decrease) in cash and cash equivalents 36 (4,234) 6,485
Cash and cash equivalents, beginning of year 5,279 9,513 3,028
--------- --------- --------
Cash and cash equivalents, end of year $ 5,315 $ 5,279 $ 9,513
========= ========= ========
Supplemental schedule of noncash investing and financing activities:
Conversion of redeemable preferred stock and accrued dividends
to common stock $ - $ - $ 26,726
========= ========= ========
Cash paid during the year for:
Interest $ 53 $ 330 $ 77
========= ========= ========
Income taxes $ 119 $ 162 $ 186
========= ========= ========
See accompanying notes to consolidated financial statements.
38
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Unify Corporation (the "Company") develops, markets and supports Unify
VISION, an Internet application server solution that enables information
technology organizations to deliver e-commerce applications by integrating
enterprise, 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 ACCELL/SQL, 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 66%
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 6).
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.
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, money market funds, 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, 1999 and 1998. 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.
39
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 the United
States, Europe, and Japan and no single customer accounted for 10% or more of
consolidated revenues in the years ended April 30, 1999, 1998 and 1997. 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, delivery has occurred, fees are fixed and determinable,
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.
97-2, SOFTWARE REVENUE RECOGNITION.
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, and ends when the
product is offered for sale. There are generally no significant capitalizable
costs for the Company's software development projects. In the event that
capitalizable software development costs do arise, amortization of those
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.
40
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
SFAS No. 128, EARNINGS PER SHARE, 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
fiscal years 1998 and 1997 as their effect would be antidilutive.
COMPREHENSIVE INCOME
On May 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the
period from nonowner sources. The adoption of this statement resulted in a
change in financial statement presentation but had no impact on the Company's
consolidated financial position, results of operations, or cash flows.
SEGMENT REPORTING
On May 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. This statement establishes
standards for the reporting of information about operating segments,
including related disclosures about products and services, geographic areas
and major customers, and requires selected information about operating
segments in interim financial statements. The adoption of this statement did
not impact the Company's consolidated financial position, results of
operations, or cash flows. The required segment data is presented in Note 11.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The statement requires balance sheet
recognition of derivatives as assets or liabilities measured at fair value.
Accounting for gains and losses resulting from changes in the values of
derivatives is dependent on the use of the derivative and whether it
qualifies for hedge accounting. The Company does not believe that the
adoption of SFAS No. 133 will have a material impact on its financial
statements.
RECLASSIFICATIONS
Certain items in the fiscal 1998 and 1997 consolidated financial statements
have been reclassified to conform to the fiscal 1999 presentation. These
reclassifications had no effect on net loss or stockholders' equity.
41
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2. SHORT-TERM INVESTMENTS
Short-term investments at April 30, 1999 consisted of $2,072,000 in money
market funds and $4,000,000 in municipal bonds maturing after 10 years.
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. There were no material realized or unrealized gains or losses on
short-term investments during fiscal 1999, 1998 or 1997.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at April 30 consisted of the following (in thousands):
1999 1998
----------- -----------
Equipment $ 5,294 $ 5,108
Furniture and leasehold improvements 1,271 1,435
----------- -----------
6,565 6,543
Less accumulated depreciation and amortization (5,148) (4,618)
----------- -----------
Property and equipment, net $ 1,417 $ 1,925
=========== ===========
NOTE 4. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
PUBLIC STOCK OFFERING AND REDEEMABLE PREFERRED STOCK
In June 1996, the Company completed an initial public offering ("IPO") of
2,187,000 shares of common stock at $12.00 per share with net proceeds to the
Company of $23,200,000. 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.
COMMON STOCK REPURCHASE PLAN
In September 1998, the Company announced that its board of directors had
authorized the repurchase of up to 500,000 of its outstanding common shares.
At April 30, 1999, a total of 52,500 common shares had been reacquired under
this program at an average price of $3.04 per share.
42
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 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
Granted (weighted average fair value of $1.88) 715,352 3.25
Exercised (322,876) 1.80
Canceled/expired (191,436) 2.61
-----------
Outstanding at April 30, 1999 1,138,060 2.97
===========
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, 1999 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 - 2.13 124,946 6.69 $ 1.29 80,594 $ 1.19
2.16 485,000 3.00 2.16 111,145 2.16
2.17 - 3.00 264,897 6.75 2.56 139,783 2.52
3.03 - 12.06 251,917 8.37 5.38 79,472 3.67
12.63 11,300 9.93 12.63 - -
------------- -------------
0.35 - 12.63 1,138,060 5.54 2.97 410,994 2.38
============= =============
Options to purchase 388,218 and 224,600 shares at weighted average prices of
$2.61 and $1.84 were exercisable at April 30, 1998 and 1997. At April 30,
1999, 182,165 shares were reserved for future grants under the Option Plan.
43
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 1999, 1998 and 1997
totaled 117,953, 222,522 and 107,550 shares at weighted average prices of
$1.93, $2.10 and $4.89, respectively. The weighted average fair values of the
fiscal 1999, 1998 and 1997 awards were $2.55, $0.91 and $2.98 per share,
respectively. At April 30, 1999, 401,975 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 issued at fair value.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net income (loss) and net income (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 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, 83% in fiscal 1999, 67% in fiscal 1998
and 60% in fiscal 1997; risk-free interest rates, 5.1% in fiscal 1999, 5.8%
in fiscal 1998 and 6.1% in fiscal 1997; 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 1999, 1998, 1997, and 1996 awards had been amortized to
expense over the vesting period of the awards, pro forma net income would
have been $3,738,000 or $0.44 per basic share and $0.41 per diluted share in
fiscal 1999 while pro forma net loss per share would have been $3,029,000 or
$0.37 per basic and diluted share in fiscal 1998 and $12,399,000 or $1.77 per
basic and diluted share in fiscal 1997. 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
1999, 1998 and 1997 pro forma adjustments are not indicative of pro forma
adjustments for future periods, when the calculation will apply to all
applicable stock options.
NOTE RECEIVABLE FROM STOCKHOLDER
Note receivable from stockholder at April 30, 1999 and 1998 consisted of the
principal balance and accrued interest due on a $195,000 full recourse note
from one of the Company's current officers. The note bears interest at 5%
annually and is secured by 384,731 shares of common stock. Under the terms of
a new employment agreement with this officer which was effective May 1, 1998,
this note receivable is being forgiven at the rate of $25,000 per quarter,
contingent upon the officer's continued employment with the Company.
Accordingly, $100,000 in debt forgiveness was recorded as a charge to
compensation expense in fiscal 1999. The due date for the note and accrued
interest thereon are being extended quarterly, contingent upon the officer's
continued employment with the Company.
44
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. INCOME TAXES
The Company recorded no significant federal income tax provision for the year
ended April 30, 1999 due to the use of federal net operating loss
carryforwards. No significant federal income tax provisions were recorded for
the years ended April 30, 1998 and 1997 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 income (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):
1999 1998 1997
----------- ----------- -----------
Domestic $ 4,110 $ (1,537) $ (10,989)
Foreign 543 (694) (574)
----------- ----------- -----------
Total operating income (loss) before income taxes $ 4,653 $ (2,231) $ (11,563)
=========== =========== ===========
Foreign withholding taxes $ 130 $ 108 $ 189
Federal and state income taxes 101 74 3
----------- ----------- -----------
Total income tax expense $ 231 $ 182 $ 192
=========== =========== ===========
Income tax expense for the years ended April 30, 1999, 1998 and 1997 differs
from the amounts computed by applying the statutory U.S. federal income tax rate
to pretax income (loss) as a result of the following (in thousands):
1999 1998 1997
----------- ----------- -----------
Computed tax expense (benefit) $ 1,629 $ (781) $ (4,047)
Increases (reductions) in tax expense resulting from:
Foreign withholding taxes 130 108 189
(Decrease) increase in valuation allowance for
deferred tax assets (1,913) 921 3,874
Other 385 (66) 176
----------- ----------- -----------
Actual income tax expense $ 231 $ 182 $ 192
=========== =========== ===========
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):
1999 1998
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 9,415 $ 11,884
Foreign tax credits 1,068 941
Deferred maintenance revenue 762 902
Reserves and other accruals 660 617
Provision for losses on accounts receivable 464 296
Other 540 265
----------- -----------
Total deferred tax assets 12,909 14,905
Deferred tax liabilities, principally depreciation - (83)
Valuation allowance (12,909) (14,822)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
45
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)\
Due primarily to a change in the deferred tax asset recorded for net
operating loss carryforwards, the valuation allowance decreased by $1,913,000
in the year ended April 30, 1999 and increased by $921,000 in the year ended
April 30, 1998.
At April 30, 1999, the Company had approximately $21,191,000 in federal net
operating loss carryforwards, approximately $2,795,000 in state net operating
loss carryforwards, approximately $5,368,000 in foreign net operating loss
carryforwards, and approximately $1,068,000 in foreign tax credit
carryforwards. The Company's federal net operating loss carryforwards expire
beginning in fiscal 2006. The Company's other net operating loss and tax
credit carryforwards have various expiration dates beginning in fiscal 2000.
The Company's ability to utilize these net operating loss carryforwards may
be subject to certain limitations in the event of a change in ownership.
NOTE 6. OTHER INCOME, NET
Other income, net for the years ended April 30 consisted of the following (in
thousands):
1999 1998 1997
----------- ----------- -----------
Interest income $ 391 $ 509 $ 923
Interest expense (53) (113) (407)
Foreign currency loss (99) (46) (149)
Minority interest 10 49 171
Loss on liquidation of subsidiaries - (332) -
Other (74) 51 -
----------- ----------- -----------
Other income, net $ 175 $ 118 $ 538
=========== =========== ===========
NOTE 7. 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 (in thousands, except per share amounts):
1999 1998 1997
----------- ----------- -----------
NET INCOME (LOSS) (NUMERATOR):
Net income (loss), basic and diluted $ 4,422 $ (2,413) $ (11,755)
=========== =========== ===========
SHARES (DENOMINATOR):
Weighted average shares of common stock
outstanding, basic 8,555 8,206 7,008
Weighted average common equivalent shares
outstanding 496 - -
----------- ----------- -----------
Weighted average shares of common stock
outstanding, diluted 9,051 8,206 7,008
=========== =========== ===========
PER SHARE AMOUNT:
Net income (loss) per share, basic $ 0.52 $ (0.29) $ (1.68)
Reduction in net income per share due to weighted
average common equivalent shares (0.03) - -
----------- ----------- -----------
Net income (loss) per share, diluted $ 0.49 $ (0.29) $ (1.68)
=========== =========== ===========
ANTIDILUTIVE SHARES: - 1,075 1,469
=========== =========== ===========
46
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8. RELATED PARTY TRANSACTIONS
Unify Japan KK ("Unify Japan") has been the exclusive distributor and master
licensee for the Company's products in Japan since July 1994. Prior to March
1999, the Company, Sumitomo Metals Industries, Ltd. ("SMI") and Artificial
Intelligence Research, Ltd. ("AIR") owned 51%, 34% and 15% interests,
respectively, in Unify Japan. In March 1999, the Company purchased AIR's entire
interest in Unify Japan for approximately $132,000 and recorded goodwill of
approximately $50,000.
TRANSACTIONS WITH AIR
Until January 1998, AIR purchased software licenses from Unify Japan as a
nonexclusive subdistributor. In January 1998, Unify Japan purchased AIR's
subdistributor rights in exchange for the cancellation of approximately $230,000
in 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
revenues are recorded. Accumulated amortization was approximately $172,000 and
$42,000 as of April 30, 1999 and 1998, respectively.
Total revenues include revenues from AIR of $220,000, $492,000, and $1,170,000
in the years ended April 30, 1999, 1998 and 1997, 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 in fiscal 1997. Sales
expense includes professional service fees from AIR totaling $98,000 in fiscal
1999.
TRANSACTIONS WITH SMI
Total revenues include revenues from SMI of $597,000, $722,000 and $424,000 in
fiscal 1999, 1998 and 1997, respectively. 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.
Unify Japan leases office space from SMI; rent expense for this office space
totaled approximately $74,000, $112,000 and $143,000 in fiscal 1999, 1998 and
1997, respectively. Unify Japan also paid SMI approximately $61,000, $169,000
and $143,000 for the services of SMI employees in fiscal 1999, 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, 1999), is secured by the assets of Unify
Japan and is due in September 1999. At April 30, 1999, 72.5 million yen, or
$608,000, was outstanding under this loan agreement. Amounts due to minority
interest stockholders at April 30, 1999 and 1998 consisted entirely of the
balances due under this loan agreement.
NOTE 9. 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 75% of participating employees' contributions up to 6% of each
employee's annual compensation. In fiscal 1999, 1998 and 1997, the Company
contributed $187,000, $99,000 and $84,000, respectively, to the 401(k) Plan.
47
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10. 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, 1999 were as follows (in thousands):
Years Ending April 30,
2000 $ 1,322
2001 1,023
2002 348
2003 196
2004 127
--------
$ 3,016
========
Rent expense under operating leases was $1,398,000, $1,561,000, and $1,648,000
for the years ended April 30, 1999, 1998 and 1997, 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.
NOTE 11. SEGMENT INFORMATION
The Company has three reportable operating segments, the United States, Europe,
and Japan, which are organized, managed and analyzed geographically and operate
in one industry segment: the development and marketing of Internet application
server software and related services. The Company evaluates operating segment
performance primarily based on net revenues and certain operating expenses. The
Company's products and services are marketed internationally through the
Company's subsidiaries in the United Kingdom, France and Japan, and through
distributors, vertical application partners and OEMs. No single customer
accounted for 10% or more of the consolidated revenues of the Company in fiscal
1999, 1998 or 1997.
Financial information for the Company's reportable operating segments is
summarized below (in thousands):
1999 1998 1997
----------- ----------- -----------
Total net revenues: (1)
United States (2) $ 17,666 $ 14,865 $ 13,283
Europe 9,233 6,887 7,772
Japan 3,911 3,057 3,181
----------- ----------- -----------
Total net revenues $ 30,810 $ 24,809 $ 24,236
=========== =========== ===========
Operating income (loss):
United States (3) $ 4,425 $ (1,040) $ (9,322)
Europe (239) (1,148) (2,485)
Japan 292 (161) (294)
----------- ----------- -----------
Total operating income (loss) $ 4,478 $ (2,349) $ (12,101)
=========== =========== ===========
48
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1999 1998 1997
----------- ----------- -----------
Interest income (4) $ 391 $ 509 $ 923
=========== =========== ===========
Interest expense (4) $ 53 $ 113 $ 407
=========== ========== ===========
Identifiable assets:
United States $ 7,976 $ 5,056 $ 3,032
Europe 5,808 4,194 3,526
Japan 1,711 1,089 1,295
----------- ----------- -----------
Subtotal identifiable assets 15,495 10,339 7,853
Corporate assets (5) 9,184 10,231 17,292
Elimination of intercompany balances (1,745) (1,471) (707)
----------- ----------- -----------
Total assets $ 22,934 $ 19,099 $ 24,438
=========== =========== ===========
Depreciation expense (6) $ 1,099 $ 1,155 $ 1,235
=========== =========== ===========
Capital expenditures (6) $ 596 $ 666 $ 1,058
=========== ========== ===========
- ---------------------------------
(1) The Company allocates revenues to operating segments based on the location
of the country where the license is installed or service is delivered.
There were no transfers between segments during the periods presented. The
accounting policies of the segments are the same as those described in
Note 1.
(2) United States revenues include export sales of approximately $2,600,000,
$3,500,000, and $3,600,000 for the years ended April 30, 1999, 1998 and
1997, respectively. Export sales have been made primarily to customers in
Asia Pacific, Australia, Latin America, South Africa, India and Russia.
(3) United States operating income (loss) is net of corporate product
development and administrative expenses.
(4) Interest income and interest expense were primarily attributable to the
United States in the periods presented. Interest income and interest
expense in Europe and Japan were not significant in those periods.
(5) Corporate assets consist primarily of United States cash and cash
equivalents, short-term investments and property and equipment.
(6) The majority of the Company's capital expenditures are incurred for
software development (which occurs exclusively in the United States) and
for corporate infrastructure. Consequently, capital expenditures and
depreciation expense were primarily attributable to the United States in
the periods presented.
Net revenues and long-lived assets by geographic area were as follows (in
thousands):
1999 1998 1997
----------- ----------- -----------
Total net revenues:
United States $ 17,666 $ 14,865 $ 13,283
United Kingdom 6,367 4,258 3,475
France 2,866 2,279 2,544
Other - 350 1,753
----------- ----------- -----------
Subtotal Europe 9,233 6,887 7,772
----------- ----------- -----------
Japan 3,911 3,057 3,181
----------- ----------- -----------
Total net revenues $ 30,810 $ 24,809 $ 24,236
=========== =========== ===========
49
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Long-lived assets:
United States $ 1,400 $ 1,780 $ 2,405
Foreign 259 233 304
----------- ----------- -----------
Total long-lived assets $ 1,659 $ 2,013 $ 2,709
=========== =========== ===========
50
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, 1997 $ 483 $ 1,551 $ (1,698) $ 149 $ 485
Year ended April 30, 1998 $ 485 $ 237 $ (159) $ - $ 563
Year ended April 30, 1999 $ 563 $ 698 $ (294) $ (26) $ 941
Allowance for amounts due from
minority interest stockholders
Year ended April 30, 1997 $ 382 $ - $ - $ (56) $ 326
Year ended April 30, 1998 $ 326 $ - $ - $ - $ 326
Year ended April 30, 1999 $ 326 $ - $ - $ 26 $ 352
Allowance for long-term accounts
receivable
Year ended April 30, 1997 $ 396 $ - $ - $ (93) $ 303
Year ended April 30, 1998 $ 303 $ - $ (46) $ - $ 257
Year ended April 30, 1999 $ 257 $ - $ (257) $ - $ -
51
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
May 1, 1998 (2)
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)
21.1 Subsidiaries of the Registrant (1)
23.1 Independent Auditors' Consent 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 10-Q on December 15, 1998.
* Exhibit pertains to a management contract or compensatory plan or
arrangement.
52