<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1996
REGISTRATION STATEMENT NO. 333-3834
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNIFY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 77-0427069
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
181 METRO DRIVE, 3RD FLOOR
SAN JOSE, CALIFORNIA 95110
(408) 467-4500
(Address, including Zip Code and telephone number, including
Area Code, of Registrant's principal executive offices)
------------------------
REZA MIKAILLI
PRESIDENT
181 METRO DRIVE, 3RD FLOOR
SAN JOSE, CALIFORNIA 95110
(408) 467-4500
(Name, address, including Zip Code and telephone number,
including Area Code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PETER M. ASTIZ, ESQ. BARRY E. TAYLOR, ESQ.
JON M. APPLETON, ESQ. ARMANDO CASTRO, ESQ.
GEOFFREY A. WEXLER, ESQ. KEVIN M. GALLIGAN, ESQ.
Baker & McKenzie Wilson Sonsini Goodrich & Rosati
660 Hansen Way Professional Corporation
Palo Alto, California 94304 650 Page Mill Road
Palo Alto, California 94304-1050
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
UNIFY CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING
LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY
ITEMS IN PART I OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION STATEMENT HEADING OR LOCATION IN PROSPECTUS
- -------------------------------------------------------- --------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................... Forepart of the Registration Statement; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors
4. Use of Proceeds................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price................... Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution.......................................... Risk Factors; Dilution
7. Selling Security Holders.......................... Prospectus Summary; Principal and Selling
Stockholders
8. Plan of Distribution.............................. Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be Registered........ Prospectus Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel............ Legal Matters
11. Information with Respect to the Registrant........ Inside Front Cover Page; Prospectus Summary; Risk
Factors; Dividend Policy; Capitalization;
Dilution; Selected Consolidated Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal and
Selling Stockholders; Description of Capital
Stock; Shares Eligible For Future Sale;
Underwriting; Legal Matters; Experts; Additonal
Information; Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY , 1996
2,140,000 SHARES
[LOGO]
COMMON STOCK
OF THE 2,140,000 SHARES OF COMMON STOCK OFFERED HEREBY, 1,850,000 ARE BEING
SOLD BY THE COMPANY AND 290,000 ARE BEING SOLD BY THE SELLING STOCKHOLDERS. THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE
SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS."
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK
OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE
OF THE COMMON STOCK WILL BE BETWEEN $10.00 AND $12.00 PER SHARE. SEE
"UNDERWRITING" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING
THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN APPROVED FOR
QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "UNFY."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE............... $ $ $ $
TOTAL (3)............... $ $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $1,000,000.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
321,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS,
IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO
PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL
$ AND THE PROCEEDS TO COMPANY WILL TOTAL $ . SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND TO THEIR RIGHT TO REJECT
ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES
REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT THE OFFICE OF
MONTGOMERY SECURITIES ON OR ABOUT JUNE , 1996.
-------------------
MONTGOMERY SECURITIES
NEEDHAM & COMPANY, INC.
BLACK & COMPANY
, 1996
<PAGE>
[Photos]
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION INCLUDING "RISK FACTORS" AND
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
THE COMPANY
Unify Corporation ("Unify" or the "Company") develops, markets and supports
client/server application development tools and database management software
products. In March 1995, the Company introduced Unify VISION 2.0, an advanced
client/server application development environment for the development,
deployment and management of high-end scalable applications. Unify VISION
combines a powerful and scalable client/server architecture with a flexible and
easy-to-use rapid application development technology. The Company is continuing
to market and enhance Unify ACCELL, a family of fourth generation language
("4GL") application development tools and Unify DataServer, a family of database
management system products. As of April 30, 1996, the Company had licensed Unify
VISION to over 175 customers and Unify ACCELL and DataServer products to over
2,000 customers worldwide.
The migration by many organizations towards client/server computing has
created significant demand for applications and their associated development
tools. The success of entry-level client/server applications has led
organizations to seek to extend client/server computing beyond the workgroup
level and across the enterprise to address business-critical operations. These
high-end business-critical applications are significantly more complex to
develop and maintain as compared to entry-level applications. Accordingly,
organizations increasingly require more sophisticated, powerful application
development tools to develop applications which support distributed
heterogeneous environments, high volumes of complex on-line transaction
processing and substantial numbers of concurrent enterprise-wide users.
According to the Hurwitz Consulting Group, the annual market size for high-end
client/server application development environments is projected to increase from
approximately $600 million as of November 1995 to approximately $2.5 billion by
the year 2000.
Unify's mission is to be the leading independent supplier of high-end
scalable client/server application development solutions. By providing
organizations with the benefits of low cost of entry, rapid time to market, and
low cost of ownership, Unify VISION is designed to enable organizations to
develop, deploy and manage business-critical high-end applications. Unify
VISION's approach to scalable application development is designed to allow
organizations to deliver full-scale, enterprise-wide high-end solutions or
migrate to high-end client/server solutions on an incremental basis. Unify
VISION is designed to enable organizations to rapidly develop and deploy
high-end client/server applications by taking immediate advantage of advanced
techniques including object-oriented programming, automatic application
partitioning and integrated application management. The Company believes that
Unify VISION enables organizations to adopt these advanced techniques at their
own pace, thereby reducing business disruption, time and high costs associated
with their initial client/server investments and allows them to deliver
applications to end-users more rapidly.
The Company's products are marketed and sold through the Company's direct
sales force in the U.S. and through subsidiaries in Japan, England, France, the
Netherlands and Germany and through a network of distributors and value added
resellers ("VARs") worldwide. Significant customers that have licensed Unify
VISION include, among others, Amoco, Fannie Mae, Glaxo, Hewlett-Packard, Merrill
Lynch, the National Security Agency, NYNEX, Pacific Bell and Sumitomo Metal
Industries Ceramics. The Company believes that significant opportunities exist
for continued sales of Unify VISION into the Company's worldwide installed base
of over 2,000 Unify ACCELL and DataServer customers. Unify VISION allows those
customers to preserve their substantial investments in existing applications
while upgrading to more advanced client/ server applications. Additionally, the
Company's strategy is to expand sales through the VAR channel. Currently, the
Company's largest VAR customers include Computron Software, General Instrument,
Northern Telecom, Triad Systems and Westinghouse Security Electronics.
Upon completion of this offering, the officers and directors of the Company
and entities affiliated with certain directors, as a group, will hold or be
deemed to beneficially own approximately 35.4% of the outstanding Common Stock.
Existing management will continue to hold sufficient voting power to enable it
to continue to significantly influence the election of directors and the control
of the business and affairs of the Company for the foreseeable future.
Although the Company's operating plans assume taxable and operating income
in future periods, because of the Company's history of operating losses and
expected near term losses, the Company determined in connection with the
Company's accounting for deferred taxes, that such plans were not sufficient to
record such deferred taxes as an asset without a full valuation allowance under
applicable accounting policies.
The Company was incorporated in California in 1980 and reincorporated into
Delaware in May 1996. The Company's executive offices are located at 181 Metro
Drive, 3rd Floor, San Jose, California 95110 and the telephone at that address
is (408) 467-4500. The Company's home page can be located on the World Wide Web
at http://www.unify.com.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,850,000 shares
Common Stock offered by the Selling
Stockholders................................ 290,000 shares
Common Stock to be outstanding after the
offering.................................... 7,490,831 shares (1)
Use of proceeds.............................. For working capital and general corporate
purposes
Nasdaq National Market symbol................ UNFY
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues................................................ $ 36,524 $ 37,160 $ 30,549 $ 28,849 30,165
Gross margin.................................................. 29,002 27,988 21,072 20,276 23,774
Loss from operations.......................................... (4,552) (2,998) (4,891) (479) (951)
Net loss...................................................... (4,375) (2,717) (7,063) (479) (938)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net loss per share (2).............................. $ (0.08) $ (0.18)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per share (2)..... 5,639 5,327
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1996
--------------------------------------
AS
ACTUAL PRO FORMA (3) ADJUSTED (4)
--------- ------------- ------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 3,028 $ 3,095 $ 21,021
Working capital (deficit)............................................... (3,183) (3,116) 14,810
Total assets............................................................ 12,997 13,064 30,710
Long-term debt, net of current portion.................................. 2,456 2,456 2,456
Total stockholders' equity (deficit).................................... (29,173) (2,380) 15,546
</TABLE>
- ------------------------------
(1) Excludes (i) 878,457 shares of Common Stock issuable upon exercise of
outstanding options, including options under the Company's 1991 Stock Option
Plan ("Stock Option Plan"), with a weighted average exercise price of $2.00
and 35,749 shares issuable upon the exercise of outstanding warrants with a
weighted average exercise price of $8.88 per share, and (ii) 406,620 and
400,000 shares of Common Stock reserved for future issuance under the Stock
Option Plan and the Company's 1996 Employee Stock Purchase Plan ("Purchase
Plan"), respectively, as of April 30, 1996. See "Management" and Note 5 of
Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the number of shares used to compute pro forma net loss per share.
(3) Reflects (i) the automatic conversion of all outstanding shares of the
Company's Preferred Stock (including accrued dividends) into 3,566,297
shares Common Stock upon the consummation of this offering; and (ii) the
issuance of 190,459 shares of Common Stock upon the exercise of outstanding
warrants upon the consummation of this offering.
(4) Adjusted to reflect the sale of 1,850,000 shares of Common Stock offered by
the Company hereby at the estimated public offering price of $11.00 per
share and application of the estimated net proceeds therefrom. See
"Capitalization" and "Use of Proceeds."
------------------------------
UNIFY, UNIFY ACCELL, UNIFY VISION, APPMAN, SMARTVIEW, DATASERVER, VISIONWEB
and the Unify logo are trademarks of the Company. All other trademarks or
tradenames referred to in this Prospectus are the property of their respective
owners.
------------------------
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
GIVES EFFECT TO (I) THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF THE
COMPANY'S PREFERRED STOCK (INCLUDING ACCRUED DIVIDENDS) INTO 3,566,297 SHARES OF
COMMON STOCK UPON THE CONSUMMATION OF THIS OFFERING; AND (II) THE ISSUANCE OF
190,459 SHARES OF COMMON STOCK UPON THE EXERCISE OF OUTSTANDING WARRANTS UPON
THE CONSUMMATION OF THIS OFFERING; AND ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED.
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS
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 "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.
HISTORY OF OPERATING LOSSES; TRANSITION OF BUSINESS
Although the Company had small profits for the third and fourth quarters of
fiscal 1996, the Company has had operating losses on an annual basis for each of
the past five fiscal years. As of April 30, 1996, the Company had an accumulated
deficit of $30.3 million. The Company's revenues have declined in each year
since fiscal 1993 as a result of declines in the sales of the Company's
DataServer database products and Unify ACCELL application development tools.
Such declines were in part offset by sales of Unify VISION 1.0 which was first
introduced in December 1993 and Unify VISION 2.0, an advanced client/server
application development environment introduced in March 1995. The Company's
ability to achieve revenue growth and profitability are substantially dependent
upon the success of Unify VISION. License revenues from Unify VISION were $2.2
million and $5.0 million for fiscal 1995 and 1996, respectively, representing
12% and 25% of total license revenues for each year. No assurance can be given
that Unify VISION or the Company's other products will achieve market acceptance
or that the Company will achieve and maintain profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FLUCTUATING QUARTERLY RESULTS AND SEASONALITY; EXPECTED OPERATING LOSS IN FIRST
FISCAL QUARTER
The Company's quarterly operating results have varied significantly in the
past, and the Company expects that such results are likely to vary significantly
from time to time in the future. Such variations result from, among other
matters, 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; changes in pricing policies by the Company or its
competitors; changes in the level of operating expenses; changes in the
Company's sales incentive plans; budgeting cycles of its 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; personnel changes; the results of international
expansion; currency fluctuations; seasonal trends and general domestic and
international economic and political conditions. The Company typically receives
a number of orders ranging in size from several hundred thousand dollars to
approximately $1 million in any fiscal quarter. Because a significant portion of
the Company's revenues has been, and the Company believes will continue to be,
derived from such large orders, 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. In addition, the
Company intends to continue to expand its domestic and international direct
sales force. The timing of such expansion and the rate at which new sales people
become productive could also cause material fluctuations in the Company's
quarterly operating results.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. Revenues are also difficult to forecast because the
market for client/server application development software is rapidly evolving,
and the Company's sales cycle, from initial evaluation to purchase and the
provision of support 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 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
5
<PAGE>
term, if revenue levels fall below expectations, net income is likely to be
disproportionately adversely affected. The Company is increasing its sales,
marketing and product development expenditures, and operating results will be
materially adversely affected if the Company does not achieve revenue growth.
There can be no assurance that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. Due to the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Information."
The Company expects that its operating results will be affected by seasonal
trends. The Company believes that 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 the quarters ending July 31 and
October 31 as a result of reduced sales activity in Europe during the summer
months. In particular, due to the foregoing factors and to increased investments
in selling, general and administrative and research and development expenses in
advance of the release of Unify VISION 3.0, the Company expects that it will
incur an operating loss for the quarter ending July 31, 1996. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON NEW PRODUCT ACCEPTANCE; DEPENDENCE ON GROWTH OF HIGH-END
CLIENT/SERVER TOOLS MARKET
The Company currently expects Unify VISION and related services to account
for an increasingly significant percentage of the Company's future revenues and
accordingly the Company is devoting an increasing level of its resources to such
product. As a result, factors adversely affecting the pricing of or demand for
Unify VISION, such as, but not limited to, competition or technological change,
would have a material adverse effect on the Company's business, operating
results 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 Unify VISION, including
Unify VISION 3.0 scheduled for release in the third calendar quarter of 1996.
There can be no assurance that the Company will timely and successfully
introduce such new or enhanced versions. There also can be no assurance that the
Company will continue to be successful in marketing Unify VISION or other
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview;" "Business -- Products" and "-- Product
Development."
To date, only a limited number of the Company's customers have completed the
development and deployment of high-end client/server applications using Unify
VISION. If the Company's customers are not able to successfully develop and
deploy high-end client/server applications with Unify VISION, the viability of
Unify VISION could be questioned and the Company's reputation could be damaged,
which could have material adverse effects on the Company's business, operating
results and financial condition. In addition, the Company expects that a
significant percentage of its future revenues will be derived from sales to
existing customers of its Unify ACCELL and DataServer products. If such existing
customers fail to migrate to high-end client/server applications, purchase
competitive products, or have difficulty deploying applications built with Unify
VISION, the Company's relationships with such customers, revenues from sales of
Unify VISION and the Company's other products, and the Company's business,
operating results and financial condition could be materially adversely
affected. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Despite the recent growth in sales of Unify VISION, there can be no
assurance that the market for high-end client/server applications and associated
development tools will continue to grow. If the high-
6
<PAGE>
end client/server market fails to grow, or grows more slowly than the Company
currently anticipates, the Company's business, operating results and financial
condition would be materially and adversely affected. See "Business -- Industry
Background."
ANTICIPATED DECLINE IN REVENUE FROM MATURE PRODUCTS
Most of the Company's revenues to date have been attributable to its
DataServer database products and Unify ACCELL application development tools.
Revenues derived from the sales of these products declined over fiscal 1994 and
1995 and were flat for fiscal 1996. While the Company expects such decline to
continue, revenues from the sales of such products will continue to represent an
important portion of the Company's revenues for at least the next several years.
Although the Company is continuing to 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 -- Strategy;" "--
Products;" "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
LENGTHY SALES CYCLE
The Company's products are typically used to develop applications that are
critical to a customer's business, and the purchase of the Company's products is
often part of a customer's larger business process re-engineering initiative or
implementation of client/server 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 a 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 such results.
INTENSE COMPETITION
The Company has experienced and expects to continue to experience intense
competition from current and future competitors. The Company's current direct
competitors for high-end client/server development tools, among others, include
Forte Software, Inc. ("Forte") and Dynasty Technologies, Inc. ("Dynasty"). The
Company also competes with database vendors such as Oracle Corporation
("Oracle"), Informix Corporation ("Informix"), Sybase, Inc. ("Sybase"), IBM
Corporation ("IBM") and others, which offer their own development tools for use
with their proprietary databases. In addition to its direct competitors, the
Company also competes with companies that offer other types of development tools
which can be used in lieu of advanced development tools such as Unify VISION.
Among the other types of tools which can be used by customers include products
offered by Powersoft (a subsidiary of Sybase), Microsoft Corporation
("Microsoft"), and others. Companies offering products competitive with the
Company's Unify ACCELL and DataServer products include Oracle, Informix and
Sybase among others.
Many of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than the Company. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged. The Company also expects to
face additional competition as other established and emerging companies enter
the client/server application development market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced
7
<PAGE>
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.
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 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,
including Unify VISION 3.0, scheduled for release in the third calendar quarter
of 1996, 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 RESELLERS
A substantial portion of the Company's total revenues are derived through
sales through VARs and distributors. Revenues from distributors and resellers
accounted for approximately 61%, 59%, and 60% of the Company's software license
revenues for fiscal 1994, 1995 and 1996, respectively. The success of the
Company is therefore dependent in large part upon the performance of its
resellers, which is outside the Company's control. The Company's ability to
achieve significant revenue growth in the future will depend in large part on
its success in maintaining existing and establishing additional relationships
with distributors, resellers and VARs worldwide. The loss of any of the
Company's major resellers either to competitive products offered by other
companies or to products developed internally by the resellers, or the failure
to attract new resellers 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%, 56% and 56%
of total revenues in fiscal 1994, 1995 and 1996, respectively. A key component
of the Company's strategy is its planned further expansion into international
markets. If the revenues generated by international operations are
8
<PAGE>
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, due to the uncertainty as to the Company's
ability to expand its international presence, there are certain risks inherent
in doing business on an international level, such as: unexpected changes in
regulatory requirements; export restrictions, tariffs and other trade barriers;
difficulties in staffing and managing foreign operations; longer payment cycles;
problems in collecting accounts receivable; political instability; fluctuations
in currency exchange rates; seasonal reductions in business activity during the
summer months in Europe and certain other parts of the world; and potentially
adverse tax consequences, any of which could adversely impact the success of the
Company's international operations. There can be no assurance that one or more
of such 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, and their results are translated
monthly into U.S. dollars. 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. Currently the Company does not
employ any hedging strategies against currency exposures and does not anticipate
doing so in the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations;" "Business -- Sales and
Marketing" and Note 11 to Notes to Consolidated Financial Statements.
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. The Company
expects to introduce Unify VISION 3.0 in the third calendar quarter of 1996.
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. In fiscal 1990, the Company was subject to two
claims regarding its database product notwithstanding such provisions. In fiscal
1995, one of such claims was settled and the second resulted in a substantial
arbitration judgment award against the Company. The sale and support of Unify
VISION by the Company may involve the risk of such claims, any of which are
likely to be substantial in light of the use of Unify VISION in high-end
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. See Note 10 to Notes to Consolidated Financial
Statements.
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL PERSONNEL
The Company's success depends largely on the efforts and abilities of
certain key personnel. The loss of the services of one or more of the Company's
executive officers or the inability to recruit 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 Chief Executive Officer, would materially and
adversely affect the Company. The Company
9
<PAGE>
does not have any key man insurance on the life of Mr. Mikailli. Loss of other
key personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Employees."
The success of the Company depends in large part upon the ability of the
Company to recruit and retain qualified employees, particularly highly-skilled
engineers and direct sales and support personnel. The competition for such
personnel is intense. There can be no assurance that the Company will be
successful in retaining or recruiting key personnel. Any failure by the Company
to expand or retain its engineering, direct sales and support personnel would
materially adversely affect the Company's business, operating results and
financial condition. See "Business -- Employees."
NEW PERSONNEL; MANAGEMENT OF GROWTH
Since February 1995, the Company has hired a new senior management team and
made significant changes in the Company's organization in order to focus on the
development, marketing and support of Unify VISION. Approximately half of the
Company's officers were hired within the past 18 months, and the Company intends
to hire additional key personnel in the near future. In addition, most of the
sales and marketing force was hired during the past 12 months. The Company's
potential expansion may also significantly strain the Company's management,
financial, customer support, operational and other resources. If the Company
achieves successful market acceptance of Unify VISION, the Company may undergo a
period of rapid growth. To accommodate this growth, the Company is in the
process of implementing a variety of new and upgraded operating and financial
systems, procedures and controls, including the improvement of its accounting
and other 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.
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 certain software such
as Galaxy from VISIX Software and RPC Tool from Microsoft which are 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."
FUTURE CAPITAL NEEDS
The Company believes that the net proceeds of this offering, together with
cash flow from operations and other existing sources of liquidity, will be
sufficient to meet its projected working capital and other cash requirements
through the end of fiscal 1997. However, there is no assurance that future
events may not cause the Company to seek additional capital sooner. If
additional capital is required, there can be no assurance that it will be
available or, if available, that it will be on terms satisfactory to the
Company. The sale of additional equity or other securities will result in
further dilution of the Company's stockholders. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
10
<PAGE>
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of copyright, trademark and trade secret
laws, non-disclosure agreements and other intellectual property protection
methods to protect its proprietary technology. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights as fully as do the laws of the United
States. There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate or that
competition will not independently develop similar technology.
Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any notices that the Company is infringing the intellectual property rights of
others, there can be no assurance that such infringement claims will not be
asserted by third parties in the future. If any such claims are asserted, there
can be no assurance that the Company will be able to defend such claim or obtain
licenses on reasonable terms. The Company's involvement in any patent dispute or
other intellectual property dispute or action to protect trade secrets and
know-how may have a material adverse effect on the Company's business, operating
results 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
manufacturing and selling its products. Any of these situations can have a
material adverse effect on the Company's business, operating results or
financial condition. See "Business -- Intellectual Property."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
after this offering could adversely affect the market price of the Common Stock
and the Company's ability to raise capital in the future in the equity markets.
In addition to the 2,140,000 shares to be sold in this offering approximately
100,000 shares not subject to lock-up agreements will be eligible for immediate
sale in the public market pursuant to Rule 144 and approximately 250,000
additional shares not subject to lock-up agreements will be eligible for sale
beginning 90 days after the date of this Prospectus, subject in some cases to
compliance with certain volume limitations under Rule 144. Approximately
5,000,000 shares are subject to lock-up agreements with the representatives of
the Underwriters pursuant to which such shares cannot be sold for 180 days
following the offering without the consent of Montgomery Securities. Commencing
180 days after the date of this Prospectus, upon the expiration of lock-up
agreements, substantially all of the Common Stock will be eligible for immediate
sale in the public market pursuant to Rule 144, subject in some cases to
compliance with certain volume limitations under Rule 144. Although to the
Company's knowledge, there are no plans, arrangements, agreements or
understandings regarding any intent to seek Montgomery Securities' consent to
release securities subject to the lock-up nor any general policy with respect to
granting such consent, in the ordinary course, a request may be made for an
early release. Montgomery Securities in its sole discretion and without notice,
may release all or any portion of the securities subject to lock-up agreements
for sale in the public market prior to the expiration of the lock-up agreements.
Furthermore, the Company intends, ninety days after the consummation of the
offering, to register approximately 1,700,000 shares of Common Stock reserved
for issuance to its employees, directors and consultants under the Company's
Stock Option Plan and Purchase Plan. As of April 30, 1996 options and warrants
for the purchase of 914,206 shares of Common Stock were outstanding with an
average exercise price of $2.27, of which approximately 295,000 are subject to
lock-up agreements. See "Shares Eligible for Future Sale" and "Underwriting."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no prior public market for the Company's Common Stock, and
there can be no assurance that a viable public market for the Common Stock will
develop or be sustained after this
11
<PAGE>
offering. The initial public offering price is being determined through
negotiation between the Company and the Underwriters based upon several factors
and may not be an indication of the market price of the Common Stock after the
offering. The Company believes that 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 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 such companies. Such fluctuations may adversely affect
the market price of the Company's Common Stock. See "Underwriting."
CONTINUED CONTROL BY MANAGEMENT; TRANSACTIONS WITH AFFILIATES; LIMITATIONS ON
LIABILITY
Upon completion of this offering, the officers and directors of the Company
and entities affiliated with certain directors, as a group, will hold or be
deemed to beneficially own approximately 35.4% of the outstanding Common Stock.
Existing management will continue to hold sufficient voting power to enable it
to continue to significantly influence the election of directors and the control
of the business and affairs of the Company for the foreseeable future. Such
concentration of ownership may also have the effect of delaying, deferring or
preventing a change in control of the Company. Management has broad discretion
in the use of proceeds. In addition, the Company has a substantial number of
authorized but unissued shares. Except in limited circumstances, such shares may
be issued by the Company without stockholder approval. See "Principal and
Selling Stockholders."
In the past, the Company has been substantially dependent upon equity and
debt financing provided by existing investors in the Company, including venture
capital funds affiliated with directors of the Company. The Company believes
that all of such transactions have been on arms-length terms. The Company does
not currently anticipate any additional financing transactions involving the
Company and any investors affiliated with members of the Board of Directors. In
addition, the Company is seeking additional outside independent directors.
Although all members of the Board of Directors are subject to fiduciary duties
regarding related party transactions, it is possible for the Board of Directors
to approve such transactions without any independent approval. In addition,
pursuant to the Company's Restated Certificate of Incorporation, the liability
of the Company's Directors for monetary damages is limited to the maximum extent
permitted by law.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION AND DELAWARE LAW
The Company's Certificate of Incorporation authorizes the Company's Board of
Directors to issue Preferred Stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares, without
further stockholder approval. The rights of the holders of Common Stock will be
subject to and may be adversely affected by the rights of holders of any
Preferred Stock that may be issued in the future. The ability to issue Preferred
Stock without stockholder approval could have the effect of making it more
difficult for a third party to acquire a majority of the voting stock of the
Company thereby delaying, deferring or preventing a change in control of the
Company. See "Management -- Directors and Executive Officers;" "Principal and
Selling Stockholders" and "Description of Capital Stock."
DEFERRED TAX ASSETS
The Company's accounting for deferred taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109 involves the evaluation of a number of
factors concerning the realizability of the Company's deferred tax assets. To
support the Company's conclusion that a 100% valuation allowance was required,
management primarily considered such factors as the Company's history of
operating losses and expected near-term future losses, the nature of the
Company's deferred tax assets, the lack of significant firm sales backlog, no
significant excess of appreciated asset value over the tax basis of the
12
<PAGE>
Company's net assets and the absence of taxable income in prior carryback years.
Although management's operating plans assume taxable and operating income in
future periods, management's evaluation of all the available evidence in
assessing the realizability of the deferred tax assets indicates that such plans
were not considered sufficient to overcome the available negative evidence.
Based upon the weight of available evidence, the Company has provided a full
valuation allowance against its net deferred tax assets as the Company believes
that it is more likely than not that the deferred tax assets will not be
realized. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Years Ended April 30, 1995 and 1996 --
Provision for Income Taxes.'
SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of $9.06 per share in the net tangible book value of the
Common Stock. To the extent that outstanding options and warrants to purchase
the Company's Common Stock are exercised, there will be further dilution. See
"Dilution."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,850,000 shares of
Common Stock offered by the Company hereby, based on an assumed initial public
offering price of $11.00 per share and after deducting the estimated
underwriting discount and commissions and offering expenses, are estimated to be
approximately $17,900,000 ($21,200,000 if the Underwriters' over-allotment
option is exercised in full).
The principal reasons for this offering are to increase the Company's equity
capital and to create a public market for the Company's Common Stock, which will
facilitate future access by the Company to public equity markets and enhance the
ability of the Company to use its Common Stock as consideration for
acquisitions.
The Company intends to use the net proceeds of this offering primarily for
working capital and other general corporate purposes, including expansion of the
Company's product development and sales and marketing efforts and potential
acquisitions. The amounts actually expended by the Company for working capital
purposes will vary significantly depending upon a number of factors, including
future revenue growth, the amount of cash generated by the Company's operations
and the progress of the Company's product development efforts. In addition, the
Company may make one or more acquisitions of complementary technologies,
products or businesses which broaden or enhance the Company's current product
offerings. However, the Company has no specific agreements or commitments, and
is not currently engaged in any negotiations, with respect to any such
acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Pending the uses described above, the net proceeds from this offering will
be invested in deposits with banks and in short-term, investment grade,
interest-bearing securities, including government obligations and money market
instruments.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain any future earnings to finance
the growth and development of its business. In addition, under the terms of the
Company's existing credit facilities, the payment of dividends is restricted.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of April
30, 1996, (i) on an actual basis, (ii) on a pro forma basis to give effect to
the reincorporation of the Company in the State of Delaware, the conversion of
all outstanding Preferred Stock into Common Stock (including accrued dividends)
and the issuance of 190,459 shares of Common Stock upon the exercise of certain
outstanding warrants, and (iii) as adjusted to reflect the sale of the 1,850,000
shares of Common Stock offered by the Company hereby and the receipt and
application by the Company of the estimated net proceeds therefrom, based on an
assumed initial public offering price of $11.00 per share, and after deducting
the estimated underwriting discounts and commissions and offering expenses. The
capitalization information set forth in the table below is qualified by the more
detailed Consolidated Financial Statements and Notes thereto appearing elsewhere
in this Prospectus and should be read in conjunction with such Consolidated
Financial Statements and Notes. See "Use of Proceeds."
<TABLE>
<CAPTION>
APRIL 30, 1996
----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED (1)
---------- ----------- ---------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Current portion of long-term debt.................................. $ 255 $ 255 $ 255
---------- ----------- ---------------
---------- ----------- ---------------
Long-term debt..................................................... $ 2,456 $ 2,456 $ 2,456
Minority interest.................................................. 495 495 495
Redeemable preferred stock, $0.001 par value; 2,931,370 shares
designated; 2,876,136 shares issued and outstanding; no shares
authorized, issued or outstanding pro forma and as adjusted....... 26,726 -- --
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 7,931,370 shares authorized;
no shares issued or outstanding pro forma and as adjusted....... -- -- --
Common Stock, $0.001 par value, 40,000,000 shares authorized;
1,884,075 shares issued and outstanding; 5,640,831, shares
issued and outstanding pro forma; 7,490,831 shares issued and
outstanding as adjusted (2)..................................... 2 6 7
Additional paid-in capital....................................... 2,188 28,977 46,902
Notes receivable from stockholders............................... (265) (265) (265)
Cumulative translation adjustments............................... (816) (816) (816)
Accumulated deficit.............................................. (30,282) (30,282) (30,282)
---------- ----------- ---------------
Total stockholders' equity (deficit)......................... (29,173) (2,380) 15,546
---------- ----------- ---------------
Total capitalization..................................... $ 504 $ 571 $ 18,497
---------- ----------- ---------------
---------- ----------- ---------------
</TABLE>
- ------------------------
(1) As adjusted to reflect the sale of 1,850,000 shares of Common Stock offered
by the Company hereby at the estimated public offering price of $11.00 per
share and application of the estimated net proceeds therefrom.
(2) Excludes 914,206 shares of Common Stock issuable upon exercise of options
and warrants, 406,620 shares reserved for future issuances under the Stock
Option Plan and 400,000 shares reserved for future issuances under the
Purchase Plan. See "Management" and Notes 5 and 12 of Notes to Consolidated
Financial Statements.
15
<PAGE>
DILUTION
The pro forma net tangible book deficit of the Company as of April 30, 1996
was $3,430,000, or $0.61 per share of Common Stock. Pro forma net tangible book
deficit per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of 1,850,000 shares of Common Stock offered by the
Company hereby and the receipt by the Company of the estimated net proceeds
therefrom, based on an assumed initial public offering price of $11.00 per share
and after deducting the estimated underwriting discounts and commissions and
offering expenses, the pro forma as adjusted net tangible book value of the
Company as of April 30, 1996 would have been $14,496,000 or $1.94 per share.
This represents an immediate increase in pro forma net tangible book value of
$2.55 per share to existing stockholders and an immediate dilution of $9.06 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 11.00
Pro forma net tangible book deficit per share as of April 30,
1996.............................................................. $ (0.61)
Increase in net tangible book value per share attributable to new
investors......................................................... 2.55
---------
Pro forma as adjusted net tangible book value per share after the
offering.......................................................... 1.94
---------
Dilution per share to new investors................................ $ 9.06
---------
---------
</TABLE>
The following table sets forth on a pro forma basis as of April 30, 1996,
the existing stockholders and new investors with respect to number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid (based upon an assumed initial
public offering price of $11.00 per share and before deducting the estimated
underwriting discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION
------------------------ --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 5,640,831 75.3% $ 23,386,000 53.5% $ 4.15
New investors......................... 1,850,000 24.7 20,350,000 46.5 11.00
----------- ----- -------------- -----
Total............................. 7,490,831 100.0% $ 43,736,000 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
The foregoing tables exclude (i) 878,457 shares of Common Stock issuable
upon exercise of outstanding options including options under the Company's Stock
Option Plan, of which 254,530 are exercisable as of April 30, 1996, or within 60
days thereafter, (ii) 406,620 shares of Common Stock reserved for future
issuance under the Stock Option Plan and (iii) 35,749 shares of Common Stock
reserved for issuance upon exercise of currently exercisable outstanding
warrants. The weighted average exercise price per share of the Company's
outstanding stock options is $2.00 and the weighted average exercise price per
share of the outstanding warrants is $8.88. See "Management;" and "Description
of Capital Stock."
- ------------------------
(1) Sales by the Selling Stockholders in this offering will cause the number of
shares held by the existing stockholders to be reduced to 5,350,831, or
approximately 71.4% of the shares of Common Stock to be outstanding after
this offering, and will increase the number of shares to be purchased by new
stockholders to 2,140,000, or 28.6% of the total number of shares of Common
Stock to be outstanding after this offering. Assuming full exercise of the
Underwriters' over-allotment option, the percentage of shares held by
existing stockholders would be 68.5% of the total number of shares of Common
Stock to be outstanding after this offering, and the number of shares held
by new stockholders would be increased to 2,461,000 shares, or 31.5% of the
total number of shares of Common Stock to be outstanding after this
offering. See "Management" and "Principal and Selling Stockholders."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The
consolidated statement of operations data for the years ended April 30, 1994,
1995 and 1996 and the consolidated balance sheet data at April 30, 1995 and 1996
are derived from the audited consolidated financial statements included
elsewhere herein. The consolidated statement of operations data for the years
ended April 30, 1992 and 1993 and the consolidated balance sheet data at April
30, 1992, 1993 and 1994 are derived from audited consolidated financial
statements not included in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses.................................... $ 25,566 $ 23,882 $ 19,048 $ 17,995 $ 20,444
Services............................................. 10,958 13,278 11,501 10,854 9,721
--------- --------- --------- --------- ---------
Total revenues..................................... 36,524 37,160 30,549 28,849 30,165
--------- --------- --------- --------- ---------
Cost of revenues:
Software licenses.................................... 2,769 2,400 3,262 2,787 2,059
Services............................................. 4,753 6,772 6,215 5,786 4,332
--------- --------- --------- --------- ---------
Total cost of revenues............................. 7,522 9,172 9,477 8,573 6,391
--------- --------- --------- --------- ---------
Gross margin........................................... 29,002 27,988 21,072 20,276 23,774
--------- --------- --------- --------- ---------
Operating expenses:
Product development.................................. 4,778 5,878 5,598 5,324 5,805
Selling, general and administrative.................. 28,776 24,389 19,795 15,000 18,920
Restructuring charges................................ -- 719 570 431 --
--------- --------- --------- --------- ---------
Total operating expenses........................... 33,554 30,986 25,963 20,755 24,725
--------- --------- --------- --------- ---------
Loss from operations............................... (4,552) (2,998) (4,891) (479) (951)
Other income (expense), net............................ 655 533 (1,830) 392 176
--------- --------- --------- --------- ---------
Loss before income taxes........................... (3,897) (2,465) (6,721) (87) (775)
Provision for income taxes............................. (478) (252) (342) (392) (163)
--------- --------- --------- --------- ---------
Net loss........................................... $ (4,375) $ (2,717) $ (7,063) $ (479) $ (938)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net loss per share........................... $ (0.08) $ (0.18)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per share
(1)................................................... 5,639 5,327
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 7,292 $ 4,730 $ 2,495 $ 3,776 $ 3,028
Working capital (deficit).......................... 5,575 1,803 (4,518) (3,116) (3,183)
Total assets....................................... 22,104 19,866 13,081 12,681 12,997
Long-term debt, net of current portion............. 959 803 471 1,488 2,456
Redeemable preferred stock......................... 21,466 21,466 23,219 24,973 26,726
Total stockholders' deficit........................ (12,502) (15,365) (24,287) (26,628) (29,173)
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the number of shares used to compute pro forma net loss per share.
17
<PAGE>
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 RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS PROSPECTUS 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 "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company develops, markets and supports Unify VISION, an advanced
client/server application development environment for the development,
deployment and management of high-end scalable applications. The Company is also
continuing to market and enhance Unify ACCELL, a family of 4GL application
development tools, and Unify DataServer, a family of database management system
products.
The Company was founded in 1980 to develop a UNIX-based database and in 1990
began focusing on the development of application development tools compatible
with the Company's database as well as databases offered by other companies such
as Oracle and Informix. In response to the expected growth in client/server
computing, the Company determined in 1992 to concentrate its product development
efforts on advanced client/server development tools resulting in the
introduction of an initial version of Unify VISION in December 1993 which was
directed at entry-level workgroup applications. In response to the emerging
market for high-end scalable development tools, the Company developed Unify
VISION 2.0, a significant enhancement to the initial release including a new
product architecture. Unify VISION 2.0 was introduced in March 1995. Since
February 1995, the Company has hired a new senior management team and made
significant changes in the Company's organization. In particular, the Company's
sales and marketing organization has been significantly changed with most
personnel having been hired after May 1995.
The Company's strategy is to aggressively market and enhance Unify VISION.
The Company continues to support its extensive installed base of Unify ACCELL
and DataServer products, which represents a significant source of potential
Unify VISION customers. The Company also generates significant revenue from
services, including customer maintenance, consulting and training. The following
table sets forth the revenues from licenses of the Company's Unify VISION and
Unify ACCELL and DataServer products and services revenue for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
License revenues:
Unify VISION................................................................. $ 708 $ 2,176 $ 5,009
Unify ACCELL and DataServer.................................................. 18,340 15,819 15,435
--------- --------- ---------
Total license revenues..................................................... 19,048 17,995 20,444
Services revenues.............................................................. 11,501 10,854 9,721
--------- --------- ---------
Total revenues............................................................. $ 30,549 $ 28,849 $ 30,165
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company currently is focusing its product development and sales and
marketing resources principally on Unify VISION. The Company expects that
revenues from Unify VISION and related services will account for substantially
all of the growth, if any, in the Company's total revenues during the
foreseeable future. The Company expects that revenues from Unify ACCELL and
DataServer will continue to decline. As a result, factors adversely affecting
the pricing of or demand for Unify VISION could have a material adverse effect
on the Company's business, operating results and financial condition. See "Risk
Factors -- Dependence on New Product Acceptance; Dependence on Growth of High-
end Client/Server Tools Market;" "-- Anticipated Decline in Revenue from Mature
Products" and "-- Intense Competition."
18
<PAGE>
The Company incurred net losses in four of the last eight quarters and in
each of the last five fiscal years. As of April 30, 1996 the Company had an
accumulated deficit of $30.3 million. Although the Company's total revenues
increased in fiscal 1996 from fiscal 1995, the Company's total revenues had
decreased in both fiscal 1994 and 1995. There can be no assurance that any of
the Company's business strategies will be successful or that the Company will be
able to sustain profitability on a quarterly or annual basis. See "Risk Factors
- -- History of Operating Losses; Transition of Business" and "-- Fluctuating
Quarterly Results and Seasonality."
The Company licenses its software through its direct sales force in the
U.S., Europe and Japan and through distributors and VARs worldwide. Revenues
from distributors and VARs accounted for approximately 61%, 59%, and 60% of the
Company's software license revenues for fiscal 1994, 1995 and 1996,
respectively. The Company's ability to achieve significant revenue growth in the
future will depend in large part on its success in maintaining existing and
establishing additional relationships with distributors and VARs worldwide. See
"Risk Factors -- Dependence on Resellers."
The Company recognizes software license revenue when a non-cancelable
license agreement has been executed, the product has been shipped, all
significant contractual obligations have been satisfied and collection of the
resulting receivable is deemed probable by management. Maintenance revenue is
recognized ratably over the maintenance period, and revenues from consulting and
training services are recognized as performed. Software licenses include both
development licenses and run-time licenses. License fees from Unify VISION are
generally based upon the number of developers or end users, as applicable.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations data
of the Company expressed as a percent of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Software licenses................................................................. 62.4 % 62.4 % 67.8 %
Services.......................................................................... 37.6 37.6 32.2
----- ----- -----
Total revenues.................................................................. 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Software licenses................................................................. 10.7 9.7 6.8
Services.......................................................................... 20.3 20.0 14.4
----- ----- -----
Total cost of revenues.......................................................... 31.0 29.7 21.2
----- ----- -----
Gross margin........................................................................ 69.0 70.3 78.8
----- ----- -----
Operating expenses:
Product development............................................................... 18.3 18.4 19.3
Selling, general and administrative............................................... 64.8 52.0 62.7
Restructuring charges............................................................. 1.9 1.5 --
----- ----- -----
Total operating expenses........................................................ 85.0 71.9 82.0
----- ----- -----
Loss from operations............................................................ (16.0) (1.6) (3.2)
Other income (expense), net......................................................... (6.0) 1.3 0.6
----- ----- -----
Loss before income taxes........................................................ (22.0) (0.3) (2.6)
Provision for income taxes.......................................................... (1.1) (1.4) (0.5)
----- ----- -----
Net loss........................................................................ (23.1)% (1.7)% (3.1)%
----- ----- -----
----- ----- -----
</TABLE>
19
<PAGE>
COMPARISON OF YEARS ENDED APRIL 30, 1995 AND 1996
TOTAL REVENUES
The Company's total revenues include software license revenues from sales of
its Unify VISION, Unify ACCELL and DataServer products, as well as service
revenues from maintenance, consulting services and training. Total revenues for
fiscal 1996 increased 5% to $30.2 million from $28.8 million for fiscal 1995.
International revenues include all software license and service revenues
from locations other than the United States. International revenues from the
Company's direct sales organizations in Europe and Japan and from distributors
and resellers in all international locations accounted for 56% of total revenues
for each of fiscal 1996 and 1995.
SOFTWARE LICENSES. Software license revenues for fiscal 1996 increased 14%
to $20.4 million from $18.0 million for fiscal 1995. Software license revenues
from Unify VISION 2.0 increased 130% to $5.0 million for fiscal 1996 from $2.2
million for fiscal 1995. This increase reflects increased acceptance of Unify
VISION and increased sales through the Company's direct sales organization in
the U.S. Software license revenues from Unify ACCELL and DataServer were
consistent from year to year. The Company expects that revenues from these
products will decline in future periods.
SERVICES. Service revenues for fiscal 1996 decreased 10% to $9.7 million
from $10.9 million for fiscal 1995. The decrease in service revenues during this
period was primarily the result of a decline in consulting revenue following a
strategic shift away from consulting services which do not directly support new
product sales.
COST OF REVENUES
COST OF SOFTWARE LICENSES. Cost of software licenses consists primarily of
product documentation, packaging and production costs in the U.S. and Japan,
royalties paid for licensed technology, costs related to funded development
contracts, and amortization of capitalized software development costs. Cost of
software licenses for fiscal 1996 decreased to $2.1 million, or 10% of software
license revenues, as compared to $2.8 million, or 15% of software license
revenues, for fiscal 1995. Amortization of capitalized software development
costs decreased to $0.6 million in fiscal 1996 from $1.1 million for fiscal
1995.
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. Cost of
services for fiscal 1996 decreased to $4.3 million, or 45% of service revenues,
as compared to $5.8 million, or 53% of service revenues for fiscal 1995. The
decrease in cost of services during this period was primarily due to a decline
in total consulting staff. Cost of services as a percentage of revenue declined
in fiscal 1996 as a result of improved consulting staff productivity. The
Company expects to gradually increase its consulting staff from current levels.
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 expenditures for fiscal
1996 remained relatively constant at $5.8 million, or 19% of total revenues, as
compared to $5.7 million, or 20% of total revenues, for fiscal 1995. The Company
believes that substantial investment in product development is critical to
maintaining technological leadership and therefore expects product development
expenditures to increase in fiscal 1997.
Software development costs have been accounted for in accordance with SFAS
No. 86. Under this standard, capitalization of software development costs begins
upon the establishment of technological feasibility. The Company begins
capitalization upon completion of a working model and amortizes capitalized
software development costs over the estimated useful life of the products,
generally one to
20
<PAGE>
three years. In accordance with this policy, there were no capitalizable
software development costs in fiscal 1996 and $0.4 million of such costs in
fiscal 1995. As of April 30, 1996, all capitalized software development costs
had been fully amortized. See Note 1 of Notes to Consolidated Financial
Statements.
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 and bad debt
expenses. SG&A expenses for fiscal 1996 increased to $18.9 million, or 63% of
total revenues, as compared to $15.0 million, or 52% of total revenues, for
fiscal 1995. The percent and dollar increases in fiscal 1996 SG&A expenses were
due to the recruitment of several key employees which filled open positions in
the U.S. sales and marketing organizations and to an increase in promotional and
travel expenses related to the launch of Unify VISION 2.0. The Company
anticipates additional legal, accounting and other administrative expenses as a
result of becoming a publicly traded company. The Company intends to continue to
increase its expenditures in SG&A in absolute dollars.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, consists of the
minority interest in the Company's Japanese joint venture, exchange gains and
losses, and interest earned by the Company on its cash and cash equivalents,
offset by interest expense on long-term debt. Other income was $0.2 million for
fiscal 1996 and $0.4 million for fiscal 1995. Other income for fiscal 1995 also
includes a $0.3 million loss from litigation offset by a $0.3 million
nonrecurring gain from the forgiveness of amounts due to the minority interest
stockholders of the Company's Japanese subsidiary. The Company's subsidiaries in
Europe and Japan operate in local currencies. To date, foreign currency gains
and losses have been immaterial; 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.
Currently, the Company does not employ any hedging strategies against currency
exposures and does not anticipate doing so in the near future.
PROVISION FOR INCOME TAXES. The Company has accounted for income taxes in
accordance with the provisions of SFAS No. 109 for all periods presented. Under
SFAS No. 109, the Company recognizes deferred tax assets and liabilities for the
expected future consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. The Company had available
federal net operating loss carryforwards of approximately $10.7 million as of
April 30, 1996. Under current tax legislation, the Company's utilization of its
operating loss carryforwards may be limited or impaired in certain circumstances
resulting from a change in ownership. See Note 6 of Notes to Consolidated
Financial Statements. After utilization of its net operating loss carryforwards,
the Company expects that its effective tax rate will approximate the statutory
rate.
The Company has provided a full valuation allowance against its net deferred
tax assets as it has determined that it is more likely than not that the
deferred tax assets will not be realized. The Company's accounting for deferred
taxes under SFAS No. 109 involves the evaluation of a number of factors
concerning the realizability of the Company's deferred tax assets. To support
the Company's conclusion that a 100% valuation allowance was required,
management primarily considered such factors as the Company's history of
operating losses and expected near-term future losses, the nature of the
Company's deferred tax assets, the lack of significant firm sales backlog, no
significant excess of appreciated asset value over the tax basis of the
Company's net assets and the absence of taxable income in prior carryback years.
Although management's operating plans assume taxable and operating income in
future periods, management's evaluation of all the available evidence in
assessing the realizability of the deferred tax assets indicates that such plans
were not considered sufficient to overcome the available negative evidence.
COMPARISON OF YEARS ENDED APRIL 30, 1994 AND 1995
TOTAL REVENUES
Total revenues for fiscal 1995 decreased 6% to $28.8 million from $30.5
million for fiscal 1994. The decrease in total revenues was primarily due to
declining software license revenues from Unify ACCELL and DataServer products,
partially offset by increases in Unify VISION sales.
21
<PAGE>
International revenues were 56% of total revenues in fiscal 1995 as compared
to 51% of total revenues in fiscal 1994.
SOFTWARE LICENSES. Software license revenues for fiscal 1995 decreased 6%
to $18.0 million from $19.0 million for fiscal 1994. During fiscal 1995,
revenues from Unify ACCELL and DataServer products declined to $15.8 million as
compared to $18.3 million for fiscal 1994. Revenues from Unify VISION, which was
first introduced in December 1993, were $2.2 million during fiscal 1995 as
compared to $0.7 million in fiscal 1994.
SERVICES. Service revenues for fiscal 1995 decreased 6% to $10.9 million
from $11.5 million for fiscal 1994. The decrease was primarily attributable to a
$1.4 million decrease in consulting and training revenue, partially offset by an
increase in maintenance revenues.
COST OF REVENUES
COST OF SOFTWARE LICENSES. Cost of software licenses in fiscal 1995 was
$2.8 million, or 15% of software license revenues, as compared to $3.3 million,
or 17% of software license revenues, in fiscal 1994. Fiscal 1994 cost of
software licenses included higher costs associated with the development and
production of documentation and packaging for the new Unify VISION product.
Amortization of capitalized software development costs decreased to $1.1 million
in fiscal 1995 from $1.4 million for fiscal 1994.
COST OF SERVICES. Cost of services in fiscal 1995 was $5.8 million, or 53%
of service revenues, as compared to $6.2 million, or 54% of service revenues, in
fiscal 1994. The decrease in fiscal 1995 consulting costs due to the reduction
of subcontractor costs after the completion of a large consulting contract in
fiscal 1994 was partially offset by increased costs associated with customer
support following the introduction of Unify VISION.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenditures in fiscal 1995 were
$5.7 million, or 20% of total revenues, as compared to $6.3 million, or 21% of
total revenues, in fiscal 1994. The decrease in expenditures was the result of a
cost reduction program instituted in the third quarter of fiscal 1994, and, to a
lesser extent, efficiencies associated with the automation of software testing
and the purchase of third-party software for integration into the Company's
products. Capitalized software development costs were $0.4 million and $0.8
million, or 1% and 2%, of total revenues in fiscal 1995 and 1994, respectively.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses in fiscal 1995 were
$15.0 million, or 52% of total revenues, as compared to $19.8 million, or 65% of
total revenues, in fiscal 1994. The percent and dollar decreases in fiscal 1995
from fiscal 1994 were primarily the result of a cost reduction program
instituted in the third quarter of fiscal 1994, significantly lower promotional
spending and lower legal expenses.
RESTRUCTURING CHARGE. The Company recorded restructuring charges of $0.4
million in fiscal 1995 and $0.6 million in fiscal 1994. The restructuring
charges represent costs associated with consolidation of facilities,
reorganization activities connected with reductions in work force and severance.
In fiscal 1995 the Company reorganized its operations, particularly its sales
and marketing staff, to focus on the opportunities for Unify VISION in the
high-end application development tools market. See Note 7 of Notes to
Consolidated Financial Statements.
OTHER INCOME (EXPENSE), NET. Other income was $0.4 million in fiscal 1995
and other expense was $1.8 million in fiscal 1994. Fiscal 1994 other expense
includes a charge of $2.2 million for settlement of litigation relating to two
product disputes. Fiscal 1995 other income includes a charge of $0.3 million for
settlement of litigation and a $0.3 million nonrecurring gain from the
forgiveness of amounts due to the minority interest stockholders of the
Company's Japanese subsidiary. See Notes 8 and 10 of Notes to Consolidated
Financial Statements.
PROVISION FOR INCOME TAXES. In fiscal 1995 and 1994, the Company recorded
no federal income tax provision due to net losses in those periods. The Company
recorded a tax provision related primarily to foreign income tax withholding on
software license royalties paid to the Company by certain foreign licensees.
22
<PAGE>
QUARTERLY INFORMATION
The following tables set forth certain unaudited consolidated statement of
operations data for the eight quarters ended April 30, 1996, as well as such
data expressed as a percentage of the Company's total revenues for the periods
indicated. This data has been derived from unaudited condensed consolidated
financial statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. Such statement of operations data should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30,
1994 1994 1995 1995 1995 1995 1996 1996
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses........... $ 4,329 $ 4,580 $ 4,559 $4,527 $ 3,618 $ 4,777 $ 5,749 $6,300
Services.................... 2,793 2,722 2,626 2,713 2,494 2,484 2,333 2,410
-------- -------- -------- --------- -------- -------- -------- ---------
Total revenues............ 7,122 7,302 7,185 7,240 6,112 7,261 8,082 8,710
-------- -------- -------- --------- -------- -------- -------- ---------
Cost of revenues:
Software licenses........... 678 721 570 818 549 509 456 545
Services.................... 1,366 1,438 1,446 1,536 1,069 960 1,148 1,155
-------- -------- -------- --------- -------- -------- -------- ---------
Total cost of revenues.... 2,044 2,159 2,016 2,354 1,618 1,469 1,604 1,700
-------- -------- -------- --------- -------- -------- -------- ---------
Gross margin.................. 5,078 5,143 5,169 4,886 4,494 5,792 6,478 7,010
-------- -------- -------- --------- -------- -------- -------- ---------
Operating expenses:
Product development......... 1,385 1,289 1,138 1,512 1,401 1,532 1,464 1,408
Selling, general and
administrative............. 3,578 3,740 3,816 3,866 4,211 4,611 4,984 5,114
Restructuring charge........ -- -- -- 431 -- -- -- --
-------- -------- -------- --------- -------- -------- -------- ---------
Total operating
expenses................. 4,963 5,029 4,954 5,809 5,612 6,143 6,448 6,522
-------- -------- -------- --------- -------- -------- -------- ---------
Income (loss) from
operations............... 115 114 215 (923) (1,118) (351) 30 488
Other income (expense), net... (101) 90 162 241 204 33 (2) (59)
-------- -------- -------- --------- -------- -------- -------- ---------
Income (loss) before income
taxes...................... 14 204 377 (682) (914) (318) 28 429
Provision for income taxes.... (123) (109) (45) (115) (65) (44) (14) (40)
-------- -------- -------- --------- -------- -------- -------- ---------
Net income (loss)........... $ (109) $ 95 $ 332 $ (797) $ (979) $ (362) $ 14 $ 389
-------- -------- -------- --------- -------- -------- -------- ---------
-------- -------- -------- --------- -------- -------- -------- ---------
</TABLE>
23
<PAGE>
The following table sets forth certain unaudited quarterly financial
information of the Company for each of the Company's last eight fiscal quarters
expressed as a percent of total revenues for the periods indicated.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30,
1994 1994 1995 1995 1995 1995 1996 1996
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses..................... 60.8% 62.7% 63.5% 62.5% 59.2% 65.8% 71.1% 72.3%
Services.............................. 39.2 37.3 36.5 37.5 40.8 34.2 28.9 27.7
-------- -------- -------- --------- -------- -------- -------- ---------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- --------- -------- -------- -------- ---------
Cost of revenues:
Software licenses..................... 9.5 9.9 8.0 11.3 9.0 7.0 5.6 6.3
Services.............................. 19.2 19.7 20.1 21.2 17.5 13.2 14.2 13.2
-------- -------- -------- --------- -------- -------- -------- ---------
Total cost of revenues.............. 28.7 29.6 28.1 32.5 26.5 20.2 19.8 19.5
-------- -------- -------- --------- -------- -------- -------- ---------
Gross margin............................ 71.3 70.4 71.9 67.5 73.5 79.8 80.2 80.5
-------- -------- -------- --------- -------- -------- -------- ---------
Operating expenses:
Product development................... 19.4 17.7 15.8 20.9 22.9 21.1 18.1 16.2
Selling, general and administrative... 50.3 51.2 53.1 53.4 68.9 63.5 61.7 58.7
Restructuring charge.................. -- -- -- 6.0 -- -- -- --
-------- -------- -------- --------- -------- -------- -------- ---------
Total operating expenses............ 69.7 68.9 68.9 80.3 91.8 84.6 79.8 74.9
-------- -------- -------- --------- -------- -------- -------- ---------
Income (loss) from operations........... 1.6 1.5 3.0 (12.8) (18.3) (4.8) 0.4 5.6
Other income (expense), net............. (1.4) 1.3 2.3 3.3 3.3 0.4 -- (0.6)
-------- -------- -------- --------- -------- -------- -------- ---------
Income (loss) before income taxes..... 0.2 2.8 5.3 (9.5) (15.0) (4.4) 0.4 5.0
Provision for income taxes.............. (1.7) (1.5) (0.7) (1.5) (1.0) (0.6) (0.2) (0.5)
-------- -------- -------- --------- -------- -------- -------- ---------
Net income (loss)..................... (1.5)% 1.3% 4.6% (11.0)% (16.0)% (5.0)% 0.2% 4.5%
-------- -------- -------- --------- -------- -------- -------- ---------
-------- -------- -------- --------- -------- -------- -------- ---------
</TABLE>
Fiscal 1995 software license and service revenues were primarily from the
Company's more mature Unify ACCELL and DataServer product families and were flat
quarter to quarter. The Company introduced Unify VISION 2.0, its advanced
client/server application development environment, in March 1995. Total revenues
declined in the first quarter of fiscal 1996 due to seasonality and to the fact
that the U.S. sales organization was in the process of restaffing and
retraining. Revenues increased in the second, third and fourth quarters of
fiscal 1996 due to improved productivity in the U.S. sales organization,
increased sales of Unify VISION 2.0 worldwide and several large Unify ACCELL and
DataServer product sales.
24
<PAGE>
The following table sets forth the revenues from licenses of the Company's
Unify VISION and Unify ACCELL and DataServer products and service revenues for
each quarter of fiscal 1996.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
JUL. 31, OCT. 31, JAN. 31, APRIL 30,
1995 1995 1996 1996
--------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
License revenues:
Unify VISION.................................. $ 540 $ 1,012 $ 1,426 $ 2,031
Unify ACCELL and DataServer................... 3,078 3,765 4,323 4,269
--------- --------- --------- -------------
Total license revenues...................... 3,618 4,777 5,749 6,300
Services revenues............................... 2,494 2,484 2,333 2,410
--------- --------- --------- -------------
Total revenues.............................. $ 6,112 $ 7,261 $ 8,082 $ 8,710
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
In the fourth quarter of fiscal 1995, the increase in cost of software
licenses was due primarily to a one-time, $210,000 write off of prepaid
third-party royalties on fiscal 1993 revenue the recognition of which had been
deferred due to the uncertainty of its collection; it was determined in fiscal
1995 that recognition of this revenue was unlikely and the related royalties
were therefore charged to expense. The increase in cost of services in the
fourth quarter of fiscal 1995 was due to a one-time, $210,000 write off of
prepaid maintenance costs which were determined to have no future value.
The Company kept staffing levels and operating expenses relatively stable
during fiscal 1995 in order to minimize net losses in a period of flat revenues.
Quarterly product development expenditures were stable in fiscal 1995 and 1996.
SG&A expenses increased quarter by quarter in fiscal 1996 due to the restaffing
of the U.S. sales and marketing organizations and to increasing promotional and
travel expenses related to the launch of Unify VISION 2.0.
The Company's quarterly operating results have varied significantly in the
past, and the Company expects that such results are likely to vary significantly
from time to time in the future. Such variations result from, among other
matters, 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; changes in pricing policies by the Company or its
competitors; changes in the level of operating expenses; changes in the
Company's sales incentive plans; budgeting cycles of its 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; personnel changes; the results of international
expansion; currency fluctuations; seasonal trends and general domestic and
international economic and political conditions. The Company typically receives
a number of orders ranging in size from several hundred thousand dollars to
approximately $1 million in any fiscal quarter. Because a significant portion of
the Company's revenues has been, and the Company believes will continue to be,
derived from such large orders, 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. In addition, the
Company intends to continue to expand its domestic and international direct
sales force. The timing of such expansion and the rate at which new sales people
become productive could also cause material fluctuations in the Company's
quarterly operating results.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. Revenues are also difficult to forecast because the
market for client/server application development software is rapidly evolving,
and the Company's sales cycle, from initial evaluation to purchase and the
provision of support 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 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
25
<PAGE>
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,
net income is likely to be disproportionately adversely affected. The Company is
increasing its sales, marketing and product development expenditures, and
operating results will be materially adversely affected if the Company does not
achieve revenue growth. There can be no assurance that the Company will be able
to achieve or maintain profitability on a quarterly or annual basis in the
future. Due to the foregoing factors, it is likely that in some future quarter
the Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected.
The Company expects that its operating results will be affected by seasonal
trends. The Company believes that it is likely that it will experience
relatively higher revenues in its quarters ending April 30 and relatively lower
revenues in its 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 also experience relatively weaker demand in the quarters ending July
31 and October 31 as a result of reduced sales activity in Europe during the
summer months. In particular, due to the foregoing factors and to increased
investments in selling, general and administrative and research and development
expenses in advance of the release of Unify VISION 3.0, the Company expects that
it will incur an operating loss for the quarter ending July 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has principally financed its operations and
investments in property and equipment through the private sale of equity
securities, totaling $23.3 million, equipment lease and bank lines of credit
which have been substantially repaid, and a $3.0 million stockholder line of
credit.
The Company used cash from operations of $0.9 million in fiscal 1994,
generated cash from operations of $1.3 million in fiscal 1995 and used cash from
operations of $1.1 million in fiscal 1996. Cash used in fiscal 1996 was
primarily due to increased accounts receivable. In fiscal 1994, 1995 and 1996,
the Company's investing activities have consisted primarily of purchases of
property and equipment and capitalization of software development costs.
As of April 30, 1996, the Company had $3.0 million in cash and cash
equivalents and negative working capital of $3.2 million. The Company has a $3.0
million line of credit provided by certain stockholders of the Company which
expires in July 1997. Advances under the stockholder provided credit facility
are made at the discretion of the lenders and bear interest at 3.75% per annum.
The amount outstanding on this line of credit as of April 30, 1996 was $2.3
million. The Company also has a $2.5 million revolving line of credit with a
bank which expires in March 1997. Total borrowings under this line are generally
limited to 80% of eligible accounts receivable and up to $500,000 may be used
separately to finance equipment purchases with no receivable borrowing
limitation. Borrowings bear interest at 2.75% and 3.50% over the bank's prime
lending rate for accounts receivable based and equipment borrowings,
respectively. See Notes 3, 4 and 5 of Notes to Consolidated Financial
Statements.
The Company believes that the net proceeds from the offering, anticipated
cash flow from operations, and its existing cash, cash equivalents and unused
borrowing capacity will be sufficient to meet its cash requirements during the
next 12 months. Thereafter, depending on its rate of growth and profitability,
the Company may require additional equity or debt financing to meet its working
capital requirements or capital equipment needs. 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
<PAGE>
BUSINESS
THE COMPANY
Unify Corporation ("Unify" or the "Company") develops, markets and supports
client/server application development tools and database management software
products. In March 1995, the Company introduced Unify VISION 2.0, an advanced
client/server application development environment for the development,
deployment and management of high-end scalable applications. Unify VISION
combines a powerful and scalable client/server architecture with a flexible and
easy-to-use rapid application development technology. The Company is continuing
to market and enhance Unify ACCELL, a family of fourth generation language
("4GL") application development tools and Unify DataServer, a family of database
management system products. As of April 30, 1996, the Company had licensed Unify
VISION to over 175 customers and Unify ACCELL and DataServer products to over
2,000 customers worldwide.
The Company's products are marketed and sold through the Company's direct
sales force in the U.S. and through subsidiaries in Japan, England, France, the
Netherlands and Germany and through a network of distributors and value added
resellers ("VARs") worldwide. Significant customers that have licensed Unify
VISION include, among others, Amoco, Fannie Mae, Glaxo, Hewlett-Packard, Merrill
Lynch, the National Security Agency, NYNEX, Pacific Bell and Sumitomo Metal
Industries Ceramics. The Company's largest VAR customers include Computron
Software, General Instrument, Northern Telecom, Triad Systems and Westinghouse
Security Electronics.
INDUSTRY BACKGROUND
Information technology ("IT") has increasingly become central to almost all
aspects of business operations from customer ordering and support to
manufacturing systems to domestic and international financial systems.
Historically, large organizations relied upon mainframe and mini-computers,
which offered reliability, streamlined control and scalability for multiple
users running transaction-intensive applications. However, the combination of
significant price/performance advances in computing capabilities and increased
competitive pressures to lower costs, improve performance and increase
flexibility and responsiveness have led organizations to attempt to manage more
of their business over networks of "client" and "server" computers. The move to
enterprise-wide "client/server" systems often requires that organizations
integrate diverse hardware and software environments which are distributed in
multiple locations. At the same time, organizations are increasingly automating
business processes. Such organizations are demanding timely delivery of
easy-to-use, robust and flexible applications. Addressing these requirements
concurrently creates significant challenges in developing, deploying and
managing applications.
The initial adoption of client/server computing occurred primarily at an
entry level, typically for small workgroups. These entry-level client/server
applications generally require relatively simple data sharing, generate low
network traffic, involve limited, simple transactions and source information
from a single shared central database. Entry-level applications have been based
upon a two-tier architecture with the application generally running on a single
desktop PC platform (first tier) with all data transferred to the client over a
network from a single shared database server (second tier). The success of
entry-level client/server applications has led organizations to extend
client/server computing through more of the business enterprise to address
business-critical operations. These new "high-end" applications are
significantly more difficult to develop and deploy as compared to entry-level
applications in that they must address issues such as support of distributed
heterogeneous environments; high volumes of complex on-line transaction
processing; and substantial numbers of concurrent enterprise-wide users.
The migration by many organizations toward client/server computing has
created significant demand for applications and their associated development
tools. According to the Hurwitz Consulting Group, the annual market size for
client/server development tools is projected to increase from approximately $600
million as of November 1995 to approximately $2.5 billion by the year 2000. This
market
27
<PAGE>
includes both the development tools offered by major relational database
vendors, which currently capture a significant portion of the overall
client/server tools market, as well as the developers of database-independent
tools.
The first generation of independent tools vendors, such as Powersoft with
its PowerBuilder product, addressed the need for database independence in the
development of entry-level client/server applications and provided easy-to-use
graphical tools. However, such entry-level tools have proven to be ineffective
in implementing high-end client/server applications. As the number of users
increase and applications become more complex, the network becomes burdened by
the amount of data which must be transferred to desktop PCs. Further, the
requirement for PC-only processing is a limiting factor for applications which
require increasingly complex and concurrent processing by multiple users. The
architecture of entry-level tools generally does not support "application
partitioning," in which application functions can be divided and processed on
multiple servers and not limited to processing only on the desktop PC. In
addition to this lack of scalability, the architectures of entry-level
application development tools do not support advanced development methodologies,
heterogeneous computing environments with multiple development and deployment
platforms, or advanced applications management and maintenance functionality.
Organizations seeking to deliver high-end client/server applications
confront multiple business issues. These include the cost of development, the
requirement to rapidly develop and deploy applications and the cost of
maintaining and extending applications as organizations evolve. Faced with these
issues and the pressure to address a growing backlog of business-critical
applications, many organizations are choosing to move, or "migrate," to high-end
client/server applications on an incremental basis rather than pursue a
full-scale enterprise-wide development process. This enables them to maximize
use of existing investments in personnel and computer infrastructure and reduce
the business disruption, time and cost of full-scale application development,
deployment and maintenance.
Whether organizations require full-scale, enterprise-wide, high-end
applications, or are migrating to such applications on an incremental basis,
organizations need tools with available features such as application
partitioning, scalability, rapid application development, application management
and the ability to run in heterogenous computing environments. At the same time,
organizations want to minimize IT expenditures and to avoid substantial
complexity and inflexibility, which leads to longer and more costly development
and maintenance.
THE UNIFY SOLUTION
Unify VISION provides comprehensive, integrated application development
solutions for customers planning to develop enterprise-wide, high-end
applications on a full scale, as well as customers that are migrating to
high-end client/server applications on an incremental basis. By providing
organizations with the benefits of low cost of entry, rapid time to market and
low cost of ownership, Unify VISION addresses customer needs for developing,
deploying and managing high-end client/server applications cost effectively and
efficiently. Unify VISION combines ease-of-use with the power and scalability of
advanced application development technology.
LOW COST OF ENTRY. Unify VISION allows organizations to adopt high-end
client/server solutions on an incremental basis. Unify VISION's approach to
scalable application development is designed to allow organizations to deliver
full-scale, enterprise-wide, high-end solutions or migrate to high-end client/
server solutions on an incremental basis. These applications can be readily
extended in functionality and for broader use throughout the organization. The
Company believes that the ease of use and flexibility of Unify VISION allow
organizations to maximize use of their existing investments in computer
infrastructure and development personnel. For example, Unify VISION offers
object-oriented programming, but allows developers to adopt object orientation
at their own pace, thereby increasing productivity. Similarly, Unify VISION
enables developers to use application partitioning, but allows developers to
avoid partitioning if additional complexity is not needed.
28
<PAGE>
RAPID TIME TO MARKET. The Company believes that the unique architecture of
Unify VISION allows organizations to develop and deploy high-end client/server
applications rapidly. Unify VISION has a scalable RADD (Rapid Application
Development and Deployment) architecture that is designed to enable developers
to quickly and easily produce complex, business-critical applications. Unify
VISION is designed to simplify the development and deployment of high-end
client/server applications through an easy-to-use graphical application
development environment; application partitioning; cross-platform portability;
its built-in application and transaction models; a sophisticated, but not rigid
object-oriented programming environment; and repository-based, team development
facilities.
LOW COST OF OWNERSHIP. Unify VISION is designed to reduce the cost of
managing and extending high-end client/server applications, addressing the needs
of organizations as they grow and change. Applications developed on one platform
can be deployed automatically on multiple platforms in a heterogenous computing
environment while maintaining a complete native look and feel. Applications are
developed using components which can be reused or extended. Partitioning of
applications can be invoked or changed in connection with the deployment of
applications, thereby eliminating the need for the application to be
redeveloped. Unify VISION's APPMAN also offers a broad range of application
management services, including event management, performance management,
software distribution, and administration. The Company believes that such
services optimize use of existing IT infrastructure and extend the lifespan of
existing applications, thereby reducing the demands on development personnel.
Unify VISION's APPMAN also provides automatic integration with leading system
and network management products thereby reducing the need for custom
programming.
STRATEGY
The Company's mission is to be the leading independent supplier of high-end
scalable client/server application development solutions. The following are the
key elements of the Company's strategy:
DELIVER EASY-TO-USE, SCALABLE, HIGH-END CLIENT/SERVER SOLUTIONS. The
Company believes that today's high-end development tools do not offer the ease
of use and scalability that customers will increasingly require. In order to
address these needs, the Company has developed a unique architecture which
provides for ease of use, lower development cost and full scalability. The
Company provides solutions for customers seeking to preserve existing IT
investments and minimize the costs and complexity of migrating to a
client/server environment. A key aspect of this strategy is to provide tools
which allow customers to develop applications which are truly scalable and which
can continue to be used and extended as the application is adopted more widely
throughout an enterprise.
SUPPORT CHANGING COMPUTING ENVIRONMENTS. The Company's strategy is to
provide tools which offer the same degree of ease-of-use, power and flexibility
in response to changing environments. The Company is developing enhancements to
Unify VISION to support application development for Internet and Intranet
applications. The Company believes Unify VISION is well-positioned for these
emerging market opportunities because the architecture of Unify VISION allows
customers to easily extend and adapt their high-end client/server applications
to changing environments.
CAPITALIZE ON LARGE INSTALLED CUSTOMER BASE. The Company plans to continue
to leverage its installed base of over 2,000 customers of Unify ACCELL and
DataServer worldwide. The Company's strategy is to sell Unify VISION to this
customer base as it migrates to high-end client/server applications, while
continuing to seek revenue from sales of enhanced versions of its Unify ACCELL
and DataServer products in the interim. Unify VISION provides a unique scalable
solution which allows Unify ACCELL customers to maximize their significant
investment in existing applications while upgrading to more advanced
client/server applications. The Company is continuing to devote resources to
enhance its Unify ACCELL and DataServer products, thereby assisting its
customers which are not yet ready to move to high-end client/server
environments.
LEVERAGE WORLDWIDE INFRASTRUCTURE. The Company has developed an extensive
international network to provide direct and indirect sales, product development
and support. The Company has more than five years of extensive experience in
developing international versions of its products and selling
29
<PAGE>
and supporting such products internationally. International sales represented
56% of revenues in each of fiscal 1995 and fiscal 1996. The Company believes
that this network will be an important competitive factor in taking advantage of
the emerging adoption of client/server computing internationally.
EXPAND VAR SALES CHANNELS. The Company believes that the flexibility and
ease of use of its development tools are particularly well-suited for use by
VARs. The Company currently has over 400 VAR customers, and sales to VARs
represented approximately 35% of software license revenues in fiscal 1996. Use
of VARs allows the Company to expand its sales channels using the VARs' sales
forces and minimizes the cost of customer support. The Company has developed
specialized pricing and support policies to support VARs. In order to increase
its market presence, the Company intends to focus additional resources to
recruit additional medium to large VARs.
DIFFERENTIATE THROUGH SUPERIOR CUSTOMER SUPPORT. The Company believes that
superior customer support is critical for customers to successfully deliver
high-end client/server solutions. Due to the complexity of client/server
computing, support services must be able to address issues which arise from
components of the client/server system beyond the Company's products such as
multiple databases, computing platforms and operating systems. The Company has
nearly fifteen years of experience in supporting database and application
development products. Because each customer has unique needs, the Company offers
modular customer support programs that match each customer's development cycle
and allow for the addition of new services as needs change.
PRODUCTS
The Company's products include Unify VISION and the Unify ACCELL and
DataServer families of products. Unify VISION is an advanced client/server
application development tool for development, deployment and management of
high-end scalable applications. Unify ACCELL is a family of 4GL application
development tools and Unify DataServer is a family of database management system
products. Since the introduction of Unify VISION 2.0, license revenues from
Unify VISION have continued to represent an increasing percentage of the
Company's revenue, increasing from 12% of license revenues in fiscal 1995 to 25%
of license revenues in fiscal 1996.
UNIFY VISION
Unify VISION is an advanced client/server application development
environment, designed to offer ease-of-use and to combine the flexibility and
productivity of client/server computing with the scalability and performance
required by enterprise-wide high-end applications. Unify VISION supports all
three major parts of the application lifecycle -- development, deployment and
management. Unify VISION is designed to provide deployment and management
flexibility and to allow end-users to adopt their applications to their changing
enterprise without substantial custom programming.
Unify VISION provides an object-oriented, graphical development environment
that includes a multi-user repository for team development, a powerful 4GL, a
graphical user interface ("GUI") designer, and an interactive debugging
facility. Unify VISION automatically interfaces and tightly integrates with
leading database systems. Unify VISION provides a set of built-in dialog forms,
called SmartView dialogs, that automates the task of selecting and customizing
application features and eliminates custom programming. Applications developed
with Unify VISION are portable across heterogenous desktop GUI, operating
system, network and database platforms. Developers can build complex
applications in their preferred development platform and deploy across preferred
end-user environment without the need for custom programming or recompilation.
Unify VISION supports automated, dynamic application partitioning, and can be
deployed in two-tier or multi-tier network environments.
Unify VISION's APPMAN is designed to automate the management of high-end
applications by embedding application management functionality into every
application. Unify VISION's APPMAN automatically supports software distribution,
event management, administration, and performance
30
<PAGE>
management. Unify VISION also automatically integrates with industry-leading
third-party system and network management products. It also includes an open
toolkit to allow developers to integrate the system and network management
products of their choice.
Unify VISION supports Windows, Windows NT and Motif desktops for both
application development and deployment and Macintosh for deployment only. Unify
VISION supports the native "look and feel" of all of these desktop interfaces.
Unify VISION supports leading server platforms including IBM RS/6000, HP 9000,
SUN SPARC, Digital Alpha UNIX, and Windows NT. Unify VISION provides native
interfaces to leading database products including Oracle, Sybase, Informix,
CA-Ingres, Microsoft SQL Server and Unify DataServer. Unify VISION supports the
Microsoft ODBC interface for PC-based workgroup database products.
The Company has adopted a platform-independent, user-based pricing model and
licenses its software for both development and deployment. The U.S. list price
for Unify VISION development license fees is $4,995 per developer. Deployment
license fees are $395 per application per end-user and $10,000 per application
server. The Company also bundles five development licenses and 10 deployment
licenses for a U.S. list price of $25,000. Typical initial license fees range
from $25,000 to $100,000.
UNIFY ACCELL
Unify ACCELL development tool sets are UNIX-based application development
products for building complex, business-critical applications targeted for
character-based platforms. They are designed to maximize developer productivity
through tight integration of 4GL technologies and optimized database features in
a flexible development environment. Unify ACCELL's modular architecture combines
an application generator, 4GL, and an interactive debugging facility with
database-server connectivity.
Developers can use the Unify ACCELL application generator to create forms
from scratch or can use an automatically-created default form. Unify ACCELL's
4GL is an event-driven programming language with powerful features supporting
more than 250 4GL statements, data types and functions. Unify ACCELL's database
independent technology supports native interfaces to major database products
including Oracle, Sybase, Informix, CA-Ingres and Unify DataServer. Unify ACCELL
applications are also portable across industry leading UNIX platform, database,
and client/server networking environments.
License fees for Unify ACCELL are based upon the hardware configuration and
number of end-users. The U.S. list prices range from $2,120 for a single
developer system to $425,000 for the largest multi-user systems.
UNIFY DATASERVER
Unify DataServer is a family of database management products that is
designed to scale from small systems to large high volume on-line transaction
processing (OLTP) systems. At the entry level, the Unify DataServer is designed
to be a high performance easy-to-use product with minimal maintenance and memory
requirements. The DataServer family of products is designed so that the growth
of user requirements over time can be quickly accommodated. Unify DataServer
supports ANSI SQL standard and an industry standard ODBC interface to provide
access to hundreds of third-party tools and products. Unify DataServer products
provide a variety of database access methods which deliver high performance
across a wide variety of environments and deployment configurations. Unify
DataServer products support all major UNIX platforms and client/server
networking environments.
Unify DataServer pricing is based upon hardware configuration and the number
of users. The U.S. list prices range from $1,410 for a single developer system
to $342,000 for the largest multi-user systems.
SERVICE AND SUPPORT
The Company believes that superior customer service and support, including
product support and maintenance, customer training and consulting services, are
critical for achieving and maintaining
31
<PAGE>
customer satisfaction and for assisting customers to successfully develop and
deliver high-end client/ server solutions. Due to the complexity of
client/server computing, support services must be able to address issues which
arise from components of the client/server system beyond the Company's products
such as multiple databases, computing platforms and operating systems. The
Company has extensive experience in supporting database and application
development products. The Company's service and support revenues for fiscal 1996
were $9.7 million or 32% of total revenues for such period.
SUPPORT. The Company offers modular customer support programs which can be
modified to match the customers' development cycles and can be customized as
needs change. All support levels provide telephone, e-mail and facsimile access,
enabling customers to log inquiries for resolution by the Company's support
staff. Service levels can be tailored by customers to select preferred call
response time, information reporting, and other features including 24-hour a
day, seven days a week support. The Company currently has annual maintenance
contracts with over 750 customers. During each of the past three years, over 80%
of the Company's support customers have renewed their support contracts.
Annual Unify VISION support is priced at $1,250 plus 10% of the development
license fee per developer for up to 4 developers. Support for additional
developers is generally priced at 10% of the license fee for each such
developer. Annual support for deployment licenses is generally priced at 10% of
the deployment license fee.
TRAINING. The Company is committed to offering its customers a
comprehensive range of training courses and materials. The Company offers two
educational options. Customers may attend a broad range of courses offered on a
regularly scheduled basis at Unify training centers located in San Jose,
California; Reston, Virginia; Surrey, England; Paris, France; Tokyo, Japan and
Vianen, the Netherlands. The Company can also provide on-site training at
customers' facilities. Charges for training services are $1,750 per student for
a five-day program.
CONSULTING. The Company provides a full range of consulting services with
the objective of adding value to the development process while at the same time
protecting customers' initial software investment. The primary goal of
consulting services is to enable customers to approach development in a manner
which maximizes the benefits that can be derived from the Company's tools and to
successfully develop high-end client/server applications. Consulting services
are generally used in connection with complex development projects and often
involve, among other elements, business process re-engineering, full life cycle
application development, and design and development reviews. Charges for
consulting services average between $1,000 to $1,500 per day with typical
consulting services running from one to eight weeks in duration.
As of April 30, 1996, the Company had 25 employees engaged in support and 15
in training and consulting. The Company intends to continue to expand its
service and support staff and make additional investments in its support
infrastructure during the remainder of fiscal 1997.
UNIFY VISION TECHNOLOGY
The Company has designed and developed Unify VISION to provide a
comprehensive, integrated solution for development, deployment and management of
high-end client/server applications.
APPLICATION DEVELOPMENT. Unify VISION provides an integrated,
object-oriented, repository-based development environment which is designed to
enable developers to quickly and easily produce high-end business-critical
client/server applications. Below is a graphical depiction of this development
environment.
32
<PAGE>
[LOGO]
Unify VISION's SCALABLE RADD (Rapid Application Development and Deployment)
architecture supports the transition to an object-oriented paradigm, but does
not require programmers to be fully trained in object orientation. Rather, Unify
VISION supports a flexible transition, combining object-oriented and procedural
programming techniques so that a customer can evolve towards object orientation
at its own speed while maintaining productivity. Unify VISION includes a
GUI-independent graphical designer, a class editor, an object-oriented 4GL,
graphical debugger, and built-in SmartView dialogs. Developers can use SmartView
dialogs to define complex operations such as application behavior and database
interfaces without manual coding. Unify VISION is built on a default application
and transaction model that eliminates much of the low-level repetitive complex
programming effort. The model consists of a set of built-in procedures and logic
that automates code-intensive functions including GUI behavior, form generation,
application partitioning, enterprise-wide database connectivity,
transaction-based logic and cross-platform portability. Unify VISION's
multi-user object repository and integrated version control facilities allow
large teams of developers to work together to develop an application without
overriding or corrupting each other's application code.
Unify VISION's GUI SMART ARCHITECTURE allows developers to build
applications which are independent of the desktop windowing system. Unify VISION
includes a platform-independent GUI toolkit that stores applications in a GUI
independent format and provides user-controlled font mapping. The application
automatically assumes the native look and feel of the GUI platform on which it
is running, eliminating the need to recompile or redesign the user interface.
This enables a team of developers to work within their preferred GUI environment
and co-develop an application.
Unify VISION's DATABASE SMART ARCHITECTURE automates and simplifies the
complex task of database interfacing. It provides built-in, high-performance
database access which exploits specialized features in major database management
systems. The application programmer simply specifies the database table
associated with each object, the transaction rules and the locking mode, and
Unify VISION automatically generates the optimum programming code. Unify VISION
provides portability for applications across all leading databases, supporting
all native extensions while enabling the use of vendor-specific enhancements
such as PL/SQL or TRANSACT-SQL. Unify VISION's DATABASE SMART interface
automates virtually all database connectivity and transaction management
including query-by-form, insert, update, delete, master/detail relationship, and
transaction control. Unify VISION generates optimized SQL for each brand of
database and supports simultaneous access to multiple heterogeneous data
sources. Furthermore, when an application originally developed for one database
is switched to another, Unify VISION automatically resolves the differences in
command syntax, semantics, locking, and transaction control without additional
coding.
33
<PAGE>
Unify VISION's EXTENSIBLE PLATFORM-INDEPENDENT ARCHITECTURE allows customers
to write platform-independent applications while at the same time integrating
with platform-specific products such as Microsoft Word and Lotus Notes.
Customers can integrate their applications with third-party products via
AppleTalk, AppleEvents, Windows DDE and UNIX sockets, depending on the platform.
In addition, Unify VISION 3.0, currently scheduled for release in the third
calendar quarter of 1996, will also support object linking and embedding (OLE).
Unify VISION's OLE automation will allow users to create form objects containing
Word documents, Excel spreadsheets, and other third-party objects. In addition,
applications running on Windows, Windows NT, UNIX, and Macintosh will be able to
access OLE objects via OLE automation.
APPLICATION DEPLOYMENT. Unify VISION's platform-independent architecture
combined with its advanced distributed application processing services,
including application partitioning, provide a variety of flexible and extendable
deployment alternatives. Below is a graphical depiction of this deployment
environment.
[LOGO]
Unify VISION's distributed application services are built around an OBJECT
BROKER technology that supports automated, dynamic partitioning and execution of
applications. Application partitioning involves the splitting apart of
application components such as desktop services, application services, and data
management services and locating them on various computing resources throughout
the network. Application partitioning provides enhanced scalability and resource
utilization and maximizes performance while reducing maintenance requirements.
Unify VISION's OBJECT BROKER is a custom messaging technology, designed to
scale for most any type of computing environment including single CPU, Symmetric
Multi-Processors (SMP), tightly-coupled processor clusters, and massively
parallel systems (MPP). Unify VISION's OBJECT BROKER supports asynchronous
messaging and publish/subscribe event generation and reporting features. Unify
VISION developers can develop partition-ready applications and deploy them
across multiple computing resources, all linked transparently with the Unify
OBJECT BROKER. Unify VISION applications are network configuration independent
and can be deployed on two-tier or multi-tier networks without specific coding,
configuration changes, or recompiling. These application partitions are binary
portable and can be stored in a network server. At the time of execution, Unify
VISION's advanced distributed services automatically establish communication
links among the various partitions of applications.
34
<PAGE>
Unify VISION's advanced distributed services support shared and reusable
application services that allow a single copy of an application service to be
shared by multiple clients and used among several applications. This allows IT
organizations to reduce maintenance costs and provides a higher level of control
and efficiency. Unify VISION's server replication technology supports multiple
copies of an application service distributed throughout the network. This
provides higher scalability, more efficient load balancing and higher system
availability in case of partial system failure.
APPLICATION MANAGEMENT. Unify VISION's comprehensive, open, integrated
management architecture enables IT organizations to manage their applications
using any preferred management system or different systems at different sites.
The architecture is open and extendable, capable of evolving in parallel with
the customers' developing client/server management infrastructures. Unify VISION
automatically embeds application management functionality in the application
during the development cycle. Below is a graphical depiction of this management
environment.
[LOGO]
For event management, Unify VISION automatically embeds over 400
application-specific events into the developed application. In addition,
developers can define their own application-specific events. Unify VISION's
APPMAN includes agents for Tivoli's Enterprise Console and BMC Patrol.
For performance management, Unify VISION's APPMAN automatically monitors and
generates over 60 different performance metrics. These metrics profile the vital
statistics of an application with respect to response times and resource
utilization. Unify VISION's APPMAN includes software agents for integration with
the H.P. MeasureWare system and PerfView console and BMC Patrol performance
management products.
For software distribution, Unify VISION's APPMAN enables developers to
incorporate software distribution and configuration information during the
development cycle. The resulting application is in a "distribution-ready"
format, compatible with industry-leading ESD (Electronic Software Distribution)
systems. Unify VISION's APPMAN includes an automated deployment configurator
that guides the developer through the process of specifying file configurations
for target platforms. The embedded software agents then automatically generate
the application description files and distribution specifications for the system
administrator's preferred ESD system. Unify VISION's APPMAN provides consistent,
standardized and correct installation of updates of VISION applications across
an enterprise. Unify VISION's APPMAN includes software agents to support
Tivoli's Courier and Microsoft's SMS products.
For administration, Unify VISION provides an integrated graphical console to
display, start, stop and restart Unify VISION application partitions. It also
enables system administrators to view and manage the various components of the
distributed application.
35
<PAGE>
CUSTOMERS AND MARKETS
As of April 30, 1996, the Company had licensed Unify VISION to over 175
customers worldwide and Unify ACCELL and DataServer products to over 2,000
customers worldwide. The Company's target end-user customers include commercial
and government organizations that utilize sophisticated business-critical
information systems distributed over heterogeneous operating systems and
databases. No customer accounted for more than 10% of the Company's total
revenues for fiscal 1995 or 1996. The following is a representative list of the
Company's end-user customers which purchased at least $25,000 of Unify product
during the last two years:
FINANCIAL SERVICES
3i
Abbey National*
Citicorp
Credit Lyonnais
Fannie Mae*
Fondo Comun*
Merrill Lynch*
Monroe Title Insurance*
Moscow Savings Bank
National Australia Bank
National Westminster Bank plc
New Mexico Mutual Casualty
Sherwood Insurance Systems
State Fund Mutual Insurance
ENERGY
AMOCO*
Itron*
Martin Marrietta Energy Systems
North Power*
Oxley Electricity*
CONSUMER/RETAIL
Budweiser
Equifax
Escom
Tesco Stores
MANUFACTURING
Boeing
Cannon
Hewlett-Packard*
Hitachi
Interleaf
Kubota System Development*
Motorola
OKI
Northrop/Grumman
Pitney Bowes
Siemens
Sony
Sumitomo Metal Industries Ceramics*
Symphony Kitchens
Temple Inland*
Westinghouse Security Electronics*
GOVERNMENT AND EDUCATION
Auburn University
Deakin University
Defense Logistics Agency*
National Security Agency*
Social Security Administration*
U.S. Air Force*
U.S. Army
U.S. Navy
TELECOMMUNICATIONS AND MEDIA
- ------------------------
AT&T
BBC
Cellular Technical Services
Northern Telecom
NTT
NYNEX Corporation*
Pacific Bell*
Reed Information Systems*
Reuters Limited
Southwestern Bell
Telebahia*
US Order*
US West Communications
SERVICES/OTHER
Australian Red Cross*
Computer Sciences Corp.
France Informatique*
Glaxo
Management Recruiters International*
Parkside Community Psychiatric
Sogitec*
UGAP*
Wang Federal Systems*
- ------------------------
* Represents customers that have purchased at least $20,000 of licenses for
Unify VISION.
The Company also sells to VARs, the largest customers for the Company's
products, including Computron Software, General Instrument, Northern Telecom,
Triad Systems and Westinghouse Security Electronics.
Representative case studies of Unify VISION applications in use include:
GOVERNMENT. A large multinational security agency has used Unify VISION for
over a year to develop applications that serve over 700 users. The applications
run with over 50 concurrent users on each server. These enterprise applications
were built in about six months and are deployed on Sun, Microsoft Windows and
IBM RS/6000 platforms. As a result of Unify VISION's ability to run on multiple
platforms, the development team needed to learn only one development tool
environment. A ten-person development team was able to leverage the rapid
application development features of Unify VISION to quickly amend the 150 forms
found in some of the relatively complex installed applications.
36
<PAGE>
TELECOMMUNICATIONS. A major telecommunications firm is using Unify VISION
to develop and deploy customer service management applications, thereby
improving customer satisfaction while reducing costs. The application
facilitates closure of a customer trouble ticket on one call by retrieving the
incoming caller's ID and phone number and using this information to retrieve and
display all pertinent customer data. The application is used by over 150
customer service representatives and roll-out plans call for an additional 650
users within 12 months. Among the reasons Unify VISION was chosen for the
project include the product's ability to extract information from multiple
databases, such as Oracle and Unify DataServer databases, without locking the
user into a certain client platform.
MANUFACTURING. A large supplier of PC printers employs Unify VISION as the
application development environment for handling their 400-user defects
management system linking three servers at different locations. After three
months of development, the customer was able to rebuild its existing application
and migrate from a character-based client/server environment. Unify VISION's
built-in automated functionality and powerful 4GL enabled the customer to
significantly reduce the number of forms and coding required. Unify VISION
provided a rapid GUI application environment complete with an open interface to
CASE and source code management tools as well as a single code stream supporting
multiple platforms. These capabilities enabled the customer to deploy to
multiple platforms without recompiling, thereby enabling rapid deployment.
FINANCIAL SERVICES. A full-service brokerage firm uses Unify VISION to
develop and support on-line and static security trading systems for their
municipal bond trading floors. The Sun and Windows-based application is the
front-end to mainframe security and pricing data. Part of the enterprise
roll-out includes global and local distributed application partitioning and
application management in both London and New York. Unify VISION satisfied the
customer's requirement for a flexible, easy-to-use tool which could create
applications deployable across multiple platforms. Unify VISION met the
requirements and allowed three database administrators who were knowledgeable
about the data but lacked programming expertise to develop the application and
respond to changing user requirements. During end-user testing, the database
administrators effectively modified the application to integrate with an
additional data source.
SALES AND MARKETING
The Company markets its products and services domestically through a
combination of direct sales and indirect channels, including distributors and
VARs. The Company's marketing efforts are primarily directed at broadening the
market for Unify VISION by increasing the awareness of the importance of a
high-end client/server application development environment and at supporting the
Company's direct and indirect sales channels. Marketing activities include,
among others, conducting public relations and product seminars, issuing
newsletters, conducting direct mailings, preparing other marketing materials,
coordinating the Company's participation in industry programs and forums and
establishing and maintaining close relationships with recognized industry
analysts. The Company also maintains a site on the World Wide Web.
The Company plans to continue to leverage its installed base of over 2,000
Unify ACCELL and DataServer customers. The Company's sales and marketing
strategy in part targets this installed base with the objective of generating
significant revenue for Unify VISION as this customer base migrates to high-end
client/server applications. The Company is also continuing to devote resources
to upgrade its ACCELL and DataServer products, thereby assisting those of its
customers that are not yet moving to high-end client/server applications.
The Company believes that the flexibility and ease-of-use of the Company's
development tools are particularly well suited for use by VARs and that the VAR
channel represents a significant market opportunity. In order to increase its
market presence, the Company intends to supplement its direct sales activities
by expanding its existing VAR sales channels through a focused program to
recruit additional medium to large VARs. Revenues from distributors and
resellers accounted for approximately 61%, 59%, and 60% of the Company's
software license revenues for fiscal 1994, 1995 and 1996,
37
<PAGE>
respectively. The Company's ability to achieve significant revenue growth in the
future will depend in large part on its success in maintaining existing and
establishing additional relationships with distributors, resellers and VARs
worldwide.
The Company markets its products internationally through subsidiaries in
Japan, England, France, the Netherlands and Germany and through distributors and
VARs. International revenue accounted for 51%, 56% and 56% of total revenues in
fiscal 1994, 1995 and 1996, respectively. For detailed information regarding the
distribution of revenues, operating results and assets by geographic area for
fiscal years 1994, 1995 and 1996, see Note 11 of Notes to Consolidated Financial
Statements.
As of April 30, 1996, the Company had 64 and 11 employees engaged in sales
and marketing activities worldwide, respectively. The Company intends to
continue to expand its sales and marketing staff and make additional investments
in marketing and advertising during fiscal 1997.
PRODUCT DEVELOPMENT
Since its inception, the Company has made substantial investments in product
development, and the Company anticipates that it will continue to commit
substantial resources to product development in the future. The Company's
principal development projects include Unify VISION 3.0, which, in addition to a
number of enhancements to existing features, will incorporate support for OLE 2
for application integration and a native Microsoft Windows 95 desktop
environment. Unify VISION 3.0 is expected to be released during the third
calendar quarter of 1996. The Company is also developing a version of Unify
VISION'S APPMAN which can be used by customers to provide application management
for use with applications developed with other development tools. Also, as part
of its strategy to support the extended enterprise, the Company is developing a
version of Unify VISION for use in development of Internet and Intranet
deployable applications. Unify's VISION Web facility allows customers to develop
multi-tiered, high-end client/server applications which run in either LAN-based
client/server environments or over the Internet. In addition, the Company
continues to invest in enhancements to its Unify ACCELL and DataServer products.
The software market in which the Company competes is characterized by rapid
technological change, frequent introductions of new and enhanced products,
changes in customer demands and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company's future
success will depend upon its ability to address the increasingly sophisticated
needs of its customers by supporting existing and emerging hardware, software,
database and networking platforms and by developing and introducing enhancements
to Unify VISION and new products on a timely basis that keep pace with such
technological developments, emerging industry standards and customer
requirements. There can be no assurance that the Company will be successful in
developing and marketing enhancements to Unify VISION and new products that
respond to technological change, evolving industry standards or customer
requirements, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and sale of such
enhancements or products or that such enhancements or products will adequately
meet the requirements of the 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.
The Company's product development activities are conducted at its
Sacramento, California facility and its San Jose, California headquarters. As of
March 31, 1996, the Company had a total of 59
38
<PAGE>
employees and contractors in product development, including 48 development
engineers. The Company's product development expenditures for fiscal 1993, 1994,
1995 and 1996 were $7.0 million, $6.3 million, $5.7 million and $5.8 million,
respectively. The Company expects that product development expenses will
continue to increase through fiscal 1997.
COMPETITION
The Company has experienced and expects to continue to experience intense
competition from current and future competitors. The Company's current direct
competitors for high-end client/server development tools include, among others,
Forte and Dynasty. The Company also competes with database vendors such as
Oracle, Informix, Sybase, IBM and others, which offer their own development
tools for use with their proprietary databases. In addition to its direct
competitors, the Company also competes with companies that offer other types of
development tools which can be used in lieu of advanced development tools such
as Unify VISION. Among the other types of tools which can be used by customers
include products offered by Powersoft, Microsoft and others.
For its Unify ACCELL and DataServer products, the Company's business
generally derives from sales of upgrades or additional run time versions of its
products. As a result, the competitive factors are generally the consideration
by a customer as to whether to develop a new system 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 ACCELL and
DataServer products include companies such as Oracle, Informix and Sybase, among
others.
Many of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than the Company. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged. The Company also expects to
face additional competition as other established and emerging companies enter
the client/server application development market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share, any one of which could materially adversely affect the Company's
business, operating results 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, deployment and management functionality;
product performance and quality; customer support; product architecture; and
price. The Company believes it presently competes favorably with respect to each
of these factors. However, the Company's market is still evolving and there can
be no assurance that the Company will be able to compete successfully against
current and future competitors and the failure to do so successfully will 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
39
<PAGE>
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 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 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. 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 manufacturing and selling its systems. Any of these situations can have a
material adverse effect on the Company's business, results of operations or
financial condition.
The Company is dependent on third-party suppliers for certain software such
as Galaxy from VISIX Software and RPC Tool from Microsoft, which are imbedded 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, 1996, the Company had a total of 190 employees, including 42
in product development, 40 in consulting, training and support, 75 in sales and
marketing and 33 in operations and administration. Of these employees, 146 were
located in the United States, 34 were located in Europe, and ten were located in
Japan.
Since February 1995, the Company has hired a new senior management team and
made significant changes in the Company's organization in order to focus on the
development, marketing and support of Unify VISION. Approximately half of the
Company's officers were hired within the past 18 months, and the Company intends
to hire additional key personnel in the near future. In addition, most of the
sales and marketing force was hired during the past 12 months.
The success of the Company depends in large part upon the ability of the
Company to recruit and retain qualified employees, particularly highly-skilled
engineers and direct-sales and support personnel. The competition for such
personnel is intense. There can be no assurance that the Company will be
successful in retaining or recruiting key personnel. Any failure by the Company
to expand or retain its engineering, direct sales and support personnel would
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.
40
<PAGE>
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. The Company believes that the amount of
ultimate liability with respect to these actions will not materially affect the
consolidated financial position of the Company. As of April 30, 1996, the
Company had future obligations to pay cash in the amount of approximately
$217,000 relating to previously settled legal proceedings and claims. Of such
amount, approximately $150,000 is payable in fiscal 1997 and the remainder in
fiscal 1998. The Company does not believe that such obligations will have an
impact on the Company's liquidity as of April 30, 1996 in any material respect.
FACILITIES
The Company maintains its headquarters in San Jose, California, in a 12,000
square foot facility under a lease which expires in September 2000. 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 sales and support offices in Chicago, Illinois; Irving,
Texas; New York, New York; and Reston, Virginia. The Company also maintains
international offices in England, France, the Netherlands and Japan. The Company
believes that its existing facilities are adequate for its current needs. The
Company believes that suitable additional or alternative space will be available
in the future on commercially reasonable terms as needed. Nevertheless, any move
to new facilities or expansion could be disruptive and could have a material
adverse effect on the Company's business results, operations and financial
condition.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
----------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Reza Mikailli 44 President, Chief Executive Officer and Director
Paul H. Bach 38 Vice President, US Commercial Sales
Scott Canali 39 Vice President, Marketing
James C. Fleming 51 Vice President, Worldwide Sales
Malcolm Padina 50 Vice President, European Sales
Terrence J. Reilly 51 Vice President, Intercontinental Sales
Susan Salvesen 40 Vice President, Finance and Administration and Chief
Financial Officer
Frank Verardi 47 Vice President, Customer Support & Product Delivery
Walter Kopp 38 Director, Product Development
D. Kirkwood Bowman (1)(2) 55 Director
Arthur C. Patterson (1)(2) 52 Director
Gerard H. Langeler (1)(2) 45 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
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 Server and Connectivity Products at Informix, a manufacturer
of computer database and software tool products. Mr. Mikailli received an M.S.
degree in computer science from Santa Clara University, and a B.S. degree in
computer science and a M.S. degree in mathematics from the University of Tehran,
Iran.
PAUL H. BACH has served as Vice President of U.S. Commercial Sales at the
Company since June 1995. From 1994 to May 1995, Mr. Bach served as Executive
Vice President, Field Operations of Infinity Financial Technology Incorporated,
a software company. From 1989 to 1994, Mr. Bach was employed by Borland
International, Inc. ("Borland"), a software company, most recently as Vice
President and General Manager, Interbase Business Unit and previously as Vice
President of U.S. Interbase Sales. Mr. Bach received a B.S. degree in economics
from The American University, Washington, D.C.
SCOTT CANALI has served as Vice President, Marketing at the Company since
April 1995. From 1992 to April 1995, Mr. Canali was Director, Marketing Programs
at Informix. From 1988 to 1992, Mr. Canali was employed by Motorola Inc., an
electronics company, as Director, Software & Channel Marketing of the Computer
Group. Mr. Canali received a B.A. in public service/management and
administration from the University of California at Davis.
JAMES C. FLEMING joined the Company as Vice President, Worldwide Sales in
January 1995. Prior thereto he was President of Intext Systems, a text storage
and retrieval company. From 1992 to 1994, Mr. Fleming served as Vice President,
U.S. Sales at Borland. From 1986 to 1992, Mr. Fleming was employed by Informix,
most recently as Vice President, U.S. & Canadian Sales and Client Services. Mr.
Fleming holds a bachelor's degree from U.C. Santa Barbara and California State
University at San Francisco.
42
<PAGE>
MALCOLM PADINA was appointed Vice President, European Sales at the Company
in February 1995. During 1994 Mr. Padina served as Vice President, European
Operations, of Visgenic Software Inc., a supplier of graphical database
development tools. From 1990 to 1993, Mr. Padina was Managing Director of the
English subsidiary of Informix.
TERRENCE J. REILLY joined the Company as Vice President, Intercontinental
Sales in April 1995. From 1993 to 1995, Mr. Reilly was employed by Blyth
Software, a software company, most recently as Vice President of North American
Sales. From August 1992 to November 1993, Mr. Reilly served as Vice President of
OEM & International Sales at Netlabs, Inc., a network management company. Mr.
Reilly received a B.A. degree in business administration/marketing from Dowling
College, and an A.S.B.A. degree in business and finance from State University of
New York, Farmingdale.
SUSAN SALVESEN joined the Company as Vice President, Finance and
Administration and Chief Financial Officer in April 1996. From May 1994 to April
1996, Ms. Salvesen was Vice President, Finance and Chief Financial Officer of AG
Associates, a semiconductor equipment company. From February 1988 to May 1994,
she served as Corporate Controller at Aspect Telecommunications, where she
managed the accounting and finance operations. She holds a B.A. degree in
economics from Douglass College of Rutgers University and an M.B.A. from the
University of Pittsburgh.
FRANK VERARDI joined the Company in 1988 as Manager of Consulting Services
and was named Director of Client Services in 1989. In November 1995, Mr. Verardi
was appointed Vice President, Customer Support & Product Delivery. Mr. Verardi
received a B.S. degree in Computer Sciences from California State University,
Chico.
WALTER KOPP joined the Company in 1987 as Engineering Manager. In 1992, Mr.
Kopp was named Director of Software Development and in January 1995 he was
appointed as Director 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 company. Mr. Kopp received a B.S. degree from Cornell University and a
M.S. degree in computer science from the University of Massachusetts.
D. KIRKWOOD BOWMAN has served as a director of the Company since December
1986. From 1985 to the present, Mr. Bowman has served as a General Partner of
Inman & Bowman Management, a venture capital management firm, which is the
General Partner of Inman & Bowman and Inman & Bowman Entrepreneurs, both of
which are venture capital funds. Mr. Bowman received a B.A. degree from the
University of the Pacific in international relations and an M.B.A. degree in
finance from the University of California at Berkeley.
ARTHUR C. PATTERSON has served as a director of the Company since December
1986. For more than five years Mr. Patterson has been a Managing Partner of
Accel Partners, a venture capital management firm investing in software and
telecommunication companies. Mr. Patterson is also a Director of AXENT
Technologies, Inc., a security software company, UUNet Technologies, Inc., an
Internet access provider, VIASOFT, Inc., a software company, PageMart Wireless,
Inc., a wireless communication company, and the GT Global group of mutual funds.
GERARD H. LANGELER has served as a director of the Company since May 1993.
From 1992 to the present, Mr. Langeler has served as a General Partner of
Olympic Venture Partners, a venture capital firm. From 1981 to 1992, Mr.
Langeler served as an officer of Mentor Graphics, Inc., a software company. Mr.
Langeler currently serves as a director of Consep, Inc., an agricultural
biotechnology company. Mr. Langeler holds an A.B. degree from Cornell University
and an M.B.A. degree from Harvard University.
Each officer serves at the discretion of the Board of Directors. Directors
are elected annually by the stockholders of the Company. There are no family
relationships among any of the directors or officers of the Company.
43
<PAGE>
The Board of Directors has a Compensation Committee and an Audit Committee,
both currently comprised of Messrs. Bowman, Langeler and Patterson. The
Compensation Committee makes recommendations to the Board concerning salaries
and incentive compensation for officers and employees of the Company. The Audit
Committee reviews the results and scope of the audit and other accounting
related services.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes all compensation earned by or paid to the
Company's Chief Executive Officer and to each of the Company's other most highly
compensated executive officers whose total annual salary and bonus exceeded
$100,000 (collectively, the "Named Executive Officers") for services rendered in
all capacities to the Company during the fiscal years ended April 30, 1995 and
1996.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
OTHER ANNUAL OPTIONS ALL OTHER
SALARY BONUS COMPENSATION GRANTED COMPENSATION
NAME AND PRINCIPAL FUNCTION (1) YEAR ($) ($) ($) (#) ($)
- ------------------------------------------------------------ ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Reza Mikailli............................................... 1996 $200,000 $ 88,250 -- 416,274 $12,000(1)
President & Chief 1995 180,000 72,000 -- 66,371 6,000
Executive Officer
James Fleming............................................... 1996 170,000 80,000 -- 10,000 12,000(1)
Vice President, 1995 47,100 20,000 -- 108,841 1,750
Worldwide Sales
Scott Canali................................................ 1996 160,000 40,000 -- 81,790 6,000(1)
Vice President, 1995 -- -- -- -- --
Marketing
Terrence Reilly............................................. 1996 120,000 77,000 -- 40,977 6,000(1)
Vice President, 1995 925 -- -- -- --
Intercontinental Sales
Malcolm Padina.............................................. 1996 133,100 48,300 -- 7,142 30,700(2)
Vice President, 1995 25,100 14,150 -- 54,527 5,600
European Sales
</TABLE>
- ------------------------
(1) Represents an automobile allowance.
(2) Includes $17,000 for automobile allowance and $12,000 for pension
contributions by the Company.
44
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the option grants
during fiscal 1996 to the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANT ANNUAL RATES OF
----------------------------------------------- STOCK PRICE
% OF TOTAL APPRECIATION FOR
OPTIONS GRANTED OPTION TERM (1)
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE OR BASE EXPIRATION ----------------
NAME (#)(2) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
- -------------------------------------- ---------------------- --------------- ---------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Reza Mikailli......................... 223,070 21.4% $0.35 7/20/05 $49,101 $124,431
57,490 5.5 1.40 1/26/06 50,618 128,276
135,714 13.0 4.20 2/07/06 358,469 908,431
James Fleming......................... 10,000 1.0 1.40 1/26/06 8,805 22,312
Scott Canali.......................... 81,790 7.9 0.35 5/17/05 18,003 45,623
Terrence Reilly....................... 27,263 2.6 0.35 5/17/05 6,001 15,208
13,714 1.3 1.40 1/26/06 12,075 30,599
Malcolm Padina........................ 7,142 0.7 1.40 1/26/06 6,289 15,938
</TABLE>
- ------------------------
(1) The potential realizable value is based on the term of the option at the
time of grant (ten years). Potential gains are net of the exercise price but
before taxes associated with the exercise. Amounts represent hypothetical
gains that could be achieved for the respective options if exercised at the
end of the relevant option term. The assumed 5% and 10% rates of stock
appreciation are based on appreciation from the exercise price per share
established at the relevant grant date. These rates are provided in
accordance with the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the future Common
Stock price. Actual gains, if any, on stock option exercises are dependent
on the future financial performance of the Company, overall market
conditions and the option holders' continued employment through the vesting
period. This table does not take into account any appreciation in the price
of the Common Stock from the date of grant to the date of this Prospectus,
other than the columns reflecting assumed rates of appreciation of 5% and
10%.
(2) All options granted in fiscal 1996 have an exercise price equal to the fair
market value on the date of grant. The Company granted options to purchase
an aggregate of 1,040,218 shares to all employees and consultants in fiscal
1996.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning the option exercises
during the fiscal year ended April 30, 1996 by the Named Executive Officers and
the fiscal 1996 year end option values.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END (#) FY-END (1)
--------------------------- ---------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Reza Mikailli ...... 346,931 $181,790 -- 135,714 $ -- $617,499
James Fleming ...... 110,202 40,000 -- 8,639 -- 63,497
Scott Canali ....... 81,790 28,627 -- -- -- --
Terrence Reilly .... 27,263 9,542 -- 13,714 -- 100,798
Malcolm Padina ..... -- -- 15,904 45,765 133,594 376,927
</TABLE>
- ------------------------
(1) Based upon the fair market value of the Company's Common Stock at fiscal
year end of $8.75 per share, as determined by the Board of Directors less
the exercise price payable for such shares.
45
<PAGE>
1991 STOCK OPTION PLAN
The Company's 1991 Stock Option Plan (the "Stock Option Plan") became
effective in March 1991 and was last amended and restated in March 1996. The
purpose of the Stock Option Plan is to attract and retain qualified personnel,
to provide additional incentives to employees, officers and consultants of the
Company and to promote the success of the Company's business. A reserve of
2,200,000 shares of the Company's Common Stock has been established for issuance
under the Stock Option Plan. The Stock Option Plan is administered by the
Compensation Committee of the Board of Directors. Subject to the Stock Option
Plan, the Compensation Committee has complete discretion to determine which
eligible individuals are to receive option grants, the number of shares subject
to each such grant, the status of any granted option as either an incentive
stock option or a non-statutory option, the vesting schedule to be in effect for
the option grant and the maximum term for which any granted option is to remain
outstanding.
Each option granted under the Stock Option Plan has a maximum term of ten
years, subject to earlier termination following the optionee's cessation of
service with the Company. Options granted under the Stock Option Plan may be
exercised only for fully vested shares. The exercise price of incentive stock
options and non-statutory stock options granted under the Stock Option Plan must
be at least 100% and 85% of the fair market value of the stock subject to the
option on the date of grant, respectively (or 110% with respect to holders of
more than 10% of the voting power of the Company's outstanding stock). The
Compensation Committee determines the fair market value of the stock. The
purchase price is payable immediately upon the exercise of the option. Such
payment may be made in cash, in outstanding shares of Common Stock held by the
participant, through a full recourse promissory note payable in installments
over a period of years or any combination of the foregoing.
The Board of Directors may amend or modify the Stock Option Plan at any
time, provided that no such amendment or modification may adversely affect the
rights and obligations of the participants with respect to their outstanding
options or unvested shares without their consent. In addition, no amendment of
the Stock Option Plan may, without the approval of the Company's stockholders,
(i) materially modify the class of individuals eligible for participation, (ii)
increase the number of shares available for issuance, except in the event of
certain changes to the Company's capital structure, (iii) materially increase
the benefits accruing to Optionees under the Stock Option Plan, or (iv) extend
the term of the Stock Option Plan. The Stock Option Plan will terminate in March
2002, unless sooner terminated by the Board.
EMPLOYEE STOCK PURCHASE PLAN
In March 1996, the Board adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan was approved by the stockholders of the
Company in May 1996. The Purchase Plan provides a means by which employees may
purchase Common Stock of the Company through payroll deductions. The Purchase
Plan is implemented by offerings of rights to eligible employees. Generally,
each offering is of 24 months' duration with purchases occurring every six
months. Common Stock is purchased for accounts of employees participating in the
Purchase Plan at a price per share equal to the lower of (i) 85% of the fair
market value of a share of Common Stock on the date of commencement of
participation in the Purchase Plan offering period or (ii) 85% of the fair
market value of a share of Common Stock on the date of purchase. Generally, all
employees, including executive officers, who work at least 20 hours per week and
are customarily employed by the Company or an affiliate of the Company for at
least five months per calendar year may participate in the Purchase Plan and may
authorize payroll deductions of up to 15% of their base compensation for the
purchase of Common Stock under the plan. The Purchase Plan authorizes the
Company to issue up to 400,000 shares of Common Stock. As of the date hereof, no
shares of Common Stock had been purchased under the Purchase Plan. The Purchase
Plan will terminate in March 2006.
EMPLOYMENT AGREEMENTS
In March 1995, the Company entered into an employment agreement with Mr.
Mikailli. Under the agreement, Mr. Mikailli receives an annual salary of
$200,000 and is eligible to receive certain bonus payments upon the Company's
achieving certain levels of its business plan. Mr. Mikailli was also given a
46
<PAGE>
one-time $25,000 "sign-on" bonus and was guaranteed a minimum bonus of $25,000
for each of the third and fourth quarters of fiscal year 1995. In addition, the
Company granted to Mr. Mikailli incentive stock options to purchase a number of
shares of the Common Stock of the Company such that the total number of shares
already held by him, plus the number of shares subject to options, represents 6%
of the fully diluted outstanding capital stock of the Company at such time. The
exercise price of the options is $0.35 per share and the options become
exercisable under a three-year vesting schedule. If Mr. Mikailli is terminated
within twelve months following a merger of the Company or a sale by the Company
of all or substantially all of its assets, these options will automatically
vest. If Mr. Mikailli is terminated under any other circumstances, such options
will have the benefit of one additional year of vesting and Mr. Mikailli will
receive his annual base salary, benefits and bonus for an additional six months
from the date of termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was formed in
March 1996 and the members of the Compensation Committee are Messrs. Bowman,
Langeler and Patterson. No executive officer of the Company serves as a member
of the board of directors or compensation committee of any entity which has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
DIRECTOR COMPENSATION
Members of the Company's Board of Directors currently do not receive cash
compensation for their services as directors. During February 1996 each of the
non-employee directors was granted an option to purchase 14,285 shares of Common
Stock at an exercise price of $4.20 per share, which options vest over a
three-year period.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation (the "Certificate")
limits the liability of directors to the maximum extent permitted by Delaware
law. Delaware law provides that a corporation's certificate of incorporation may
contain a provision eliminating or limiting the personal liability of a director
for monetary damages for breach of their fiduciary duties as directors, except
for liability for (i) any breach of their duty of loyalty to the corporation or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law or (iv) any transaction from which
the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors,
officers, and trustees to the fullest extent permitted by law. The Company
believes that indemnification under its Bylaws covers at least negligence and
gross negligence on the part of indemnified parties. The Company's Bylaws also
permit the Company to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the Bylaws would permit indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the Company's
directors and executive officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of the
Company, arising out of such person's services as a director or executive
officer of the Company or any other company or enterprise to which the person
provides services at the request of the Company. The Company believes that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
47
<PAGE>
CERTAIN TRANSACTIONS
In November 1993, the Company entered into a Revolving Credit Agreement with
certain investors (the "Lenders"), pursuant to which the Lenders agreed to make
available to the Company a revolving credit facility of up to $3,000,000. The
amount of the credit facility provided by holders of more than 5% of the
outstanding shares of the Company's Common Stock was as follows:
<TABLE>
<CAPTION>
NAME AMOUNT OF CREDIT
- --------------------------------------------------------------------------- -----------------
<S> <C>
Inman & Bowman (1)......................................................... $ 561,148
Accel Capital L.P (2)...................................................... 456,557
Olympic Venture Partners (3)............................................... 431,929
Merrill, Pickard, Anderson & Eyre (4)...................................... 274,991
Institutional Venture Partners (5)......................................... 255,199
Robert Fleming Nominees, Ltd. (6).......................................... 179,534
</TABLE>
- ------------------------
(1) D. Kirkwood Bowman, a director of the Company, is a General Partner of Inman
& Bowman ("I&B") Management which is a General Partner of I&B.
(2) Arthur Patterson, a director of the Company, is either a General Partner or
a General Partner of the respective General Partner of Accel Capital L.P.,
Accel Capital (International) L.P. and Ellmore C. Patterson Partners.
(3) Gerard Langeler, a director of the Company, is a General Partner of Olympic
Venture Partners ("OVP") II, is Attorney-in-Fact of Rainier Venture Partners
("RVP"), and a Vice President of RVP Advisors Fund and OVP II Advisors Fund.
(4) Merrill, Pickard, Anderson & Eyre ("MPAE") and related parties own of record
391,765 shares of Common Stock of the Company.
(5) Institutional Venture Partners ("IVP") and related parties owns of record
312,657 shares of Common Stock of the Company.
(6) Robert Fleming Nominees, Ltd. and related parties own of record 255,771
shares of the Common Stock of the Company.
The Company's obligations to pay each of the Lenders any amounts loaned to
the Company under the Revolving Credit Agreement were evidenced by full-recourse
Promissory Notes. Each Promissory Note provided that the principal amount of any
amounts loaned accrued interest at a rate of 3.75% per annum. The principal and
all accrued interest under each Promissory Note initially was due on August 30,
1995. In connection with the Revolving Credit Agreement, each Lender was also
issued a Warrant to purchase its pro rata share of 190,476 shares of the
Company's Common Stock at an exercise price of $1.75 per share. Such warrants
were immediately exercisable as to one-half of the shares covered thereby, with
the remaining one-half of the warrant exercisable only after such time as the
total amount advanced to the Company under the credit facility exceeded
$2,000,000. The amount advanced to the Company under the credit facility
exceeded $2,000,000 in January 1996. The warrants may be exercised by payment of
cash or the delivery of a promissory note or by a cashless exercise if the
Lender elects to receive the number of shares receivable upon exercise less the
number of shares having a value equal to the exercise price. The Revolving
Credit Agreement subsequently was amended on two separate occasions, pursuant to
which, among others, the term of the Agreement was extended, initially to
December 31, 1995, and, most recently, to July 31, 1997. Additionally, effective
as of December 31, 1995 the exercise price of the warrants was reduced from
$1.75 per share to $0.35 per share and the Lenders were granted certain
conversion rights relating to amounts outstanding under the revolving Credit
Agreement. Such conversion rights terminate upon the consummation of the
offering.
48
<PAGE>
In January 1996, the Company entered into a loan transaction with Mr.
Mikailli, the proceeds of which were used to exercise stock options. As of April
30, 1996 the principal amount outstanding under such loan was $195,022. The loan
is a full recourse loan bearing interest at the rate of 5% per year and secured
by the underlying shares. The loan is due in three years or earlier on the sale
of the shares.
In March 1995, the Company entered into an Employment Agreement with Mr.
Mikailli. See "Management -- Employment Agreements." The Company has entered
into indemnification agreements with each of its executive officers and
directors. See "Management -- Limitation of Liability and Indemnification
Matters."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested directors of the Board of
Directors, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of April 30, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by:
(i) each person (or group of affiliated persons) who is known by the Company to
own beneficially 5% or more of the Company's Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers, (iv) all
directors and executive officers as a group and (v) each of the Selling
Stockholders of the Company's Common Stock. Except as otherwise noted, the
persons or entities in this table have sole voting and investment power with
respect to all the shares of Common Stock beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER OFFERING
-------------------------- NUMBER OF --------------------------
BENEFICIAL OWNER (1) NUMBER PERCENTAGE SHARES BEING SOLD NUMBER PERCENTAGE
- ------------------------------------------------ ----------- ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Inman & Bowman (2) ............................. 771,368 13.3% 35,628 735,740 9.6%
4 Orinda Way
Bldg. D, Suite 150
Orinda, CA 94563
Accel Capital L.P. (3) ......................... 628,315 10.9% -- 628,315 8.2%
One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Olympic Venture Partners (4) ................... 606,223 10.5% -- 606,223 7.9%
2420 Carillon Point
Kirkland, WA 98033
Merrill, Pickard, Anderson & Eyre (5) .......... 391,765 6.8% -- 391,765 5.1%
2480 Sand Hill Road
Bldg. 2, Suite 290
Menlo Park, CA 94025
Institutional Venture Partners (6) ............. 312,657 5.4% -- 312,657 4.1%
3000 Sand Hill Road
Bldg. 2, Suite 290
Menlo Park, CA 94025
Fleming Capital Management (7) ................. 255,771 4.4% -- 255,771 3.3%
1285 Avenue of the Americas
16th Floor
New York, New York 10019
D. Kirkwood Bowman (8) ......................... 771,368 13.3% 35,628 735,740 9.6%
Arthur C. Patterson (9) ........................ 628,315 10.9% -- 628,315 8.2%
Gerard Langeler (10) ........................... 606,223 10.5% -- 606,223 7.9%
Reza Mikailli (11) ............................. 384,732 6.7% -- 384,732 5.0%
James Fleming (12) ............................. 110,202 1.9% -- 110,202 1.4%
Scott Canali (13) .............................. 81,790 1.4% -- 81,790 1.1%
Terrence Reilly (14) ........................... 27,263 * -- 27,263 *
Malcolm Padina (15) ............................ 18,175 * -- 18,175 *
All directors and executive officers as
a group (12 persons) (16) ..................... 2,723,219 47.1% 35,628 2,687,591 35.2%
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER OFFERING
-------------------------- NUMBER OF --------------------------
BENEFICIAL OWNER (1) NUMBER PERCENTAGE SHARES BEING SOLD NUMBER PERCENTAGE
- ------------------------------------------------ ----------- ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Other Selling Stockholders
Selby F. Little, III ........................... 28,571 * 28,571 -- --
Merritt Lutz ................................... 25,704 * 25,704 -- --
David B. Edwards ............................... 52,135 * 24,985 27,150 *
Richard Terry Duryea ........................... 37,800 * 24,857 12,943 *
Nicholas Nierenberg ............................ 107,826 1.8% 20,717 87,109 1.2%
William Osberg ................................. 62,736 1.1% 20,912 41,824 *
Reed Taussig ................................... 17,535 * 17,535 -- --
Harris Trust and Savings Bank .................. 20,317 * 20,317 -- --
as Trustee for the Unisys
Corporation Master Trust
Rhode Island Securities Corporation ............ 19,203 * 19,203 -- --
Hall, Morris, Drufva II LP ..................... 197,283 3.4% 8,878 188,405 2.5%
Battery Ventures ............................... 195,636 3.4% 8,719 186,917 2.5%
Ronald Bassin .................................. 7,428 * 7,428 -- --
Larry Howard ................................... 32,427 * 6,855 25,572 *
Dougery & Wilder III ........................... 146,009 2.5% 6,507 139,502 1.8%
J. Gregory Harris .............................. 12,857 * 4,285 8,572 *
Emil Osberg .................................... 13,264 * 4,285 8,979 *
Sarah E. Gamble ................................ 1,548 * 1,548 -- --
Citibank/N.A. Custodian ........................ 1,548 * 1,548 -- --
for Larry Hagman IRA
Charles Fullerton .............................. 963 * 963 -- --
John R. Dougery ................................ 8,028 * 358 7,670 *
North Carolina Trust Company ................... 197 * 197 -- --
</TABLE>
- ------------------------
* Less than one percent.
(1) Except as set forth herein the address of the directors and executive
officers set forth in the table is the address of the Company appearing
elsewhere in the Prospectus. A person is deemed to be the beneficial owner
of securities that can be acquired by such person within 60 days upon the
exercise of options.
(2) Includes 756,601 shares held by I&B, 13,180 shares held by I&B
Entrepreneurs and options to buy 1,587 shares held by D. Kirkwood Bowman.
(3) Includes 356,687 shares held by Accel Capital L.P., 237,790 shares held by
Accel Capital (International) L.P., 4,617 shares held by Arthur C.
Patterson, 27,634 shares held by Ellmore C. Patterson Partners and options
to buy 1,587 shares held by Arthur C. Patterson.
(4) Includes 451,478 shares held by OVP II, 149,254 shares held by RVP, 2,053
shares held RVP Advisors Fund, 1,851 shares held by OVP II Advisors Fund and
options to buy 1,587 shares held by Gerald Langeler.
(5) Includes 386,097 shares held by MPAE IV and 5,668 shares held by MPAE
Technology Partners.
51
<PAGE>
(6) Includes 307,970 shares held by IVP IV and 4,687 shares held by IVP
Management IV.
(7) Includes 212,570 shares held by Fleming Capital Management, Inc. and 43,201
shares held by Robert Fleming Nominees, Ltd.
(8) Includes 756,601 shares held by I&B and 13,180 shares held by I&B
Entrepreneurs. Mr. Bowman is a General Partner of I&B Management, which is
the General Partner of I&B and I&B Entrepreneurs. Mr. Bowman disclaims
beneficial ownership of such shares except to the extent to which he holds a
pecuniary interest.
(9) Includes 356,687 shares held by Accel Capital L.P., 237,790 shares held by
Accel Capital (International) L.P., 4,617 shares held by Arthur C. Patterson
and 27,634 shares held by Ellmore C. Patterson Partners. Mr. Patterson is
either a General Partner or a General Partner of the respective General
Partner, of Accel Partners, Accel Capital (International) L.P. or Ellmore C.
Patterson Partners. Mr. Patterson disclaims beneficial ownership of such
shares except to the extent of which he holds a pecuniary interest.
(10) Includes 451,478 shares held by OVP II, 149,254 shares held by RVP, 2,053
shares held by RVP Advisors Fund and 1,851 shares held by OVP II Advisors
Fund. Mr. Langeler is a General Partner of OVP, and is Attorney-in-Fact of
Rainier Venture Partners and a Vice President of both RVP Advisors Fund and
OVP II Advisers Fund. Mr. Langeler disclaims beneficial ownership of such
shares except to the extent to which he holds a pecuniary interest.
(11) Includes 194,762 shares subject to a right of repurchase in favor of the
Company which expires ratably over a three year period.
(12) Includes 76,189 shares subject to a right of repurchase in favor of the
Company which expires ratably over a four year period.
(13) Includes 63,046 shares subject to a right of repurchase in favor of the
Company which expires ratably over a four year period.
(14) Includes 21,015 shares subject to a right of repurchase which expires
ratably over a four year vesting period.
(15) Represents options to buy shares vested as of June 30, 1996.
(16) Includes 426,910 shares subject to a right of repurchase which expires
ratably over a three or four year vesting period and 4,761 options to buy
shares vested as of June 30, 1996.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.001 par value,
7,490,831 of which will be outstanding, and 5,000,000 shares of Preferred Stock,
$0.001 par value, none of which will be outstanding. At April 30, 1996, the
Company had 5,640,831 shares of Common Stock outstanding held by 294
stockholders. The following description of the capital stock of the Company and
certain provisions of the Company's Restated Certificate of Incorporation and
Bylaws is a summary and is qualified in its entirety by the provisions of the
Restated Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders, including the election of
directors, and, subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." Cumulative voting is
neither required nor permitted under the Company's Restated Certificate of
Incorporation. In the event of liquidation or dissolution of the Company, the
holders of Common Stock are entitled to receive all assets available for
distribution to the stockholders, subject to any preferential rights of any
Preferred Stock then outstanding. The holders of Common Stock have no preemptive
or other subscription rights, and there are no conversion rights or redemption
or sinking fund provisions with respect to the Common Stock. All outstanding
shares of Common Stock are, and the shares offered hereby upon issuance and sale
will be, fully paid and nonassessable. The rights, preferences and privileges of
the holders of Common Stock are subject to, and may be adversely affected by,
the rights of the holders of any shares of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock that
may be issued from time to time 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. The issuance of Preferred Stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes could, among other things, adversely affect the voting power
of the holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, discourage bids for
the Company's Common Stock at a premium or otherwise adversely affect the market
price of the Common Stock. The Company has no current plans to issue any
Preferred Stock.
REGISTRATION RIGHTS
After the closing of this offering, the holders ("Holders") of an aggregate
of approximately 4,900,000 shares of Common Stock are entitled to certain rights
with respect to the registration of such shares for offer and sale to the public
under the Securities Act. Under these provisions, the Holders may request that
the Company file up to two registration statements under the Securities Act with
respect to at least 30% of such Common Stock or lesser percentage if the
aggregate offering price to the public would be at least $3,000,000. Upon
receipt of such a request, the Company is required to notify all other Holders
and to use all reasonable efforts to effect such registration, subject to
certain conditions, including that the request must be received three months
following the closing of this offering. Further, whenever the Company proposes
to register any of its securities under the Securities Act for its own account
or for the account of other security holders, the Company is required to notify
each Holder of the proposed registration and include all Common Stock which such
Holder may request to be included in such registration, subject to certain
limitations. The Company has obtained a waiver of these rights to the extent
they would have applied to this offering. Generally, the Company is required to
bear all expenses (except underwriting discounts, selling commissions and stock
transfer taxes) of all registrations. No Holders have given the Company notice
that they intend to exercise registration rights following the offering.
53
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston. Its telephone number is (617) 575-2500.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for securities of
the Company. No prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of Common Stock of the Company in the public market after the lapse of the
restrictions described below could adversely affect the prevailing market price
and the ability of the Company to raise equity capital in the future at a time
and price which it deems appropriate.
Upon completion of this offering, the Company will have approximately
7,490,831 shares of Common Stock outstanding. Of these shares, the 2,140,000
shares sold in this offering will be freely transferable without restriction or
registration under the Securities Act, except for any shares purchased by
affiliates of the Company. The remaining 5,350,831 shares were sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act and are "restricted" shares within the meaning of Rule 144
adopted under the Securities Act (the "Restricted Shares"). Of the Restricted
Shares, approximately 100,000 shares not subject to lock-up agreements will be
eligible for immediate sale in the public market pursuant to Rule 144(k).
Beginning 90 days after the effective date of the Registration Statement
approximately 250,000 additional shares not subject to lock-up agreements will
be eligible for sale in the public market pursuant to Rule 144 or Rule 701,
subject to compliance with certain volume limitations under Rule 144.
Approximately 5,000,000 shares are subject to lock-up agreements (the "Lock-Up
Agreements") with the Representatives of the Underwriters (as both terms are
defined below). The holders of shares subject to Lock-Up Agreements have agreed
not to offer, sell or otherwise dispose of any of their shares of Common Stock
for a period of 180 days following the date of this Prospectus, without the
prior written consent of Montgomery Securities, one of the Representatives. See
"Underwriting." Montgomery Securities in its sole discretion and without notice
may earlier release for sale in the public market all or any portion of the
shares subject to the Lock-up Agreements.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate who has beneficially owned
Restricted Shares for at least a two-year period (as computed under Rule 144) is
entitled to sell within any three-month period a number of such shares that does
not exceed the greater of (i) 1% of the then outstanding shares of the Common
Stock (approximately 75,000 shares after giving effect to this offering) and
(ii) the average weekly trading volume in the Company's Common Stock during the
four calendar weeks immediately preceding such sale. Sales under Rule 144 are
also subject to certain provisions relating to the manner and notice of sale and
the availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed an affiliate of the
Company at any time during the 90 days immediately preceding a sale, and who has
beneficially owned restricted shares for at least a three-year period (as
computed under Rule 144), would be entitled to sell such shares under Rule
144(k) without regard to the volume limitation and other conditions described
above. Restricted shares and options to purchase Common Stock sold by the
Company to, among others, its employees, officers and directors pursuant to
written compensation plans or contracts and in reliance on Rule 701 under the
Securities Act, may be resold in reliance on Rule 144 by such persons who are
not affiliates subject only to the provisions of Rule 144 regarding manner of
sale, and by such persons who are affiliates without complying with the Rule's
holding period requirements.
The Company expects to file a registration statement under the Securities
Act 90 days after the completion of this offering to register approximately an
additional 1,700,000 shares of Common Stock reserved for issuance under the
Stock Option Plan and the Purchase Plan.
54
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), represented by Montgomery
Securities, Needham & Company, Inc. and Black & Company (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company and the Selling
Stockholders the number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to purchase
all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- -----------
<S> <C>
Montgomery Securities............................................................
Needham & Company, Inc...........................................................
Black & Company..................................................................
-----------
Total........................................................................ 2,140,000
-----------
-----------
</TABLE>
The Representatives have advised the Company that the Underwriters initially
propose to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers a
concession of not more than $ per share, and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the initial public offering, the offering price and
other selling terms may be changed by the Representatives. The Common Stock is
offered subject to receipt and acceptance by the Underwriters and to certain
other conditions, including the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 321,000 additional shares of Common Stock, to cover over-allotments, if any,
at the same price per share as the initial 2,140,000 shares to be purchased by
the Underwriters. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover
over-allotments made in connection with this offering.
Holders of approximately 5,000,000 shares of Common Stock prior to this
offering have agreed, subject to certain limited exceptions, not to sell or
offer to sell or otherwise dispose of the shares of Common Stock currently held
by them, any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Montgomery Securities. Montgomery Securities may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to these lock-up agreements. In addition, the Company has
agreed that for a period of 180 days after the date of this Prospectus it will
not, without the consent of Montgomery Securities, issue, offer, sell, grant
options to purchase or otherwise dispose of any equity securities or securities
convertible into or exchangeable for equity securities except for shares of
Common Stock offered hereby and shares issued pursuant to the Stock Option Plan
or the Purchase Plan. See "Management -- 1991 Stock Option Plan;" "-- Employee
Stock Purchase Plan" and "Shares Eligible for Future Sale."
55
<PAGE>
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make in
respect thereof.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations among the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in such negotiations are the
history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company management, its past and present
operations and financial performance, the prospects for future earnings of the
Company, the present state of the Company's development, the general condition
of the securities markets at the time of the offering and the market prices of
and demand for publicly traded common stocks of comparable companies in recent
periods and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Baker & McKenzie, Palo
Alto, California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The audited Consolidated Financial Statements and schedule of the Company
included in this Prospectus and appearing in the Registration Statement (as
defined below) have been audited by KPMG Peat Marwick LLP, independent auditors,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document are not necessarily complete. Although all material elements
of such contracts, agreements and other documents required to be disclosed in
this Prospectus are so disclosed in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, each such statement being
qualified in all respects by such reference. The Registration Statement and the
exhibits and schedules thereto may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange Commission in
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: 13th Floor, Seven World Trade Center, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission, Washington, D.C. at
prescribed rates.
56
<PAGE>
GLOSSARY OF TECHNICAL TERMS
4GL (FOURTH GENERATION LANGUAGE): a programming language designed for ease
of use facilitated by interaction with the programmer, often used to define
languages used with relational databases.
AGENTS: In the client/server model, agents are automatic computer processes
that perform information gathering and preparation on behalf of a client or
server, and often communicate with other agents to perform a larger collective
task.
APPLICATION PARTITIONING: a process by which application functions are
divided and processed on multiple servers, thereby not limiting processing to
any single computer.
CASE -- COMPUTER AIDED SOFTWARE ENGINEERING: a technique for using
computers to help with one or more phases of the software life-cycle, including
the systematic analysis, design, implementation and maintenance of software.
CLIENT/SERVER: an arrangement used on computer networks that makes use of
"distributed intelligence", thereby treating both the central data server and
individual desktop computers as intelligent, programmable devices capable of
sharing data processing tasks.
GUI -- GRAPHICAL USER INTERFACE: a type of display format that enables
users to select commands, start programs and see lists of files and other
options by pointing to pictorial representations ("icons") and lists of menu
items on the screen.
MASSIVELY PARALLEL SYSTEMS: computer systems that incorporate a significant
number of data processing units to simultaneously process discrete portions of a
data processing task.
OBJECT-ORIENTED PROGRAMMING: a type of software programming in which a
program is viewed as a collection of discrete software objects, each of which is
a self-contained collection of common data structures and data processing
routines.
ODBC -- OPEN DATABASE CONNECTIVITY: an industry standard for accessing
different database systems.
OLE -- OBJECT LINKING AND EMBEDDING: an industry standard that allows users
to embed objects such as text, graphics or spreadsheets in other documents.
RADD -- RAPID APPLICATION DEVELOPMENT AND DEPLOYMENT: a programming
architecture that is designed to enable developers to quickly and easily produce
complex, business-critical applications.
SQL -- STRUCTURED QUERY LANGUAGE: an industry standard database language
used in querying, updating and managing relational databases.
VAR -- VALUE-ADDED RESELLER: a company that distributes hardware or
software products made by others, adding value through the combination of other
products, user support, and service.
<PAGE>
UNIFY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Financial Statements:
Balance Sheets as of April 30, 1995 and 1996............................................................. F-3
Statements of Operations for the years ended April 30, 1994, 1995 and 1996............................... F-4
Statements of Stockholders' Deficit for the years ended April 30, 1994, 1995 and 1996.................... F-5
Statements of Cash Flows for the years ended April 30, 1994, 1995 and 1996............................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Unify Corporation:
We have audited the accompanying consolidated balance sheets of Unify
Corporation and subsidiaries as of April 30, 1995 and 1996, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the years in the three-year period ended April 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Unify
Corporation and subsidiaries as of April 30, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended April 30, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
San Jose, California
May 17, 1996
F-2
<PAGE>
UNIFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, 1996
--------- -------------------
1995 ACTUAL PRO FORMA
--------- -------- ---------
ASSETS (NOTE 12)
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents....................... $ 3,776 $ 3,028 $ 3,095
Accounts receivable, net of allowances of $1,043
in 1995 and $483 in 1996....................... 3,667 4,745 4,745
Amounts due from minority interest stockholders,
net of allowances of $492 in 1995 and $382 in
1996........................................... 1,091 525 525
Prepaid expenses................................ 520 893 893
Other current assets............................ 408 119 119
--------- -------- ---------
Total current assets.......................... 9,462 9,310 9,377
Property and equipment, net....................... 2,226 3,358 3,358
Capitalized software, net of accumulated
amortization of $914 in 1995..................... 582 -- --
Other assets...................................... 411 329 329
--------- -------- ---------
Total assets.................................. $ 12,681 $ 12,997 $ 13,064
--------- -------- ---------
--------- -------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt............... $ 189 $ 255 $ 255
Accounts payable................................ 833 1,866 1,866
Amounts due to minority interest stockholders... 2,155 1,392 1,392
Accrued compensation and related expenses....... 1,409 1,655 1,655
Taxes payable................................... 690 542 542
Litigation settlements.......................... 443 217 217
Other accrued liabilities....................... 2,347 1,916 1,916
Deferred revenue................................ 4,512 4,650 4,650
--------- -------- ---------
Total current liabilities..................... 12,578 12,493 12,493
Long-term debt, net of current portion............ 1,488 2,456 2,456
Minority interest................................. 270 495 495
Commitments and contingencies.....................
Redeemable preferred stock, $0.001 par value;
2,931,370 shares designated; 2,876,136 shares
issued and outstanding; aggregate liquidation
preference of $25,424 and $27,177 in 1995 and
1996, respectively; no shares authorized, issued
or outstanding pro forma......................... 24,973 26,726 --
Stockholders' deficit:
Preferred stock, $0.001 par value; 7,931,370
shares authorized; no shares issued or
outstanding pro forma.......................... -- -- --
Common stock, $0.001 par value; 40,000,000
shares authorized; 1,340,344 and 1,884,075
shares issued and outstanding in 1995 and 1996,
respectively; 5,640,831 shares outstanding pro
forma.......................................... 1 2 6
Additional paid-in capital...................... 2,159 2,188 28,977
Notes receivable from stockholders.............. (515) (265) (265)
Cumulative translation adjustments.............. (682) (816) (816)
Accumulated deficit............................. (27,591) (30,282) (30,282)
--------- -------- ---------
Total stockholders' deficit................... (26,628) (29,173) (2,380)
--------- -------- ---------
Total liabilities and stockholders' deficit... $ 12,681 $ 12,997 $ 13,064
--------- -------- ---------
--------- -------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Software licenses............................................................ $ 19,048 $ 17,995 $ 20,444
Services..................................................................... 11,501 10,854 9,721
--------- --------- ---------
Total revenues............................................................. 30,549 28,849 30,165
--------- --------- ---------
Cost of revenues:
Software licenses............................................................ 3,262 2,787 2,059
Services..................................................................... 6,215 5,786 4,332
--------- --------- ---------
Total cost of revenues..................................................... 9,477 8,573 6,391
--------- --------- ---------
Gross margin................................................................... 21,072 20,276 23,774
--------- --------- ---------
Operating expenses:
Product development.......................................................... 5,598 5,324 5,805
Selling, general and administrative.......................................... 19,795 15,000 18,920
Restructuring charges........................................................ 570 431 --
--------- --------- ---------
Total operating expenses................................................... 25,963 20,755 24,725
--------- --------- ---------
Loss from operations....................................................... (4,891) (479) (951)
Other income (expense), net.................................................... (1,830) 392 176
--------- --------- ---------
Loss before income taxes..................................................... (6,721) (87) (775)
Provision for income taxes..................................................... (342) (392) (163)
--------- --------- ---------
Net loss..................................................................... $ (7,063) $ (479) $ (938)
--------- --------- ---------
--------- --------- ---------
Pro forma net loss per share................................................... $ (0.08) $ (0.18)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per share.......................... 5,639 5,327
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE TOTAL
----------------- PAID-IN FROM TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS ADJUSTMENTS DEFICIT DEFICIT
--------- ------ ---------- ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at April 30, 1993.............. 940,855 $ 1 $1,592 $-- $(416) $(16,542) $(15,365)
Exercise of stock options............. 379,906 -- 665 (621) -- -- 44
Dividend accrual...................... -- -- -- -- -- (1,753) (1,753)
Translation adjustments............... -- -- -- -- (150) -- (150)
Net loss.............................. -- -- -- -- -- (7,063) (7,063)
--------- ------ ---------- ------ ----------- ----------- --------------
Balances at April 30, 1994.............. 1,320,761 1 2,257 (621) (566) (25,358) (24,287)
Exercise of stock options............. 19,583 -- 8 -- -- -- 8
Cancellation and reissuance of common
stock................................ -- -- (106) 106 -- -- --
Dividend accrual...................... -- -- -- -- -- (1,754) (1,754)
Translation adjustments............... -- -- -- -- (116) -- (116)
Net loss.............................. -- -- -- -- -- (479) (479)
--------- ------ ---------- ------ ----------- ----------- --------------
Balances at April 30, 1995.............. 1,340,344 1 2,159 (515) (682) (27,591) (26,628)
Exercise of stock options............. 776,897 1 341 (182) -- -- 160
Exercise of warrants.................. 13,571 -- 48 -- -- -- 48
Repurchase of common stock............ (246,737) -- (432) 432 -- -- --
Dividend accrual...................... -- -- -- -- -- (1,753) (1,753)
Imputed interest on note payable to
preferred stockholders............... -- -- 72 -- -- -- 72
Translation adjustments............... -- -- -- -- (134) -- (134)
Net loss.............................. -- -- -- -- -- (938) (938)
--------- ------ ---------- ------ ----------- ----------- --------------
Balances at April 30, 1996.............. 1,884,075 $ 2 $2,188 $(265) $(816) $(30,282) $(29,173)
--------- ------ ---------- ------ ----------- ----------- --------------
--------- ------ ---------- ------ ----------- ----------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................................... $ (7,063) $ (479) $ (938)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation..................................................................... 1,305 1,086 979
Amortization of capitalized software............................................. 1,422 1,149 582
Provision for losses on accounts receivable...................................... 149 35 (42)
Noncash restructuring charges.................................................... 570 431 --
Minority interest................................................................ (378) (493) (366)
Provision for litigation settlements............................................. 2,154 300 --
Forgiveness of amounts due to minority interest stockholders..................... -- (305) --
Imputed interest on note payable to preferred stockholders....................... -- -- 72
Changes in operating assets and liabilitites:
Accounts receivable............................................................ 2,428 1,711 (1,364)
Amounts due from minority interest stockholders................................ (69) (729) 356
Prepaid expenses and other current assets...................................... 303 250 (184)
Accounts payable............................................................... (1,262) 129 1,068
Amounts due to minority interest stockholders.................................. (81) 997 (336)
Accrued compensation and related expenses...................................... (309) (553) 292
Taxes payable.................................................................. 7 32 (85)
Litigation settlements......................................................... -- (2,702) (226)
Other accrued liabilities...................................................... (379) 295 (387)
Deferred revenue............................................................... 352 156 (491)
--------- --------- ---------
Net cash (used in) provided by operating activities.................................. (851) 1,310 (1,070)
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment................................................. (849) (811) (784)
Capitalized software............................................................... (750) (420) --
Other assets....................................................................... 384 330 8
--------- --------- ---------
Net cash used in investing activities................................................ (1,215) (901) (776)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from debt obligations..................................................... 198 1,250 1,000
Principal payments under debt obligations.......................................... (279) (483) (428)
Proceeds from issuance of common stock............................................. 44 8 208
Additional investment in subsidiary by minority interest stockholders.............. -- -- 591
--------- --------- ---------
Net cash (used in) provided by financing activities.................................. (37) 775 1,371
--------- --------- ---------
Effect of exchange rate changes on cash.............................................. (132) 97 (273)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents................................. (2,235) 1,281 (748)
Cash and cash equivalents, beginning of year......................................... 4,730 2,495 3,776
--------- --------- ---------
Cash and cash equivalents, end of year............................................... $ 2,495 $ 3,776 $ 3,028
--------- --------- ---------
--------- --------- ---------
Interest paid........................................................................ $ 190 $ 164 $ 167
--------- --------- ---------
--------- --------- ---------
Income taxes paid.................................................................... $ 310 $ 304 $ 232
--------- --------- ---------
--------- --------- ---------
Noncash investing and financing activities:
Common stock issued (canceled) in return for notes receivable from stockholders.... $ 621 $ (106) $ (250)
--------- --------- ---------
--------- --------- ---------
Unify VISION software, maintenance and training exchanged for financial
applications software, support and training....................................... $ 1,050
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Unify Corporation (the "Company") develops, markets and supports Unify
VISION, an advanced client/server application development environment for
development, deployment and management of high-end scalable applications. The
Company also enhances, markets and supports Unify ACCELL, a family of fourth
generation language application development tools and Unify DataServer, a family
of database management system products.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries and Unify Japan KK, which is 51%
owned by the Company. All significant intercompany balances and transactions
have been eliminated.
The functional currencies of the Company's foreign subsidiaries are the
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
respective period. Translation adjustments are excluded from net income and
accumulated in a separate component of stockholders' deficit. Foreign currency
translation gains or losses resulting from the sale of products in other than
the functional currency are reported in results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates made in preparing these consolidated financial
statements include the degree of certainty of collection for revenue recognition
and allowances for potential credit losses.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturities of
three months or less and are stated at cost, which approximates fair value. Cash
equivalents consist primarily of demand deposits with banks, certificates of
deposit and money market funds.
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
certificates of deposit and money market funds. The Company places its temporary
cash investments primarily with two financial institutions.
The Company licenses its products principally to companies in North America,
Europe and Japan and no customer accounted for more than 10% of consolidated
revenues in the years ended April 30, 1994, 1995 and 1996. The Company performs
periodic credit evaluations of its customers and generally does not require
collateral. Allowances are maintained for potential credit losses.
REVENUE RECOGNITION
Software license revenue is recognized when a noncancelable license
agreement has been executed, the product has been shipped, all significant
contractual obligations have been satisfied and collection of the resulting
receivable is probable. Services 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
F-7
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
deferred revenue until recognized. See also Note 2 to Consolidated Financial
Statements. The Company's revenue recognition policies are in compliance with
the provisions of the American Institute of Certified Public Accountants'
Statement of Position No. 91-1, SOFTWARE REVENUE RECOGNITION.
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 five years.
CAPITALIZED SOFTWARE
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards (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. The Company begins capitalization
upon completion of a working model. Amortization of capitalized software
development costs is computed on a product-by-product basis as the greater of
the ratio of current product revenue to the total of current and anticipated
product revenue or the straight-line method over the software's estimated
economic life, generally one to three years. Unamortized capitalized software
development costs are periodically compared to their net realizable value and a
loss is recorded for any excess.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes pursuant to SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under the asset and
liability method, deferred taxes are recorded for the difference between the
financial statement and tax bases 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.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per common and common equivalent share is based upon the
weighted average number of outstanding shares of common stock and common
equivalent shares from stock options and warrants (under the treasury stock
method, if dilutive) and redeemable preferred stock (using the as-if-converted
method, even if antidilutive). Pursuant to certain Securities and Exchange
Commission (SEC) Staff Accounting Bulletins, common and common equivalent shares
issued at prices below the anticipated initial public offering (IPO) price
during the twelve-month period prior to the offering have been included in the
calculation, even if antidilutive, as if they were outstanding for all periods
presented using the treasury stock method and the anticipated IPO price.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Equipment............................................................... $ 5,961 $ 6,474
Furniture and leasehold improvements.................................... 1,526 1,776
Financial applications software......................................... -- 888
--------- ---------
7,487 9,138
Less accumulated depreciation........................................... 5,261 5,780
--------- ---------
Property and equipment, net............................................. $ 2,226 $ 3,358
--------- ---------
--------- ---------
</TABLE>
F-8
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT (CONTINUED)
In December 1995, the Company entered into an agreement with a customer
whereby the Company exchanged licenses for its Unify VISION software,
maintenance and training for licenses for the customer's financial applications
software, support and training. The Company recorded the transaction using the
fair value of the assets exchanged. During fiscal 1996, the Company recognized
$262,000 for the initial delivery of software development licenses to the
customer. The remaining $788,000 has been deferred because either the related
software licenses have not been delivered or the support and training have not
been provided.
3. LINE OF CREDIT
In March 1996, the Company established a $2.5 million revolving line of
credit with a bank. This line of credit permits borrowings up to 80% of eligible
accounts receivable and up to $500,000 of the line may also be used to finance
80% of equipment purchases with no receivable borrowing limitation. The line is
secured by all of the Company's assets, bears interest at 2.75% and 3.50% over
the bank's prime lending rate (11.00% and 11.75% as of April 30, 1996,
respectively) for receivable based and equipment borrowings, respectively, and
expires in March 1997. The agreement provides for minimum interest payments and
contains certain financial covenants, with which the Company was in compliance
at April 30, 1996.
4. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Unsecured note payable to preferred stockholders, interest at 3.75%, due
July 1997 (Note 5)...................................................... $ 1,250 $ 2,250
Note payable, secured by equipment, bearing interest at 8.70%, payable in
monthly installments of $7 through April 1997........................... 126 66
Other.................................................................... 301 395
--------- ---------
1,677 2,711
Less current portion..................................................... 189 255
--------- ---------
Long-term debt, net of current portion................................... $ 1,488 $ 2,456
--------- ---------
--------- ---------
</TABLE>
Future maturities of long-term debt as of April 30, 1996 were $255,000,
$2,410,000 and $46,000 for the years ending April 30, 1997, 1998 and 1999,
respectively.
5. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
REDEEMABLE PREFERRED STOCK
Authorized and outstanding redeemable preferred stock and its principal
terms are as follows at April 30, 1996 (in thousands, except share data):
<TABLE>
<CAPTION>
SHARES SHARES AMOUNT DIVIDEND LIQUIDATION
SERIES AUTHORIZED OUTSTANDING PAID IN PREFERENCE PREFERENCE
- ----------- ----------- ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
A 571,428 571,421 $ 2,955 $ 720 $ 3,000
B 571,428 571,409 2,940 720 3,000
C 744,800 744,779 6,439 1,564 6,517
D 608,000 559,978 4,672 1,176 4,900
E 435,714 428,549 4,460 1,080 4,500
--------- ----------- -----------
$ 21,466 $ 5,260 $ 21,917
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
F-9
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT (CONTINUED)
Each share of preferred stock and all accumulated dividends are convertible,
at the holder's option, into common stock at an initial conversion price of
$5.25 per share for Series A and B, $8.75 per share for Series C and D and
$10.50 per share for Series E. In certain instances, the preferred stock
automatically converts to common stock upon completion of a public offering of
the Company's common stock. The holders of preferred stock are entitled to the
number of votes equal to the number of shares of common stock into which their
preferred stock is convertible.
Beginning in May 1993, the holders of the Series A, B, C, D and E preferred
stock became entitled to receive annual dividends at the rate of $0.42, $0.42,
$0.70, $0.70 and $0.84 per share, respectively. Accumulated dividends of
$3,507,000 and $5,260,000 are included in redeemable preferred stock as of April
30, 1995 and 1996, respectively. The Company is currently unable to pay cash
dividends under state law. No dividends or payments in liquidation may be made
with respect to common stock until all accumulated preferred stock dividends
have been paid in full and, in the event of liquidation, until the accumulated
dividends and the liquidation preferences of the preferred stock have been paid.
Beginning May 31, 1996 for the holders of Series A, B, C and D preferred
stock and May 31, 1997 for the holders of Series E preferred stock, each
preferred stockholder will have the option to require the Company to repurchase
up to 100% of their initial investment over five years at $5.25, $5.25, $8.75,
$8.75 and $10.50 per share, respectively, plus accrued but unpaid dividends.
STOCK OPTIONS
Under the terms of the 1991 Stock Option Plan (the "1991 Option Plan"),
2,200,000 shares of common stock have been reserved for issuance to eligible
directors, officers and employees. Under the 1991 Option Plan, incentive stock
options or nonqualified stock options may be granted at prices not less than
100% of the fair market value of the Company's common stock at the date of
grant, as determined by the Company's Board of Directors. Options granted
generally vest over four years, are exercisable to the extent vested, and expire
10 years from the date of grant.
F-10
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT (CONTINUED)
A summary of stock option activity under the 1991 Option Plan is as follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
SHARES --------------------------
AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
---------- ---------- --------------
<S> <C> <C> <C>
Outstanding at May 1, 1993...... 269,917 1,123,380 $0.07 to $5.25
Granted....................... (419,910) 419,910 0.35 to 1.75
Exercised..................... -- (379,906) 1.75 to 3.50
Expired/cancelled............. 385,547 (385,547) 1.75 to 5.25
---------- ----------
Outstanding at April 30, 1994... 235,554 777,837 0.07 to 3.50
Granted....................... (519,688) 519,688 0.35
Exercised..................... -- (19,583) 0.35 to 1.75
Expired/cancelled............. 452,152 (452,152) 0.35 to 3.50
---------- ----------
Outstanding at April 30, 1995... 168,018 825,790 0.07 to 1.75
Authorized.................... 821,429 --
Granted....................... (1,083,075) 1,083,075 0.35 to 7.00
Exercised..................... -- (776,897) 0.35 to 1.40
Expired/cancelled............. 500,248 (253,511) 0.35 to 1.75
---------- ----------
Outstanding at April 30, 1996... 406,620 878,457 $0.07 to $7.00
---------- ----------
---------- ----------
Vested at April 30, 1996........ 253,205 $0.07 to $4.20
----------
----------
Shares subject to repurchase at
April 30, 1996................. 544,884
----------
----------
</TABLE>
STOCK PURCHASE PLAN
In March 1996, the Company's Board of Directors adopted the 1996 Employee
Stock Purchase Plan (the "1996 Purchase Plan") which authorizes the issuance of
up to 400,000 shares of common stock. Under the 1996 Purchase Plan eligible
employees may purchase shares at 85% of the fair market value of the common
stock at the date of purchase. No shares of common stock had been purchased
under the 1996 Purchase Plan at April 30, 1996.
NOTES RECEIVABLE FOR COMMON STOCK
In fiscal 1994, four of the Company's officers exercised stock options to
purchase 354,764 shares of common stock at $1.75 per share for non recourse, non
interest bearing notes due upon the earlier of the sale of the related shares by
the officers or the year 2000. In fiscal 1995, a total of 75,600 shares owned by
two of the officers were cancelled and reissued at $0.35 per share and the notes
related to these shares were consequently reduced by a total of $106,000. In
fiscal 1996, 246,737 shares owned by another officer, who had left the Company,
were reacquired by the Company in exchange for cancellation of the related
$432,000 note.
During fiscal 1996, one of the Company's officers exercised stock options to
purchase 346,931 shares of common stock at prices ranging from $0.35 to $1.40
per share for a note receivable which bears interest at 5% annually and is
secured by the shares of common stock. The note and accrued interest are due
upon the earlier of the sale of the related shares by the officer or the year
1999. This note receivable also includes $13,000 for common shares originally
purchased in fiscal 1994 for a non-recourse note that has been cancelled.
F-11
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT (CONTINUED)
WARRANTS
In connection with a $3.0 million revolving credit facility provided in
November 1993 by certain preferred stockholders, the Company issued warrants
which are exercisable into 190,459 shares of common stock at an exercise price
of $1.75 per share. In December 1995, the exercise price for these warrants was
reduced to $0.35 per share in conjunction with a one year extension of the
revolving credit facility. These warrants were fully exercisable at April 30,
1996 and expire in November 1996 or upon completion of a public registration of
the Company's common stock which meets certain minimum criteria.
In connection with various other financings, the Company has issued warrants
which are exercisable into 28,412 shares of Series D preferred stock and 7,337
shares of Series E preferred stock at exercise prices of $8.54 and $10.22,
respectively. These warrants were exercisable at April 30, 1996 and expire in
December 1996 and September 1998, respectively.
6. PROVISION FOR INCOME TAXES
The Company recorded no federal income tax provision for the years ended
April 30, 1994, 1995 and 1996 due to net losses in those periods. The Company
recorded a tax provision related primarily to foreign income tax withholding on
software license royalties paid to the Company by certain foreign licencees.
Income tax expense for the years ended April 30, 1994, 1995 and 1996 consisted
of current tax expense as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Foreign withholding taxes........................................................... $ 329 $ 370 $ 151
State............................................................................... 13 22 12
--------- --------- ---------
Total income tax expense.......................................................... $ 342 $ 392 $ 163
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense for the years ended April 30, 1994, 1995 and 1996 differs
from the amounts computed by applying the U.S. federal income tax rate of 34% to
pretax loss as a result of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)........................................... $ (2,285) $ (30) $ (264)
Increases (reductions) in tax expense resulting from:
Foreign (income) losses subject to foreign income tax expense (benefit) not
subject to U.S. tax.............................................................. 196 (240) 382
Foreign withholding taxes......................................................... 329 370 151
Benefit from utilization of federal net operating loss deduction.................. -- -- (136)
Increase in valuation allowance for deferred tax assets -- nonutilization of U.S.
tax loss......................................................................... 2,079 249 --
Other............................................................................. 23 43 30
--------- --------- ---------
Actual income tax expense....................................................... $ 342 $ 392 $ 163
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROVISION FOR INCOME TAXES (CONTINUED)
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 are as follows
(in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................................... $ 5,870 $ 5,980
Reserves and other accruals........................................... 561 496
Deferred maintenance revenue.......................................... 1,345 1,036
Accounts receivable................................................... 522 348
Foreign tax credits................................................... 1,003 907
Other................................................................. 423 370
--------- ---------
Total deferred tax assets............................................. 9,724 9,137
Deferred tax liabilities -- principally software capitalization......... (283) (162)
Valuation allowance..................................................... (9,441) (8,975)
--------- ---------
Net deferred tax assets................................................. $ -- $ --
--------- ---------
--------- ---------
</TABLE>
Due primarily to an increase in the deferred tax assets recorded for net
operating loss carry-forwards offset by a decrease in the deferred tax assets
recorded for reserves and other accruals, the valuation allowance increased by
$117,000 in the year ended April 30, 1995. Due primarily to decreases in the
deferred tax assets recorded for deferred maintenance revenue and accounts
receivable, the valuation allowance decreased by $466,000 in the year ended
April 30, 1996.
At April 30, 1996, the Company had approximately $10,658,000 in federal net
operating loss carryforwards, approximately $6,932,000 in foreign net operating
loss carryforwards and approximately $907,000 in foreign tax credit
carryforwards which expire in various years through 2008.
Due to the "change of ownership" provisions of the Tax Reform Act of 1986,
the availability of the Company's net operating loss and credit carryforwards
will be subject to an annual limitation in future periods if a change of
ownership of more than 50% should occur over a three-year period. Such a change
could substantially limit the eventual utilization of these tax carryforwards.
7. RESTRUCTURING CHARGES
In the third quarter of fiscal 1994, the Company recorded a charge of
$570,000 which included $407,000 for severance and other costs associated with a
reduction in force and $163,000 for facilities reorganization and professional
fees. The Company reduced its workforce by 15%, primarily in sales and product
development. The reserves for facilities reorganization related to the closing
of six small satellite sales offices and included future rent for those offices,
buyout payments for expected early termination of certain leases and equipment
moving expenses. These restructuring costs were paid out primarily during the
fourth quarter of fiscal 1994 and during fiscal 1995. There were no significant
reclassifications or reductions of the original reserves.
In the fourth quarter of fiscal 1995, the Company incurred a charge of
$431,000 which included $276,000 for severance and other costs associated with a
reduction in force and $155,000 for facilities reorganization and professional
fees. The reduction in force totaled 8% of the Company's employees and affected
every functional area. The reserves for facilities reorganization were for the
write off of leasehold improvements and the costs to remove portable
infrastructure in connection with the relocation of the Company's product
development, customer support, telesales and administrative functions
F-13
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RESTRUCTURING CHARGES (CONTINUED)
to a smaller facility in Sacramento, California. These reserves also included
the costs of consolidating two smaller West Coast sales offices into the
Company's new corporate headquarters in San Jose, California. These
restructuring costs were paid out during fiscal 1996 and there were no
significant reclassifications or reductions of the original reserves.
8. OTHER INCOME (EXPENSE)
Other income (expense) for the years ended April 30, 1994, 1995 and 1996
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest income..................................................................... $ 65 $ 107 $ 81
Interest expense.................................................................... (171) (225) (234)
Foreign currency gain (loss)........................................................ 52 12 (37)
Minority interest................................................................... 378 493 366
Litigation settlements.............................................................. (2,154) (300) --
Forgiveness of amounts due to minority interest stockholders (Note 9)............... -- 305 --
--------- --------- ---------
Other income (expense), net......................................................... $ (1,830) $ 392 $ 176
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company, Sumitomo Metals Industries, Ltd. ("SMI") and Artificial
Intelligence Research, Ltd. ("AIR") are related parties as they own 51%, 34% and
15% interests, respectively, in Unify Japan KK ("Unify Japan").
TRANSACTIONS WITH AIR
AIR distributed the Company's products in Japan prior to July 1990. In
conjunction with the formation of Unify Japan in July 1990, the Company
appointed AIR as exclusive distributor and master licensee for Unify products in
Japan. AIR then granted Unify Japan the exclusive right to subdistribute
products in the non-OEM market in Japan in return for approximately 185 million
yen, or $1,272,000, payable in five equal annual installments. From July 1990 to
July 1994, Unify Japan paid royalties on its non-OEM market revenue to AIR and
AIR paid royalties on all Unify products sold in Japan to the Company. In July
1994, the Company terminated AIR's exclusive distribution rights and appointed
Unify Japan exclusive distributor and master licensee for the Company's products
in Japan. The balance due AIR on the non-OEM subdistribution note was reduced by
53 million yen, or $595,000, in connection with this action, resulting in a
$305,000 credit to the consolidated statement of operations (net of 49% minority
interest). After July 1994, AIR purchased software licenses from Unify Japan as
a subdistributor and Unify Japan paid intercompany royalties on all Unify
products sold in Japan to the Company.
Total revenues include revenues from AIR of $2,202,000, $3,098,000 and
$1,870,000 in the years ended April 30, 1994, 1995 and 1996, respectively. Cost
of software licenses includes AIR royalty expense of $207,000 in fiscal 1994.
Cost of software licenses also includes charges from AIR to duplicate and ship
the Japanese versions of all Unify products sold in Japan totaling $88,000,
$207,000 and $384,000 in fiscal 1994, 1995 and 1996, respectively. Cost of
services includes contract labor from AIR to provide customer support totaling
$430,000 and $333,000 for the years ended April 30, 1995 and 1996, respectively.
Product development expense includes contract labor from AIR to provide software
porting and translation services totaling $300,000, $463,000 and $1,160,000 in
the years ended April 30, 1994, 1995 and 1996, respectively.
F-14
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
Net amounts due from minority interest stockholders at April 30, 1995 and
1996 represent amounts payable by AIR to Unify Japan for the purchase of
software licenses and related services and amounts payable by AIR to the Company
for royalties.
TRANSACTIONS WITH SMI
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 will
receive a 40% discount from list price on purchases of the translated software
for its internal use. The agreement also grants SMI a 10% royalty on sales of
the Japanese version of Unify VISION from its release for shipment to regular
customers, which occurred in August 1995, through December 1996. Software
licenses revenue for fiscal 1996 includes approximately $450,000 in funded
development revenue relating to this translation project, recognized ratably as
the related product development expenses of approximately $880,000 were
incurred. Royalties due SMI during the same period were not significant. In
fiscal 1995 SMI also made a refundable prepayment of 72 million yen, or
$870,000, to Unify Japan for the purchase of software licenses for the Japanese
version of Unify VISION; revenue for this prepayment was deferred until shipment
of product. During fiscal 1996, Unify Japan shipped SMI approximately 24 million
yen, or $236,000, of Japanese product against this prepayment.
In September 1995, Unify Japan entered into a 100 million yen, or $935,000,
loan agreement with a bank affiliated with SMI. The loan bears interest at the
prime rate (approximately 2% at April 30, 1996), is secured by the assets of
Unify Japan and is due in September 1996. As of April 30, 1996, 50 million yen,
or $467,000, was outstanding on this line of credit. Under a separate agreement
which expires on May 31, 1996, Unify Japan also owes Sumitomo Bank $280,000.
Finally, Unify Japan leased office space from SMI under a renewable one-year
lease beginning in August 1994; rent expense paid to SMI totaled approximately
$130,000 in fiscal 1995 and $150,000 in fiscal 1996.
Amounts due to minority interest stockholders consisted of the following (in
thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Notes payable to SMI banking affiliates.................................. $ -- $ 747
Non-OEM subdistribution note due AIR..................................... 169 --
Other amounts due AIR.................................................... 573 199
Product development advances from SMI.................................... 543 --
Refundable prepayment from SMI........................................... 870 446
--------- ---------
Total amounts due...................................................... $ 2,155 $ 1,392
--------- ---------
--------- ---------
</TABLE>
F-15
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
YEARS ENDING APRIL 30,
- --------------------------------------------------------------------------
1997...................................................................... $ 1,179
1998...................................................................... 839
1999...................................................................... 754
2000...................................................................... 756
2001...................................................................... 357
---------
$ 3,885
---------
---------
</TABLE>
Rent expense under operating leases was $2,425,000, $2,110,000 and
$1,622,000 for the years ended April 30, 1994, 1995 and 1996, respectively.
LITIGATION
In November 1994, the Company paid $2,650,000 in full and final settlement
of a dispute with two former customers which related to software sold by the
Company in 1989. In October 1994, the Company also settled a dispute with a
former French customer for approximately $467,000, to be paid over three years.
The Company increased existing reserves by $2,154,000 in fiscal 1994 for these
litigation settlements. Finally, the Company recorded a charge of $300,000 in
fiscal 1995 for the settlement of an employment dispute with a former officer of
the Company which arose in that year.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, after
consulting with legal counsel, the amount of ultimate liability with respect to
these actions will not materially affect the consolidated financial position of
the Company.
F-16
<PAGE>
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION
The Company operates in one industry segment: developing, marketing and
supporting client/ server products for developing, deploying and managing
high-end scalable software applications. The distribution of revenues, operating
income (loss) and assets by geographic area for the years ended April 30, 1994,
1995 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
United States............................................ $ 22,806 $ 21,233 $ 21,696
Japan.................................................... 1,459 3,404 4,913
Europe................................................... 10,880 9,942 9,394
Eliminations............................................. (4,596) (5,730) (5,838)
--------- --------- ---------
Total revenues......................................... $ 30,549 $ 28,849 $ 30,165
--------- --------- ---------
--------- --------- ---------
Operating income (loss):
United States............................................ $ (3,770) $ 320 $ 965
Japan.................................................... (233) (988) (543)
Europe................................................... (888) 189 (1,373)
--------- --------- ---------
Total operating income (loss).......................... $ (4,891) $ (479) $ (951)
--------- --------- ---------
--------- --------- ---------
Identifiable assets:
United States............................................ $ 3,294 $ (3,169) $ 7,686
Japan.................................................... 1,071 2,796 1,692
Europe................................................... 4,233 2,610 3,660
--------- --------- ---------
Subtotal identifiable assets............................. 8,598 2,237 13,038
Corporate assets......................................... 4,424 5,469 4,784
Eliminations............................................. 59 4,975 (4,825)
--------- --------- ---------
Total assets........................................... $ 13,081 $ 12,681 $ 12,997
--------- --------- ---------
--------- --------- ---------
</TABLE>
United States revenue includes export sales of approximately $3,300,000,
$2,900,000 and $2,700,000 in the years ended April 30, 1994, 1995 and 1996,
respectively. Export sales have been made primarily to customers in Australia,
the Pacific Rim, Latin America, and Canada. Intercompany sales are at prices
intended to provide a profit after marketing, support and general and
administrative costs. United States operating income (loss) is net of corporate
product development and administrative expenses. Corporate assets consist
primarily of cash and cash equivalents, property and equipment, and capitalized
software.
12. PUBLIC STOCK OFFERING
On March 26, 1996, the Company's Board of Directors authorized management of
the Company to file a Registration Statement with the SEC permitting the Company
to sell shares of its common stock to the public. The Company's Board of
Directors also approved the reincorporation of the Company in Delaware and a
one-for-seven reverse stock split. Common share and per share data in these
consolidated financial statements have been retroactively adjusted to reflect
the reincorporation and reverse stock split. If the offering is consummated
under the terms presently anticipated, all of the currently outstanding
preferred stock and accrued dividends will automatically convert to 2,876,136
and 690,161 shares of common stock, respectively, upon the closing of the IPO.
The conversion of the preferred stock and accrued dividends, along with the
anticipated exercise of warrants to purchase 190,459 shares of common stock,
have been reflected in the accompanying unaudited pro forma consolidated balance
sheet as of April 30, 1996.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SUMMARY........................................ 3
THE COMPANY.................................... 3
RISK FACTORS................................... 5
USE OF PROCEEDS................................ 14
DIVIDEND POLICY................................ 14
CAPITALIZATION................................. 15
DILUTION....................................... 16
SELECTED CONSOLIDATED FINANCIAL DATA........... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 18
BUSINESS....................................... 27
MANAGEMENT..................................... 42
CERTAIN TRANSACTIONS........................... 48
PRINCIPAL AND SELLING STOCKHOLDERS............. 50
DESCRIPTION OF CAPITAL STOCK................... 53
SHARES ELIGIBLE FOR FUTURE SALE................ 54
UNDERWRITING................................... 55
LEGAL MATTERS.................................. 56
EXPERTS........................................ 56
ADDITIONAL INFORMATION......................... 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..... F-1
</TABLE>
----------------------
UNTIL JUNE , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,140,000 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
MONTGOMERY SECURITIES
NEEDHAM & COMPANY, INC.
BLACK & COMPANY
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, in connection with the sale of Common
Stock being registered. All amounts are estimated except the registration fee,
the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY
ITEM REGISTRANT
- ----------------------------------------------------------------------------------------- -------------
<S> <C>
SEC Registration Fee..................................................................... $ 10,183
NASD Filing Fee.......................................................................... 3,454
Nasdaq Listing Fee....................................................................... 32,000
Printing and Engraving Expenses.......................................................... 100,000
Legal Fees and Expenses.................................................................. 250,000
Blue Sky Fees and Expenses............................................................... 10,000
Accounting Fees and Expenses............................................................. 375,000
Director and Officer Insurance Premium................................................... 200,000
Transfer Agent and Registrar Fees........................................................ 7,500
Miscellaneous............................................................................ 11,863
-------------
Total................................................................................ $ 1,000,000
-------------
-------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 of the Delaware General Corporation Law
which provides for indemnification of directors and officers.
Under its Restated Certificate of Incorporation and Bylaws the Registrant
shall, to the full extent permitted by the Delaware General Corporation Law,
indemnify each person made or threatened to be made a party to any civil,
criminal or investigative action, suit or proceeding by reason of the fact that
such person is or was a director, officer or employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. The Restated
Certificate of Incorporation and Bylaws state that the indemnification provided
therein is not exclusive. The Registrant has also entered into an
Indemnification Agreement with each director and certain officers which provides
that the Registrant shall indemnify the director or officer in connection with
any such actions, suits or proceedings.
Prior to the completion of the offering, the Registrant will have in force
an insurance policy under which its directors and officers will be insured,
within the limits and subject to the limitations in the policy, against certain
expenses in connection with the defense of such actions, suit or proceedings to
which they are parties by reason of being or having been directors or officers.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 1993, the Company has sold and issued the following securities
without registration under the Securities Act of 1933, as amended (as adjusted
where appropriate for the proposed reverse stock split whereby seven outstanding
shares of Common Stock will be converted into one share of Common Stock):
(1) From May 1, 1993 to April 30, 1996, the Company issued options to
purchase an aggregate of 684,726 shares of Common Stock under the Company's
Stock Option Plan, net of cancellations, and an aggregate of 929,649 shares
of Common Stock were issued through the exercise of
II-1
<PAGE>
options granted under the Stock Option Plan. For additional information
concerning these transactions, reference is made to the information
contained under the caption "Management -- 1991 Stock Option Plan" in the
form of Prospectus included herein.
(2) In September 1993 the Company issued to Silicon Valley Bank a
warrant to purchase 7,337 shares of Series E Preferred Stock at the initial
exercise price of $10.22 per share.
(3) In March 1996 the Company issued to Montgomery Securities 13,571
shares of Common Stock for aggregate cash consideration of $47,500, pursuant
to the exercise by Montgomery Securities of a warrant dated April 26, 1991.
The sales and issuances of the securities described above were deemed to be
exempt from registration under the Securities Act in reliance upon (i) Section
4(2) thereof and Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering, or (ii) Rule 701 promulgated thereunder
as transactions pursuant to a compensatory benefit plan or a written contract
relating to compensation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Exhibits
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement (draft dated May 17, 1996)
2.1** Agreement and Plan of Merger dated May 16, 1996, for the
reincorporation of Unify Corporation, a California Corporation,
into Unify Corporation, a Delaware corporation.
3.1** Restated Certificate of Incorporation of the Company
3.2** Bylaws of the Registrant
4.1** Form of Stock Certificate
4.2 Series E Stock Purchase Agreement by and among the Company and the
purchasers named therein, dated as of April 2, 1992
5.1** Opinion of Baker & McKenzie as to legality of securities being
registered
10.1** Employment Agreement by and between Reza Mikailli and the Registrant
dated as of March 31, 1995
10.2** 1991 Stock Option Plan, as amended
10.3** 1996 Employee Stock Purchase Plan
10.4** Form of Indemnification Agreement
10.5** Loan and Security Agreement, dated March 5, 1996, by and between the
Registrant and Coast Business Credit
10.6** Revolving Credit Agreement dated as of November 29, 1993, as
amended, by and among the Registrant and the Lenders listed on
Exhibit A thereto.
10.7 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.
11.1** Statement of Computation of Pro Forma Net Loss Per Share
21.1** Subsidiaries of the Registrant
23.1 Consent of Independent Auditors (See page S-1)
23.2** Consent of Counsel (contained in Exhibit 5.1)
24.1** Powers of Attorney
</TABLE>
- ------------------------
** Previously filed.
(b) Financial statement schedules for the three years ended April 30, 1996
Schedule II -- Valuation and Qualifying Accounts
II-2
<PAGE>
All other schedules are omitted because they are not applicable, or the
required information is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
421(b)(1) or (4) or 497(b) under the Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective and (2) for the
purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the Closing, as specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Jose, State of California, on June 6, 1996.
UNIFY CORPORATION
By: /s/ REZA MIKAILLI
-----------------------------------
Reza Mikailli, PRESIDENT
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on June 6, 1996:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ REZA MIKAILLI
------------------------------------------- Chief Executive Officer and Director (Principal Executive
Reza Mikailli Officer)
/s/ SUSAN SALVESEN Vice President, Finance and Administration and Chief
------------------------------------------- Financial Officer (Principal Financial and Accounting
Susan Salvesen Officer)
*
------------------------------------------- Director
D. Kirkwood Bowman
*
------------------------------------------- Director
Gerard Langeler
*
------------------------------------------- Director
Arthur Patterson
* By /s/ REZA MIKAILLI
---------------------------------------
Reza Mikailli, ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
CONSENT AND INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors of
Unify Corporation:
The audits referred to in our report dated May 17, 1996, included the
related financial statement schedule for each of the years in the three-year
period ended April 30, 1996 included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
San Jose, California
June 5, 1996
S-1
<PAGE>
SCHEDULE II
UNIFY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
ADDITIONS (DEDUCTIONS):
BALANCE AT CHARGED TO DEDUCTIONS: TRANSFERS BALANCE AT
BEGINNING OPERATING WRITE-OFFS OF BETWEEN END OF
OF PERIOD EXPENSES ACCOUNTS ACCOUNTS PERIOD
---------- ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts receivable
Year ended April 30, 1994....................... $1,421 $149 $(581) $ 59 $1,048
Year ended April 30, 1995....................... 1,048 35 (293) 253 1,043
Year ended April 30, 1996....................... 1,043 (43) (231) (286) 483
Allowance for amounts due from minority interest
stockholders
Year ended April 30, 1994....................... 804 -- -- (59) 745
Year ended April 30, 1995....................... 745 -- -- (253) 492
Year ended April 30, 1996....................... 492 -- -- (110) 382
Allowance for long-term accounts receivable
Year ended April 30, 1996....................... -- -- -- 396 396
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBERS DESCRIPTION PAGE NUMBER
- ---------- ---------------------------------------------------------------------------------- -------------
<C> <S> <C>
1.1** Form of Underwriting Agreement (draft dated May 17, 1996).........................
2.1** Agreement and Plan of Merger dated May 16, 1996, for the reincorporation of Unify
Corporation, a California Corporation, into Unify Corporation, a Delaware
corporation......................................................................
3.1** Restated Certificate of Incorporation of the Company..............................
3.2** Bylaws of the Registrant..........................................................
4.1** Form of Stock Certificate.........................................................
4.2 Series E Stock Purchase Agreement by and among the Company and the purchasers
named therein, dated as of April 2, 1992.........................................
5.1** Opinion of Baker & McKenzie as to legality of securities being registered.........
10.1** Employment Agreement by and between Reza Mikailli and the Registrant dated as of
March 31, 1995...................................................................
10.2** 1991 Stock Option Plan, as amended................................................
10.3** 1996 Employee Stock Purchase Plan.................................................
10.4** Form of Indemnification Agreement.................................................
10.5** Loan and Security Agreement, dated March 5, 1996, by and between the Registrant
and Coast Business Credit........................................................
10.6** Revolving Credit Agreement dated as of November 29, 1993, as amended, by and among
the Registrant and the Lenders listed on Exhibit A thereto.......................
10.7 Joint Venture Agreement, dated September 3, 1990, as amended, by and among the
Registrar, Unify Japan Corporation, Sumitomo Metals Industries, Ltd. and
Artificial Intelligence Research.................................................
11.1** Statement of Computation of Pro Forma Net Loss Per Share..........................
21.1** Subsidiaries of the Registrant....................................................
23.1 Consent of Independent Auditors (See page S-1)....................................
23.2** Consent of Counsel (contained in Exhibit 5.1).....................................
24.1** Powers of Attorney................................................................
</TABLE>
- ------------------------
** Previously filed.
<PAGE>
UNIFY CORPORATION
SERIES E PREFERRED STOCK PURCHASE AGREEMENT
This Agreement is made as of April 2, 1992, among Unify Corporation, a
California corporation (the "Company") and the persons and entities listed on
the "Schedule of Purchasers" attached hereto as Exhibit A. The parties
specified on the Schedule of Purchasers as of the date hereof, as well as such
additional parties as may be added thereto as a result of subsequent closings as
permitted under this Agreement, are referred to herein as "Purchasers".
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto mutually agree as follows:
SECTION 1
AUTHORIZATION AND SALE OF
Series E Preferred Stock
1.1 AUTHORIZATION. The Company has, or before the Closing will have,
authorized the sale and issuance of 3,000,000 shares of its Series E Preferred
Stock (the "Series E Preferred") having the rights, restrictions, privileges and
preferences set forth in the Restated Articles of Incorporation of the Company
attached hereto as Exhibit B (the "Articles"). The Company has, or before the
Closing will have, adopted and filed the Articles with the Secretary of State of
the State of California.
1.2 SALE OF SERIES E PREFERRED. Subject to the terms and conditions
hereof, at the Closing the Company will issue and sell to the Purchasers, and
the Purchasers will buy from the Company, the number of shares of Series E
Preferred specified opposite each Purchaser's name on the Schedule of
Purchasers, at a purchase price of $1.50 per share. The Company's agreements
with each of the Purchasers are separate agreements, and the sales of the Series
E Preferred to each of the Purchasers are separate sales.
1.3 SERIES A PREFERRED. The Company has previously sold an aggregate of
1,463,416 shares of its Series A Preferred Stock (the "Series A Preferred") to
the purchasers named on the Schedule of Purchasers to that certain Series A
Preferred Stock Purchase Agreement between the Company, certain Founders (as
defined therein), and certain purchasers dated as of December 8, 1986, as
amended, (the "Series A Agreement"). The amendment to the Series A Agreement
attached hereto as Exhibit E-1 is hereafter referred to as the "Series A
Amendment" and references herein to the Series A Agreement shall be deemed to
include the amendments thereto, including those in the Series A Amendment.
1
<PAGE>
1.4 SERIES B PREFERRED. The Company has previously sold an aggregate of
4,000,000 shares of its Series B Preferred Stock (the "Series B Preferred") to
the purchasers named on the Schedule of Purchasers to that certain Series B
Preferred Stock Purchase Agreement between the Company and certain purchasers
dated as of October 2, 1987, as amended (the "Series B Agreement"). The
amendment to the Series B Agreement attached hereto as Exhibit E-2 is hereafter
referred to as the "Series B Amendment" and references herein to the Series B
Agreement shall be deemed to include the amendments thereto, including those in
the Series B Amendment.
1.5 SERIES C PREFERRED. The Company has previously sold an aggregate of
5,213,600 shares of its Series C Preferred Stock (the "Series C Preferred") to
the purchasers named on the Schedule of Purchasers to that certain Series C
Preferred Stock Purchase Agreement between the Company and certain purchasers
dated as of September 30, 1988, as amended (the "Series C Agreement"). The
amendment to the Series C Agreement attached hereto as Exhibit E-3 is hereafter
referred to as the "Series C Amendment" and references herein to the Series C
Agreement shall be deemed to include the amendments thereto, including those in
the Series C Amendment.
1.6 SERIES D PREFERRED. The Company has previously sold an aggregate of
3,920,000 shares of its Series D Preferred Stock (the "Series D Preferred") to
the purchasers named on the Schedule of Purchasers to that certain Series D
Preferred Stock Purchase Agreement between the Company and certain purchasers
dated as of March 22, 1991, as amended (the "Series D Agreement"). The
amendment to the Series D Agreement attached hereto as Exhibit E-4 is hereafter
referred to as the "Series D Amendment" and references herein to the Series D
Agreement shall be deemed to include the amendments thereto, including those in
the Series D Amendment.
SECTION 2
CLOSING DATE; DELIVERY
2.1 CLOSING DATE. The closing (the "Closing") for the purchase and sale
of the Series E Preferred being purchased by the Purchasers hereunder (the
"Shares") shall be held at the offices of Baker & McKenzie, 660 Hansen Way, Palo
Alto at 4:00 p.m. on April 2, 1992, or at such other time and place as the
Company and two-thirds in interest of the Purchasers mutually agree upon (the
"Closing Date"). The Company may designate one or more additional dates for
closings, provided that no such closing shall occur more than one hundred and
twenty (120) days following the Closing Date without the approval of two-thirds
in interest of the Purchasers. The Company shall not issue or sell any shares
of Series E Preferred other than as provided in this
2
<PAGE>
agreement without the consent of the holders of two-thirds of the Shares.
2.2 CLOSING. At the Closing, the Company will deliver to the Purchasers
certificates representing the number of Shares to be purchased at the Closing by
each Purchaser, as set forth in the Schedule of Purchasers, against payment of
the purchase price therefor by wire transfer or a check payable to the order of
the Company in the amount specified in the Schedule of Purchasers.
SECTION 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
Subject to and except as disclosed by the Company in the Schedule of
Exceptions attached hereto as Exhibit C, the Company hereby represents and
warrants to each Purchaser as follows:
3.1 ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has all requisite corporate power to own and operate
its properties and assets, and to carry on its business as presently conducted
and as proposed to be conducted. The Company has made all filings required to
be made by it under the laws of each jurisdiction where the character or
location of the properties owned or leased by the Company or the nature of the
business conducted by the Company requires any filings, except for filings in
jurisdictions where the failure to make such filings would not, individually or
in the aggregate, have a material adverse effect on the business, properties or
financial condition of the Company. The Company has made available to the
Purchasers copies of its Articles of Incorporation, Bylaws and minute books.
Said copies are true, correct and complete and contain all amendments through
the date of this agreement, and will be true, correct and complete on the
Closing Date.
3.2 CORPORATE POWER. The Company has all requisite legal and corporate
power to execute and deliver this agreement, to sell and issue the Shares
hereunder and to carry out and perform its obligations under the terms of this
agreement.
3.3 CAPITALIZATION. The authorized capital stock of the Company consists
of (or will consist of prior to the Closing) 60,000,000 shares of Common Stock
(the "Common Stock"), of which 6,252,104 are issued and outstanding; and
17,933,016 shares of Preferred Stock (the "Preferred Stock") consisting of
1,463,416 shares of Series A Preferred Stock, all of which are issued and
outstanding; 4,000,000 shares of Series B Preferred Stock, all of which are
issued and outstanding; 5,213,600 shares of Series C Preferred Stock, all of
which are issued and outstanding;
3
<PAGE>
4,256,000 shares of Series D Preferred Stock, 3,920,000 of which are issued
and outstanding and 3,000,000 shares of Series E Preferred Stock, none of
which are issued and outstanding. All such issued and outstanding shares
have been duly authorized and validly issued, and are fully paid and
nonassessable. The rights, restrictions, privileges and preferences of the
Series A, Series B, Series C, Series D and Series E Preferred Stock will be
as stated in the Articles. The Company, by appropriate action by the Board
of Directors, shall have reserved 4,000,000 shares of Common Stock for
issuance upon conversion of the Series A Preferred Stock; 4,000,000 shares of
Common Stock for issuance upon conversion of the Series B Preferred Stock;
5,213,600 shares of Common Stock for issuance upon conversion of the Series C
Preferred Stock; 4,256,000 shares of Common Stock for issuance upon
conversion of the Series D Preferred Stock; 3,000,000 shares of Common Stock
for issuance upon conversion of the Series E Preferred Stock. The Company
has reserved up to 256,000 shares of Series D Preferred Stock for issuance
upon exercise of warrants and not more than 6,799,550 shares of Common Stock
for issuance upon exercise of currently outstanding options or warrants
granted by the Company pursuant to its 1982 Stock Option Plan, 1991 Stock
Option Plan or pursuant to other options or warrants approved by the
Company's Board of Directors. Except as set forth above, and in the right of
first refusal set forth in Section 7.7 below as well as in the Series A
Agreement, Series B Agreement, Series C Agreement and Series D Agreement,
there are no preemptive or other outstanding rights, options, warrants,
conversion rights or agreements for the purchase or acquisition from the
Company of any shares of its capital stock or other securities of the
Company. All of the outstanding shares of Common Stock (and options to
purchase Common Stock), Preferred Stock and other outstanding securities of
the Company have been duly and validly issued in compliance with federal and
state securities laws. Attached hereto as Exhibit D is an accurate list of
the holders of the Company's outstanding Common Stock (and options and
warrants to purchase Common Stock), Preferred Stock and other outstanding
securities of the Company as of the date of this agreement and as of the
Closing Date, which list accurately reflects employees, directors, officers,
consultants and other shareholders of the Company who hold Common Stock (and
options and warrants to purchase Common Stock) and other outstanding
securities of the Company and the shares of Common Stock which are subject to
an option to repurchase pursuant to the various stock purchase plans and
agreements under which they were issued. The Company has previously made
available to the Purchasers copies of each stock option plan and the form of
each stock purchase agreement and stock option agreement of the Company under
which Common Stock (or options and warrants to purchase Common Stock) and
other outstanding securities of the Company have been or may be issued.
Except as disclosed in Exhibit C hereto, the consideration paid for the
outstanding Common Stock was cash and has been paid in full.
4
<PAGE>
3.4 AUTHORIZATION. All corporate action on the part of the Company, its
directors and shareholders necessary for the sale and issuance of the Series E
Preferred Stock (the "Shares") and the Common Stock issuable upon conversion of
the Shares, and the performance of the Company's obligations hereunder and the
reservation of the Common Stock issuable upon conversion of the Shares, has been
taken or will be taken prior to the Closing. This agreement, and the agreements
attached hereto as Exhibits are valid and binding obligations of the Company,
enforceable in accordance with their terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors. The
Shares (and the Common Stock issuable upon conversion thereof), when issued in
compliance with the provisions of this agreement, will be validly issued and
will be fully paid and nonassessable, and will be free of any liens or
encumbrances; provided, however, that the Shares (and the Common Stock issuable
upon conversion thereof) may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein.
3.5 FINANCIAL STATEMENTS.
(a) The Company has furnished to each Purchaser its audited balance
sheet, as at April 30, 1991, and its audited statement of earnings for the
fiscal year ended April 30, 1991, its unaudited statements of earnings for the
nine (9) months ended January 31, 1992, and its unaudited balance sheet as at
January 31, 1992 (collectively, the "Financial Statements"). The Financial
Statements are complete and correct in all material respects and have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated (except as disclosed
therein). Such balance sheets fairly present the financial condition of the
Company as at the dates thereof, and together with the pertinent notes, reflect
all material liabilities, contingent or otherwise, of the Company as at such
dates, and such statements of earnings accurately present the operating results
of the Company during the periods indicated therein (subject to normal year-end
audit adjustments where applicable).
(b) The Company's backlog of orders as of January 31, 1992 is set
forth in Exhibit C.
3.6 ABSENCE OF CHANGES. Since January 31, 1992, there has not been:
(a) Any change in the assets, liabilities, financial condition or
operations of the Company except changes in the ordinary course of business
which have not been, either in any case or in the aggregate, materially adverse;
5
<PAGE>
(b) Any change (individually or in the aggregate), except in the
ordinary course of business, in the contingent obligations of the Company by way
of guaranty, endorsement, indemnity, warranty or otherwise;
(c) Any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties or business of the
Company;
(d) Any waiver or compromise by the Company of a valuable right or of
a material debt owed to it;
(e) Any loans made by the Company to its employees, officers or
directors other than travel and relocation advances made in the ordinary course
of business;
(f) Any changes in the compensation of the Company's employees,
officers or directors;
(g) Any declaration or payment of any dividend or other distribution
of the assets of the Company;
(h) Any agreement obligating the Company to make payments that could
exceed $25,000 in any fiscal year;
(i) To the best knowledge of the Company, any other event or
condition of any character which has materially and adversely affected the
Company's business or prospects; or
(j) Any agreement or commitment by the Company to do any of the
things described in this Section 3.6.
3.7 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and
marketable title to all of its properties and assets, in each case subject to no
mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of
current taxes not yet due and payable, and (ii) possible minor liens and
encumbrances which do not in any case materially detract from the value of the
property subject thereto or materially impair the operations of the Company, and
which have not arisen otherwise than in the ordinary course of business.
3.8 LIABILITIES. The Company has no material liabilities and, to the best
of its knowledge, knows of no material contingent liabilities not disclosed in
the Financial Statements, except current liabilities incurred in the ordinary
course of business subsequent to January, 31, 1992.
3.9 PATENTS, TRADEMARKS AND TRADE SECRETS. There are no pending or
threatened claims against the Company alleging that the conduct of the Company's
business infringes or conflicts with the rights of others under patents, service
marks, trade names,
6
<PAGE>
trademarks, copyrights, trade secrets or other proprietary rights. The
Company's business as now conducted and as proposed to be conducted will not
infringe or conflict with the rights of others, including rights under
patents, service marks, trade names, trademarks, copyrights, trade secrets
and other proprietary rights. The Company owns or possesses sufficient legal
rights to all the patents, copyrights, trademarks, trade names, service
marks, trade secrets and other rights necessary for the operation of its
business as now conducted and as proposed to be conducted. To the Company's
knowledge after due investigation, no employee or consultant of the Company
owns any rights in patents, trademarks, trade names, processes, data or
know-how directly or indirectly competitive with those owned or to be used by
the Company or derived from or in connection with the conduct of the
Company's business. The Company is not aware of any violation or
infringement by a third party of any of the Company's patents, licenses,
trademarks, service marks, trade names, copyrights, trade secrets or other
proprietary rights. The Company has taken and will take reasonable security
measures to protect the secrecy, confidentiality and value of all trade
secrets useful in the conduct of its business.
3.10 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company
is not in violation of any term of its Articles of Incorporation or Bylaws, or
of any term contained in any instrument or contract to which it is a party the
damages arising from which would have a liquidated value exceeding $25,000, and,
to the best of its knowledge, is not in violation of any order, statute, rule or
regulation applicable to the Company. No event or failure of performance has
occurred which, with the passage of time or the giving of notice or both, would
constitute such a violation. Neither the execution, delivery and performance of
this agreement, nor the issuance of the Shares or the Common Stock issuable upon
conversion of the Shares, will result in any such violation or be in conflict
with or constitute a default under any such term, or result in the creation of
any mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company; and there is no such violation or default, nor any such
term, which materially and adversely affects the business of the Company as
presently conducted or as proposed to be conducted or any of its properties or
assets. To the best of the Company's knowledge, no other party is in material
default of any such instrument or contract.
3.11 LITIGATION, ETC. No action, suit, proceeding or investigation is
pending or threatened against the Company, nor, to the best of its knowledge, is
there any basis therefor. The foregoing includes any action, suit, proceeding
or investigation, pending or threatened, which questions the validity of this
agreement or the right of the Company to enter into it, or which might result,
either individually or in the aggregate, in any material adverse change in the
assets, condition, affairs or
7
<PAGE>
prospects of the Company, financial or otherwise, and also includes any
litigation pending or threatened, against the Company, by reason of the past
employment relationships of any employee, officer or consultant of the
Company, the activities or proposed activities of the Company, or
negotiations by the Company with possible backers of, or investors in, the
Company or its proposed business. No action, suit, proceeding or
investigation is pending or threatened by the Company.
3.12 REGISTRATION RIGHTS. Except as set forth in this agreement, in the
Series A, Series B, Series C and Series D Agreements and the Warrant Purchase
Agreement with Silicon Valley Bank dated July 30, 1990 (the "SVB Warrant") and
the Common Stock Purchase Warrant issued to Montgomery Securities, dated April
26, 1991, (the MS Warrant"), the Company is not under any obligation to register
(as defined in Section 8.2 below) any of its presently outstanding securities or
any of its securities which may hereafter be issued.
3.13 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of,
or designation, declaration or filing with, any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of this agreement, or the offer, sale or issuance of the Shares or the
Common Stock issuable upon conversion of the Shares, or the consummation of any
other transaction contemplated by this agreement, except (i) the filing of the
Articles with the Secretary of State of the State of California, which filing
will have been made and be effective on the Closing Date, and (ii) the filing of
a Notice with the California Commissioner of Corporations pursuant to
Section 25102(f) of the California Corporations Code within fifteen (15) days of
Closing (covering the sale of the Shares), both of which filings shall be
promptly made.
3.14 OFFERING. Based in part on the representations of the Purchasers set
forth in Section 4 hereof and in written responses to the Company's inquiries,
the offer, sale and issuance of the Shares and the Common Stock issuable upon
conversion of the Shares, in conformity with the terms of this agreement
constitute transactions exempt from the registration requirements of Section 5
of the Securities Act of 1933, as amended (the "Securities Act").
3.15 DISCLOSURE. The Company has previously delivered to each of the
Purchasers its information package dated February 5, 1992 (the "Information
Package"). The Information Package has been prepared by the management of the
Company in a good faith effort to describe the Company's products and proposed
products, the markets therefor and projections of anticipated financial
performance by the Company. Neither any representation or warranty by the
Company contained in this agreement, nor any
8
<PAGE>
other statement or certificate furnished or to be furnished to the Purchasers
pursuant hereto or in connection with the transactions contemplated hereby by
the Company, including the Information Package, when read together, contains
or will contain any untrue statement of a material fact or omits or will omit
to state a material fact necessary to make the statements contained therein
or herein not misleading in light of the circumstances under which they were
made; provided however, that neither the Company nor the Company's management
makes any representation or warranty that the projections set forth in the
Information Package can or will be realized.
3.16 NO CONFLICTING AGREEMENTS. To the best of the Company's knowledge,
no employee of the Company is, or will be in connection with the proposed
operations of the Company, in violation of any term of any employment contract,
proprietary information and inventions agreement, or any other contract or
agreement relating to the relationship of any such employee with the Company or
any previous employer.
3.17 CONTRACTS AND OTHER COMMITMENTS. The Company does not have any
contract, agreement, lease or other commitment, written or oral, absolute or
contingent, other than (i) contracts that do not involve more than $25,000, and
do not extend for more than one year beyond the date hereof, (ii) sales and
product distribution contracts entered into in the ordinary course of business
and involving less than $100,000 worth of goods and services, and
(iii) contracts terminable at will by the Company on no more than 30 days'
notice without cost or liability to the Company. For the purpose of this
section, employment and consulting contracts and contracts with labor unions,
and license agreements and any agreements relative to the Company's technology
shall not be considered to be contracts entered into in the ordinary and usual
course of business.
3.18 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, and has no stock or other interest as owner or principal
in, any other corporation or partnership, joint venture, association or other
business venture or entity.
3.19 MANUFACTURING RIGHTS. The Company has not granted rights to
manufacture, produce, assemble, license or sell its products to any other person
in any agreement with an aggregate value of over $100,000 and is not bound by
any agreement with an aggregate value of over $100,000 which affects the
Company's exclusive right to manufacture, assemble or sell its products.
3.20 TRANSACTIONS WITH PRINCIPALS. No employee, shareholder, officer or
director of the Company is indebted to the Company, nor is the Company indebted
(or committed to make loans or extend or guarantee credit) to any of them.
9
<PAGE>
3.21 TAXES. The Company has accurately prepared and timely filed all
income tax returns and other tax returns which are required to be filed, and has
paid, or made provision for the payment of, all taxes which have or may have
become due pursuant to said returns or pursuant to any assessment which has been
received by it. The provisions for taxes reflected in the respective Financial
Statements are adequate for all taxes (federal, state and local) for the periods
ending on the respective dates of said Financial Statements.
3.22 BROKERAGE. There are no claims for brokerage commissions, finders'
fees or similar compensation in connection with the transactions contemplated by
this agreement based on any arrangement or agreement made by or on behalf of the
Company. The Company agrees to indemnify and hold the Purchasers harmless
against any liability, settlement or expense arising out of, or in connection
with, any such claim.
3.23 INSURANCE. The Company has fire and casualty insurance policies,
with extended coverage, sufficient in amount to allow it to replace any of its
properties which might be damaged or destroyed, and a products liability
insurance policy, with limits as specified on Exhibit C.
3.24 USE AND PROHIBITED USE OF PROCEEDS. The proceeds from the sale of
the Shares will be used for general corporate purposes.
3.25 EMPLOYEES. The Company has no employment contract with any officer
or employee or any other consultant or person which is not terminable by it at
will without liability, except as the Company's right to terminate its employees
at will may be limited by applicable California law. Other than the 1982 Stock
Option Plan and 1991 Stock Option Plan, copies of which have been previously
made available to the Purchasers, the Company has no deferred compensation,
pension, health, profit sharing, bonus, stock purchase, stock option,
hospitalization, insurance, severance or any other employee benefit or welfare
benefit plan or obligation covering any of its officers or employees. No
employee or consultant to the Company is receiving compensation from the Company
at a rate in excess of $50,000 per annum. There are no controversies or labor
trouble or union organization activities pending or, to the knowledge of the
Company, threatened, between it and its employees. None of the Company's
employees belongs to any union or collective bargaining unit. All technical
employees, other key employees and officers of the Company have signed
proprietary information agreements with the Company prior to or at the
commencement of their employment in substantially the form made available to the
Purchasers. To the best of its knowledge, the Company has complied with all
applicable state and federal equal employment opportunity and other laws related
to employment.
10
<PAGE>
3.26 VOTING AGREEMENTS. The Company has no agreement, obligation or
commitment with respect to the election of any individual or individuals to the
Board of Directors, and to the best of the Company's knowledge, there is no
voting agreement or other arrangement among its shareholders with respect to the
election of any individual or individuals to the Board of Directors.
SECTION 4
INVESTMENT REPRESENTATION
Each Purchaser hereby represents and warrants only to the Company with
respect to this purchase as follows:
4.1 EXPERIENCE. He or it is experienced in evaluating and investing in
high technology companies such as the Company, is capable of evaluating the
merits and risks of investment and has the capacity to protect his or its
interests with respect to such investment.
4.2 INVESTMENT. He or it is acquiring the Shares for investment for his
or its own account and not with a view to, or for resale in connection with, any
distribution thereof, and he or it has no present intention of selling or
distributing the Shares or any of the Common Stock into which the Shares are
convertible. He or it understands that the Shares and Common Stock into which
the Shares are convertible to be purchased by he or it have not been registered
under the Securities Act by reason of a specific exemption from the registration
provisions of the Securities Act which depends upon, among other things, the
bona fide nature of the investment intent as expressed herein.
4.3 RULE 144. He or it acknowledges that, because they have not been
registered under the Securities Act, the Shares and the Common Stock into which
the Shares are convertible he or it is purchasing must be held indefinitely
unless subsequently registered under the Securities Act or an exemption from
such registration is available. He or it is aware of the provisions of Rule 144
promulgated under the Securities Act which permits limited resale of securities
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, the existence of a public market for
the shares, the availability of certain current public information about the
Company, the resale occurring not less than two years after a party has
purchased and paid for the security to be sold, the sale being through a
"broker's transaction" or in transactions directly with a "market maker" (as
provided by Rule 144(f)) and the number of shares being sold during any three
month period not exceeding specified limitations (unless the sale is within the
requirements of Rule 144(k)).
11
<PAGE>
4.4 NO PUBLIC MARKET. He or it understands that no public market now
exists for any of the securities issued by the Company and that it is uncertain
whether a public market will ever exist for the Shares or the Common Stock into
which the Shares are convertible.
4.5 ACCESS TO DATA. He or it has had an opportunity to discuss the
Company's business, management and financial affairs with its management, and to
obtain any additional information necessary to verify the accuracy of the
information given to him or it and have had all questions and inquiries answered
to his or its satisfaction.
SECTION 5
CONDITIONS TO PURCHASERS' OBLIGATIONS AT CLOSING
The Purchasers' obligations to purchase the Shares at the Closing are
subject to the fulfillment on or prior to the Closing Date of all of the
conditions set forth below in this Section 5.
5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made in Section 3 hereof shall be true and correct when made, and
shall be true and correct on the Closing Date.
5.2 COVENANTS. All covenants, agreements and conditions contained in this
agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with in all respects.
5.3 OPINION OF COMPANY'S COUNSEL. At the Closing the Purchasers shall
have received from Baker & McKenzie, counsel to the Company, a favorable opinion
addressed to them, dated the Closing Date, in the form attached hereto as
Exhibit F.
5.4 SERIES A AMENDMENT. The Company and the holders of not less than a
majority of the Series A Preferred shall have executed and delivered the
Series A Amendment substantially in the form attached hereto as Exhibit E-1.
5.5 SERIES B AMENDMENT. The Company and the holders of not less than a
majority of the Series B Preferred shall have executed and delivered the
Series B Amendment substantially in the form attached hereto as Exhibit E-2.
5.6 SERIES C AMENDMENT. The Company and the holders of not less than
sixty-six and two-thirds percent (66-2/3%) of the Series C Preferred shall have
executed and delivered the Series C Amendment substantially in the form attached
hereto as Exhibit E-3.
12
<PAGE>
5.7 SERIES D AMENDMENT. The company and the holders of not less than
sixty-six and two-thirds percent (66-2/3%) of the Series D Preferred shall have
executed and delivered the Series D Amendment substantially in the form attached
hereto as Exhibit E-4.
5.8 QUALIFICATIONS. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Shares pursuant to this agreement shall have been duly obtained and shall be
effective on and as of the Closing.
5.9 CERTIFICATE OF PRESIDENT. The Company's Chief Executive Officer or
President shall have executed and delivered to the Purchasers a certificate, in
the form attached hereto as Exhibit G, containing certain representations and
warranties.
5.10 COMPLIANCE CERTIFICATE. The Company shall have delivered to the
Purchasers a certificate, executed by the Chief Executive Officer or President
of the Company, dated the Closing Date, certifying to the fulfillment of the
conditions specified in Sections 5.1, 5.2, 5.4, 5.5, 5.6, 5.7 and 5.8 of this
agreement.
5.11 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
connection with the transactions contemplated at the Closing hereby and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchasers, and the Purchasers shall
have received all such counterpart originals or certified or other copies of
such documents as they may reasonably request.
SECTION 6
CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING
The Company's obligation to sell the Shares at the Closing is subject to
the fulfillment of the following conditions:
6.1 REPRESENTATIONS CORRECT. The representations made by the Purchasers
in Section 4 hereof shall be true and correct when made, and shall be true and
correct on the Closing Date.
SECTION 7
AFFIRMATIVE COVENANTS OF THE COMPANY
Notwithstanding any provision of the Company's Bylaws regarding delivery or
non-delivery of financial information to shareholders of the Company, the
Company hereby covenants and agrees as follows:
13
<PAGE>
7.1 FINANCIAL INFORMATION. The Company will furnish the following
information to each Purchaser for so long as he or it is a holder of any of the
Shares or Common Stock into which the Shares are converted:
(a) As soon as practicable after the end of each fiscal year, and in
any event within 90 days thereafter, a consolidated balance sheet of the Company
and its subsidiaries, if any, as of the end of such fiscal year, and a
consolidated statement of income and a consolidated statement of changes of cash
flow of the Company and its subsidiaries, if any, for such year, prepared in
accordance with generally accepted accounting principles and setting forth in
each case in comparative form the figures for the previous fiscal year, all in
reasonable detail and with an audit opinion thereon from independent public
accountants of recognized national standing selected by the Company.
(b) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Company, and in
any event within 30 days thereafter, a consolidated balance sheet of the Company
and its subsidiaries, if any, as of the end of each such quarterly period, and a
consolidated statement of income and a consolidated statement of changes in cash
flows of the Company and its subsidiaries, if any, for such period and for the
current fiscal year to date, prepared in accordance with generally accepted
accounting principles, with the exception that no notes need be attached to such
statements and year-end audit adjustments may not have been made. Said
financial statements shall be signed by an officer of the Company who shall
state that such financial statements are in accordance with generally accepted
accounting principles, with the exception that no notes need be attached to such
statements and year-end audit adjustments may not have been made.
(c) Each Purchaser has the right to visit and inspect any of the
properties of the Company or any of its subsidiaries, if any, and to discuss
their affairs, finances and accounts with their officers, all at such reasonable
times and as often as may be reasonably requested.
7.2 OTHER INFORMATION. The Company shall furnish the following
information to each Purchaser who requests such information in writing for so
long as he or it (together with his or its affiliates) holds at least 120,000 of
the Shares or shares of Common Stock issuable upon conversion of the Shares (on
an
14
<PAGE>
as-converted-to-Common-Stock basis and subject to adjustment for any stock
splits, combinations or dividends):
(a) As soon as practicable after the end of each fiscal month, and in
any event within thirty (30) days thereafter, a consolidated balance sheet of
the Company and its subsidiaries, if any, as at the end of such month, and a
consolidated statement of income of the Company and its subsidiaries, if any,
for such month, and for the current fiscal year to date, in each case setting
forth in comparative form the Company's and its subsidiaries', if any, projected
consolidated balance sheets and projected consolidated statements of income for
the corresponding periods (as prepared pursuant to subparagraph 7.1(a)),
prepared in accordance with generally accepted accounting principles, all in
reasonable detail and certified subject to changes resulting from year-end audit
adjustments, by the principal financial officer of the Company; provided,
however, that any financial statements provided hereunder need not contain any
footnotes. To such financial statements there shall be appended a discussion
and analysis, in reasonable detail, of such financial statements and the general
business condition and prospects of the Company by management of the Company so
as to assist the recipients in understanding and interpreting such financial
statements.
(b) Within ten (10) days of adoption by the Board of Directors, but
not later than forty-five (45) days prior to the beginning of each fiscal year,
an annual plan for such year which shall include monthly capital and operating
expense budgets, cash flow statements, projected balance sheets and statements
of earnings for each month and for the end of such year itemized in such detail
as the Board of Directors may reasonably determine. Approval of such budgets,
statements and projections shall be required by a majority of the Board of
Directors.
(c) Within ten (10) days after a material change in the annual plan
specified in subparagraph 7.2(b) is approved by the Board of Directors, revised
budgets, statements or projections (as so specified).
(d) Copies of all reports, registration statements and other material
filed by the Company or any subsidiary with the Securities and Exchange
Commission or with any national securities exchange on which securities of the
Company or any subsidiary may be listed.
7.3 ASSIGNMENT OF RIGHTS TO INFORMATION. The rights granted pursuant to
Section 7.1 may not be assigned or otherwise conveyed by any Purchaser or by any
subsequent transferee of any such rights without the written consent of the
Company, which consent shall not be unreasonably withheld; provided that the
Company may refuse such written consent if the proposed
15
<PAGE>
transferee is a competitor of the Company; and provided further, that no such
written consent shall be required if the transfer is to any parent,
subsidiary, affiliate or group member of any Purchaser, or to any partner or
retired partner of any Purchaser that is a general or limited partnership or
to any such partner's estate, or if the transfer is to any transferee who
will own at least an aggregate of 180,000 shares of Common Stock (on an
as-converted-to-Common-Stock basis) after the transfer.
7.4 CONFIDENTIALITY. Each Purchaser agrees that he or it will keep
confidential and will not disclose or divulge any confidential, proprietary or
secret information which such Purchaser may obtain from the Company, and which
the Company has prominently marked "confidential," "proprietary" or "secret" or
has otherwise identified as being such, pursuant to financial statements,
reports and other materials submitted by the Company as required hereunder, or
pursuant to visitation or inspection rights granted hereunder unless such
information is already known to the Purchaser or is or becomes publicly known,
or unless the Company gives its written consent to the Purchaser's release of
such information, except that no such written consent shall be required (and
Purchaser shall be free to release such information) if such information is to
be provided to Purchaser's lawyer or accountant, or to an officer, director or
partner of a Purchaser.
7.5 BOARD OF DIRECTORS. The Company will reimburse the reasonable
expenses of Directors representing the Purchasers incurred in attending Board of
Directors Meetings.
7.6 EMPLOYEE AGREEMENTS. All current employees and consultants of the
Company have executed, and all future employees and consultants of the Company
shall be required to execute, a proprietary information agreement in the form as
the Board of Directors may from time to time deem appropriate. All current and
future employees, directors and consultants of the Company who shall purchase or
receive options to purchase shares of the Company's Common Stock shall be
required to execute stock purchase or option agreements in a form approved by
the Board of Directors providing for straight-line vesting of shares over a
four-year period beginning upon start of employment or services substantially as
provided in Exhibit I to the Series A Agreement, unless otherwise deemed
appropriate by the Board of Directors.
7.7 RIGHT OF FIRST REFUSAL. The Company hereby grants to each Purchaser
the right of first refusal to purchase, pro rata, all (or any part) of New
Securities (as defined in this paragraph 7.7) that the Company may, from time to
time propose to sell and issue. Such Purchaser's pro rata share, for purposes
of this right of first refusal, is the ratio of the number of shares of Common
Stock into which the number of Shares purchased by such Purchaser hereunder are
convertible to the total number of
16
<PAGE>
outstanding shares of Common Stock (calculated on a fully diluted basis) of
the Company. This right of first refusal shall be subject to the following
provisions:
(a) "New Securities" shall mean any Common Stock or Preferred Stock
of the Company, whether now authorized or not, and rights, options or warrants
to purchase said Common Stock or Preferred Stock, and securities of any type
whatsoever that are, or may become, convertible into said Common Stock or
Preferred Stock; provided, however, that "New Securities" does not include
(i) securities issuable upon conversion of or with respect to Series A,
Series B, Series C, Series D and Series E Preferred; (ii) securities offered to
the public pursuant to a registration statement filed under the Securities Act;
(iii) securities issued pursuant to the acquisition of another corporation by
the Company by merger, purchase of substantially all of the assets, or other
reorganization whereby the Company owns not less than fifty-one percent (51%) of
the voting power of such corporation; (iv) shares of the Company's Common Stock
(or related options) issued to employees, officers or consultants of the Company
pursuant to any employee stock offering, plan or arrangement approved by the
Board of Directors; (v) shares of the Company's Common Stock or Preferred Stock
issued in connection with any stock split, stock dividend or recapitalization by
the Company; (vi) securities issued pursuant to the acquisition of licenses or
other rights, assets or technology from third parties on the condition that such
issuance and acquisition is approved by at least 80% of the incumbent Board of
Directors; or (vii) securities issuable upon exercise of the SVB Warrant.
(b) In the event that the Company proposes to undertake an issuance
of New Securities, it shall give each Purchaser written notice of its intention,
describing the type of New Securities, the price and the general terms upon
which the Company proposes to issue the same. Each Purchaser shall have twenty
(20) days from the date of mailing of any such notice to agree to purchase his
pro rata share of such New Securities for the price and upon the general terms
specified in the notice by giving written notice to the Company and stating
therein the quantity of New Securities to be purchased. Each Purchaser shall
have a right of over allotment such that if any Purchaser fails to exercise his
right hereunder to purchase his pro rata portion of New Securities, the Company
shall so notify the other Purchasers and the other Purchasers may purchase the
nonpurchasing Purchaser's portion on a pro rata basis, within ten (10) days from
the date of such notice. For the purposes of this Section 7.7, if the Company
proposes to offer any New Securities as part of a related transaction, including
but not limited to, warrants which may be offered as part of a debt financing
(collectively, "Related Securities"), then the Purchaser's right to subscribe to
such New Securities will be conditioned upon the Purchaser's subscription to the
Related Securities.
17
<PAGE>
(c) In the event that Purchasers fail to exercise in full the right
of first refusal within said twenty (20) day period (plus ten (10) day period,
if applicable), the Company shall have ninety (90) days thereafter to sell the
New Securities respecting which the Purchasers' rights were not exercised, at a
price and upon general terms no more favorable to the purchasers thereof than
specified in the Company's notice. In the event the Company has not sold the
New Securities within such ninety (90) day period, the Company shall not
thereafter issue or sell any New Securities, without first offering such
securities to the Purchasers in the manner provided above.
(d) The right of first refusal granted under this Agreement shall
expire upon the first closing of the first firmly underwritten public offering
of Common Stock of the Company that is pursuant to a registration statement
filed with, and declared effective by, the SEC under the Securities Act,
covering the offer and sale of Common Stock to the public at a per share price
(prior to underwriter commissions and expenses) of at least $3.00 and at an
aggregate offering price (after deduction for underwriter commissions and
expenses) of not less than $5,000,000.
(e) This right of first refusal is assignable only in connection with
a sale of Shares or Common Stock issued on conversion thereof.
7.8 KEY MAN INSURANCE. The Company, within thirty (30) days of the
Closing Date, shall obtain and keep in effect a term life insurance policy on
the life of the Chief Executive Officer in the amount of $1,000,000, unless the
employment of the insured by the Company terminates, with proceeds payable to
the Company. Additional term life insurance policies may be obtained on such
other officers of the Company, and in such amounts, as may be determined by the
Board of Directors.
7.9 TERMINATION. The covenants set forth in Sections 7.1, 7.2 and 7.5
shall terminate at such time as the Company becomes subject to the reporting
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended.
SECTION 8
RESTRICTIONS ON TRANSFERABILITY OF SECURITIES;
REGISTRATION RIGHTS
8.1 RESTRICTIONS ON TRANSFERABILITY. The Shares (and the Common Stock
into which the Shares are convertible) shall not be transferable except upon the
conditions specified in this Section 8, which conditions are intended to insure
compliance with the provisions of the Securities Act, or, in the case of
Section 8.12 hereof, to assist in an orderly distribution. Each
18
<PAGE>
Purchaser will cause any proposed transferee of the Shares (or of the Common
Stock into which the Shares are convertible) held by a Purchaser to agree to
take and hold such securities subject to the provisions and upon the
conditions specified in this Section 8.
8.2 CERTAIN DEFINITIONS. As used in this Section 8, the following terms
shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"RESTRICTED SECURITIES" shall mean the securities of the Company required
to bear the legend set forth in Section 8.3 hereof.
"REGISTRABLE SECURITIES" means shares of the Company's Common Stock
(i) issued or issuable pursuant to the conversion of the Series A, Series B,
Series C, Series D or Series E Preferred Stock, or the Shares, (ii) acquired by
any of the Purchasers of Series A Preferred from a shareholder of the Company
prior to December 31, 1986, (iii) issued upon exercise of the SVB Warrant or the
MS Warrant or (iv) issued as a dividend or other distribution with respect to,
or in exchange or in replacement of, the Series A, Series B, Series C, Series D
or Series E Preferred, or such Common Stock, excluding in all cases, however
(including exclusion from the calculation of the number of outstanding
Registrable Securities), any Registrable Securities sold by a person in a
transaction, including a transaction pursuant to a registration statement under
this Section 8, Section 8 of the Series A Agreement, Section 8 of the Series B
Agreement, Section 8 of the Series C Agreement Section 8 of the Series D
Agreement, or a transaction pursuant to Rule 144, in which his rights under this
Section 8, Section 8 of the Series A Agreement, Section 8 of the Series B
Agreement, Section 8 of the Series C Agreement or Section 8 of the Series D
Agreement are not transferred.
The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in
complying with Sections 8.5, 8.6 and 8.13 hereof,
19
<PAGE>
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company, reasonable fees
and disbursements of a single special counsel for the Holders, blue sky fees
and expenses, and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular employees
of the Company which shall be paid in any event by the Company).
"SELLING EXPENSES" shall mean all underwriting discounts and selling
commissions applicable to the sale.
"HOLDER" shall mean any holder of outstanding Series A, Series B, Series C,
Series D Preferred, Shares or Registrable Securities.
"INITIATING HOLDERS" shall mean any Holder or Holders of not less than 50%
of the then outstanding Registrable Securities.
8.3 RESTRICTIVE LEGEND. Each certificate representing (i) the Shares, or
(ii) shares of the Company's Common Stock issued upon conversion of the Shares
and (iii) any securities issued in respect of the Shares or such Common Stock,
shall (unless otherwise permitted by the provisions of Section 8.4 below) be
stamped or otherwise imprinted with a legend in substantially the following form
(in addition to any legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR AS PROVIDED IN THE
AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR
TRANSFER. COPIES OF THE AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN
REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY
OF THE CORPORATION AT ITS PRINCIPAL OFFICE.
8.4 NOTICE OF PROPOSED TRANSFERS. The holder of each certificate
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 8.4. Prior to any proposed
transfer of any Restricted Securities unless there is in effect a registration
statement under the Securities Act covering the proposed transfer, the holder
thereof shall give written notice to the Company of such holder's intention to
effect such transfer. Each such notice shall describe the manner and
circumstances of the proposed transfer in sufficient detail, and shall be
accompanied (except in the following cases, with respect to which the
requirements set forth in the balance of this sentence need not be complied
with: transactions in compliance with Rule 144 or Rule 144A so long as the
Company is furnished with evidence of
20
<PAGE>
compliance with such Rule; transactions involving the distribution of
Restricted Securities by any Purchaser which is a general or limited
partnership to any of its partners, or retired partners, or to the estate of
any of its partners or retired partners so long as such transaction does not
involve the disposition of such Restricted Securities for value; transactions
involving the transfer of Restricted Securities by any holder who is an
individual to his family members or to a trust for the benefit of such
shareholder or his family members; or transfers not involving a change in
beneficial ownership) by either (i) an unqualified written opinion of legal
counsel who shall be reasonably satisfactory to the Company addressed to the
Company and reasonably satisfactory in form and substance to the Company's
counsel, to the effect that the proposed transfer of the Restricted
Securities may be effected without registration under the Securities Act,
(ii) a "no action" letter from the Commission to the effect that the
distribution of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with
respect thereto, or (iii) such other showing that may be reasonably
satisfactory to legal counsel to the Company, whereupon the holder of such
Restricted Securities shall be entitled to transfer such Restricted
Securities in accordance with the terms of the notice delivered by the holder
to the Company. Each certificate evidencing the Restricted Securities
transferred as above provided shall bear the appropriate restrictive legend
set forth in Section 8.3 above, except that such certificate shall not bear
such restrictive legend if in the opinion of counsel for the Company such
legend is not required in order to establish compliance with any provisions
of the Securities Act.
8.5 REQUESTED REGISTRATION. In case the Company shall receive from
Initiating Holders a written request that the Company effect any registration
(other than a registration on Form S-3 or any related form of Registration
Statement) with respect to at least 30% of the Registrable Securities (or any
lesser percentage if the aggregate offering price to the public would be at
least $3,000,000), the Company will:
(a) promptly give written notice of the proposed registration to all
other Holders; and
(b) as soon as practicable, use its diligent best efforts to effect
such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities
21
<PAGE>
of any Holder or Holders joining in such request as are specified in a
written request given within fifteen (15) days after receipt of such written
notice from the Company; provided that the Company shall not be obligated to
take any action to effect any such registration, qualification or compliance
pursuant to this Section 8.5:
(i) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(ii) prior to December 1, 1991;
(iii) within the ninety (90) day period immediately following
the effective date of the registration statement pertaining to the first
underwritten public offering of securities of the Company for its own account
(other than a registration relating solely to a Commission Rule 145 transaction
or a registration relating solely to employee benefit plans);
(iv) after the Company has effected two (2) registrations
pursuant to Section 8.5 of this agreement, Section 8.5 of the Series A
Agreement, Section 8.5 of the Series B Agreement, Section 8.5 of the Series C
Agreement or Section 8.5 of the Series D Agreement and such registrations have
been declared or ordered effective; or
(v) if at the time of the request to register Registrable
Securities the Company gives notice within thirty (30) days of such request that
it is engaged or has fixed plans to engage within thirty (30) days of the time
of the request in an initial firmly underwritten registered public offering as
to which the Holders may include Registrable Securities pursuant to Sections 8.5
or 8.6.
Subject to the foregoing clauses (i) through (v) and to Section 8.5(d), the
Company shall file a registration statement covering the Registrable Securities
so requested to be registered as soon as practicable after receipt of the
request of the Initiating Holders.
(c) UNDERWRITING. If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
Section 8.5 and the Company shall include such information in the written notice
referred to in Section 8.5(a). The right of any Holder to registration pursuant
to Section 8.5 shall be conditioned upon such Holder's participation in such
underwriting and the
22
<PAGE>
inclusion of such Holder's Registrable Securities in the underwriting to the
extent requested (unless otherwise mutually agreed by a majority in interest
of the Holders and such Holder) to the extent provided herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders and consented
to by the Company, which consent shall not be unreasonably denied.
Notwithstanding any other provision of this Section 8.5, if the underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten and so advises the Initiating Holders in writing, then the
Initiating Holders shall so advise all Holders (except those Holders who have
indicated to the Company their decision not to distribute any of their
Registrable Securities through such underwriting) and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all such Holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities owned by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration.
If any Holder disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the Initiating Holders. The Registrable Securities and/or other securities
so withdrawn from such underwriting shall also be withdrawn from such
registration; provided, however, that, if by the withdrawal of such Registrable
Securities a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed by
the underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion used above in determining the
underwriter limitation.
If the underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may include securities for its own account or the
account of others in such registration if the underwriter so agrees and if the
number of Registrable Securities which would otherwise have been included in
such registration and underwriting will not thereby be limited.
(d) DELAY OF REGISTRATION. If the Company shall furnish to the
Initiating Holders a certificate signed by the President of the Company stating
that, in the good faith judgment of the Board of Directors of the Company, it
would be seriously
23
<PAGE>
detrimental to the Company and its shareholders for such registration
statement to be filed on or before the date filing would be required and it
is therefore essential to defer the filing of such registration statement,
then the Company may direct that such request for registration be delayed for
a period not in excess of ninety (90) days, such right to delay a request to
be exercised by the Company not more than twice in any one-year period.
8.6 COMPANY REGISTRATION.
(a) If at any time or from time to time, the Company shall determine
to register any of its Common Stock, for its own account or for the account of
others (other than the Holders), other than a registration relating solely to
employee benefit plans or a registration relating solely to a Commission Rule
145 transaction or a registration on any registration form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of Registrable Securities, the
Company will:
(i) promptly give to each Holder written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within twenty (20) days after receipt of such written notice from
the Company, by any Holder or Holders.
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 8.6(a)(i). In such event the right of any Holder to
registration pursuant to Section 8.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 8.6, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the underwriter may exclude some or all
Registrable Securities from such registration and underwriting. The Company
shall so
24
<PAGE>
advise all Holders (except those Holders who have indicated to the Company
their decision not to distribute any of their Registrable Securities through
such underwriting), and the number of shares of Registrable Securities that
may be included in the registration and underwriting shall be allocated among
such Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities owned by such Holders at the time of filing
the registration statement. No Registrable Securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. If any Holder disapproves of the terms of any
such underwriting, such person may elect to withdraw therefrom by written
notice to the Company and the underwriter. The Registrable Securities and/or
other securities so withdrawn from such underwriting shall also be withdrawn
from such registration; provided, however, that, if by the withdrawal of such
Registrable Securities a greater number of Registrable Securities held by
other Holders may be included in such registration (up to the maximum of any
limitation imposed by the underwriters), then the Company shall offer to all
Holders who have included Registrable Securities in the registration the
right to include additional Registrable Securities in the same proportion
used above in determining the underwriter limitation.
8.7 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Section 8.5 or any registration under Section 8.6 or Section 8.13 shall be borne
by the Company; and all Selling Expenses shall be borne by the holders of the
securities so registered pro rata on the basis of the number of shares so
registered. The Company shall not, however, be required to pay for expenses of
any registration proceeding begun pursuant to Section 8.5, the request of which
has been subsequently withdrawn by the Initiating Holders (unless the withdrawal
is based upon material adverse information concerning the Company of which the
Initiating Holders were not aware at the time of such request or unless the
Holders of a majority of Registrable Securities agree to forfeit their right to
one requested registration pursuant to Section 8.5 in which event such right
shall be forfeited by all Holders), in which case such expenses shall be borne
by the holders of securities (including Registrable Securities) requesting such
registration in proportion to the number of shares for which registration was
requested.
8.8 REGISTRATION PROCEDURES. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 8,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
25
<PAGE>
(a) Keep such registration, qualification or compliance effective for
a period of one hundred eighty (180) days or until the Holder or Holders have
completed the distribution described in the registration statement relating
thereto, whichever first occurs; and
(b) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request.
8.9 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers,
directors, partners and legal counsel, and each person controlling such Holder,
with respect to which registration, qualification or compliance has been
effected pursuant to this Section 8, and each underwriter, if any, and each
person who controls any underwriter against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on (i) any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other similar document (including any
related registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, or (ii) any violation by the Company
of any federal, state or common law rule or regulation applicable to the Company
in connection with any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers, directors, partners and legal
counsel, and each person controlling such Holder, each such underwriter and each
person who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, as incurred, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission based upon written information furnished to the Company by an
instrument duly executed by such Holder or underwriter and stated to be
specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each legal counsel and independent accountant of the Company, each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of the Securities Act, and
26
<PAGE>
each other such Holder, each of its officers, directors and partners and each
person controlling such Holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in any such registration statement, prospectus, offering circular or other
similar document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under
which they were made, and will reimburse the Company, such Holders, such
directors, officers, persons, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, as incurred, in
each case to the extent, but only to the extent, that such untrue statement
(or alleged untrue statement) or omission (or alleged omission) is made in
such registration statement, prospectus, offering circular or other document
in reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder and stated to be
specifically for use therein; provided, however, that the obligations of such
Holders hereunder shall be limited to an amount equal to the proceeds to each
such Holder of Registrable Securities sold as contemplated herein.
(c) Each party entitled to indemnification under this Section 8.9
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has received written notice of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld). The Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
shall bear the expense of such defense of the Indemnified Party if
representation of both parties by the same counsel would be inappropriate due to
actual or potential conflicts of interest. The failure of any Indemnified Party
to give notice as provided herein shall relieve the Indemnifying Party of its
obligations under this Section 8 only to the extent that such failure to give
notice shall materially adversely prejudice the Indemnifying Party in the
defense of any such claim or any such litigation. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such
27
<PAGE>
Indemnified Party of a release from all liability in respect to such claim or
litigation.
8.10 INFORMATION BY HOLDER. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Section 8.
8.11 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to:
(a) Use its best efforts to facilitate the sale of the Restricted
Securities to the public, without registration under the Securities Act,
pursuant to Rule 144 under the Securities Act, provided that this shall not
require the Company to file reports under the Securities Act and the Exchange
Act at any time prior to the Company's being otherwise required to file such
reports.
(b) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act at all times after
ninety (90) days after the effective date of the first registration under the
Securities Act filed by the Company for an offering of its securities to the
general public;
(c) Use its best efforts to then file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act, as amended (at any time after it has become
subject to such reporting requirements);
(d) So long as a Purchaser owns any Restricted Securities to furnish
to the Purchaser forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company as a Purchaser may reasonably request in availing itself
of any rule or regulation of the
28
<PAGE>
Commission allowing a Purchaser to sell any such securities without
registration.
8.12 "MARKET STAND-OFF" AGREEMENT. Each Holder of more than 1% of the
Company's outstanding voting stock agrees not to sell or otherwise transfer or
dispose of any Common Stock (or other securities) of the Company held by it
during the one hundred twenty (120) day period following the effective date of a
registration statement of the Company filed under the Securities Act if so
requested by the Company and underwriter of Common Stock (or other securities)
of the Company, provided that:
(a) such agreement shall apply only to the first underwritten
registered public offering of the Company; and
(b) all officers and directors of the Company and all other
holders of at least 1% of the Company's voting securities enter into similar
agreements. The Company may impose stop-transfer instructions with respect to
the shares (or securities) subject to the foregoing restriction until the end
of such period.
8.13 FORM S-3. The Company shall use its best efforts to qualify for
registration on Form S-3 and to that end the Company shall register (whether or
not required by law to do so) its Common Stock under the Securities Exchange Act
of 1934, as amended, within twelve (12) months following the effective date of
the first registration of any securities of the Company on Form S-1. After the
Company has qualified for the use of Form S-3, the Holders of Registrable
Securities shall have the right to registrations on Form S-3 thereafter (but not
more than two in any twelve (12) month period) under this Section 8.13 (requests
shall be in writing and shall state the number of shares of Registrable
Securities to be disposed of and the intended method of disposition of such
shares by such Holder or Holders), provided that the Company shall not be
required to effect a registration pursuant to this Section 8.13 unless the
Holder or Holders requesting registration propose to dispose of shares of
Registrable Securities which they reasonably anticipate will have an aggregate
disposition price (before deduction of underwriting discounts and expenses of
sale) of at least $500,000.
The Company shall give notice to all Holders of Registrable Securities of
the receipt of a request for registration pursuant to this Section 8.13 and
shall provide a reasonable opportunity for other Holders to participate in the
registration. Subject to the foregoing, the Company will use its best efforts
to effect promptly the registration of all shares of Registrable Securities on
Form S-3, as the case may be, to the extent requested by the Holder or Holders
thereof for purposes of disposition.
29
<PAGE>
8.14 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to
register securities granted under Sections 8.5, 8.6 and 8.13 may be assigned or
otherwise conveyed by any Holder to its shareholders, partners or former
partners (or their estates), to the Holder's family members or a trust for his
or their benefit, or to any transferee who acquires at least 100,000 shares of
Registrable Securities; provided in each case, that the Company is given written
notice by such transferee at the time of or within a reasonable time after said
transfer, stating the name and address of said transferee and said transferee's
agreement to be bound by the provisions of Section 8 of this agreement.
8.15 CERTAIN LIMITATIONS IN CONNECTION WITH FUTURE GRANTS OF REGISTRATION
RIGHTS. From and after the date of this agreement, the Company shall not enter
into any agreement with any holder or prospective holder of any securities of
the Company providing for the granting to such holder of registration rights
unless such agreement:
(a) includes the equivalent of Section 8.12 as a term; and
(b) contains provisions substantially similar to those contained in
Sections 8.5(c) and 8.6(b) with respect to the allocation of Registrable
Securities to be included in an underwritten public offering if marketing
factors require a limitation on the number of such securities to be included.
Notwithstanding the foregoing, from and after the Closing Date the Company
shall not enter into any agreement with any person or persons providing for the
granting to such holder of registration rights superior to those granted to
Holders pursuant to this Section 8, or of registration rights which might cause
a reduction in the number of shares includable by the Holders in any offering
pursuant to Section 8.5 or in any offering subject to Section 8.6.
8.16 AMENDMENTS. The provisions of this Section 8 may be amended at any
time and from time to time, and particular provisions of this Section 8 may be
waived, with and only with an agreement or consent in writing signed by the
Company and by the holders of at least two-thirds (2/3) of the number of shares
of Registrable Securities (or securities convertible into Registrable
Securities) outstanding as of the date of such amendment or waiver; provided
however, that this Section 8.16 may not be amended except in accordance with
Section 9.4 hereof.
SECTION 9
MISCELLANEOUS
9.1 GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the laws of the State of California
30
<PAGE>
applicable to contracts between California residents entered into and to be
performed entirely within the State of California.
9.2 SURVIVAL. The representations, warranties, covenants and agreements
made by the parties herein shall survive any investigation made by any Purchaser
or the Company and shall survive the closing of the transactions contemplated
hereby.
9.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
9.4 ENTIRE AGREEMENT; AMENDMENT. This agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Except as provided in Section 8.16 above, any term of this agreement may be
amended and the observance of any term of this agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the holders of at
least two-thirds (2/3) of the outstanding Shares, determined on an as-converted-
to-Common-Stock basis, (including, for such purposes, on a proportional basis,
any shares of Common Stock into which any of the Shares have been converted that
have not been sold to the public). Any amendment or waiver effected in
accordance with this section shall be binding upon each holder of any securities
purchased under this agreement at the time outstanding (including securities
into which such securities have been converted), each future holder of all such
securities, and the Company.
9.5 EFFECT OF AMENDMENT OR WAIVER. Each Purchaser acknowledges that by
the operation of Section 9.4 hereof the holders of two-thirds (2/3) of the
outstanding Shares (and Common Stock issued upon conversion of the Shares)
determined on an as-converted-to-Common-Stock basis, will have the right and
power to diminish or eliminate all rights of such Purchaser under this
agreement.
9.6 RIGHTS OF PURCHASERS. Each holder of the Shares (and Common Stock
issued upon conversion of the Shares) shall have the absolute right to exercise
or refrain from exercising any right or rights that such holder may have by
reason of this agreement or the Shares, including without limitation the right
to consent to the waiver of any obligation of the Company under this agreement
and to enter into an agreement with the Company for the purpose of modifying
this agreement or any agreement effecting any such modification, and such holder
shall not incur any liability to any other holder or holders of the Shares with
respect to exercising or refraining from exercising any such right or rights.
31
<PAGE>
9.7 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that he or
it is not relying upon any person, firm, or corporation, other than the Company
and its officers and directors, in making its investment or decision to invest
in the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling person, officers, directors, partners, agents or employees of any
Purchaser shall be liable for any action heretofore or hereafter taken or
omitted to be taken by any of them in connection with the Shares (and Common
Stock issued upon conversion of the Shares).
9.8 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be effective five (5) days
after mailed by first-class mail, postage prepaid, or otherwise delivered by
hand or by messenger, addressed (a) if to a Purchaser, at such Purchaser's
address set forth in the Schedule of Purchasers, or at such other address as
such Purchaser shall have furnished to the Company in writing, or (b) if to any
other holder of any Shares, at such address as such holder shall have furnished
the Company in writing, or, until any such holder so furnishes an address to the
Company, then to and at the address of the last holder of such Shares who has so
furnished an address to the Company, or (c) if to the Company, at the address
specified on the signature page hereof or at such other address as the Company
shall furnish to each Purchaser and each such other holder in writing.
9.9 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any holder of any of the Shares, upon any breach or
default of the Company under this agreement, shall impair any such right, power
or remedy of such holder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereunder occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any holder of any breach or default under this
agreement, or any waiver on the part of any holder of any provisions or
conditions of this agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
9.10 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH
QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT
32
<PAGE>
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO
EXEMPT.
9.11 EXPENSES. The Company and each Purchaser shall bear its own expenses
and legal fees incurred on its behalf with respect to this agreement and the
transactions contemplated hereby.
9.12 COUNTERPARTS. This agreement may be executed in any number of
counterparts, each of which may be executed by less than all of the Purchasers,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
9.13 SEVERABILITY. In the case any provision of this agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
The foregoing agreement is hereby executed as of the date first above
written.
UNIFY CORPORATION PURCHASERS
-----------------------------
By: /s/ /s/
----------------------- -----------------------------
Its:----------------------- -----------------------------
[Type of Print name of Purchaser]
Address: 3901 Lennane Dr. Address: ------------------------
Sacramento, CA 95834 ------------------------
Attn: President ------------------------
Attn: ------------------------
33
<PAGE>
EXHIBITS
Exhibit A Schedule of Purchasers
Exhibit B Restated Articles of Incorporation
Exhibit C Schedule of Exceptions
Exhibit D List of Stockholders and Optionees
Exhibit E-1 Series A Amendment
Exhibit E-2 Series B Amendment
Exhibit E-3 Series C Amendment
Exhibit E-4 Series D Amendment
Exhibit F Form of Baker & McKenzie Opinion
Exhibit G Form of President's Certificate
34
<PAGE>
Exhibit A
SCHEDULE OF PURCHASERS
Number of Shares Total
of Series E Purchase
Name and Address Preferred Stock Price
- --------------------------------- ---------------- -----------
INMAN & BOWMAN 555,537 $833,305.50
INMAN & BOWMAN ENTREPRENEURS 5,611 8,416.50
ACCEL CAPITAL L.P. 253,758 380,637.00
ACCEL CAPITAL (INTERNATIONAL) L.P. 169,173 253,759.50
ARTHUR C. PATTERSON 3,490 5,235.00
INTERNATIONAL SYNERGIES LTD. 2,283 3,424.50
ELMORE C. PATTERSON PARTNERS 19,524 29,286.00
JAMES R. SWARTZ 3,836 5,754.00
DIXON R. DOLL 2,283 3,424.50
PAUL KLINGENSTEIN 1,918 2,877.00
GERALD L. MAYFIELD 292 438.00
OLYMPIC VENTURE PARTNERS II 322,426 483,639.00
RAINIER VENTURE PARTNERS 106,535 159,803.00
RVP ADVISORS FUND 1,559 2,338.50
OVP II ADVISORS FUND 1,409 2,113.50
DOUGERY & WILDER II 412,487 618,730.50
MERRILL, PICKARD, ANDERSON & EYRE IV 274,991 412,486.50
INSTITUTIONAL VENTURE PARTNERS IV 251,371 377,056.50
INSTITUTIONAL VENTURE MANAGEMENT IV 3,828 5,742.00
ROBERT FLEMING NOMINEES, LTD. 179,534 269,301.00
HALL, MORRIS & DRUFVA II, L.P. 139,833 209,749.50
35
<PAGE>
BATTERY VENTURES 137,324 205,986.00
FLEMING VENTURES 103,122 154,683.00
J.F. SHEA CO., INC. 47,876 71,814.00
--------- -------------
3,000,000 $4,500,000.00
--------- -------------
36
<PAGE>
Exhibit 10.7
JOINT VENTURE AGREEMENT
This Agreement is made and entered into this 4th day of September, 1990 by
and among Unify Corporation Delaware, Inc., a Delaware corporation ("UC"), AIR
Co., Ltd., a Japanese corporation ("AIR"), and Sumitomo Metal Industries, Ltd.,
a Japanese corporation ("SMI").
WITNESSETH:
WHEREAS, the parties hereto (hereinafter collectively referred to as the
"Parties" and individually the "Party") desire to jointly operate a Japanese
corporation, which will market, sell and distribute the products developed by
UC;
WHEREAS, UC has incorporated a wholly owned subsidiary in Japan with the
name of Unify Japan K.K. (the "Company") as the base of the joint venture
company (also referred to as the "Company") contemplated herein;
WHEREAS, UC is a wholly owned subsidiary of Unify Corporation, a California
corporation ("Unify");
WHEREAS, SMI and AIR agree to use the Company as an entity to become the
joint venture company and to invest in the Company;
WHEREAS, the Parties desire to stipulate the details of the structure of
the joint venture and the terms and conditions related to the operation thereof
including but not limited to each Party's assistance or role to the Company in
order to realize its successful business.
NOW, THEREFORE, in consideration for the promises and covenants contained
herein, the Parties hereby agree as follows:
Section 1. REORGANIZATION OF THE COMPANY
1.1 UC shall procure that, as soon as practicable after this Agreement is
executed, the Company shall take the necessary steps to file and register the
Amended Articles of Incorporation in the form of EXHIBIT I attached hereto
("Amended Articles") and to consummate the Recapitalization as set forth in
Section 2 hereof.
-1-
<PAGE>
1.2 The name of the Company shall be UNIFY JAPAN CORPORATION in English
and YUNIFAI JAPAN KABUSHIKI KAISHA in Japanese.
1.3 The business of the Company shall be;
(a) to market, sell and distribute all the products of UC including,
but not limited to, all current and future versions of those
products described in EXHIBIT II attached hereto (the
"Products"), and to render services related thereto, in Japan;
(b) any other business incidental or relating to the business set
forth above; and
(c) any other business that may be agreed upon by the Parties.
Section 2. RECAPITALIZATION
2.1 The Company shall, as soon as practicable after the date hereof, newly
issue sixty (60) voting shares of common stock designated as "Common Stock" in
the Amended Articles and eight (8) voting shares of preferred stock designated
as "Preferred A Stock" in the Amended Articles. The Company shall issue thirty-
three (33) shares of Common Stock to UC, twelve (12) shares of Common Stock and
eight (8) shares of Preferred A Stock to SMI, and fifteen (15) shares of Common
Stock to AIR.
The shares to be issued pursuant to this Subsection shall be subscribed to
by the Parties so that the shareholdings in the Company by the respective
Parties shall be as set forth below at the time of the completion of the
issuance of new shares and subscription thereof as set forth in this Subsection
(the "Recapitalization") (but before the transfer of shares of Common Stock from
UC to SMI pursuant to Section 10 has been consummated).
Number of Shares Subscription
Class Subscriber to be subscribed to Price per share
- ----- ----------- -------------------- ----------------
Common UC 65 Y 50,000
SMI 12 Y 50,000
AIR 15 Y 50,000
Preferred
A Stock SMI 8 Y 32,625,000
-2-
<PAGE>
2.2 The Preferred A Stock shall have the features as specified in the
Amended Articles, including, but not limited to, full voting rights.
2.3 Each Party who subscribes to the shares in the Recapitalization shall
pay the subscription prices in cash, wire transfer or cashier's check at the
bank or trust company designated by the Company.
For the purpose of this Agreement, the Recapitalization shall be deemed to
have been completed on the next day after the day on which the Parties have
paid, as specified by the Company, the subscription price for the shares to be
issued by the Company in the Recapitalization.
2.4 The Parties agree that, except as contemplated herein throughout the
term of this Agreement, the Company shall not (i) issue any common stock at the
price less than Fifty Thousand Yen (Y50,000) per share or any Preferred A Stock
at the price less than Thirty-Two Million Six Hundred Twenty-Five Thousand Yen
(Y32,625,000) per share unless such issuance is unanimously agreed upon by the
Parties, nor (ii) issue any security which is convertible to, or entitles the
holder thereof to subscribe for, the shares of any Common Stock or Preferred A
Stock which bears the conversion price or subscription price, as the case may
be, less than the respective per share prices set forth in the preceding clause.
2.5 Immediately following the completion of the Recapitalization, the
Amended Articles shall be amended further to provide for an authorized capital
of three hundred eighty-seven (387) shares of Common Stock and thirteen (13)
shares of Preferred Stock.
2.6 Notwithstanding any provision to the contrary in the Amended Articles,
the Company shall not issue any shares of voting stock, the number of which is
not the same as the number of all of the then outstanding voting stock or an
integral divisor or multiple thereof unless otherwise agreed by the Parties,
provided that this provision shall not apply to the issuance of five shares of
Preferred B Stock in the Secondary Financing.
Section 3. REPRESENTATIONS AND WARRANTIES
3.1 UC understands that SMI and AIR agree to use the Company as the joint
venture vehicle relying on the following representations and warranties by UC,
which representations and
-3-
<PAGE>
warranties were made as follows as of the date hereof, (a) the Company is
duly incorporated and validly exists under the laws of Japan, (b) only 32
shares of Common Stock of the Company have been issued as of the date hereof
and no other security of any kind, including any security which can be
convertible to, or entitles the holders thereof the right to subscribe for,
any share of the Company, has been issued or is outstanding and there is no
other outstanding right, subscription, warranty, preemptive right, option or
agreement that entitle any party or share or security of the Company (other
than as provided herein), (c) the Company has not borne or undertaken any
present or future, fixed or contingent, liability or indebtedness to any
party or person, nor has the Company entered into any agreement with any
party or person, in either case except for those undertaken by the Company in
the ordinary course of business of the Company which were succeeded to by the
Company from AIR (other than as provided herein and other than any indemnity
agreement entered into with any director in connection with the formation and
organization of the Company), (d) there is no employee or director benefit
plan adopted or maintained by the Company, (e) there is no litigation, cause
of action by any party or person against the Company, or any threat thereof,
(f) the transaction contemplated under this Agreement shall not cause any
liability or responsibility of the Company to any party or person, (g) all
the representations and warranties made in this Subsection shall be true and
accurate on the Effective Date (as hereinafter defined). Notwithstanding the
foregoing, SMI and AIR acknowledge that in entering into this Agreement,
neither is relying upon any representations or warranties from the Company,
UC or Unify regarding the current or future financial or business prospects
or success of the Company, UC or Unify.
3.2 UC agrees that it will indemnify and hold harmless SMI and/or AIR from
and against any losses, liabilities, damages, costs or expenses based upon,
arising out of, or otherwise in respect of any inaccuracy in or breach of any
representation or warranty contained in Subsection 3.1. The provision in this
Section shall survive the termination of this Agreement with respect to any
Party or Parties by reason that it or they cease to be shareholders of the
Company.
3.3 SMI and AIR each represent and warrant to UC that as of the date of
this Agreement there is no written or unwritten agreement pursuant to which SMI,
or any of its affiliates, currently owns a controlling interest in AIR or have
any right, option or obligation to acquire AIR or a controlling interest in AIR
and that no such arrangement is presently contemplated. SMI and AIR agree to
notify UC in writing if SMI or any of its
-4-
<PAGE>
affiliates obtains any such right, option or obligation during the term of this
Agreement or if any such arrangement is contemplated by the parties in the
future.
Section 4. TRANSFER OF SHARES OF STOCK
4.1 Notwithstanding, but without violating any provision of the Amended
Articles, if any Party wishes to sell any shares of Common Stock or Preferred
Stock (collectively "Stock") held by it, it shall first offer the shares to all
the other Parties holding the shares of any voting Stock by giving notices to
all of them and to the Board of Directors identifying the number of shares to be
sold, the price desired by the offering Party, the third party purchaser to
which the Party proposes to sell the shares if the shares are not purchased by
the other Parties and other terms, if any, of the sale. The other Parties
holding the shares of Stock shall be entitled, by giving a notice of acceptance
to the offering Party and to the Board of Directors of the Company within thirty
(30) days after receipt of such notice of offer, to purchase a part or all of
the shares so offered subject to the terms and conditions set forth in the
notice of offer. In case of competition among the other Parties who are
entitled, and made acceptance notice, to purchase the shares, the shares so
offered shall be allocated to the competing Parties in proportion (as nearly as
possible to avoid fractional shares but not increasing the number of shares so
sold) to their then current holding ratio of the voting stock of the Company.
4.2 The Party who sent a notice of acceptance pursuant to Subsection 4.1
above shall pay in cash the purchase price within thirty (30) days after the
expiration of the thirty (30) day period for which the offer is open, and the
offering Party shall, in exchange for the receipt of the payment, transfer
the shares so purchased to the purchasing Party(ies).
4.3 In case and to the extent all the shares so offered are not accepted
by the other Parties within the thirty (30) day period, the shares which
remain unpurchased may be offered and sold within thirty (30) days after the
expiration of the above thirty (30) day period, provided that the price and
other terms of the sale shall not be more favorable to the third party
purchaser than those offered to the other Parties, that the third party
purchaser is that same as identified in the transferor's notice to the other
Parties in accordance with Section 4.1, and provided further that the third
party purchaser shall agree to be bound by this Agreement and undertake any
and all rights and obligations of the offering Party under this Agreement
except for Section 9.
-5-
<PAGE>
4.4 The Parties agree to cause their respective nominees on the Board of
Directors of the Company to vote to approve any transfer of shares in accordance
with this Section 4.
Section 5. DIRECTORS OF THE COMPANY
5.1 Notwithstanding the provision in the Amended Articles with respect to
cumulative voting, and except as provided in Section 5.3, the Board of Directors
shall consist of five (5) directors of which three (3) shall be nominated by UC
and the other two (2) shall be nominated by SMI and AIR, respectively. The
provisions of this Section 5.1 shall apply only as long as the holding ratio of
Common Stock among the Parties remains unchanged form that at the time
immediately after the completion of (i) the Recapitalization as set forth in
Subsection 2.1 and (ii) the purchase of the fourteen (14) shares of Common Stock
in the Company by SMI form UC as set forth in Section 10, provided that each
Party shall continue to have the right under the preceding sentence unless the
Party's holding ratio changes even if the holding ratio of another Party has
changed. All issuances of capital stock by the Company, including the grant of
options or other rights to acquire same, shall include a covenant on the part of
the purchaser to vote such shares consistent with this Section 5.1.
5.2 For the purpose of Subsection 5.1 hereinabove, a change in holding
ratio shall not be deemed to have occurred for a given party unless a change in
holding ratio occurs due to (i) the sale or transfer by such party of shares of
capital stock in the Company, or (ii) the declination by such party to exercise
its preemptive right to any new shares of capital stock which it may have
pursuant to the Amended Articles when new shares of voting stock are issued by
the Company, provided that the preemptive right under this Subsection shall not
include the preemptive right of UC or AIR under the Amended Articles to purchase
the Preferred B Stock, the preemptive right of SMI to shares of Common Stock
which may be issued pursuant to Subsection 11.1(b)(i), or the right of a Party
to purchase any new shares of Common Stock for which another shareholder of the
Company is entitled to preemptive right but declines to exercise the right.
5.3 Except as otherwise agreed by the Parties, the Company shall not pay
any remuneration to non-full-time Directors, nor shall it bear any traveling
costs or expenses for such Directors to attend any meeting of the Board of
Directors.
-6-
<PAGE>
Section 6. OFFICERS OF THE COMPANY
6.1 The officers of the Company shall be one President, one Vice President
and such other officers as may be appointed by the Board of Directors.
6.2 UC shall be entitled to nominate the President of the Company,
provided that the appointment of the President shall be subject to the approval
of SMI, which approval shall not be unreasonably withheld.
6.3 SMI shall be entitled to nominate the Vice President in charge of
administration of the Company, who at SMI's request shall be appointed a
representative director. The appointment of the Vice President shall be subject
to the approval of the President. The Parties shall procure that the President
shall not unreasonably disapprove of the appointment of the Vice President
nominated by SMI.
6.4 The Party having the right to nominate any Director or officer shall
have the right to remove any such Director or officer and nominate a replacement
therefor. The Parties shall vote their shares and/or cause their nominees on
the Board of Directors to take such actions as are necessary to effectuate the
foregoing.
Section 7. APPROVAL BY SMI OF CORPORATE ACTIONS
7.1 No decision on the following matters shall be made and no action
therefor shall be taken by the Company without the prior written consent of SMI,
(i) as long as SMI does not sell any shares of Common Stock or Preferred Stock
it has subscribed to, and (ii) as long as SMI exercises all the preemptive
rights to any new shares of Common Stock (except for the new shares of Common
Stock which may be issued pursuant to Subsection 11.1(b)(i)) which it may have
pursuant to the Amended Articles when new shares of Common Stock are issued, and
(iii) only in case the Secondary Financing as set forth in Section 11 hereof has
occurred, as long as SMI has subscribed to the new five (5) shares of Preferred
B Stock to be issued in the Secondary Financing.
(a) Amendment of the Articles of Incorporation of the Company;
(b) Decrease in capital of the Company;
-7-
<PAGE>
(c) Assignment or sale of substantial portion of the Company's
business or assets to any person or party;
(d) Merger or consolidation of the Company with any party; and
(e) Dissolution or liquidation of the Company.
7.2 For the purpose of Subsection 7.1 hereinabove, the preemptive right
shall not include the right to purchase the new shares of Common Stock for which
a certain shareholder of the Company is entitled to preemptive rights but
declines to exercise the rights, and SMI shall not be deemed to decline to
exercise its preemptive rights when all Parties agree not to exercise their
preemptive rights so that the Company can issue new shares of Common Stock to
any particular party(ies) or person(s).
Section 8. OBLIGATIONS OF THE COMPANY TO SMI
8.1 The Parties agree that the Company shall offer to SMI or its
subsidiary (for the purpose of this Section 8.1, collectively referred to as
SMI) special discount prices for the Products distributed by the Company to SMI,
for a period of five (5) years after the Recapitalization as set forth in
Subsection 2.1. The prices so offered to SMI shall be at least twenty-five
percent (25%) lower than the prices offered other systems integrators at the
time of any such transaction, provided that such transaction is on the same
basic terms and conditions, including sales quantity and payment terms. The
terms offered hereunder shall be applied to the Products to be sold to SMI only
(i) for SMI's internal use or (ii) for sublicense of the Products by SMI,
directly or indirectly to third party end users as part of an application or in
combination with another product (in the course of SMI's activities in the
capacity of a VAR or a systems integrator).
8.2 The Parties agree that, immediately after the Recapitalization as set
forth in Subsection 2.1, the Company shall organize and thereafter maintain
within the Company and at the cost of the Company, a working team whose work is
fully dedicated to support SMI's or its subsidiary's system integration business
and promote the sales of the Company through SMI or its subsidiaries.
-8-
<PAGE>
Section 9. LICENSE AGREEMENT
9.1 UC and AIR represent that AIR and Unify have entered into a Master
License Agreement and that AIR and the Company have entered into a Sublicense
Agreement, both as of July 4, 1990 and amended as of the same date as the date
hereof. Notwithstanding the terms of such agreements, UC and AIR hereby
represent and warrant that the Company shall at all times have the right to
distribute and license the Products as contemplated under the Sublicense
Agreement and that no dispute with respect to the Master License Agreement or
Sublicense Agreement shall affect the Company's rights to distribute the
Products. Even if the scope of the Master License Agreement is narrowed, UJ
shall continue to have the right it has had originally under the Sublicense
Agreement on the same terms and conditions except to the extent that Unify or
its designee has become the licensor of all or part of the rights granted.
Without limiting the generality of the foregoing, the Company shall always be
provided and maintain complete sets of masters and camera ready copies of all
documentation sufficient to permit the Company to exercise its rights to
distribute and license the Products. No changes shall be made in the Sublicense
Agreement which materially and adversely affect the economic terms of such
agreement to the Company without SMI's prior written consent, which consent
shall not be unreasonably withheld. The provision in this Section shall survive
the termination of this Agreement with respect to UC and/or AIR by reason that
it or they cease to be shareholders of the Company.
9.2 Notwithstanding anything to the contrary contained in the Master
License Agreement and the Sublicense Agreement, AIR and Unify agree to provide
the Company with additional financial support during each of the fiscal years
ending April 30, 1991, 1992 and 1993 as provided in this Section.
(a) During fiscal 1991 AIR and Unify shall reduce the amount of
royalties payable by the Company by three percent (3%) and six
percent (6%), respectively, of the Company's Net Product Revenue
(as defined in the Sublicense Agreement).
(b) During each of fiscal 1992 and 1993, AIR and Unify shall record
an amount as a potential credit ("Support Credit") in favor of
the Company calculated as three percent (3%) and six percent
(6%), respectively, of the Company's Net Product Revenue (as
defined in the Sublicense Agreement) up to maximum Net Product
Revenue of $3.9 and $5.4 million for each of such fiscal years,
respectively (the "Target Revenues").
-9-
<PAGE>
(c) The Support Credit for each such year shall be reduced dollar for
dollar for the amount by which the operating results of the
Company improve from losses of $145,000 and $27,000,
respectively, for each of the applicable fiscal years. Each
dollar reduction shall be applied pro rata to the portion of the
Support Credit owed by AIR and Unify based upon the percentage of
the Support Credit owed by each.
(d) The amount of the Support Credit for each applicable year, as
adjusted pursuant to paragraph (c) hereof, if any, shall be paid
by AIR and Unify to the Company within forty-five (45) days
following the end of the Company's fiscal year.
Notwithstanding the Support Credits during each of fiscal 1992 and 1993, the
Company and AIR shall pay in cash the full amount of royalties payable under the
Sublicense Agreement and the Master License Agreement, respectively, in
accordance with the terms of such agreements.
Section 10. SMI'S PURCHASE OF UNIFY COMMON STOCK AND THE COMPANY'S COMMON
STOCK
As a significant part of consideration of promises and mutual covenants
contained in this Agreement;
(a) Unify shall issue, and SMI shall subscribe to, new shares of
common stock in Unify in the number of four hundred thousand
(400,000). The total price for the shares plus other
consideration offered in connection with the transactions
contemplated hereby shall be One Million Two Hundred Thousand US
Dollars (US$1,200,000). In connection therewith, the parties
shall execute the Stock Purchase Agreement in the form of EXHIBIT
III attached hereto, concurrently with the execution of this
Agreement, and;
(b) concurrently with the execution of this Agreement, UC and SMI
shall enter into an agreement whereby UC shall sell, and SMI
shall
-10-
<PAGE>
purchase, fourteen (14) shares of Common Stock in the Company
held by UC at the price of Fifty Thousand Yen (Y50,000) per
share, of which sale of Common Stock AIR shall not exercise the
right to purchase them as set forth in Section 4. The sale and
purchase of the shares of Common Stock shall be a cash
transaction and be closed within the day on which the
Recapitalization as set forth in Subsection 2.1 has been
completed.
Section 11. SECONDARY FINANCING OF THE COMPANY
11.1 The Parties agree that the Company may issue five (5) shares of
Preferred B Stock subject to the following conditions, but not subject to the
preemptive rights of the shareholders to new shares in the Company on resolution
of the Board of Directors. The issuance of the new five (5) shares of Preferred
B Stock pursuant to this Section may be made only once (the "Secondary
Financing").
(a) The resolution of the Board of Directors with respect to the
issuance of the new five (5) shares of Preferred B Stock pursuant
to this Subsection 11.1 shall be by vote of a majority of the
Board and shall not be made within six (6) months after the
Recapitalization as set forth in Subsection 2.1, nor shall it be
made after five (5) years from such date. Such resolution shall
also authorize the issuance of Common Stock which might be issued
in accordance with paragraph (b)(i) hereof.
(b) On such resolution of the issuance of the new shares, SMI shall
take either of the following two courses of action and shall
notify UC and the Company in writing within thirty (30) days of
the date of the Resolution of the Board of Directors; provided
that if no election shall be made, the election shall be within
the discretion of the Company's Board of Directors:
(i) to subscribe to the whole new five (5) shares of Preferred B
Stock at the price of the then Yen equivalent of Two Hundred
Forty Thousand US Dollars (US$240,000) per share. In this
event, SMI may, at its sole election within a fourteen (14)
day period after the resolution by the Board of
-11-
<PAGE>
Directors of the issuance of the new five (5) shares of
Preferred B Stock, request Unify to purchase back the whole
shares of common stock in Unify subscribed to pursuant to
Section 10 above and then held by SMI, and when SMI so
requests, Unify shall purchase back or cause someone else to
purchase such shares at the total price of One Million Two
Hundred Thousand US Dollars (US$1,200,000) independently of
any combination or split of the shares of common stock in
Unify which may be made hereafter. The sale and purchase of
the common stock in Unify, if it should occur, shall be a
cash transaction and shall be closed no later than the
closing of subscription of the new five (5) shares of
Preferred B Stock. If SMI elects to subscribe to the
Preferred B Stock as provided in this paragraph,
simultaneously with the closing of such purchase UC and AIR
shall have the right to subscribe to eight (8) and two (2)
shares of newly issued Common Stock of the Company,
respectively, at a price of Y50,000 per share (and SMI
hereby waives its preemptive rights with respect thereto);
or
(ii) to require UC to subscribe to the whole new five (5) shares
of Preferred B Stock at the price of the then Yen equivalent
of Two Hundred Forty Thousand US Dollars (US$240,000) per
share. If SMI requires that UC subscribe to the five (5)
shares of Preferred B Stock, SMI shall sell to UC and AIR
the greater of (a) twelve (12) and one (1) shares of Common
Stock of the Company, respectively, at a price of Fifty
Thousand Yen (Y50,000) per share or (b) the number of shares
of Common Stock corresponding to fourteen percent (14%) of
the Company's outstanding voting stock (with UC and AIR
purchasing based upon the same ratio provided in the
preceding clause) at the price of Fifty Thousand Yen
(Y50,000) per share in respect to the first fourteen (14)
shares of Common Stock, and, if the number of shares to be
sold to UC pursuant to this paragraph exceeds the fourteen
(14), with respect to the shares in excess of the
-12-
<PAGE>
first fourteen (14) shares, at the weighted average
subscription price of the shares of stock that have been
issued by the Company after the Recapitalization and
subscribed to by SMI. The sale and purchase of the stock in
the Company, if it occurs, shall be a cash transaction and
shall be closed no later than the closing of the
subscription by UC of the new five (5) shares of Preferred B
Stock.
(c) The subscription of the Preferred B Stock as provided herein
shall occur within forty-five (45) days of the date of the Board
resolution authorizing same; provided that if SMI has exercised
its option to require Unify to repurchase shares of Unify common
stock originally acquired by SMI or to purchase the Preferred B
Stock, the subscription shall occur within the later of forty-
five (45) days after the date to the Board resolution authorizing
the subscription or thirty (30) days after SMI notifies Unify of
its election.
(d) The Preferred B Stock shall have the same rights as the Preferred
A Stock, provided that the subscription price per share of
Preferred B Stock shall be equivalent to the Yen equivalent of
Two Hundred Forty Thousand US Dollars (US$240,000). Each of the
Parties agrees to take such shareholder actions and cause their
nominees to the Board of Directors of the Company to authorize
and take such action as are required to effect the creation and
call for the subscription of the Preferred B Stock in accordance
with the foregoing.
11.2 In case the Secondary Financing has not occurred within five (5)
years after the completion of the Recapitalization, the Company shall refund or
otherwise pay to AIR Ninety-Two Thousand Six Hundred Fifty US Dollars
(US$92,650), for which payment appropriate measures and procedures shall be
discussed in good faith and agreed upon between the Company and AIR.
Section 12. EFFECTIVE DATE.
The effective date of this Agreement (the "Effective Date") shall be the
later of (i) the date of execution of this
-13-
<PAGE>
Agreement, or (ii) the date on which all approvals and clearances of the
appropriate Japanese or United States authorities which are required for the
effectuation or implementation of this Agreement, if any, have been obtained or
completed on terms and conditions acceptable to all the Parties.
Section 13. TERM AND TERMINATION
13.1 This Agreement shall come into effect on the Effective Date and shall
continue to be effective until the Company is dissolved for nay reason, or until
terminated by a unanimous consent of the Parties; provided, however;
(a) that, if any Party shall default in the performance of its
material obligations under this Agreement, and if such default
shall no be corrected within thirty (30) days after the same
shall have been called to the attention of the defaulting Party
(the "Defaulting Party") by any other Party (the "Complaining
Party") by notice, then the Complaining Party, at its option, may
thereupon terminate this Agreement only with respect to the
Defaulting Party by giving a notice to the Defaulting Party and
other non-defaulting Party;
(b) that, if:
(i) voluntary or involuntary proceedings to dissolve or wind up
a Party are commenced and not dismissed within ninety (90)
days thereafter;
(ii) any proceeding relating to a Party pursuant to laws for the
protection of debtors generally, including the US or
Japanese Bankruptcy Code, are commenced and not dismissed
within ninety (90) days thereafter;
(iii)a Party petitions or applies to any tribunal for the
appointment of a trustee or receiver of itself or of any
substantial part of its assets; or
(iv) any order is entered in any proceedings against a Party,
decreeing the dissolution
-14-
<PAGE>
or split-up of that Party, and such order remains in effect
for more than ninety (90) days,
then, either of the other unaffected Parties (the "Non-Insolvent
Party") may, at its option, thereupon terminate this Agreement
only with respect to the Party affected by the foregoing
procedures (the "Insolvent Party") by giving a notice to the
Insolvent Party and other Non-Insolvent Party;
(c) that, if any Party ceases to be a shareholder of the Company,
this Agreement shall terminate as to such Party automatically.
13.2 In case this Agreement is terminated with respect to a Defaulting or
an Insolvent Party (in either case, the "Terminated Party") by reason as set
forth in Subsection 13.1(a) or (b) above, the Terminated Party shall be deemed
to have made an offer as of such date of termination as set forth in Subsection
4.1 hereof of all the shares of the Company's stock then held by it on the date
of the notice of termination by the Complaining Party or the Non-Insolvent
Party, as the case may be, except that:
(a) Such deemed offer may be accepted during a sixty (60) day period
after the date on which the offer is deemed to have been made;
(b) The price shall be the fair market value to be determined and
agreed upon by the Parties (including, for this purpose only, the
Terminated Party). In case the Parties cannot reach an agreement
on such price, the fair market value shall be determined by one
or more independent appraisers to be appointed by the agreement
of the Parties concerned with the sale and purchase of the
shares, or in absence of such agreement on the appraiser(s), by a
certified public accountant appointed by the President of the
Japanese Institute of Certified Public Accountants on request of
any Party concerned.
Provided that, nothing in this Subsection shall limit or prejudice the
right of any non-defaulting Party to claim from the Defaulting Party any damages
for the losses incurred by the non-defaulting Party due to any failure of the
Defaulting Party to discharge its obligation under this Agreement or to pursue
-15-
<PAGE>
any other remedies available. Provided further, that no termination of this
Agreement shall affect the proprietary ownership rights to the Product which
shall at all times remain vested in UC nor rights to distribute the Products
which shall be governed by the terms of each agreement granting such rights.
The provisions in this Subsection shall survive the termination of this
Agreement with respect to any Party or Parties by reason that it or they cease
to be the shareholders of the Company.
Section 14. COVENANT OF UC TO SMI
UC hereby agrees that, in case the Company is dissolved and thereafter
Unify grants any other third party(ies) or person(s) a right or rights to
conduct business which the Company was given the right to conduct under the
Sublicense Agreement in Japan or conducts such business by UC itself in Japan
and provided that SMI is still a Party to this Agreement at the time of such
dissolution, UC shall pay to SMI (i) when SMI has not subscribed to the new five
(5) shares of Preferred B Stock to be issued in the Secondary Financing, the
then Yen equivalent of One Million Eight Hundred Thousand US Dollars
(US$1,800,000), less an amount of proceeds, if any, received by SMI because of
its equity ownership in the Company other than any dividend to the Common Stock
(which proceeds shall include any Preferred Dividends (as defined in the Amended
Articles) or distributions on such stock, liquidation proceeds and with respect
to any sale or transfer of such shares the higher of the amount received on
transfer or the amount which would have been received had the shares not been
transferred; the foregoing collectively referred to as "Proceeds"), (ii) when
SMI has subscribed to the new five (5) shares of Preferred B Stock to be issued
in the Secondary Financing, the then Yen equivalent of One Million Eight Hundred
Thousand US Dollars (US$1,800,000) less an amount, if any, by which SMI's
Proceeds exceed an amount of the then Yen equivalent of Three Million US Dollars
(US$3,000,000). Such payment may be made in installments and shall not bear
interest provided that the total amount of such payment shall have been paid to
SMI within five (5) years after the commencement of distribution by the party or
person so granted or UC itself. The provision in this Section shall survive any
termination of this Agreement by reason of the dissolution of the Company for
any reason.
-16-
<PAGE>
Section 15. BUY/SELL OPTIONS
In case more than fifty percent (50%) of all outstanding voting securities
in a Party or Unify (the "Acquired Party") are purchased by any of the third
party or parties listed in EXHIBIT IV-1 (in case of UC or Unify being the
Acquired Party), EXHIBIT IV-2 (in case of AIR being the Acquired Party) or
EXHIBIT IV-3 (in case of SMI being the Acquired Party) attached hereto, as the
case may be, the Parties shall have the right to exercise either of the
following options, by giving a written notice to the Acquired Party within sixty
(60) days from the date on which such event has been brought to the attention of
the other Parties:
(a) If UC or Unify is the Acquired Party, each of SMI and AIR shall
have the right to sell the shares of the Company's capital stock
then held by them to UC.
(b) If SMI or AIR is the Acquired Party, UC shall have the right to
purchase the shares of the Company's capital stock then held by
SMI or AIR, as the case may be.
The purchase price for any sale and purchase under this Section 15 shall be the
fair market value of the shares to be sold and purchased to be determined in the
same manner as set forth in Subsection 13.2. Any sale and purchase of shares in
the Company pursuant to this Section shall be a cash transaction and be closed
within thirty (30) days after the sixty (60) day period for which a non-Acquired
Party may exercise this option.
Section 16. EFFECT AND EFFECTUATION OF THIS AGREEMENT
In the event of any conflict between the provisions of this Agreement and
the Amended Articles, the provisions of this Agreement shall govern as among the
Parties. Each Party shall cast voting right(s) exercisable by it in the meeting
of shareholders, and cause the Director(s) nominated by the Party to cast his or
their votes in any meeting of the Board of Directors, in the manner to
effectuate the intent of this Agreement without violating any governing laws and
regulations or any provision in the Amended Articles.
Section 17. ASSIGNMENT
No Party shall be entitled to assign its interest under this Agreement
without the prior written consent of all of the
-17-
<PAGE>
other Parties, except in connection with a transfer of shares in accordance with
the provision in the Amended Articles and this Agreement.
Section 18. CONFIDENTIALITY
18.1 Each of the parties hereto and their respective representatives will
hold in confidence any data and information obtained with respect to any other
party, or the business of any other party, from any representative, officer,
director or employee of such party, or from any books or records of such party
in connection with this Agreement or the transactions contemplated by this
Agreement, and shall not use such data and information or disclose the same to
others, except if such data or information is (i) published or is a matter of
public knowledge, (ii) required by any applicable law or regulation to be
disclosed, (iii) acquired from a third party without any confidential
restriction or (iv) which was already in possession of the receiving party at
the time of receipt. It is understood and agreed that any party's remedies at
law for a breach by another party of its obligations under this Section will be
inadequate and that the non-breaching party shall, in the event of any such
breach, be entitled to equitable relief (including without limitation injunctive
relief and specific performance) in addition to all other remedies provided
under this Agreement or available to the non-breaching party at law. The
obligations and rights of the parties under this Section shall survive any
expiration or termination of this Agreement for any reason whatsoever.
18.2 Without limiting the generality of Section 18.1, each Party agrees to
keep in strict confidence the contents and terms of this Agreement and any
arrangement contemplated herein, and any disclosure to third parties or public
announcement thereof shall, except as required by laws or regulation of Japan or
the U.S.A. or any Japanese or U.S. governmental authority, be subject to the
prior written consent of the other Parties referred to therein.
Section 19. DISPUTES
19.1 If a claim, dispute or controversy arising out of or in connection
with or relating to this Agreement, including but not limited to, a breach or
alleged breach of this Agreement arises among the Parties, either during or
after the term of this Agreement, any Party shall send to other Parties a
written
-18-
<PAGE>
notice describing the substance of such dispute. On such notice, the Parties
shall use their best effort to settle the dispute amicably.
19.2 In case the Parties fail to settle the claim, dispute or controversy
amicable pursuant to Subsection 19.1 above, such claim, dispute or controversy
shall be submitted by the Parties to arbitration. In case UC is the sole
respondent or one of the respondents, the arbitration shall be conducted in San
Francisco, California, in accordance with the Commercial Arbitration Rules of
the American Arbitration Association. In case SMI or AIR is the sole
respondent, or both of them are respondents, the arbitration shall be conducted
in Tokyo, Japan, in accordance with the Commercial Arbitration Rules of the
Japan Commercial Arbitration Association. The award rendered by the arbitrator
will include costs of arbitration, reasonable attorneys' fees and reasonable
costs for expert and other witnesses, and judgment on such award may be entered
in any court having competent jurisdiction; provided, however, that nothing in
this Agreement shall be deemed as preventing any Party from seeking injunctive
relief (or any other provisional remedy) from the courts as necessary to protect
a Party's name, proprietary information, trade secrets, know-how or any other
interests.
19.3 The provisions in this Section shall survive any termination of this
Agreement.
Section 20. MISCELLANEOUS
20.1 All notices, requests, demands and/or other communications required
and permitted to be given under this Agreement shall be in writing and sent to
the appropriate address shown below or to such other address as the Party to
receive the notice may have last designated in writing in the manner herein
provided. A notice shall be deemed to have been duly given on the earlier date
when actually received, whether delivered by hand or transmitted by telecopier,
or seven (7) days after being deposited in the mail, postage prepaid, registered
or certified mail, properly addressed as follows:
Notice Addresses:
To UC: UNIFY CORPORATION DELAWARE, INC.
3870 Rosin Court, Suite 100
Sacramento, California 95834
U.S.A.
Attn: President
Telecopier: 916/921-5340
-19-
<PAGE>
To AIR: AIR Co., Ltd.
1-3-14 Kitahama
Chuo-ku, Osaka 541
Japan
Fax No.: (011) 816-201-4849
Attn: Y. Kitayama
President
To SMI: SUMITOMO METAL INDUSTRIES, LTD.
8-4 Kitahama 4-chome
Chuo-ku, Osaka
JAPAN
Attn: Manager, System Engineering Division
Telecopier: 06/220-5866
20.2 This Agreement shall be governed by and construed in accordance with
the laws of Japan.
20.3 This Agreement sets forth the entire agreement and understanding
among the Parties with respect to the subject matter of this Agreement and
supersedes all prior negotiations, commitments and agreements, expressed or
implied, whether oral or in writing, with respect to the subject matter of this
Agreement. This Agreement may only be changed or modified by an agreement in
writing signed by all of the Parties.
20.4 If any term, provision, covenant or condition of this Agreement is
held by a court or a board of competent jurisdiction to be invalid, void or
unenforceable, the rest of this Agreement shall remain in full force and effect
and shall in no way be affected, impaired or invalidated.
20.5 The headings herein are for reference only and shall not affect the
construction of this Agreement.
20.6 If the arrangements provided for in this Agreement expose any Party
of the Company to significant tax obligations or legal or business difficulties,
the Parties shall discuss in good faith and use their best efforts to come up
with
-20-
<PAGE>
alternatives which have the same effect therewith but minimize or eliminate the
tax exposure or the legal or business difficulties.
IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the
day and year first above written.
SUMITOMO METAL INDUSTRIES, LTD.
By: /s/ YOSHISUKE MISAKA
------------------------------------
Name: Yoshisuke Misaka
Title: Director
UNIFY CORPORATION DELAWARE, INC.
By: /s/ DAVID M. SAYKALLY
------------------------------------
Name: David M. Saykally
Title: President
AIR CO., LTD.
By: /s/ YOICHI KITAYAMA
------------------------------------
Name: Yoichi Kitayama
Title: President
-21-
<PAGE>
Unify Corporation, a California corporation, does hereby agree to guarantee
the performance of any and all obligations of UC under this Agreement and to
discharge such obligations by itself on behalf of UC in case UC cannot fully
discharge such obligation for any reason, including, but not limited to, that UC
is under the procedures under Chapter 7 or Chapter 11 of U.S. Bankruptcy Codes.
Unify Corporation further agrees that to the extent that the agreement refers to
any action to be taken or obligation to be fulfilled by "Unify", Unify
Corporation will take such action or perform such obligation.
UNIFY CORPORATION
By: /s/ DAVID M. SAYKALLY
------------------------------------
Name: David M. Saykally
Title: President
-22-
<PAGE>
Exhibit 10.7
FIRST AMENDMENT TO JOINT VENTURE AGREEMENT
This First Amendment to that certain Joint Venture Agreement dated
September 4, 1990 is made this 20th day of June, 1994, between Unify Corporation
Delaware, Inc. ("UC"), a corporation organized under the laws of the State of
Delaware, Sumitomo Metal Industries, Ltd. ("SMI"), a corporation under the laws
of Japan, and AIR Co., Ltd. ("AIR"), a corporation organized under the laws of
Japan.
WHEREAS, UC is a wholly owned subsidiary of Unify Corporation ("Unify"), a
corporation organized under the laws of the State of California;
WHEREAS, on September 4, 1990 the parties entered into that certain Joint
Venture Agreement concerning Unify Japan Kabushiki Kaisha (the "Company");
WHEREAS, the prior agreements concerning distribution of Unify software in
Japan have been terminated and superseded by revised distribution agreements;
WHEREAS, to reflect the changes in the contractual relationships among the
parties and the Company, and the revised manner of distribution of Unify
products in Japan, the parties now desire to add to and amend certain provisions
of the Joint Venture Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. The first sentence of former Section 5.1 of the Joint Venture Agreement
shall be amended to read as follows:
5.1 Notwithstanding the provision in the Amended Articles with respect to
cumulative voting, and except as provided in Section 5.3, the Board of
Directors shall consist of six (6) directors of which three (3) shall be
nominated by UC, two (2) shall be nominated by SMI, and one (1) by AIR,
respectively.
2. A new Section 5.4 shall be added which shall read as follows:
5.4 The place for the meetings of the Board of Directors of the Company
shall rotate between Sacramento, California and Tokyo, Japan. Meetings of
the Board of Directors shall not be held more frequently than once each
fiscal quarter, unless otherwise agreed by the Parties. Meetings of the
Board of Directors may be held by telephonic conference call among the
Directors to the extent permitted under the Japanese law.
3. Former Section 6.1 of the Joint Venture Agreement shall be amended to read
as follows:
1
<PAGE>
6.1 The officers of the Company shall be one President, and such other
officers as may be appointed by the Board of Directors. The Company shall
also have a Statutory Auditor.
4. Former Section 6.2 of the Joint Venture Agreement shall be amended to read
as follows:
6.2 For a one year term following the date of this Amendment, SMI shall be
entitled to nominate the President of the Company, provided that the
appointment of the President shall be subject to the approval of UC, which
approval shall not be unreasonably withheld. Approximately one year after
the date of this Amendment, the Company shall hire a new President who
shall also become the representative director of the Company in place of
the prior SMI nominee. Insofar as possible, the new President shall be
unaffiliated with any of the Parties. The President shall have the
authority to propose candidates for the executive positions of Controller,
Sales and Marketing Manager, and Engineering Manager, subject to the
approval of UC and SMI, which approval shall not be unreasonably withheld.
UC shall be entitled to nominate the Statutory Auditor.
5. Former Section 6.3 of the Joint Venture Agreement shall be deleted.
6. The heading of Section 7 shall be amended to read "Approval of Corporate
Actions." A new Section 7.3 shall be added which shall read as follows:
7.3 The Company shall prepare a revenue and profit plan for each fiscal
quarter. Such revenue and profit plan shall be subject to advance review
and written approval by a corporate officer of Unify. In addition, any
borrowings or payments by the Company not included in a plan approved by
Unify that individually or in the aggregate to one payee or lender total
more than Five Million (5,000,000) Japanese Yen shall also be subject to
advance review and written approval by a corporate officer of Unify.
7. Former Section 9.1 of the Joint Venture Agreement shall be amended to read
in its entirety as follows:
9.1 The Parties represent that the Master License Agreement and Sublicense
Agreement entered into pursuant to the Joint Venture Agreement have been
terminated. UC and AIR further represent that Unify and the Company shall
enter into a new Master Distribution Agreement as of the 22nd day of June,
1994 and that AIR and the Company shall enter into a Subdistribution
Agreement immediately upon the execution of the Master Distribution
Agreement, both of which replace the terminated Master License and
Sublicense Agreements.
2
<PAGE>
8. A new Section 9.3 shall be added which shall read as follows:
9.3 SMI shall endeavor to provide a sound capital flow for the Company
that will ensure that the Company can satisfy its current obligations and
liabilities incurred in the normal course of its business operations. In
the event that SMI and the Company contemplate the use of a financing
method that creates a legal debt or contractual commitment payable by the
Company to SMI or any third party, then the proposed method shall be
reviewed and approved jointly by corporate officers of SMI, Unify and the
Company. Further, any repayment obligations arising from the approved
financing method assumed by the Company shall be structured in such a
manner to allow the Company to continue the payment of all its financial
commitments and obligations in a timely manner and in the normal course of
its business. The specific terms and conditions of the written debt
instrument or contract to be signed by the Company which documents the
financing method utilized by the Company shall be approved in writing
jointly by a corporate officer of SMI and Unify prior to execution by the
Company. In no event shall either SMI or Unify be required to provide any
financial guarantee or other security for the financial debt or contractual
commitment entered into by the Company, without the prior written consent
of a corporate officer of such party.
If the power of attorney granted to SMI by UC pursuant to the Limited
Revocable Power of Attorney executed between UC and SMI on the 20th day of
June, 1994 should be revoked by UC as permitted therein, then the
obligation to endeavor to provide a sound capital flow for the Company as
stated above thereafter shall not be primary to SMI, but shall be
implemented, in mutual consultation and cooperation, together with UC, who
will thereafter, as a majority owner of the Company, share with SMI, this
obligation and requirement. With respect to any legal debt or contractual
commitment executed by the Company prior to the revocation of such power of
attorney, the terms for repayment of such debt or commitment by the Company
shall not be altered or accelerated by the fact or occurrence of such
revocation.
9. Former Section 11 of the Joint Venture Agreement shall be deleted.
10. The words "Sublicense Agreement" in the fourth to fifth line of former
Section 14 of the Joint Venture Agreement shall be replaced by "terminated July
4, 1990 Sublicense Agreement."
11. Section 20.1 shall be amended to reflect the following address and
facsimile number for UC.
Unify Corporation Delaware, Inc.
3901 Lennane Drive
Sacramento, California 95834-1922
3
<PAGE>
U.S.A.
Attn: President
Facsimile: 1-916-928-6412
12. The parties agree to amend the Articles of Incorporation and Directors'
Regulations of the Company as necessary to comply with this Amendment to the
Joint Venture Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
Unify Corporation Delaware, Inc.
By /s/
---------------------------------
Its President and CEO
--------------------------------
Sumitomo Metal Industries, Ltd.
By /s/
---------------------------------
Its Director
--------------------------------
Air Co., Ltd.
By /s/
---------------------------------
Its President
--------------------------------
4