-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TuUc3DNMphvbpRL3FRZpqYY+wo6EuqaWx20lqgQp11M2b8L5udraBvHTqDMK7G5d /GFnx6NsjjdLctNTuDuPxQ== 0000912057-96-011668.txt : 19960607 0000912057-96-011668.hdr.sgml : 19960607 ACCESSION NUMBER: 0000912057-96-011668 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960606 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIFY CORP CENTRAL INDEX KEY: 0000880562 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770427069 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-03834 FILM NUMBER: 96577359 BUSINESS ADDRESS: STREET 1: 181 METRO DR STREET 2: 3RD FL CITY: SAN JOSE STATE: CA ZIP: 95110 BUSINESS PHONE: 4084674500 MAIL ADDRESS: STREET 1: 181 METRO DRIVE CITY: SAN JOSE STATE: CA ZIP: 95110 S-1/A 1 S-1/A 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) DELAWARE 7372 77-0427069 (State or other jurisdiction (Primary Standard Industrial (IRS Employer of Classification Code Number) Identification No.) incorporation or organization)
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: 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
------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT HEADING OR LOCATION IN PROSPECTUS - -------------------------------------------------------- -------------------------------------------------- 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
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. 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.
PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS - -------------------------------------------------------------------------------------------- PER SHARE............... $ $ $ $ TOTAL (3)............... $ $ $ $
(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 [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 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 THE OFFERING 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
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED APRIL 30, ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- 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 --------- --------- --------- ---------
APRIL 30, 1996 -------------------------------------- AS ACTUAL PRO FORMA (3) ADJUSTED (4) --------- ------------- ------------ 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
- ------------------------------ (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 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 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 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 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 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 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 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 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 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 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 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."
APRIL 30, 1996 ---------------------------------------- ACTUAL PRO FORMA AS ADJUSTED (1) ---------- ----------- --------------- (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 ---------- ----------- --------------- ---------- ----------- ---------------
- ------------------------ (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 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: 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 --------- ---------
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):
SHARES PURCHASED (1) TOTAL CONSIDERATION ------------------------ --------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ----------- -------------- ----------- ------------- 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% ----------- ----- -------------- ----- ----------- ----- -------------- -----
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 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.
YEARS ENDED APRIL 30, ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 --------- --------- --------- ---------
APRIL 30, ---------------------------------------------------------- 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) 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)
- ------------------------ (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 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:
YEARS ENDED APRIL 30, ------------------------------- 1994 1995 1996 --------- --------- --------- (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 --------- --------- --------- --------- --------- ---------
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 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:
YEARS ENDED APRIL 30, ------------------------------------- 1994 1995 1996 ----------- ----------- ----------- 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)% ----- ----- ----- ----- ----- -----
19 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 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 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 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.
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) 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 -------- -------- -------- --------- -------- -------- -------- --------- -------- -------- -------- --------- -------- -------- -------- ---------
23 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.
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 -------- -------- -------- --------- -------- -------- -------- --------- 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% -------- -------- -------- --------- -------- -------- -------- --------- -------- -------- -------- --------- -------- -------- -------- ---------
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 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.
QUARTERS ENDED ---------------------------------------------- JUL. 31, OCT. 31, JAN. 31, APRIL 30, 1995 1995 1996 1996 --------- --------- --------- ------------- (IN THOUSANDS) 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 --------- --------- --------- ------------- --------- --------- --------- -------------
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 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 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 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 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 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 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 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 [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 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 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 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 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 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 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 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 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 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the Company's directors and executive officers:
NAME AGE POSITION WITH THE COMPANY ----------------------------------- --- ------------------------------------------------------------ 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
- ------------------------ (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 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 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 $100,000 (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company during the fiscal years ended April 30, 1995 and 1996.
LONG-TERM ANNUAL COMPENSATION COMPENSATION -------------------------------- ------------ OTHER ANNUAL OPTIONS ALL OTHER SALARY BONUS COMPENSATION GRANTED COMPENSATION NAME AND PRINCIPAL FUNCTION (1) YEAR ($) ($) ($) (#) ($) - ------------------------------------------------------------ ---- -------- -------- ------------ ------------ ------------ 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
- ------------------------ (1) Represents an automobile allowance. (2) Includes $17,000 for automobile allowance and $12,000 for pension contributions by the Company. 44 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning the option grants during fiscal 1996 to the Named Executive Officers.
POTENTIAL REALIZABLE VALUE AT ASSUMED INDIVIDUAL GRANT ANNUAL RATES OF ----------------------------------------------- STOCK PRICE % OF TOTAL APPRECIATION FOR OPTIONS GRANTED OPTION TERM (1) OPTIONS GRANTED TO EMPLOYEES IN EXERCISE OR BASE EXPIRATION ---------------- NAME (#)(2) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($) - -------------------------------------- ---------------------- --------------- ---------------- ---------- ------ ------- 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
- ------------------------ (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.
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 - -------------------- ------------ -------- ----------- ------------- ----------- ------------- 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
- ------------------------ (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 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 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 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:
NAME AMOUNT OF CREDIT - --------------------------------------------------------------------------- ----------------- 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
- ------------------------ (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 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 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.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER OFFERING -------------------------- NUMBER OF -------------------------- BENEFICIAL OWNER (1) NUMBER PERCENTAGE SHARES BEING SOLD NUMBER PERCENTAGE - ------------------------------------------------ ----------- ------------- ----------------- ----------- ------------- 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%
50
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER OFFERING -------------------------- NUMBER OF -------------------------- BENEFICIAL OWNER (1) NUMBER PERCENTAGE SHARES BEING SOLD NUMBER PERCENTAGE - ------------------------------------------------ ----------- ------------- ----------------- ----------- ------------- 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 -- --
- ------------------------ * 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 (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 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 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 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.
NUMBER OF UNDERWRITER SHARES - --------------------------------------------------------------------------------- ----------- Montgomery Securities............................................................ Needham & Company, Inc........................................................... Black & Company.................................................................. ----------- Total........................................................................ 2,140,000 ----------- -----------
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 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 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. UNIFY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- 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
F-1 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 UNIFY CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 30, APRIL 30, 1996 --------- ------------------- 1995 ACTUAL PRO FORMA --------- -------- --------- ASSETS (NOTE 12) (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 --------- -------- --------- --------- -------- ---------
See accompanying notes to consolidated financial statements. F-3 UNIFY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED APRIL 30, ------------------------------- 1994 1995 1996 --------- --------- --------- 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 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. F-4 UNIFY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS, EXCEPT SHARE DATA)
NOTES COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE TOTAL ----------------- PAID-IN FROM TRANSLATION ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCKHOLDERS ADJUSTMENTS DEFICIT DEFICIT --------- ------ ---------- ------------ ----------- ----------- -------------- 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) --------- ------ ---------- ------ ----------- ----------- -------------- --------- ------ ---------- ------ ----------- ----------- --------------
See accompanying notes to consolidated financial statements. F-5 UNIFY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED APRIL 30, ------------------------------- 1994 1995 1996 --------- --------- --------- 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 --------- ---------
See accompanying notes to consolidated financial statements. F-6 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 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):
APRIL 30, -------------------- 1995 1996 --------- --------- 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 --------- --------- --------- ---------
F-8 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):
APRIL 30, -------------------- 1995 1996 --------- --------- 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 --------- --------- --------- ---------
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):
SHARES SHARES AMOUNT DIVIDEND LIQUIDATION SERIES AUTHORIZED OUTSTANDING PAID IN PREFERENCE PREFERENCE - ----------- ----------- ------------ --------- ----------- ----------- 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 --------- ----------- ----------- --------- ----------- -----------
F-9 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 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:
SHARES OUTSTANDING SHARES -------------------------- AVAILABLE NUMBER OF PRICE FOR GRANT SHARES PER SHARE ---------- ---------- -------------- 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 ---------- ----------
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 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):
1994 1995 1996 --------- --------- --------- Foreign withholding taxes........................................................... $ 329 $ 370 $ 151 State............................................................................... 13 22 12 --------- --------- --------- Total income tax expense.......................................................... $ 342 $ 392 $ 163 --------- --------- --------- --------- --------- ---------
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):
1994 1995 1996 --------- --------- --------- 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 --------- --------- --------- --------- --------- ---------
F-12 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):
APRIL 30, -------------------- 1995 1996 --------- --------- 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................................................. $ -- $ -- --------- --------- --------- ---------
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 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):
1994 1995 1996 --------- --------- --------- 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 --------- --------- --------- --------- --------- ---------
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 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):
APRIL 30, -------------------- 1995 1996 --------- --------- 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 --------- --------- --------- ---------
F-15 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): YEARS ENDING APRIL 30, - -------------------------------------------------------------------------- 1997...................................................................... $ 1,179 1998...................................................................... 839 1999...................................................................... 754 2000...................................................................... 756 2001...................................................................... 357 --------- $ 3,885 --------- ---------
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 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):
1994 1995 1996 --------- --------- --------- 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 --------- --------- --------- --------- --------- ---------
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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 ----------------------
PAGE ----- 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
---------------------- 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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.
AMOUNT TO BE PAID BY ITEM REGISTRANT - ----------------------------------------------------------------------------------------- ------------- 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 ------------- -------------
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 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 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
- ------------------------ ** Previously filed. (b) Financial statement schedules for the three years ended April 30, 1996 Schedule II -- Valuation and Qualifying Accounts II-2 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 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:
SIGNATURE TITLE - ------------------------------------------------------ --------------------------------------------------------- /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
II-4 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 SCHEDULE II UNIFY CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
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 ---------- ---------- ------------- ------------ ---------- 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
S-2 INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL NUMBERS DESCRIPTION PAGE NUMBER - ---------- ---------------------------------------------------------------------------------- ------------- 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................................................................
- ------------------------ ** Previously filed. EX-4.2 2 EXHIBIT 4.2 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 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 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 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 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 (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 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 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 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 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 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 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 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 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 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 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 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 (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 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 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 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 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 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 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 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 (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 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 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 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 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 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 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 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 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 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 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 EX-10.7 3 EXHIBIT 10.7 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- 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- 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- 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- 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- 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- 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- (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- 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- (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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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 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 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 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 -----END PRIVACY-ENHANCED MESSAGE-----