ITEM 1. BUSINESS
The Company
Unify (the “Company”, “we”, “us” or “our”) is a global provider of application modernization, data management and application development solutions. Our migration solutions, development software and embedded databases allow customers to modernize and maximize their application environment. Our award-winning technologies help organizations drive business optimization, improve collaboration, increase customer service and reduce costs. Unify’s strategy is to help businesses modernize mission-critical legacy applications and data. Based on market requirements for application modernization, our solutions help companies increase speed and agility, improve asset reuse, lower IT costs, reduce business risks and exposures, and free information previously locked within proprietary systems.
The Company sells and markets its application development and database software and services and modernization solutions through two segments. The segments are the Database and Development Products (“DDP”) and our Modernization & Migration Products.
Unify serves more than 10,000 end user corporate information technology (“IT”) department customers, 35 distributors and 250 software value-added resellers (“VARs”), solutions integrators (“SIs”) and independent software vendors (“ISVs”) partners across the globe. Our clients represent diverse industries including energy, financial services, government, health care, insurance, manufacturing, retail, telecommunications and more. We market and sell products directly in the United States, Australia, United Kingdom (“UK”), France, Germany and Canada, and indirectly to more than 50 countries through worldwide distributors in Europe, Middle East and Africa (“EMEA”), Asia Pacific and Latin America. On June 30, 2009, Unify acquired AXS-One Inc., as disclose in footnote 2.
Over the past five years, we have expanded our product offering to adapt to evolving market requirements. Our application modernization solutions include Composer for Lotus Notes, Composer Sabertooth, Composer for Oracle Forms and Composer for COBOL. Our application development product families include NXJ Developer, Team Developer, ACCELL and VISION; and our data management software includes SQLBase and DataServer.
Unify was initially incorporated in California in 1980 and later reincorporated in Delaware on April 10, 1996. We are headquartered in Roseville, California, and have offices in Maryland, Australia, France, Germany, the UK and Canada. Our headquarters office is located at 1420 Rocky Ridge Drive, Suite 380, Roseville, California 95661. Our telephone number is (916) 218-4700 and our website address is http://www.unify.com.
Products
Application Modernization and Migration Solutions
Composer™ for Lotus Notes is specifically designed for customers that need to modernize and migrate proprietary applications to a new technology platform. Composer for Lotus Notes is a software plus services solution for migrating IBM Lotus Notes® applications to the Microsoft platform. Composer delivers like-for-like, production-to-production migration of Lotus Notes applications to the Microsoft stack while preserving the business logic/workflow in order to avoid end-user disruption. With Composer, Lotus Notes applications are decomposed and re-assembled: Data from the Lotus Notes application is migrated into a normalized SQL Server database; Business logic is restructured as C# Web Services in Visual Studio; User Interface is transformed into SharePoint Lists and Web Parts; and ACL security is mapped into the Microsoft Active Directory Services.
Composer Sabertooth™ is designed for organizations that are standardizing on Microsoft and are forced to transition Team Developer applications to C# or VB.NET. The vast majority of Unify’s worldwide Team Developer customers continue to benefit from the ability to rapidly build and deploy business applications fast and cost-effectively. From the latest Web Services Consumption in Team Developer 5.1 to the planned .NET support in future releases, Composer Sabertooth delivers complimentary solution for organizations requiring standardization and consolidation of their IT systems and applications to the Microsoft .NET platform, either now or in the near future.
Composer for Oracle Forms automatically converts Oracle Forms and PL/SQL code to Java and we believe is the only one of its kind to be validated by Oracle for migrating Forms to Java (J2EE). Utilizing J2EE simplifies the application development process by using standardized and reusable object oriented components and by automating multi-tier functionality. As a result, the amount of time needed for programming and training is decreased, saving time and money. Composer for Oracle Forms can convert all releases of Oracle Forms including character-based versions such as Release 2.3, 3.0 and 4.5. By automating the migration process, Composer for Oracle Forms removes the risk of human error and produces standardized business applications that are fully maintainable, helping companies stay competitive.
Composer for COBOL delivers automation migration of legacy COBOL, Ideal and Natural code to modern code and relational databases through partnerships with Ateras Inc. and Information Analysis Inc (“IAI”). Through the Ateras partnership, Composer for COBOL offers a complete solution for companies needing to modernize their legacy mainframe applications, including migrating mainframe code and non-relational databases from IDMS, IMS, VSAM or from Natural / Adabas to COBOL, C# or JAVA code, with either a DB2, SQL Server or Oracle database. The partnership with IAI enables Composer for COBOL to migrate Ideal / Datacom applications to COBOL code with either a DB2 or Oracle database. Composer for COBOL delivers an automated code conversion and data migration for a functionally equivalent application. Unify’s methodology is designed to eliminate risk and substantially reduce time and costs of IT departments.
Rapid Application Development Products
NXJ Developer and NXJ Enterprise® is a visual environment for the rapid development of innovative Web 2.0 Rich Internet Applications (“RIA”). NXJ Developer is distinguished by its combination of intuitive visual design, flexible service-oriented architecture (“SOA”) programming, and ease of integration with both Java code and .NET business logic via Web services. The combination of AJAX-rich client technology and Web services make NXJ Developer a powerful and competitive solution for delivering SOA-based Rich Internet Applications. NXJ Enterprise® includes all of the powerful technology of NXJ Developer but adds workflow and reporting for delivering enterprise class RIA and web-based applications.
Team Developer® is a visual object-oriented rapid application development product that shortens the development cycle by providing developers the tools needed to quickly design, develop and deploy Windows solutions. Team Developer provides a completely integrated visual development environment that includes a database explorer, integrated reporting tool, team-oriented source code management facility, and a powerful component developer facility that enables programmers to automate and customize the development environment.
ACCELL® is a highly productive 4GL application development suite and database software for developing and deploying data-rich, database-driven applications. 4GL is a fourth generation programming language designed to allow users to develop applications, particularly for the purpose of querying databases and producing reports. The ACCELL products support interfaces to leading database products including Unify DataServer, IBM DB2, Informix, Microsoft SQL Server, Oracle and Sybase. The ACCELL product suite includes ACCELL/Web, ACCELL/SQL and ACCELL/IDS.
ACCELL/Web™ - enables our customers with existing ACCELL/SQL applications to convert them into fully featured graphical web-based applications without rewriting the application or modifying the source code.
ACCELL/SQL™ - is our 4GL-based rapid application development software for developing client/server applications. ACCELL/SQL connects to Unify, Oracle, Sybase and Informix databases creating a fast application performance environment.
ACCELL/IDS™ - is our 4GL-based rapid application development software for applications that connect to Unify’s DataServer ELS database.
VISION® is a graphical, client/server application development system that allows for rapid creation and easy modification of complex business applications based on 4GL technology. Unify VISION consists of an object-oriented, repository-based component framework designed to enable developers to rapidly create and easily modify application components. VISION also contains an application server to allow organizations to integrate custom-built and packaged applications with the Internet.
Database Management Products
SQLBase® is a fully relational, high performance, embedded database that allows organizations to manage data closer to the customer, where capturing and organizing information is becoming increasingly critical. SQLBase provides what other database companies cannot deliver: a self-recovering, maintenance-free embedded database architecture that enables IT, ISVs and VARs to focus on their solution, rather than the underlying database technology.
SQLBase® Treasury is an encrypted, secure version of the SQLBase database.
DataServer® is a high performance enterprise relational database management system with minimal maintenance and memory requirements. It can quickly accommodate the growth of user requirements over time, making it an attractive choice for mission critical applications. DataServer makes it easy for developers to create graphical applications and migrate existing database applications to enterprise network and Internet environments.
DataServer® ELS is a high performance, easily embeddable database. Its small footprint and proven reliability make it an industry favorite for embedded applications that require relational databases.
Report Builder™ provides individuals a quick and easy way to create attractive reports and ad-hoc queries for databases. Report Builder offers full Cross Platform capabilities and is available for Windows and Linux desktop computers.
Customers
Unify’s customers include corporate information technology departments (“IT”), software value-added resellers (“VARs”), solutions integrators (“SIs”) and independent software vendors (“ISVs”) from a variety of industries, including insurance, financial services, healthcare, government, manufacturing, retail, education, and more. We had one customer in the year ended April 30, 2008 that accounted for 12% of consolidated revenues. No single customer accounted for 10% or more of consolidated revenue in the years ended April 30, 2009 and 2007.
Sales, Marketing and Distribution
Unify’s products and professional services are marketed and distributed to customers globally using a combination of a direct corporate sales force and indirect distribution channels, including ISVs, VARs, SIs and worldwide distributors. The indirect sales channels leverage Unify’s sales, support and consulting resources to provide complete solutions to our customers.
Unify’s direct sales organization consists of sales representatives and pre-sales consultants. Our North America sales representatives are located primarily in our headquarters in Roseville, California. Unify markets its products internationally through offices in the UK, France, Germany, Canada and Australia. Unify has distributors in Asia Pacific, Europe, Japan, Latin and South America, and Russia. International revenues accounted for 68%, 78% and 73% of total revenues in fiscal 2009, 2008 and 2007, respectively.
Unify’s marketing is focused on generating demand and marketing awareness for Unify products including efforts to support the direct and indirect sales channels. Marketing activities include e-business initiatives, strategic demand generation, public relations, customer communications and events, trade shows and our Web site.
As of April 30, 2009, Unify had 26 employees engaged in sales and marketing activities, 18 in North America and 8 in Europe.
Customer Support and Professional Services
Unify’s customer support and professional services organizations play an important role in maintaining customer satisfaction, facilitating license sales and enabling customers to successfully architect, design, develop, deploy, manage or migrate applications.
Customer Support and Maintenance
Unify provides customer support via telephone, Web, e-mail and fax from its support centers located in California, Canada, Australia, France and Holland. Distribution partners provide telephone support to international customers with technical assistance from the U.S.-based support personnel who also respond to e-mail inquiries. Customers are offered tailored support service levels including response time, information reporting, and other features, such as 24-hour a day, seven-day a week support. During each of the past three fiscal years, over 75% of our support and maintenance customers have renewed their annual contracts.
Consulting
Unify offers a full range of consulting services ranging from application implementation services including delivering a proof of concept to completed applications using our technology infrastructure. Our products allow companies to maximize return on investment, get to market quickly or be more efficient. Consulting services include: application migration, project implementations and application updates, business process-centric application development, Web-enablement, technology/knowledge transfer, application architecture audits and database tuning. The level of consulting services is tailored to customer-defined needs and includes development plans, hands-on development tasks and project management.
Education
Unify offers education courses at our training centers located in Roseville, California and Paris, France. We also offer on-site training at customer and partner facilities.
As of April 30, 2009, we had a total of 7 employees engaged in providing customer support. Of those employees, 4 were located in the United States and 3 were located in Europe.
Product Development
In fiscal 2009, we focused our development efforts primarily on the Composer for Lotus Notes, Team Developer, SQLBase, Q, Report Builder and VISION products. During fiscal 2009, we developed and released major new versions of SQLBase, Team Developer, SQLBase Treasury and VISION, and transitioned the Composer for Lotus Notes migration solution to a tool based product offering. Unify’s product development expenses for fiscal 2009, 2008 and 2007, were $2.9 million, $3.5 million and $2.4 million, respectively.
Most of Unify’s current software products have been developed internally; however, we have licensed certain software components from third parties and we may do so again in the future. We are committed to delivering products that meet customer and market needs today and into the future.
Intellectual Property
Unify relies on a combination of copyright, trademark and trade-secret laws, non-disclosure agreements and other methods to protect our proprietary technology. Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries in which we sell products do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means of protecting our 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 Unify regarding infringement of any existing patents or other intellectual property rights and we have not received any notices that we are infringing or allegedly infringing the intellectual property rights of others, there can be no assurance that infringement claims will not be asserted by third parties in the future. If any such claims are asserted, there can be no assurance that we will be able to defend such claim or obtain licenses on reasonable terms. Our involvement in any patent dispute or any other intellectual property dispute or action to protect trade secrets and know-how may have an adverse effect on our business, operating results, and financial condition. Adverse determinations in any litigation may subject us to significant liabilities to third parties, require us to seek licenses from third parties, and prevent us from developing and selling its products. Any of these situations could have an adverse effect on our business, operating results and financial condition.
Unify is dependent on third-party suppliers for certain software which is embedded in some of our products. Although we believe that the functionality provided by software which is licensed from third parties is obtainable from multiple sources, or could be developed by us 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, we could be required to develop an alternative approach to developing products which could require payment of additional fees to third parties or internal development costs and delays that might not be successful in providing the same level of functionality. Such delays, increased costs, or reduced functionality could adversely affect our business, operating results, and financial condition.
Competition
The market for Unify’s software is intensely competitive, subject to rapid change and significantly affected by new product introductions and other activities of market participants. Our products and software solutions compete in the market with dozens of other companies that provide application modernization solutions, application development products, and databases. These competitors include IBM, Microsoft, Oracle and Sun. All of these competitors are large, well capitalized companies with significantly greater financial, technical and marketing resources as well as greater name recognition and larger customer bases. The Unify solutions are competitive from a technical capability, rich interface and ease of use, service and pricing perspectives, but our competitors have greater brand recognition and perceived financial strength.
The Company generally derives sales from new project initiatives, additional deployment of existing applications and product upgrades. As a result, the key competitive factor is generally the decision by a customer as to whether or not to begin a new project initiative or upgrade or keep things status quo. Organizations choose Unify software for a variety of factors including the ability to migrate applications, build and deploy applications quickly, the knowledge of Unify’s software among its IT developers, the high level of customer service and support Unify provides and our price point, which gives customers a cost-effective solution to their business problem. Organizations will typically choose a competitor because of their perceived financial strength.
As new products and technologies are introduced, increased competition could result in fewer customer orders, reduced prices and reduced gross margins, any one of which could adversely affect our 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 our prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and gain significant market share. Such competition could adversely affect our ability to sell additional licenses and maintenance and support renewals on favorable terms.
Employees
As of April 30, 2009, we had a total of 89 employees, including 24 in product development, 26 in sales and marketing, 21 in customer support, consulting, and training, and 18 in finance, operations and general administration. Of these employees, 75 were located in the United States and 14 were located in Europe.
Unify’s success depends in large part on its ability to attract and retain qualified employees, particularly senior management, engineering and direct sales. The competition for such employees is intense. There can be no assurance that we will be successful in attracting or retaining key employees. Any failure we have in attracting and retaining qualified senior management, engineering, direct sales, and support personnel could adversely affect our business, operating results, and financial condition. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we may file from time to time. You may obtain copies of these reports directly from us or from the SEC and the SEC’s Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. In addition, the SEC maintains information for electronic filers (including Unify) at its website at www.sec.gov. We make available free of charge on or through our Internet website located at www.unify.com our SEC filings on Forms 10-K, 10-Q and 8-K and any amendments to those filings as soon as reasonably practicable after electronic filing with the SEC.
RISK FACTORS
In evaluating the Company’s business, readers should carefully consider the business risks discussed in this section in addition to the other information presented in this Annual Report on Form 10-K and in our other filings with the SEC.
Deterioration in general economic conditions has caused and could cause additional decreases or delays in spending by customers and could harm our ability to generate license and maintenance revenues and our results of operations.
The state of the global economy and availability of capital has and could further impact the spending patterns of existing and potential future customers. Any reduction in spending by, or loss of, existing or potential future customers would cause revenues to decline. Further, it may be difficult to adjust expenses and capital expenditures quickly enough to compensate for any unexpected revenue shortfall.
Software license and maintenance purchases tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Since most revenues are derived from sales of software licenses, the current deterioration in economic conditions has caused and could cause additional decreases in or delays in software spending and is likely to reduce software license revenues and negatively impact our short term ability to grow revenues. Further, any decreased collectability of accounts receivable or early termination of agreements due to the current deterioration in economic conditions could negatively impact our results of operations.
The conversion ratio of certain convertible notes and the exercise price of certain warrants may be substantially below the market price of our stock at the time of exercise which could potentially have a negative impact on our stock price.
In conjunction with the acquisition of Gupta Technologies LLC in November 2006, we obtained debt financing that included convertible notes in the principal amount of $5,350,000 and we also issued 670,000 warrants. As of April 30, 2009, the remaining principal amount of convertible notes resulting from our debt financing was approximately $1,400,000 which is convertible into our common stock at a fixed ratio of $5.00 per share. As of April 30, 2009, there were 550,000 warrants issued as part of our debt financing that were outstanding which are exercisable at fixed exercise prices ranging from $1.35 per share to $1.90 per share. Subject to certain exceptions, these conversion ratios and exercise prices are subject to downward adjustment in the event we issue additional shares of common stock at prices below the then-current conversion ratio or exercise price. Conversion of the notes or exercise of the warrants is only likely to occur at such time as the conversion ratio or exercise price, as the case may be, is lower than the current market price for our stock. Issuance of common stock at a price below our current market price would have a dilutive effect on current stockholders and could potentially have a negative impact on our stock price.
If we default on any secured loan, all or a portion of our assets could be subject to forfeiture.
To finance the cash portion of the acquisition of Gupta and provide working capital, we entered into a Revolving Credit and Term Loan Agreement (the “Loan Agreement”) with ComVest on November 20, 2006. Under the Loan Agreement, we granted to ComVest a first priority security interest in substantially all of our assets. If we default on the Loan Agreement and are unable to cure the default pursuant to the terms of the agreement, our lender could take possession of any or all assets in which it holds a security interest, including intellectual property, and dispose of those assets to the extent necessary to pay off the debts, which could seriously harm our business. Furthermore, we may enter into other secured credit or loan agreements in the future. As of April 30, 2009, the outstanding loan balance of convertible debt was $1.4 million.
We are subject to intense competition.
We have experienced and expect to continue to experience intense competition from current and future competitors including IBM, Microsoft Corporation, and Oracle Corporation. Often, these competitors have significantly greater financial, technical, marketing and other resources than Unify, in addition to having greater name recognition and more extensive customer bases. As a result, our 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 we can.
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 our 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 adversely affect our ability to sell additional licenses and maintenance and support renewals on terms favorable to us. Further, competitive pressures could require us to reduce the price of our products and related services, which could adversely affect our business, operating results, and financial condition. There can be no assurance that we will be able to compete successfully against current and future competition, and the failure to do so would have an adverse effect upon our business, operating results and financial condition.
The markets in which we compete are subject to rapid technological change.
The markets in which we compete are 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.
Our future success will depend in part upon our ability to address the increasingly sophisticated needs of customers by developing new product functionality and enhancements that keep pace with technological developments, emerging industry standards and customer requirements.
There can be no assurance that our products will continue to be perceived by our customers as technologically advantageous or that we will not experience difficulties that delay or prevent the sale of enhancements to existing products that meet with a significant degree of market acceptance. If the release dates of any future product enhancements, or new products are delayed, or if when released, they fail to achieve market acceptance, our business, operating results, and financial condition would be adversely affected.
We are dependent on indirect sales channels.
A significant portion of our revenues are derived from indirect sales channels, including ISVs, VARs and distributors. ISVs, VARs and distributors accounted for approximately 61%, 64% and 61% of our software license revenues for fiscal 2009, 2008 and 2007, respectively. Our success therefore depends in part upon the performance of our indirect sales channels, over which we have limited influence. Our ability to achieve significant revenue growth in the future depends in part on maintaining and expanding our indirect sales channels worldwide. The loss of any major partners, either to competitive products offered by other companies or to products developed internally by those partners, or the failure to attract effective new partners, could have an adverse effect on our business, operating results, and financial condition.
There are numerous risks associated with our international operations and sales.
Revenues derived from our international customers accounted for 68%, 78% and 73% of our total revenues, with the remainder from North America, in fiscal 2009, 2008 and 2007, respectively. If the revenues generated by our international operations are not adequate to offset the expense of maintaining such operations, our overall business, operating results and financial condition will be adversely affected. There can be no assurance that we will continue to be able to successfully market, sell and deliver our products in these markets. Although we have had international operations for a number of years, there are certain unique business challenges and risks inherent in doing business outside of North America, and such challenges and risks can vary from region to region. These include 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 other parts of the world; unfamiliar or unusual business practices; and potentially adverse tax consequences, any of which could adversely impact the success of our international operations. There can be no assurance that one or more of these factors will not have an adverse effect on our future international operations and, consequently, on our business, operating results and financial condition. In addition, the Company’s subsidiaries and distributors in Europe and Japan operate in local currencies. If the value of the U.S. dollar increases relative to foreign currencies, our business, operating results and financial condition could be adversely affected.
Our stock price may be subject to volatility.
Unify’s common stock price has been and is likely to continue to be subject to significant volatility. A variety of factors could cause the price of the common stock to fluctuate, perhaps substantially, including: announcements of developments related to our business; fluctuations in the operating results and order levels of Unify or its competitors; general conditions in the computer industry or the worldwide economy; announcements of technological innovations; new products or product enhancements from us or our competitors; changes in financial estimates by securities analysts; developments in patent, copyright or other intellectual property rights; and developments in our relationships with our customers, distributors and suppliers; legal proceedings brought against the Company or its officers; and significant changes in our senior management team. 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, have experienced extreme price fluctuations which have often been unrelated to the operating performance of those companies. Such fluctuations may adversely affect the market price of our common stock.
Beginning on August 25, 2008, the Company’s stock started trading on the NASDAQ. Prior to being traded on the NASDAQ, the Company’s stock was traded over-the-counter on the “bulletin board”. Even though our stock is now traded on the NASDAQ, we do not receive any analyst coverage, our stock is thinly traded and our stock is considered to be micro-cap stock. Our stock is therefore subject to greater price volatility than larger companies whose stock trades more actively.
Our quarterly operating results may be subject to fluctuations and seasonal variability.
Unify’s quarterly operating results have varied significantly in the past and we expect that they could vary significantly in the future. Such variations could result from the following factors: the size and timing of significant orders and their fulfillment; demand for our products; the quantity, timing and significance of our product enhancements and new product announcements or those of our competitors; our ability to attract and retain key employees; seasonality; changes in our pricing or our competitors’; realignments of our organizational structure; changes in the level of our operating expenses; incurrence of extraordinary operating expenses, changes in our sales incentive plans; budgeting cycles of our customers; customer order deferrals in anticipation of enhancements or new products offered by us or our competitors; product life cycles; product defects and other product quality problems; currency fluctuations; and general domestic and international economic and political conditions.
Due to the foregoing factors, quarterly revenues and operating results may vary on a quarterly basis. Revenues and quarterly results may vary because software technology is rapidly evolving, and our sales cycle, from initial evaluation to purchase and the providing of maintenance services, can be lengthy and vary substantially from customer to customer. Because we normally deliver products within a short time of receiving an order, we typically do not have a backlog of orders. As a result, to achieve our quarterly revenue objectives, we are dependent upon obtaining orders in any given quarter for shipment in that quarter. Furthermore, because many customers place orders toward the end of a fiscal quarter, we generally recognize a substantial portion of our software license revenues at the end of a quarter. Our expense levels largely reflect our expectations for future revenue and are therefore somewhat fixed in the short term.
We expect that our operating results will continue to be affected by the continually challenging IT economic environment as well as by seasonal trends. In particular, we anticipate relatively weaker demand in the fiscal quarters ending July 31 and October 31 as a result of reduced business activity in Europe during the summer months.
Our products are subject to lengthy sales cycles.
Our application modernization solutions are used to implement comprehensive solutions including complete technology platform transitions and new applications. As a result, the delivery of our application modernization solutions generally involves a four to ten week implementation time and a significant commitment of management attention and resources by prospective customers. Accordingly, our sales cycle is subject to delays associated with the long approval process that typically accompanies significant initiatives or capital expenditures. Our business, operating results, and financial condition could be adversely affected if customers reduce or delay orders. There can be no assurance that we will not continue to experience these and additional delays in the future. Such delays may contribute to significant fluctuations of quarterly operating results in the future and may adversely affect those results.
Our software products could contain defects and could be subject to potential release delays.
Software products frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. There can be no assurance that, despite testing by us and 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 an adverse effect upon our business, operating results and financial condition. Additionally, if the release dates of any future Unify product line additions or enhancements are delayed or if, when released, they fail to achieve market acceptance, our business, operating results, financial condition and cash flows would be adversely affected.
Our license agreements may not protect us from product liability claims.
The license agreements we have with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in these license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. The sale and support of current and future products may involve the risk of such claims, any of which are likely to be substantial in light of the use of these products in the development of core business applications. A successful product liability claim brought against the Company could have an adverse effect upon our business, operating results, and financial condition.
We rely upon technology from certain third-party suppliers.
Unify is dependent on third-party suppliers for software which is embedded in some of its products. We believe that the functionality provided by software which is licensed from third parties is obtainable from multiple sources or could be developed by the Company. However, 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, we could be required to develop an alternative approach to developing such products, which could require payment of additional fees to third parties or internal development costs and delays that might not be successful in providing the same level of functionality. Such delays, increased costs or reduced functionality could adversely affect our business, operating results and financial condition.
We may be subject to violations of our intellectual property rights.
Unify 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 our efforts to protect proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our technology exists, piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means of protecting our proprietary rights will be adequate and, to the extent such rights are not adequate, other companies could independently develop similar products using similar technology.
On April 17, 2009, an individual filed a complaint for patent infringement against Unify and 26 other companies in the United States District Court for the District of Oregon captioned Gary Odom v. Attachmate, et. al., 3:09-cv-00406-AC. The complaint alleges that the defendants infringed a U.S. Patent issued on April 22, 2008. We have received a verbal notification from the plaintiff that the lawsuit will be dismissed with prejudice as to Unify without any payment or further action by Unify but as of the date of this Report the dismissal has not yet been filed with the court. However, until the dismissal is filed, there can be no assurance that we will not be required to defend this claim and there can be no assurance that we will be able to defend any infringement claims that may be asserted by third parties in the future, or if necessary obtain licenses on reasonable terms. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how may have an adverse effect on our business, operating results, and financial condition regardless of outcome due to the resources we may be required to commit. Adverse determinations in any litigation may subject us to significant liabilities to third parties, require that we seek licenses from third parties and prevent us from developing and selling our products. Any of these situations could have an adverse effect on our business, operating results, and financial condition.
Our success is dependent upon the retention of key personnel and we may be unable to retain key employees.
Our future performance depends on the continued service of key technical, sales and senior management personnel. With the exception of Unify’s president and chief executive officer, there are no other Unify technical, sales, executive or senior management personnel bound by an employment agreement. The loss of the services of one or more of our officers or other key employees could seriously harm our business, operating results and financial condition. Future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and we may fail to retain our key technical, sales and managerial employees, or attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future.
Rapid growth may significantly strain our resources.
If we are able to achieve rapid and successful market acceptance of our current and future products, we may undergo a period of rapid growth. This expansion may significantly strain management, financial resources, customer support, operational and other resources. To accommodate this anticipated growth, we are continuing to implement a variety of new and upgraded operating and financial systems, procedures and controls, including the improvement of our 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 an adverse effect on our business, operating results, and financial condition. Moreover, there can be no assurance that our systems, procedures and controls will be adequate to support our future operations.
Our disclosure controls and procedures and our internal control over financial reporting may not be effective to detect all errors or to detect and deter wrongdoing, fraud or improper activities in all instances.
While we believe we currently have adequate internal control over financial reporting, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and fraud. In designing our control systems, management recognizes that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further the design of a control system must reflect the necessity of considering the cost-benefit relationship of possible controls and procedures. Because of inherent limitations in any control system, no evaluation of controls can provide absolute assurance that all control issues and instances of wrongdoing, if any, that may affect our operations, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, that breakdowns can occur because of simple error or mistake and that controls may be circumvented by individual acts by some person, by collusion of two or more people or by management’s override of the control. The design of any control system also is based in part upon certain assumptions about the likelihood of a potential future event, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in cost-effective control systems, misstatements due to error or wrongdoing may occur and not be detected. Over time, it is also possible that controls may become inadequate because of changes in conditions that could not be, or were not, anticipated at inception or review of the control systems. Any breakdown in our control systems, whether or not foreseeable by management, could cause investors to lose confidence in the accuracy of our financial reporting and may have an adverse impact on our business and on the market price for Unify’s common stock.
ITEM 2.
ITEM 2. PROPERTIES
The Company’s principal administrative offices and headquarters are in Roseville, California where we lease a 17,660 square foot facility. This lease is for a period of 68 months and ends in April 2014. We also lease offices in the United Kingdom, Germany, France, Canada and Baltimore, Maryland. We believe that our existing facilities are adequate for our needs and that suitable additional or alternative space will be available on commercially reasonable terms as needed.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the normal course of business. If such matters arise, the Company cannot assure that it would prevail in such matters, nor can it assure that any remedy could be reached on mutually agreeable terms, if at all. Due to the inherent uncertainties of litigation, were there any such matters, the Company would not be able to accurately predict their ultimate outcome. As of April 30, 2009, there were no proceedings or litigation involving the Company that management believes would have a material adverse impact on its financial position, results of operations, or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on April 2, 2009. As part of the meeting, the election of Board members was voted on by the Company’s stockholders. Elected to serve on the board were Steven D. Whiteman, Robert M. Bozeman, Richard M. Brooks, Robert J. Majteles, Tery R. Larrew and Todd E. Wille. All board members elected to serve were previously board members for the Company. The elected board members will serve until the next Annual Meeting of Stockholders and until their respective successors are duly elected and qualified.
As part of the Annual Meeting, stockholders voted on the nominees for director, an amendment to increase the number of options reserved for issuance under the 2001 stock option plan and ratified the appointment of Grant Thornton LLP as the Company’s auditors for the fiscal year ending April 30, 2009.
1.
The election of each of the nominees for director was approved with the following votes:
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
For all of fiscal 2008 and through August 24, 2008 of fiscal 2009, Unify’s common stock was traded on the Over-The-Counter Bulletin Board (OTC BB) under the symbol UFYC.OB. Beginning on August 25, 2008, Unify began trading on the NASDAQ under the symbol UNFY. The following table sets forth the lowest and highest sale price of our common stock, as reported on the over-the-counter market or the NASDAQ for the periods presented. For common stock traded on the OTC BB, quotations reflect prices between dealers, do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.
Common Stockholders of Record
As of May 31, 2009, there were approximately 304 stockholders of record of the Company’s common stock, as shown in the records of our transfer agent, excluding stockholders whose stock was held in nominee or street name by brokers.
Dividends
We have never paid dividends on our common stock and our present policy is to retain anticipated future earnings for use in our business.
Equity Compensation Plan Information
Unify maintains a compensation plan that provides for the issuance of its Common Stock to officers, directors, other employees or consultants. This plan is known as the 2001 Stock Option Plan (the “Option Plan”) and it was approved by the stockholders. The 1991 Stock Option Plan, which had a ten-year life, has expired and has therefore ceased to be available for new grants. In fiscal 2003, the Board adopted, without a need for shareholder approval, the 2002 Director Restricted Stock Plan (the “Director Restricted Stock Plan”) as part of a program to provide compensation we felt was necessary to attract, retain and reward members of our Board of Directors who were willing to provide the time and energy that we believe is required to meet our business goals. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans as of April 30, 2009:
____________________
Material Features of Director Restricted Stock Plan
On May 1, 2002 the Board approved the Director Restricted Stock Plan as part of a compensation program designed to attract and retain independent members for our board of directors. The maximum aggregate number of shares of common stock that may be issued under the Director Restricted Stock Plan is 100,000. In fiscal 2009, there were no shares awarded under this plan. As of April 30, 2009 there is a balance of 3,862 shares reserved for future awards under this plan.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of the Company contains forward-looking statements that involve risks and uncertainties and should be read in conjunction with the cautionary language applicable to such forward-looking statements described above in “A Caution About Forward-Looking Statements” found before Item 1 of this Form 10-K. You should not place undue reliance on these forward-looking statements which speak only as of the date of this Annual Report on Form 10-K. The following discussion should also be read in conjunction with the Consolidated Financial Statements and Notes thereto in Item 8. 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, the Risk Factors discussed in this Annual Report and in the Company’s other filings with the SEC.
Overview
Unify (the “Company”, “we”, “us” or “our”) is a global provider of application modernization, data management and application development solutions. Our migration solutions, development software and embedded databases allow customers to modernize and maximize their application environment. Our award-winning technologies help organizations drive business optimization, improve collaboration, increase customer service and reduce costs. Unify’s strategy is to help businesses modernize mission-critical legacy applications and data. Based on market requirements for application modernization, our solutions help companies increase speed and agility, improve asset reuse, lower IT costs, reduce business risks and exposures, and free information previously locked within proprietary systems.
The Company sells and markets application development and database software and services and modernization solutions through two segments. The segments are the Database and Development Products (“DDP”) and our Modernization & Migration Products.
On June 30, 2009, the Company purchased AXS-One Inc. for approximately 3.1 million shares of common stock.
On January 30, 2009, the Company purchased privately held CipherSoft Inc. (“CipherSoft”), headquartered in Calgary, Canada, for approximately $628,000 plus the assumption of debt of $1,032,000 and future potential royalty payments to be paid over a four year period following the acquisition.
On May 22, 2007, the Company purchased privately held Active Data Corporation (“ADC”) for approximately $420,000 plus potential earn-out payments over a two year period following the acquisition.
On September 13, 2006, the Company entered into a Purchase and Exchange Agreement (“Purchase Agreement”) with Halo Technology Holdings, Inc. (“Halo”) whereby Unify agreed to purchase Gupta from Halo in exchange for: (i) the Company’s Insurance Risk Management (“IRM”) division, (ii) the Company’s ViaMode software, (iii) $6,100,000 in cash, and (iv) the amount, if any, by which Gupta’s net working capital exceeds IRM’s net working capital at the close of the transaction (the “Purchase and Exchange”). The Company’s acquisition of Gupta was consummated on November 20, 2006. As a result of the Gupta acquisition the Company’s fiscal 2007 financial results include approximately five months of Gupta operations.
On November 20, 2006, the Company entered into various agreements with ComVest Capital LLC (“ComVest”) whereby ComVest, along with participation from Special Situations Funds, provided debt financing for the Gupta acquisition and for working capital, consisting of convertible term loans totaling $5.35 million and a revolving credit facility of up to $2.5 million. The term loans had an initial interest rate of 11.25% and have terms of 48 to 60 months. The agreement was modified in April 2008 such that the interest rate on the term loans was reduced to 5% and principal payments were deferred until June 2009. The revolver has an interest rate of prime plus 2.25% and has a maturity date of November 30, 2010. As part of the financing, ComVest received 402,000 warrants and Special Situations Funds received 268,000 warrants. The warrants are for the purchase of common stock at prices from $1.35 to $1.90 per share. The agreements provide for ComVest to have a security interest in substantially all of the Company’s assets.
In February 2005, Unify acquired privately-held Acuitrek Inc. (“Acuitrek”), a provider of policy administration and underwriting solutions for the alternative risk market. The acquisition was the result of a strategy to penetrate underserved specialty markets with our solutions and led to the formation of the Unify IRM division. However, with the September 2006 sale of the Company’s IRM division and ViaMode software asset to Halo, Acuitrek, Inc. was sold to Halo. In connection with this sale, the Company amended certain terms of the agreement under which it had purchased Acuitrek, Inc. in February 2005.
Today, Unify’s customers include corporate information technology departments (“IT”), software value-added resellers (“VARs”), solutions integrators (“SIs”) and independent software vendors (“ISVs”) from a variety of industries, including insurance, financial services, healthcare, government, manufacturing, retail, education, and more. We are headquartered in Roseville, California, with offices in Maryland, Australia, France, Germany, the United Kingdom (“UK”) and Canada. We market and sell products directly in the United States, Europe, and Australia and indirectly through global distributors representing more than 50 countries.
Our mission is to enable customers to modernize mission critical applications. Our software and solutions give customers a rich user experience, quality information and a high degree of customer satisfaction.
Our technology products include NXJ Developer and NXJ Enterprise, Team Developer, ACCELL, VISION, DataServer, SQLBase and SQLBase Treasury and our Composer product line including, Lotus Notes, Sabertooth, Oracle Forms and COBOL. The Company is committed to providing exceptional technology to this customer base and to continue to meet their current and future technology needs. Services to our extensive customer installed base include sales and marketing, support, and professional services.
Critical Accounting Policies
The following discussion and analysis of the Company’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The areas that require significant judgment are as follows.
Revenue Recognition
The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. Additionally, the Company generates revenue from its migration solutions products. The Company licenses its products to end-user customers, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s products are generally sold with a perpetual license. The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection or special acceptance. With the exception of its migration solutions, the Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition. For migration solutions, the Company recognizes revenue for software licenses sales in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and Accounting Research Bulletin (“ARB”) 45, Long-Term Construction Type Contracts. The Company exercises judgment in connection with the determination of the amount of revenue to be recognized in each accounting period. The nature of each contractual arrangement determines how revenues and related costs are recognized.
For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectability is probable and persuasive evidence of an arrangement exists.
The Company considers a signed noncancelable license agreement, a customer purchase order, a customer purchase requisition, or a sales quotation signed by an authorized purchaser of the customer to be persuasive evidence that an arrangement exists such that revenue can be recognized.
For migration solution arrangements that require significant modification or customization of software, revenue is recognized based on contract accounting under the provisions of Accounting Research Bulletin (“ARB”) 45, Long-Term Construction Type Contracts and Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. For migration solution products the Company uses the percentage-of-completion method for revenue recognition. Under the percentage-of-completion method, progress towards completion is measured by labor hours.
The Company’s customer contracts include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as maintenance and support and/or consulting). The value allocated to the undelivered elements is unbundled from the delivered element based on vendor-specific objective evidence (VSOE) of the fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as: (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace. The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the contract using the residual method as the fair value of all undelivered elements is determinable.
We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
An assessment of the ability of the Company’s customers to pay is another consideration that affects revenue recognition. In some cases, the Company sells to undercapitalized customers. In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customer’s financial condition has improved. Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible. This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer. Any deterioration in credit worthiness of a customer may impact the Company’s evaluation of accounts receivable in any given period.
Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred. Consulting service arrangements are performed on a “best efforts” basis and may be billed under time-and-materials arrangements or fixed price arrangements. Revenues and expenses relating to providing consulting services are recognized as the services are performed.
Valuation of Long-Lived Assets
Our long-lived assets are comprised of long-term investments. The Company held a minority interest in Arango, a privately held corporation located in Panama. In September 2007, The Company sold all of its stock in Arango and the related gain on the sale of stock is included in other income for the fiscal year ended April 30, 2008. Additionally, in April 2008, we wrote off our investment in Unify Japan of $39,000 based on our assessment that there was a permanent decline in value for this investment. At April 30, 2009 and 2008, we had no long-term investments. We assess the valuation of long-lived assets whenever circumstances indicate that there is a decline in carrying value below cost that is other-than-temporary. Several factors can trigger an impairment review such as significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. In assessing potential impairment for such investments, we consider these factors as well as the forecasted financial performance. When such decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period operating results to the extent of the decline. Future adverse changes in market conditions or poor operating results could result in losses or an inability to recover the carrying value of the long-term investments that is not currently reflected in the investments carrying value, thereby, possibly requiring impairment charges in the future.
Deferred Tax Asset Valuation Allowance
As of April 30, 2009, we had approximately $17.1 million of deferred tax assets related principally to net operating loss carryforwards, reserves and other accruals, and foreign tax credits. The Company’s ability to utilize net operating loss carryforwards may be subject to certain limitations in the event of a change in ownership. A valuation allowance has been recorded to offset these deferred tax assets. The ability of the Company to ultimately realize its deferred tax assets will be contingent upon the Company achieving taxable income. There is no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Should we determine that we would be able to realize the deferred tax assets in the future in excess of the recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Results of Operations
The following table sets forth our consolidated statement of operations expressed as a percentage of total revenues for the periods indicated:
Total Revenues
The Company generates revenue from software license sales and related services, including maintenance, support and consulting services. We license our software through our direct sales force in the United States and Europe, and through indirect channels comprised of distributors, ISVs, VARs, and other partners worldwide. Revenues from our distributor, ISV and VAR indirect channels accounted for approximately 61%, 64%, and 61% of our software license revenues for fiscal 2009, 2008 and 2007, respectively. International revenues include all our software license and service revenues from customers located outside North America. International revenues accounted for 68%, 78%, and 73% of total revenues in fiscal years 2009, 2008 and 2007, respectively.
Total revenues in fiscal 2009 were $20.6 million, an increase of $0.8 million or 4% from fiscal 2008 revenues of $19.8 million. Total software license revenues in fiscal 2009 were $6.4 million, a decrease of $2.1 million or 24% from fiscal 2008 software license revenues of $8.5 million. The decrease in software license revenues was due to the deterioration in worldwide economic conditions in fiscal 2009, the decline of the Euro and an order of approximately $1 million received during fiscal 2008 from our Russian distributor that did not reoccur in fiscal 2009. Total services revenues were $11.7 million in fiscal 2009, an increase of $0.7 million or 6% from fiscal 2008. Total migration solutions revenue in fiscal 2009 was $2.5 million compared to $0.3 million in fiscal 2008. The increase in migration solutions revenue is due to an increase in sales from our Composer for Lotus Notes solution and sales from our new Composer solutions, Composer Sabertooth and Composer for Oracle Forms. Total revenues in fiscal 2008 were $19.8 million, an increase of $8.6 million or 77% from fiscal 2007 revenues of $11.2 million. Total software license revenues in fiscal 2008 were $8.5 million for an increase of $4.1 million or 92% from fiscal 2007, while total service revenues of $11.0 million in fiscal 2008 increased by $4.3 million or 63% from fiscal 2007. The increase in total revenue and service revenues was primarily the result of the November 20, 2006 acquisition of Gupta Technologies LLC.
For fiscal 2009 and 2008, total revenues from the Americas were 32% and 22% of total revenues, respectively. Total revenue from the Americas in absolute dollars was $6.7 million for fiscal 2009 and $4.4 million for fiscal 2008. Total revenue from our European territory was $10.8 million for fiscal 2009 and $10.9 million for fiscal 2008. On a percentage basis, revenue from our European territory was 52% for fiscal 2009 and 55% for fiscal 2008. For fiscal 2009 and 2008, total revenues from international distributors were 15% and 23% of total revenues, respectively. Total revenue from the international distributors in absolute dollars was $3.1 million for fiscal 2009 and $4.5 million for fiscal 2008.
Cost of Revenues
Cost of Software Licenses. Cost of software licenses consists primarily of royalty payments and the amortization of purchased technology from third parties that is amortized ratably over the technology’s expected useful life. Cost of software licenses was $0.2 million for fiscal 2009, $0.2 million for fiscal 2008 and $0.4 for fiscal 2007.
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 implementation services. Total cost of services was $1.0 million for fiscal 2009, $1.2 million for fiscal 2008 and $1.0 million for fiscal 2007. Our cost of services as a percent of services revenues was 5% in fiscal 2009, 6% in fiscal 2008 and 9% in 2007. The favorable decrease in the percentage of cost of service expenses to services revenue in fiscal 2008 versus fiscal 2007 was the result of economies of scale relative to our cost structure and an increase in services revenue, both of which were direct results of our acquisition of Gupta. This trend continued in fiscal 2009.
Cost of Migration Solutions. Cost of migration solutions consists primarily of both expenses associated with employees involved in migration projects and also expenses related to third party assistance. Cost of migration solutions was $1.0 million in fiscal 2009 and $0.1 million in fiscal 2008. There were no costs for migration solutions in fiscal 2007 as the company had no related sales in fiscal 2007. The increase in cost of migration solutions in fiscal 2009 over fiscal 2008 is directly related the increase in sales for Composer for Lotus Notes, Composer Sabertooth and Composer for Oracle Forms.
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 costs in fiscal 2009 were $2.9 million compared to $3.5 million in fiscal 2008 and $2.4 million in fiscal 2007. The increase in product development costs in fiscal 2008 compared to fiscal 2007 was the result of the addition of the Gupta product development team plus additional outsourced development costs associated with efforts to deliver the first major new version of the Gupta Team Developer product in several years.
Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and benefits, marketing programs, travel expenses, professional services, facilities expenses and bad debt expense. SG&A expenses were $12.5 million in fiscal 2009, $12.0 million for 2008 and $8.3 million for 2007. The increase in SG&A costs in fiscal 2009 was caused by having a full year’s expenses for the Composer sales resources plus the additional costs during the fourth quarter from the CipherSoft acquisition. The increase in SG&A in fiscal 2008 was the result of having 12 months of the Gupta personnel, plus approximately $0.3 million in closing costs for our German subsidiary, plus the launch of the Composer business in terms of both personnel and sales and marketing activities. As a percentage of total revenue, SG&A expenses were 61% in fiscal 2009, 61% in fiscal 2008 and 74% in fiscal 2007. The major components of SG&A for fiscal 2009 were sales expenses of $6.5 million, marketing expenses of $0.9 million and general and administrative expenses of $5.1 million. For fiscal 2008, the major components were sales expenses of $5.8 million, marketing expenses of $1.4 million and general and administrative expenses of $4.8 million. For fiscal 2007, the major components of SG&A were sales expenses of $4.1 million, marketing expenses of $0.6 million, and general and administrative expenses of $3.6 million.
Interest Expense. Interest expense is primarily the result of interest from outstanding debt and was $194,000, $900,000 and $527,000 in fiscal 2009, 2008 and 2007, respectively. Fiscal 2009 interest expense consists primarily of interest incurred on notes payable resulting from a debt financing in conjunction with the acquisition of Gupta plus the amortization of related debt issuance costs and the note discount representing the value of the issued warrants. The decrease in interest expense was caused by the decrease in outstanding debt and related amortization of the note discount.
Other Income (Expense). Other income (expense), net consists primarily of the gain on the sale of the Other Investments, the foreign exchange gains and losses and interest earned by the Company on our cash and cash equivalents. Other income (expense) was $124,000, $130,000 and $136,000 in fiscal 2009, 2008 and 2007, respectively. We continue to periodically review the recorded value of our investments. We record an investment impairment charge if and when we believe an investment has experienced a decline in market value that is other than temporary. Future adverse changes in market conditions or poor operating results of an investment could result in losses or an inability to recover the carrying value of the investment, thereby possibly requiring impairment charges in the future. In September 2007, the Company sold all of its stock in Arango as part of a stock repurchase plan offered by Arango. At the time of the sale, the Company had a carrying value of $175,000 for the Arango stock. Proceeds from the sale of the Arango stock were $264,000 which generated a gain that was included in other income. Additionally, during fiscal 2008, we wrote off our investment in Unify Japan of $39,000 based on our assessment that there was a permanent decline in value for this investment. The write off of Unify Japan was recorded in other expense.
Provision for Income Taxes. For fiscal 2009, the Company recorded $27,000 in foreign tax benefit and $206,000 for state and federal tax expense. For fiscal 2008, the Company recorded $89,000 in foreign tax expense and $235,000 for state or federal taxes. For fiscal 2007, the Company recorded $82,000 in foreign tax expense and no expense for state and federal taxes. At April 30, 2009, the Company had approximately $40.0 million in federal net operating loss carryforwards that begin to expire in fiscal year 2010 through 2028, approximately $9.5 million in state net operating loss carryforwards that expire in fiscal years 2016 to 2019, approximately $1.5 million in foreign net operating loss carryforwards that do not expire and approximately $4.3 million in capital loss carryforwards that expire in 2010. The Company’s ability to utilize these net operating loss carryforwards may be subject to certain limitations in the event of a change in ownership.
Liquidity and Capital Resources
At April 30, 2009, the Company had cash and cash equivalents of $6.1 million, compared to $2.7 million at April 30, 2008. The Company had net accounts receivable of $4.5 million as of April 30, 2009 and $5.1 million as of April 30, 2008.
On November 20, 2006, the Company entered into various agreements with ComVest whereby ComVest, along with participation from Special Situations Funds, provided debt financing for the Gupta acquisition and for working capital, consisting of convertible term loans totaling $5.35 million and a revolving credit facility of up to $2.5 million. The term loans had an initial interest rate of 11.25% and have repayment terms of 48 to 60 months. The agreement was modified in April 2008 whereby the interest rate on the term loans has been decreased to 5% and all principal payments have been deferred until June 2009. The revolver has an interest rate of prime plus 2.25% and has a maturity date of November 30, 2010. As part of the financing, ComVest received 402,000 warrants and Special Situations Funds received 268,000 warrants. The warrants are for the purchase of common stock at prices from $1.35 to $1.90 per share. The agreements provide for ComVest to have a security interest in substantially all of the Company’s assets.
We believe that existing cash of $6.1 million as of April 30, 2009, along with forecasted operating cash flows for fiscal year 2010 and the ComVest credit facility will provide us with sufficient working capital for us to meet our operating plan for fiscal year 2010. The fiscal 2010 operating plan assumes normal operations for the Company, capital expenditures of approximately $150,000 and required principal and interest payments on debt.
In fiscal 2010, we plan to increase the marketing of our Composer product line and we also anticipate releasing new versions of some of our Rapid Application Development Products as well as our Database Management Products. The fiscal 2010 plan requires few additional strategic investments in sales, marketing or implementation services. We believe our fiscal 2010 plan will generate positive cash flow as a result of increased revenues for our Composer product line, our Rapid Application Development Products and our Database Management Products.
Operating Cash Flows. In fiscal 2009, we had cash flows from continuing operations of $3.8 million. This compares to fiscal 2008 and 2007 where cash flows from continuing operations were $3.4 million and $0.6 million, respectively. Cash flows provided by operations for fiscal 2009 principally resulted from $2.3 million of income from operations, a $0.7 million decrease in accounts receivable, a decrease in other long term assets of $0.1 million, an increase in other accrued liabilities of $0.4 million, an increase in accounts payable of $0.1 million, $0.8 million in amortization of intangible assets, $0.2 million in depreciation and $0.5 million in stock based expenses. Offsetting these amounts was a $0.8 million decrease in deferred revenue, a decrease of $0.4 million in accrued compensation and related expenses and an increase of $0.1 million in prepaid expenses and other current assets.
In fiscal 2008, we had cash flows from continuing operations of $3.4 million. Cash flows provided by operations for fiscal 2008 principally resulted from $1.6 million of income from operations, a $0.9 million increase in deferred revenue, a $0.8 million increase in accrued compensation and related expenses, $0.8 million in amortization of intangible assets, $0.2 million for amortization of discount on notes payable, $0.2 million in depreciation and $0.2 million in stock based expenses. Offsetting these amounts was an increase of $0.6 million in accounts receivable, an increase of $0.1 million in other long term assets, a $0.3 million decrease in accounts payable, a decrease of $0.3 million in accrued acquisition costs, and fulfillment of support obligations of $0.3 million.
In fiscal 2007, we had cash flows provided by operations of $0.6 million principally resulting from a $2.6 million increase in deferred revenue, a $0.4 million decrease in accounts receivable, a $0.2 million increase in prepaid expenses and other current assets, a $0.5 million increase in accrued acquisition costs, $0.3 million in amortization, $0.2 million in depreciation and $0.1 million in stock based expenses. Offsetting these amounts was a loss from continuing operations for fiscal year 2007 of $1.4 million, a decrease of $0.7 million in accrued compensation and related expenses, a $0.5 million decrease in accounts payable, a decrease of $0.8 million in other accrued liabilities, an increase of $0.2 million in other long term assets and fulfillment of support obligations of $0.2 million.
Investing Cash Flows. Cash used in investing activities for continuing operations was a negative $0.8 million for fiscal 2009. The use of cash consisted of $0.5 million related to the acquisition of CipherSoft Inc., $0.2 million related to the purchase of property and equipment and $0.1 million related to payments on acquisitions. Cash used in investing activities for continuing operations was $0.6 million in fiscal 2008 and $5.9 million in fiscal 2007. The use of cash in investing activities for continuing operations for fiscal 2007 was related to the acquisition of Gupta.
Financing Cash Flows. Net cash provided by financing activities for continuing operations in fiscal 2009 was $1.1 million. In fiscal 2009 sources of cash included $1.2 million in proceeds from the exercise of warrants and $1.0 million from borrowings under debt obligations. This amount was offset by a payment of $1.1 million for principal payments under debt obligations. Net cash used in financing activities for continuing operations in fiscal 2008 was $2.3 million. In fiscal 2008 cash used for principal payments under debt obligations was $3.3 million. This amount was offset by $1.0 million in borrowing under debt obligations and $20,000 of proceeds from issuance of common stock. Net cash provided by financing activities for continuing operations in fiscal 2007 was $7.0 million. In fiscal 2007 sources of cash from financing activities included $7.7 million from borrowings and $0.2 million from the proceeds of the issuance of common stock. In fiscal 2007 $1.0 million in cash was used to make principal payments on debt obligations.
A summary of certain contractual obligations as April 30, 2009 is as follows (in thousands):
Recently Issued Accounting Standards
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). This Statement is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. We are currently assessing the impact, if any, of SFAS 165 on our consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We are currently assessing the impact, if any, of SFAS 157 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations. The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. Statement 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently assessing the impact of SFAS 141(R) on our consolidated financial statements and will account for the acquisition of AXS-One Inc. under SFAS 141(R). As of April 30, 2009, we have capitalized $75,000 in acquisition costs that will be expensed in the first quarter of fiscal 2010 under SFAS 141(R).
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 5, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in net income and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in net income. SFAS No. 160 is effective for us beginning May 1, 2009. We are currently evaluating additional impacts, if any, of adopting SFAS No. 160 on our consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities with a view toward improving the transparency of financial reporting, and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We believe that the adoption of SFAS No. 161 will not have a material impact on our consolidated financial statements.
On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1(FSP APB 14-1), Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 requires issuers of convertible debt that may be settled wholly or partly in cash when converted to account for the debt and equity components separately. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and must be applied retrospectively to all periods presented. We believe that the adoption of FSP APB 14-1 will not have a material impact on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position ("FSP") FAS 142-3, "Determination of Useful Life of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, "Goodwill and Other Intangible Assets." FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. We believe that the adoption of FSP FAS 142-3 will not have a material impact on our consolidated financial statements.
In May of 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies literature established by the FASB as the source for accounting principles to be applied by entities which prepare financial statements presented in conformity with generally accepted accounting principles (GAAP) in the United States. This statement is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” This statement will require no changes in the Company’s financial reporting practices.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company’s exposure to market rate risk for changes in interest rates relates primarily to its investment portfolio, which consists of cash equivalents. Cash equivalents are highly liquid investments with original maturities of three months or less and are stated at cost. Cash equivalents are generally maintained in money market accounts which have as their objective preservation of principal. The Company does not believe its exposure to interest rate risk is material for cash and cash equivalents, which totaled $6.1 million at April 30, 2009. Unify had no short-term investments at April 30, 2009.
In November 2006, the Company entered into a revolving credit facility agreement with ComVest whereby ComVest would provide up to $2.5 million through a revolving credit facility. The revolver has an interest rate of prime plus 2.25% and has a maturity date of November 30, 2010. Should the prime interest rate increase during the life of the revolver, the Company would have exposure to interest rate risk if it has a large balance outstanding on the revolver. At April 30, 2009 the Company had no amount outstanding under the revolver.
Unify does not use derivative financial instruments in its short-term investment portfolio, and places its investments with high quality issuers only and, by policy, limits the amount of credit exposure to any one issuer. The Company is averse to principal loss and attempts to ensure the safety of its invested funds by limiting default, market and reinvestment risk.
Foreign Currency Exchange Rate Risk. As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have an adverse impact on the Company’s business, operating results and financial position. Historically, the Company’s primary exposures have related to local currency denominated sales and expenses in Europe, Japan and Australia. For example, when the U.S. dollar strengthens against the major European currencies, it results in lower revenues and expenses recorded for those regions when translated into U.S. dollars.
Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on its future operating results. Although Unify takes into account changes in exchange rates over time in its pricing strategy, it does so only on an annual basis, resulting in substantial pricing exposure as a result of foreign exchange volatility during the period between annual pricing reviews. The Company also has currency exchange rate exposures on intercompany accounts receivable and intercompany accounts payable related to activities with the Company’s operations in France, Germany, UK and Canada. At April 30, 2009, the Company had $2.0 million in such payables denominated in Euros and U.S. Dollars and a total $1.5 million in receivables denominated in Euros, Canadian dollars, U.S. Dollars and pounds sterling. The Company encourages prompt payment of intercompany balances in order to minimize its exposure to currency fluctuations, but it engages in no hedging activities to reduce the risk of such fluctuations. A hypothetical ten percent change in foreign currency rates could have a significant impact on the Company’s business, operating results and financial position. The Company has not experienced material exchange losses on intercompany balances in the past; however, due to the substantial volatility of currency exchange rates, among other factors, it cannot predict the effect of exchange rate fluctuations on its future business, operating results and financial position.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15 (a) for an index to the financial statements and supplementary financial information, which are filed, as part of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls were effective as of the end of the period covered by this annual report.
(b) Changes in Internal Controls. There have been no changes in our internal controls over financial reporting during the fiscal year April 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
(c) Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of financial statements in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of April 30, 2009. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.
Based on the Company’s processes and assessment, as described above, management has concluded that, as of April 30, 2009, the Company’s internal control over financial reporting was effective.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K for the year ended April 30, 2009.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive officers as of the date May 31, 2009.
Executive Officers
Executive Officers
Todd E. Wille has served as president and chief executive officer since November 2000. He rejoined the Company in October 2000 as the chief operating officer and acting chief financial officer. Mr. Wille originally joined Unify in August 1995 as the corporate controller. In September 1997, Mr. Wille was promoted to vice president, finance and chief financial officer. In March 1998, Mr. Wille left the Company and joined FRx Software Corporation as the vice president of finance and chief financial officer. Subsequently, Mr. Wille was promoted to senior vice president of operations. Mr. Wille received a B.A. degree in business administration with concentrations in accounting and finance and management information systems from Wartburg College.
Steven D. Bonham joined the Company in June 2005, as vice president of finance and administration and chief financial officer. Before joining Unify, Mr. Bonham was the chief financial officer for LexisNexis/Examen, a subsidiary of LexisNexis, from 1997-2005. Prior to LexisNexis/Examen, Mr. Bonham spent nine years with Foundation Health Corporation, a former Fortune 500 publicly traded managed care insurance company, most recently serving as the vice president of finance for Foundation’s, California Heath Plan. Mr. Bonham, a licensed certified public accountant, has a B.S. degree in accounting from California State University, Sacramento.
Mark T. Bygraves joined the Company in November 2006 as part of the acquisition of Gupta Technologies, where he had served since February 2002 and was appointed as an officer on May 1, 2007. Mr. Bygraves is responsible for driving the Unify channel sales programs together with day to day operational responsibilities for Northern Europe, Middle East and Africa (EMEA). Mr. Bygraves has worked in the IT industry for 20 years, holding a number of senior positions, most recently from January 1999 to January 2002 as Director of Channels at Hitachi Data Systems. Prior to Hitachi Data Systems, Mr. Bygraves was the Sales Director of Transformation Software.
Duane V. George has served as vice president of product development and CTO since July 2006. Mr. George is responsible for Unify’s Technical Services Group which includes product development, customer support, training, documentation, quality control and assurance. Mr. George provides technical vision, leads all aspects of the Company’s technology development and plays an integral role in shaping the Company’s strategic direction, development and future growth. He is responsible for refining the technology strategy for Company products and services and implementing projects aligned to that strategy and delivering all technology applications, systems and solutions that are core to the Company’s offerings. Mr. George has been in the information technology and engineering industries for over 25 years. He began his career as an engineer with the Department of Defense managing the acquisition and implementation of Computer Aided Design and Manufacturing (CAD/CAM) systems. Subsequently, Mr. George joined the US Space Command to manage strategic space defense initiatives and satellite Command Control and Communication (C3) programs. He eventually moved into software development, customer support and project management with an emphasis on customer satisfaction. Mr. George joined Unify in 1995 and has been a core member of the support, consulting and product development teams. He earned his B.S. in engineering from Brigham Young University in Provo, Utah.
Kevin R. Kane joined Unify in January 2007 and is responsible for driving market adoption for the Company's service-oriented architecture (SOA) modernization product portfolio. Mr. Kane brings demonstrated sales success in growing top-line revenue for several enterprise software companies. Most recently he served as the global sales director for Sacramento, California based Meridian Systems from 2005 to 2007. Trimble Navigation acquired Meridian Systems in late 2006. Prior to Meridian Systems, Mr. Kane assisted in launching VIEO, now Censure, as a senior sales executive from 2004 to 2005. Prior to VIEO, Mr. Kane was with Dazel Corporation which was acquired by HP Printing and Imaging Division from 1999 to 2004. Prior to HP, Mr. Kane held various sales management positions with Tivoli Systems, an IBM software company, Beyond Software, acquired by NEON Systems and Sterling Software, acquired by Computer Associates. Mr. Kane received his B.A. degree in business management from Saint Mary’s College of California.
Frank Verardi has served in an executive officer position since 2000. Mr. Verardi is currently responsible for driving the Unify channel sales programs together with day to day operational responsibilities for the Americas and Asia Pacific regions. Mr. Verardi served as vice president and general manager of Unify Business Solutions from May 2005 to April 2007, where he oversaw the sales and marketing for the Company’s technology products. From June 2003 to April 2005, he served as vice president of technical services, and from May 2001 to May 2003, he served as vice president of worldwide sales and marketing. Prior to these positions, Mr. Verardi served in various management positions, including vice president of worldwide professional services, vice president of worldwide product delivery and customer support, and director of client services. Mr. Verardi joined the Company in August 1988. Before joining Unify, Mr. Verardi held various positions with Computer Sciences Corporation, including director of commercial professional services. Mr. Verardi received a B.S. degree in computer science from California State University, Chico.
Board of Directors
Steven D. Whiteman has served as a director of the Company since May 1997. In August 2004, he was appointed chairman of the board. Mr. Whiteman previously served as the president and chief executive officer of Intesource, an Internet based procurement service specifically for the food industry. From June 2000 to May 2002, he worked as an independent consultant. From May 1993 until June 2000, Mr. Whiteman served as president of Viasoft, Inc. (“Viasoft”), a publicly traded software products and services company. From February 1994 to June 2000, Mr. Whiteman also served as chief executive officer and director of Viasoft, and from April 1997 to June 2000, he served as chairman of the board of directors. Mr. Whiteman is also a director of Intesource, Actuate Corporation, and Flypaper Inc. Mr. Whiteman holds a B.A. degree in business administration from Taylor University and a M.B.A. from the University of Cincinnati.
Robert M. Bozeman was appointed director in January of 2008. Mr. Bozeman currently serves as an advisor to companies in the technology industry. He is experienced in business operations, venture capital investment, and mergers and acquisitions having previously served in the capacities of CEO and Board Member for a variety of software, information services and computer supplier companies. Mr. Bozeman's last operating role was as CEO for Bricsnet from July, 2003 through November, 2004; prior to that - from November, 1997 through December, 2003, Mr. Bozemen was General Partner of Angel Investors LP for both its Fund I and Fund II. Investments by the firm included Ask Jeeves, Brightmail, Google, Opsware, and PayPal. In addition, many of Angel Investors LP investments became successful acquisitions, including AOL’s acquisition of Spinner, Microsoft’s acquisitions of eQuil, MongoMusic and Vacation Spot and Sybase’s acquisition of AvantGo!. Mr. Bozeman is currently on the Board and/or is an advisor to AkiiRa, Become.com, Pacific Art Group, Restoration Partners and Vortex.
Richard M. Brooks has served as a director of the company since August 2005. Since September 2006, Mr. Brooks has been a partner with Tatum LLC, a national Executive Services consulting company. With Tatum LLC, Mr. Brooks has acted as the project lead on a variety of finance assignments, including acting as the interim CFO for Pixelworks, a publicly traded semi-conductor company. Mr. Brooks previously served as chief executive officer for VantageMed, a public company, from April 2002 to December 2004. In addition, Mr. Brooks served as a director of VantageMed Corporation from March 2001 to January 2005 and was appointed chairman of that board in May of 2002. Mr. Brooks received a B.S. in business administration from Oregon State University.
Tery R. Larrew has served as a director of the Company since May 2002. Mr. Larrew is the founding and managing partner of Caddis Capital LLC, a private equity firm that specializes in income oriented investments with strong equity appreciation including International Gaming and Entertainment; Energy - Oil & Gas Exploration and Production; Real Estate - Mobile Home Communities, Apartment Complexes, Self Storage Units and Unimproved Land; Natural Resources - Water and Secured Debt/Hard Asset financing. Until 2005, Mr. Larrew served as the President and CEO of Vericept Corporation, a provider of network-based early warning and misuse prevention solutions, headquartered in Denver, Colorado. Prior to joining Vericept in 2002, Mr. Larrew co-founded IQ3G, a mobile services company, in 2000. From 1999 to 2000, Mr. Larrew was the chairman and chief executive officer of a start-up e-communication company, UPDATE Systems, Inc. From 1989 to 1998, Mr. Larrew served as President of the Database Marketing Services Division of Metromail/CIC. He is a graduate of Colorado State University with a B.S. degree in business administration and serves on the Global Leadership Council for the Colorado State University School of Business.
Robert J. Majteles has served as a director of the Company since April 2004. Mr. Majteles is the managing partner of Treehouse Capital LLC (www.treehousecapital.com), an investment firm. In addition, Mr. Majteles is a Lecturer at the Haas School of Business and the Boalt Hall School of Law at the University of California, Berkeley. Mr. Majteles holds a B.A. from Columbia University and a J.D. from Stanford University.
Audit Committee
We have established an audit committee, the primary responsibilities of which are to oversee the accounting and financial reporting processes of our company as well as our affiliated and subsidiary companies, and to oversee the internal and external audit processes. The audit committee also assists the board of directors in fulfilling its oversight responsibilities by reviewing the financial information which is provided to stockholders and others, and the system of internal controls which management and the board of directors have established. The audit committee oversees the independent auditors, including their independence and objectivity. However, the committee members are not acting as professional accountants or auditors, and their functions are not intended to duplicate or substitute for the activities of management and the independent auditors. The audit committee is empowered to retain independent legal counsel and other advisors as it deems necessary or appropriate to assist the audit committee in fulfilling its responsibilities, and to approve the fees and other retention terms of the advisors.
The audit committee is comprised of three members, each of whom was elected by the board of directors. Richard Brooks, Tery Larrew, and Steven Whiteman currently serve as our audit committee members. Our board of directors has determined that each of the members of our audit committee is “independent,” as defined under and required by the federal securities laws and the rules of the NASDAQ. Our board of directors has determined that Mr. Brooks qualifies as an “audit committee financial expert” under the federal securities laws and that each member of the audit committee has the “financial sophistication” required under the rules of the NASDAQ. Mr. Brooks is the chairperson of the audit committee.
Compensation Committee
We have established a compensation committee, the primary responsibilities of which are to periodically review and approve the compensation and other benefits for our employees, officers and independent directors, including reviewing and approving corporate goals and objectives relevant to the compensation of our executive officers in light of those goals and objectives, and setting compensation for these officers based on those evaluations. Our compensation committee also administers and has discretionary authority over the issuance of stock awards under our stock compensation plans.
The compensation committee has in the past, and may in the future, delegate authority to review and approve the compensation of our employees to certain of our executive officers, including with respect to stock option grants issued under our Stock Option Plan. Even where the compensation committee has not delegated authority, our executive officers typically make recommendations to the compensation committee regarding compensation to be paid to our employees and the size of stock options and stock grants.
The compensation committee is comprised of three members, Messrs. Larrew, Majteles and Whiteman. Mr. Larrew is the chairperson of the compensation committee. The board has determined that Mr. Larrew meets the independence requirements of the NASDAQ Marketplace Rules.
Code of Conduct and Ethics
Our board of directors has adopted a code of conduct and ethics that establishes the standards of ethical conduct applicable to all directors, officers and employees of our company. The code addresses, among other things, conflicts of interest, compliance with disclosure controls and procedures and internal control over financial reporting, corporate opportunities and confidentiality requirements. The audit committee is responsible for applying and interpreting our code of conduct and ethics in situations where questions are presented to it. The board has adopted a Code of Business Conduct that applies to all our employees, officers and directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
We provide what we believe is a competitive total compensation package to our executive management team through a combination of base salary, an annual cash incentive plan, a long-term equity incentive compensation plan and broad-based benefits programs. We place emphasis on pay for performance-based incentive compensation programs, which make payments when certain company or revenue goals are achieved. This Compensation Discussion and Analysis explains our compensation philosophy, policies and practices with respect to our chief executive officer, chief financial officer, and the other three most highly-compensated executive officers, which are collectively referred to as the named executive officers.
The Objectives of Our Executive Compensation Program
Our compensation committee is responsible for establishing and administering our policies governing the compensation for our executive officers. Our executive officers are elected by our board of directors. Our compensation committee is composed entirely of non-employee independent directors. The primary goals of the compensation committee with respect to executive compensation are to attract and retain the most talented and dedicated executives possible, to tie annual and long-term cash and equity incentives to achievement of specified performance objectives, and to align executives’ incentives with stockholder value creation. To achieve these goals, the compensation committee intends to implement and maintain compensation plans that tie a substantial portion of executives’ overall compensation to our financial and operational performance, as measured by metrics such as revenue, revenue growth and profitability. The compensation committee evaluates individual executive performance with a goal of setting compensation at levels the committee believes are comparable with executives in other companies of similar size and stage of development operating in the software industry while taking into account our relative performance and our own strategic goals. In March 2009, we retained a compensation consultant to review our policies and procedures with respect to executive and board compensation and update a market compensation study that was originally completed in March 2007. The compensation committee used the results of the consultant’s analysis to evaluate the appropriateness of compensation levels for our executives compared to other companies of similar size.
Our compensation committee meets outside the presence of all of our executive officers, including the named executive officers, to consider appropriate compensation for our chief executive officer, or CEO. For all other named executive officers, the committee meets outside the presence of all executive officers except our CEO, Mr. Wille, who reviews each other named executive officer’s performance with the committee and makes recommendations to the compensation committee with respect to the appropriate base salary, cash bonus incentives and equity incentives. The compensation committee considers the annual performance of the executive officer, the importance of the executive position to the Company, the past salary history of the executive officer and the contributions to be made by the executive officer to us. The compensation committee also reviews the analyses and recommendations of the executive compensation consultant retained by the committee. After considering the relevant information, the compensation committee establishes the annual compensation package for our executive officers.
We use the following principles to guide our decisions regarding executive compensation:
Allocation between long-term and currently paid out compensation.
The compensation we currently pay consists of base pay and annual cash incentive compensation. The long-term compensation consists entirely of stock awards or stock options pursuant to our 2001 Stock Option Plan. The allocation between long-term and currently paid out compensation is based on an analysis of how the enterprise software industry and companies of similar size in the general technology market use long-term and currently paid compensation to pay their executive officers.
Allocation between cash and non-cash compensation.
It is our intent to allocate all currently paid compensation and annual incentive pay in the form of cash and all long-term compensation in the form of stock awards and/or stock options to purchase our common stock. We consider competitive market analyses when determining the allocation between cash and non-cash compensation.
Provide compensation opportunities targeted at market median levels.
To attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance to our stockholders, we strive to provide a total compensation package that is competitive with total compensation provided by our industry peer group. We benchmark our salary and target incentive levels and practices as well as our performance results in relation to other comparable general technology and enterprise software companies of similar size in terms of revenue and market capitalization. In fiscal 2009, we engaged a compensation consultant to provide us with a comprehensive evaluation of our executive compensation program. The consultant used multiple data sources, including confidential market compensation surveys and public survey data to enable them to compare our company to others with similar attributes.
We target base salaries and target total compensation to result in annual salaries equal to the market median (50th percentile) pay level. We believe our executive compensation packages are reasonable when considering our business strategy, our compensation philosophy and the competitive market pay data.
Require performance goals to be substantially achieved in order for the majority of the target pay levels to be earned.
Our executive compensation program emphasizes pay for performance. Performance is measured based on the achievement of company and divisional performance goals established by our board of directors relative to our board of director approved annual business plan. The goals for our company and divisional measures are established so that target attainment is not assured. The attainment of these company and divisional goals will require significant effort on the part of our executives.
Offer the same comprehensive benefits package to all full-time employees.
We provide a competitive benefits package to all full-time employees which includes health and welfare benefits, such as medical, dental, vision care, disability insurance, life insurance benefits, and a 401(k) savings plan. We have no structured executive perquisite benefits (e.g., club memberships or company vehicles) for any executive officer, including the named executive officers, and we currently do not provide any deferred compensation programs or supplemental pensions to any executive officer, including the named executive officers.
Provide fair and equitable compensation.
We provide a total compensation program that we believe will be perceived by both our executive officers and our stockholders as fair and equitable. In addition to conducting analyses of market pay levels and considering individual circumstances related to each executive officer, we also consider the pay of each executive officer relative to each other executive officer and relative to other members of the management team. We have designed the total compensation programs to be consistent for our executive management team.
Our Executive Compensation Program Elements
Overall, our executive compensation programs are designed to be consistent with the objectives and principles set forth above. For each fiscal year, the compensation committee will select, in its discretion, the executive officers of the Company or its subsidiaries who are to participate in the Company’s incentive plans. The compensation committee will establish the terms and conditions applicable to any award granted under the plan and a participant will be eligible to receive an award under the plan in accordance with such terms and conditions. Awards will be paid in whole or in part in cash, common stock or other property and will generally be paid in the first quarter following completion of a given fiscal year. The actual amount of any discretionary bonus payment will be determined following a review of each executive’s individual performance and contribution to our strategic goals. The plan does not fix a maximum payout for any officer’s annual discretionary incentive payment. With the exception of the Company’s chief executive officer, no other executive officers have an employment agreement. The basic elements of our executive compensation programs are summarized below:
Base Salary. Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. Generally, we believe that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. Base salaries are reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. For 2009, this review occurred at the beginning of the first quarter.
Management Incentive Plan. The Company, through the compensation committee, maintains an annual Management Incentive Plan (“MIP”) such that executives of the Company can receive an incentive payment based on the achievement of pre-defined objectives. The incentive plan awards are intended to compensate officers for achieving financial and operational goals and for achieving individual annual performance objectives. These objectives vary depending on the individual executive, but relate generally to the Company’s financial results. The Company’s financial performance met the MIP predefined objective for fiscal 2009, therefore, MIP cash incentive bonuses were accrued for fiscal 2009.
Long-Term Equity Incentive Program. We believe that long-term performance is achieved through an ownership culture that encourages such performance by our executive officers through the use of stock and stock-based awards. Our stock compensation guidelines have been established to provide certain of our employees, including our executive officers, with incentives to help align those employees’ interests with the interests of stockholders. The compensation committee believes that the use of stock and stock-based awards is a significant component in enabling the company to achieve its compensation goals. We do maintain stock award guidelines and all stock awards are made at the direction of the compensation committee. We believe that the aggregate equity ownership levels for our executive officers should be set near competitive median levels for comparable companies. For fiscal 2009, this review occurred at the beginning of the first quarter.
Options and Stock Awards. Our 2001 Stock Option Plan authorizes us to grant options to purchase shares of common stock to our employees, directors and consultants. Our compensation committee is the administrator of the stock option plan. Stock option grants are made at the commencement of employment and, occasionally, following a significant change in job responsibilities or to meet other special retention or performance objectives. The compensation committee reviews and approves stock option awards to executive officers based upon a review of competitive compensation data, its assessment of individual performance, a review of each executive’s existing long-term incentives, and retention considerations. Periodic stock option grants are made at the discretion of the compensation committee to eligible employees and, in appropriate circumstances, the compensation committee considers the recommendations of members of management, such as Mr. Wille, our Chief Executive Officer. In 2009, certain named executive officers were awarded stock options in the amounts indicated in the section entitled “Grants of Plan Based Awards”. These grants included stock options grants made in May 2008.
Other Compensation. In accordance with our compensation philosophy, the compensation committee may, in its discretion, revise, amend or authorize any changes to the executive officer’s compensation or benefits as deemed necessary. There were no non-discretionary payments to executive officers during fiscal 2009.
Tax Deductibility of Executive Compensation
Limitations on deductibility of compensation may occur under Section 162(m) of the Internal Revenue Code which generally limits the tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to $1 million in the year the compensation becomes taxable to the executive officer. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements.
Compensation Committee Report
The Compensation Committee is comprised entirely of independent directors. The Committee has reviewed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Committee recommended to our board of directors that the Compensation Discussion and Analysis be included in this annual report.
Submitted by the Compensation Committee: Tery R. Larrew, Robert J. Majteles, Steven D. Whiteman.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation earned during the fiscal years ended April 30, 2009, 2008 and 2007 by our President and Chief Executive Officer, our Chief Financial Officer and our three other most highly-compensated executive officers for the last three (3) fiscal years:
____________________
Grants of Plan-Based Awards
The compensation committee approved option awards under our 2001 Stock Option Plan to certain of our named executives in fiscal 2007, 2008 and 2009 and awarded stock to Mr. Wille and Mr. Bonham in 2007. Set forth below is information regarding awards granted during fiscal 2007, 2008 and 2009.
____________________
(1)
All options were granted with an exercise price equal to the fair market value per share of the common stock on the date of grant, as determined by the fair market value of the Company’s common stock on that day.
(2)
The fair value of the Option Awards is compensation expense of the option awards for financial reporting purposes under FAS 123R which may vary significantly from the actual intrinsic value ultimately realized by the named executive officers due to stock price fluctuations and timing factors. The intrinsic value is calculated as the difference between the market value of the option award based upon the current per share price of our Common Stock and the cash exercise price to buy the shares represented by the option award which is subAll options were granted with an exercise price equal to the fair market value per share of the common stock on the date of grant, as determined by the fair market value of the Company’s common stock on that day.
Option Awards Fair Value vs. Intrinsic Value. The fair value of each option award represents the grant-date fair value-based compensation expense calculated under FAS 123R for each named executive officer that will be charged to the Company’s financial statements over the vesting period of the option award. This recognized compensation expense of the option awards for financial reporting purposes may vary significantly from the actual intrinsic value ultimately realized by the named executive officers due to stock price fluctuations and timing factors. The intrinsic value is calculated as the difference between the market value of the option award based upon the current per share price of our Common Stock and the cash exercise price to buy the shares represented by the option award.
The supplemental table below compares the fair value to the intrinsic value for each of the fiscal 2009 option awards. Due to the decline in the market price of our Common Stock after the grant date, there is no economic value to the executive as all of these option awards are “out of the money” and have no intrinsic value.
Option Awards Fair Value v. Intrinsic Value (supplemental table)
____________________
(1)
The Fair Value of the Option Award represents the total compensation expense the Company will record over the vesting period in accordance with the grant-date fair value-based compensation expense calculated under FAS 123R. This is the amount reported in the Summary Compensation Table below.
(2)
The total cash amount the executive will be required to pay to the Company to buy the stock represented by the option award at the time of exercise. The exercise price for these option awards is $6.40 which was the closing price of the Company’s common stock on the date of grant.
(3)
The current market value is based on the April 30, 2009 closing price of $2.93.
(4)
The economic gain or loss to the executive officer is calculated as the difference between the market value of the option award at $2.93 per share and the cash cost to exercise these shares at $6.40 per share. Based on this calculation, all of the above listed option awards are “out of the money” and have no intrinsic value.
Stock Option Plans
Our 2001 Stock Option Plan (the “2001 Option Plan”) is administered by our compensation committee. The objectives of the plan include attracting, motivating and retaining key personnel and promoting our success by linking the interests of our employees, directors and consultants with our success.
Prior to the 2001 Option Plan, the Company had a 1991 Stock Options Plan (the “1991 Option Plan”) which expired as of March 2001. Under the 1991 Option Plan, the Company was able to grant options to eligible employees, directors and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 1991 Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant.
Options Available for Issuance
Under the 2001 Stock Option Plan, the Company may grant options to purchase up to 2,000,000 shares of common stock to eligible employees, directors, and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. As of April 30, 2009 there were 1,147,189 options available under the 2001 Option Plan.
Term of Options
The term of each option is ten years from the date of the grant of the option, unless a shorter period is established for incentive stock options or the administrator of the 2001 Stock Option Plan establishes a shorter period.
Vesting Schedule
Options granted under our 2001 Stock Option Plan, unless waived or modified in a particular option agreement or by action of the compensation committee, vest over a four year period. The options generally have no vesting until the end of one year at which time they become 25% vested. Following the first year, the options generally vest monthly on a ratable basis over the next three years. At the end of four years the options are fully vested.
Administration
The compensation committee has full discretionary authority to determine all matters relating to options granted under the plan. The compensation committee has the authority to determine the persons eligible to receive options, the number of shares subject to each option, the exercise price of each option, any vesting schedule, any acceleration of the vesting schedule and any extension of the exercise period.
Amendment and Termination
Our board of directors has authority to suspend, amend or terminate the plan, except as would adversely affect participants’ rights to outstanding awards without their consent. As the plan administrator, our compensation committee has the authority to interpret the plan and options granted under the plan and to make all other determinations necessary or advisable for plan administration.
Other Stock Options
In fiscal 2003, the Board authorized the issuance of non-registered non-plan stock options (“Non-Plan Options”) for individual senior level executive recruitment. These Non-Plan Options are granted pursuant to written agreements that are not subject to the terms of the 2001 Option Plan, but have similar terms and conditions. The options and shares issuable under the Non-Plan Options are restricted securities under the Securities Act and may not be issued or sold except under an effective registration statement or an applicable exemption there from. The Non-Plan Option agreements contain substantially similar terms as options issued under our 2001 Option Plan, including vesting schedule and option term.
Other Benefits
Retirement Savings Opportunity
The Company maintains a 401(k) employee retirement savings plan. Eligible employees may contribute up to 100% of their pre-tax salary, but not more than statutory limits. We match a portion of employee contributions, currently 50% of the first 6% of compensation deferred. We do not provide an option for our employees to invest in our common stock in the 401(k) plan.
Health and Welfare Benefits
All full-time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.
Employment Agreements and Termination and Change of Control Agreements
We have an employment agreement with Mr. Wille, our president and chief executive officer which became effective October 1, 2000. Under the agreement, he originally received an annual salary, of $220,000, subject to Board adjustment, and is eligible to receive bonuses upon Unify achieving certain benchmarks in its business plan. Following a merger of the Company or sale of substantially all of its assets, the unvested portion of all options held by Mr. Wille as of the date of the transaction will automatically vest. Should Mr. Wille be terminated without cause or resign for good reason, all options held by Mr. Wille will have the benefit of twelve (12) additional months of vesting and he will receive an amount equal to twelve (12) months’ salary and the continuation of health benefits for 12 months following termination.
Change in Control
Under our 1991 and 2001 Stock Option Plans, should we merge with or be otherwise acquired by another company in a transaction where our stockholders do not retain a majority of the voting stock, a “Change of Control” occurs. If there is a Change of Control and the successor company fails to either assume the outstanding options or substitute substantially equivalent options for its own stock, the vesting of all outstanding Unify options shall accelerate to become fully vested and immediately exercisable. Any outstanding options will terminate if they are not exercised upon consummation of the merger or assumed or replaced by the successor corporation.
Outstanding Equity Awards at May 31, 2009
The following table summarizes the outstanding equity award holdings by our named executive officers.
Option Exercises and Stock Vested
There have been no exercises of stock options by our named executive officers during the last fiscal year.
Compensation of Directors
The compensation for each individual non-employee (independent) Director is assessed by the other members of the Board and is generally based upon the degree and quality of his/her participation in Board activities. Directors receive an annual cash retainer and an annual stock option. For the year ended April 30, 2009 each director was awarded 5,000 options to purchase common stock. A summary of the compensation for individual non-employee (independent) Director is included on the following table.
____________________
(1)
Unify pays non-employee directors an annual cash retainer fee of $25,000 which is paid in four quarterly payments of $6,250 each. Payments are to be made in the middle of each fiscal quarter. Directors also receive compensation for their participation or chairing of committees. These payments are paid in four quarterly payments are to be made in the middle of each fiscal quarter. The Chairman of the Board, Chairman of the Audit Committee and Chairman of the M&A Committee are paid $10,000 annually. The Chairman of the Compensation Committee is paid an annual fee of $5,000. An annual fee of $2,000 is paid for participation in the Compensation Committee and an annual fee of $3,000 is paid for participation on the Audit Committee.
(2)
Directors can receive an annual stock option grant of up to 10,000 shares of Unify common stock. Eligibility will be determined by the Board and will be based on several factors from the prior fiscal year, including the financial performance of the Company, the Director’s personal contribution to the Company and any other relevant factors or events. The stock option grant, if any, will be made in May of each year and the exercise price shall be equivalent to the fair market value of the stock at the time of the option grant. Any such option grant will vest monthly over a period of twelve (12) months.
The following table details the Company’s committee structure and committee membership information.
____________________
(1)
With the exception of Mr. Wille, the company’s CEO, all other board members are non-employees.
(2)
The Disclosure Committee is chaired by the Company’s Chief Financial Officer, Steven D. Bonham.
The following table sets forth certain information with respect to our non-employee director compensation during the fiscal year ended April 30, 2009.
Director Compensation Table
____________________
Director Restricted Stock Plan
In fiscal 2003, the Board adopted, without a need for shareholder approval, the 2002 Director Restricted Stock Plan (the “Director Restricted Stock Plan”) as part of a program to provide compensation we felt was necessary to attract, retain and reward members of our Board of Directors who were willing to provide the time and energy that we believe is required to meet our business goals. At the end of fiscal 2007, the Board changed the Director Compensation such that were is no longer a stock award component. Since the sole purpose of the Director Restricted Stock Plan was to provide stock awards to the Directors, this plan will no longer be used. Consequently, there were no shares awarded in the fiscal 2009 under the Director Restricted Stock Plan and there is a balance of 3,862 shares available at April 30, 2009.
Indemnification of Officer and Directors
Unify’s Restated Certificate of Incorporation (the “Certificate”) limits the liability of our 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 transactions from which the director derived an improper personal benefit. Our bylaws call for us to indemnify our directors, executive officers, and trustees to the fullest extent permitted by law. We believe that such indemnification covers negligence and gross negligence. Our bylaws also permit us to secure insurance on behalf of any executive officer, director, employee or other agent for any liability arising out of his or her actions in such capacity (subject to certain exclusions), regardless of whether the bylaws permit indemnification.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors and persons who beneficially own more than ten percent (10%) of Unify’s common stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (“SEC”). Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) reports filed by them.
Based solely upon our review of such reports furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and more than ten percent (10%) stockholders for the fiscal year ended April 30, 2009, were met.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 30, 2009 with respect to the beneficial ownership of our common stock by: (i) each member of our board of directors; (ii) each of our named executives; (iii) all of our directors and executive officers as a group; and (iv) each stockholder who is known to us to own beneficially more than 5% of our outstanding common stock. The following beneficial ownership table assumes full conversion of the convertible term notes resulting from the debt financing in conjunction with the acquisition of Gupta.
____________________
* Less than 1%
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Amounts Due from Officers, Directors and Principal Stockholders. Except for advances of reimbursable expenses we have made no other loans to executive officers, directors, stockholders or other affiliates. Any such loan must be approved by a majority of those board members who are independent of and have no interest in the transaction.
Upon consummation of Unify’s 2004 equity financing, the investors affiliated with Special Situations Funds (“SSF”) exercised their right to designate a director nominee and designated Robert J. Majteles to serve as a member of our Board of Directors. Mr. Majteles joined the Board of Directors in 2004. Mr. Majteles is the founder of Treehouse Capital, LLC, an investment firm. SSF has entered into an agreement with Mr. Majteles and Treehouse Capital pursuant to which Treehouse Capital, through Mr. Majteles, provides certain management and financial advisory services for the funds on request. If Mr. Majteles’ services are requested by the funds with respect to a particular portfolio investment, Treehouse Capital is entitled to ten percent of the funds’ net gain (as defined) or net loss (as defined) on the investment during the term of the agreement, offset by certain fees that may be paid by the portfolio company to Treehouse Capital or Mr. Majteles directly. Under the agreement, Mr. Majteles is required to act independently of the funds in discharging his fiduciary duties to stockholders of any company for which he serves as a member of the Board of Directors and also is obligated not to disclose to the funds or use for his own benefit any confidential information he obtains in connection with his service for a particular portfolio company. Mr. Majteles does not have or share voting or dispositive power over any securities held by the funds. Mr. Majteles has agreed to serve as a member of Unify’s Board of Directors pursuant to this agreement.
Director Independence. Five of our six directors are independent under the rules of the NASDAQ Marketplace. Only our CEO, Mr. Wille, is not considered independent under such rules.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
Fees billed by our principal accountant, Grant Thornton LLP, for fiscal 2009 and fiscal 2008 audit services totaled approximately $250,000 and $249,000, respectively. This includes fees associated with the annual audit, review of the Company’s quarterly reports on Form 10-Q and the statutory audit required for our French subsidiary.
Audit-Related Fees
Audit-related service fees billed by Grant Thornton for fiscal 2009 and fiscal 2008 were approximately $9,000 and $34,000, respectively. The fiscal fees primarily related to registration statements and other filings required to be filed with the SEC.
Other Fees
Our principal accountant, Grant Thornton LLP, had no other fees for fiscal year 2009 and fiscal year 2008.
Pre-Approval Policies and Procedures
The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other services performed by the independent auditor. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent auditor is engaged to perform it.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements
Schedules are omitted because they are not applicable, or the required information is shown in the Consolidated Financial Statements or Notes thereto.
2. Exhibits- See Item 15(b) below.
(b) Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities on the dates indicated.
Report of Independent Registered Public Accountants
Board of Directors and Shareholders
Unify Corporation
We have audited the accompanying consolidated balance sheets of Unify Corporation (a Delaware corporation) and subsidiaries as of April 30, 2009 and 2008, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 as of April 30, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2009 in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Reno, Nevada
July 16, 2009
UNIFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
See accompanying notes.
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See accompanying notes.
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
See accompanying notes.
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2009
(Tables in thousands of dollars, except share and per share data, unless otherwise indicated)
Note 1. The Company and Summary of Significant Accounting Policies
The Company
Unify (the “Company”, “we”, “us” or “our”) is a global provider of application modernization, data management and application development solutions. Our migration solutions, development software and embedded databases allow customers to modernize and maximize their application environment. Our award-winning technologies help organizations drive business optimization, improve collaboration, increase customer service and reduce costs. Unify’s strategy is to help businesses modernize mission-critical legacy applications and data. Based on market requirements for application modernization, our solutions help companies increase speed and agility, improve asset reuse, lower IT costs, reduce business risks and exposures, and free information previously locked within proprietary systems.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including Unify Corporation France S.A., Gupta Technologies, LLC, Gupta Technologies Ltd., Gupta Technologies GmbH, Active Data Corporation, Unify Acquisition Corp. and CipherSoft Inc. All significant intercompany balances and transactions have been eliminated.
The functional currency of the Company’s foreign subsidiaries is their local currency. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at period-end exchange rates. Income and expense accounts are translated at average rates of exchange in effect during the reporting period. Foreign currency transaction gains or losses are included in other income, net. Foreign currency adjustments resulting from the translation process are excluded from net income and recorded in other comprehensive income. At April 30, 2009, the Company had $2,992,000 in foreign bank accounts.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Significant estimates include the assessment of the valuation of goodwill and other intangible assets, valuation allowance for deferred taxes and the allowance for doubtful accounts for accounts receivable, long-term receivables, revenue recognition and notes receivable. Actual results could differ from these estimates.
Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of three months or less when purchased and are stated at cost. Cash equivalents consist primarily of demand deposits with banks and money market funds.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments. The carrying amounts of long term accounts receivable approximate fair value based on the collection analysis performed and recording of necessary reserves. The fair values of the Company's long term borrowings are estimated based on the Company's current incremental borrowing rates for similar types of borrowing arrangements and such values approximate the carrying value of the borrowings as of fiscal year end.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Concentrations of Credit Risk and Credit Evaluations
Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents primarily with four financial institutions which at times may exceed federal issued levels. The Company licenses its products principally to companies in the United States, Europe, Latin America and Japan. No single customer accounted for 10% or more of consolidated revenue in the years ended April 30, 2009 and 2007. One single customer accounted for 12% of consolidated revenues in the year ended April 30, 2008. The Company performs periodic credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential credit losses. International revenues include all our software license and service revenues from customers located outside North America. International revenues accounted for 68%, 78% and 73% of total revenues in fiscal years 2009, 2008 and 2007, respectively.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is established to ensure trade receivables are not overstated due to uncollectability. Bad-debt reserves are maintained for all customers based on a variety of factors, including the length of time receivables are past due, significant one-time events and historical experience. Additional reserves for individual accounts are recorded when the Company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. Following is a schedule that details activity for the allowance for doubtful accounts and the allowance for long-term accounts and notes receivable.
Property and Equipment
Property and equipment are stated at cost. Depreciation is recorded on a straight-line basis over the estimated useful lives of the related assets, generally three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term.
Capitalized Software
Under the criteria set forth in Statement of Financial Accounting Standard (“SFAS”) No. 86 Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, capitalization of software development costs begins upon the establishment of technological feasibility of the product. With respect to the Company’s software development process, technological feasibility is established upon completion of a working model. To date, the Company’s products have been released shortly after reaching technological feasibility. Therefore, development costs incurred after completion of a working model and prior to general release have not been significant. Accordingly, no software development costs have been capitalized by the Company to date.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may be in excess of fair value or not recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
The Company periodically reevaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful lives of the long-lived assets. The criteria used for these evaluations include management’s estimate of the asset’s continuing ability to generate income from operations and positive cash flows in future periods.
Goodwill
Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. No impairment of goodwill has been identified during any of the periods presented (Note 4).
Intangible Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods (Note 4).
Revenue Recognition
The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. The Company licenses its products to end-user customers, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s products are generally sold with a perpetual license. The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection, special acceptance or warranty provisions. With the exception of its migration solutions, the Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition. For migration solutions, the Company recognizes revenue for software licenses sales in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and Accounting Research Bulletin (“ARB”) 45, Long-Term Construction Type Contracts. The Company exercises judgment in connection with the determination of the amount of revenue to be recognized in each accounting period. The nature of each contractual arrangement determines how revenues and related costs are recognized.
For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectability is probable and persuasive evidence of an arrangement exists.
The Company considers a signed noncancelable license agreement, a customer purchase order, a customer purchase requisition, or a sales quotation signed by an authorized purchaser of the customer to be persuasive evidence that an arrangement exists such that revenue can be recognized.
For migration solution arrangements that require significant modification or customization of software, revenue is recognized based on contract accounting under the provisions of Accounting Research Bulletin (“ARB”) 45, Long-Term Construction Type Contracts and Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. For migration solution products the Company uses the percentage-of-completion method for revenue recognition. Under the percentage-of-completion method, progress towards completion is measured by the ratio of labor hours incurred to date over total estimated labor hours.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company’s customer contracts include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as maintenance and support and/or consulting). The value allocated to the undelivered elements is unbundled from the delivered element based on vendor-specific objective evidence (VSOE) of the fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as: (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace. The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the contract using the residual method as the fair value of all undelivered elements is determinable.
We defer revenue for any undelivered elements, and recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
An assessment of the ability of the Company’s customers to pay is another consideration that affects revenue recognition. In some cases, the Company sells to undercapitalized customers. In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customer’s financial condition has improved. Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible. This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer. Any deterioration in credit worthiness of a customer may impact the Company’s evaluation of accounts receivable in any given period.
Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred. Consulting service arrangements are performed on a “best efforts” basis and are billed under either time-and-materials or fixed price arrangements. Revenues and expenses relating to providing consulting services are recognized as the services are performed.
Warranties and Indemnification
The Company offers a limited warranty for product and service sales that generally provide the customer a sixty-day warranty period against defects. To date, the Company has not incurred any material costs as a result of such warranties and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.
The Company’s license agreements generally include certain provisions for indemnifying customers against liabilities if its product or services infringe upon a third-party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock-Based Compensation
Effective May 1, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based Payment, using the modified version of prospective application. Under this method, compensation expense includes the estimated fair value of equity awards vested during the reported period. Expense for equity awards vested is determined based on grant date fair value previously calculated for pro forma disclosures under SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of FASB Statement No. 123. For the fiscal years ended April 30, 2009, 2008 and 2007, stock-based compensation expense was comprised of the following (in thousands):
The following table shows remaining unrecognized compensation expense from continuing operations on a pre-tax basis related to all types of nonvested equity awards outstanding as of April 30, 2009. This table does not include an estimate for future grants that may be issued (amounts in thousands).
The cost above is expected to be recognized over a weighted-average period of 1.33 years.
The Company continues to use the Black-Scholes option pricing model to estimate fair value of equity awards, which requires the input of highly subjective assumptions, including the expected stock price volatility. The Company’s calculations are made using the Black-Scholes option pricing model, with the following weighted average assumptions: expected option life, 12 months following vesting; stock volatility, 90% in fiscal 2009, 104% in fiscal 2008, and 193% in fiscal 2007; risk-free interest rates, 2.9% in fiscal 2009, 4.2% in fiscal 2008, and 4.7% in fiscal 2007; and no dividends during the expected term. Not all stock options that have been granted will be exercised. Accordingly, the Company’s calculation of equity-based compensation expense includes an adjustment for the estimated number of options that will be forfeited. The Company uses a forfeiture rate of 20%, which is based on historical trends.
A summary of the Company’s stock option activity for the fiscal year ended April 30, 2009 is as follows:
____________________
(1)
Aggregate intrinsic value is defined as the difference between the current market value and the exercise price and is estimated using the closing price of the Company’s common stock on the last trading day of the periods ended as of the dates indicated.
The total intrinsic value of awards exercised during the year ended April 30, 2009 and 2008 was $1,975 and $26,566, respectively. The total fair value of awards vested during the year ended April 30, 2009 and 2008 was $561,190 and $258,297, respectively.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the Company’s nonvested stock option activity for the fiscal year ended April 30, 2009 is as follows:
Income Taxes
Deferred taxes are recorded for the difference between the financial statement and tax basis of the Company’s assets and liabilities and net operating loss carryforwards. 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 reinvested.
Income (loss) Per Share
Statement of Financial Accounting Standards No. 128, Earnings per Share, requires a dual presentation of basic and diluted income (loss) per share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (e.g. convertible preferred stock, warrants, and common stock options) were exercised or converted into common stock. Potential common shares in the diluted EPS computation are excluded for fiscal year 2007 as their effect would be antidilutive.
Comprehensive Income (loss)
Comprehensive income (loss) includes net income (loss) and comprehensive income (loss). The Company’s components of other comprehensive income (loss) are gains and losses on foreign currency translation.
Segment Reporting
The Company sells and markets application development and database software and services and modernization solutions through two segments. The segments are the Database and Development Products (“DDP”) and our Modernization & Migration Products.
Recently Issued Accounting Standards
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). This Statement is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. We are currently assessing the impact, if any, of SFAS 165 on our consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We are currently assessing the impact, if any, of SFAS 157 on our consolidated financial statements.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations. The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. Statement 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently assessing the impact of SFAS 141(R) on our consolidated financial statements and will account for the acquisition of AXS-One Inc. under SFAS 141(R). As of April 30, 2009, we have capitalized $75,000 in acquisition costs that will be expensed in the first quarter of fiscal 2010 under SFAS 141(R).
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 5, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in net income and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in net income. SFAS No. 160 is effective for us beginning May 1, 2009. We are currently evaluating additional impacts, if any, of adopting SFAS No. 160 on our consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities with a view toward improving the transparency of financial reporting, and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We believe that the adoption of SFAS No. 161 will not have a material impact on our consolidated financial statements.
On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1(FSP APB 14-1), Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 requires issuers of convertible debt that may be settled wholly or partly in cash when converted to account for the debt and equity components separately. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and must be applied retrospectively to all periods presented. We believe that the adoption of FSP APB 14-1 will not have a material impact on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position ("FSP") FAS 142-3, "Determination of Useful Life of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142, "Goodwill and Other Intangible Assets." FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted. We believe that the adoption of FSP FAS 142-3 will not have a material impact on our consolidated financial statements.
In May of 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies literature established by the FASB as the source for accounting principles to be applied by entities which prepare financial statements presented in conformity with generally accepted accounting principles (GAAP) in the United States. This statement is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” This statement will require no changes in the Company’s financial reporting practices.
Reclassifications
Certain items in the fiscal 2008 and 2007 consolidated financial statements have been reclassified to conform to the fiscal 2009 presentation. These reclassifications had no effect on operating results or stockholders’ equity.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 2. Acquisitions and Discontinued Operations
On September 13, 2006, the Company entered into a Purchase and Exchange Agreement with Halo Technology Holdings Inc. (“Halo”) whereby Unify agreed to purchase all of the outstanding stock of Gupta Technologies LLC (“Gupta”) from Halo in exchange for: (i) the Company’s Insurance Risk Management (“IRM”) division, (ii) the Company’s ViaMode software, (iii) $6,100,000 in cash, and (iv) the amount, if any, by which Gupta’s net working capital exceeds IRM’s net working capital at the close of the transaction. The Company’s acquisition of Gupta was consummated on November 20, 2006. The total purchase price for Gupta was $7.7 million. Gupta was founded in 1984 and is a leading producer of secure, small-footprint, embeddable databases and enterprise application development tools. The acquisition resulted in additional revenue and market share in the Company’s core markets and significantly enhanced the distribution channels through which the Company’s products can be sold. Gupta’s headquarters was in Redwood Shores, California with offices in Germany and the UK and has distributors and partners in more than 40 countries around the world. Gupta’s results of operations are included in the Company’s results from the date of acquisition, November 20, 2006, to April 30, 2009.
On November 20, 2006, the Company entered into various agreements with ComVest Capital LLC (“ComVest”) whereby ComVest, along with participation from Special Situations Funds, provided debt financing for the Gupta acquisition. The debt financing consisted of $5.35 million in convertible term notes and a revolver of up to $2.5 million. There are three tranches that comprise the convertible term notes, Tranche 1 is for $1,000,000, Tranche 2 is for $3,250,000 and Tranche 3 is for $1,100,000. The term loans had an initial interest rate of 11.25% and have repayment terms of 48 to 60 months. The agreement was modified in April 2008 whereby the interest rate on the term loans has been decreased to 5% and all principal payments have been deferred until June 2009. As part of the debt financing the Company provided the lenders with 670,000 warrants to purchase common stock. There are 200,000 warrants to purchase common stock at a price of $1.35 per share, 270,000 warrants at a price of $1.60 per share and 200,000 warrants at a price of $1.90 per share. The warrants have an expiration date of October 31, 2012. Additionally, the holder of the term notes may, at their option, upon written notice to Unify given at any time and from time to time from the date Unify has sufficient authorized, unissued and unreserved shares of common stock convert the outstanding principal and any accrued interest into shares of Unify common stock. Tranche 1 is convertible at $2.50 per common share and Tranches 2 and 3 are convertible at $5.00 per common share. Unify may require conversion of the convertible term notes if its common stock price closes at or above 160% of the applicable conversion price for 20 or more consecutive market days. In October 2007, the outstanding balance for Tranche 1 of $0.9 million was converted into 352,380 shares of common stock. Additionally, in fiscal 2008, $1.6 million of the outstanding balance of Tranche 2 and $0.5 million of the outstanding balance of Tranche 3 was converted into 424,670 shares of common stock. The agreement provides for ComVest to have a security interest in substantially all of the Company’s assets. We capitalized $238,000 of debt issuance costs associated with the debt financing and also recorded a discount on the notes payable of approximately $743,000 that is attributed to the warrants that were issued in conjunction with the financing. The debt issuance costs and the discount on notes payable are being amortized using the effective interest method over the stated life of the related notes. The amortization of both the debt issuance costs and the discount on the notes payable was approximately $77,000 in fiscal 2009 and is included in interest expense. The unamortized amount of the discount on the notes payable was $29,000 as of April 30, 2009 and is included in long-term debt, net. As of April 30, 2009 the unamortized portion of debt issuance costs was $30,000 which is included in other assets, net.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Gupta purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on management’s determination of their estimated fair values at the acquisition date, November 20, 2006. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill. The Company believes the fair values assigned to the assets acquired and liabilities assumed were based on reasonable assumptions. The following table summarizes the fair values of net assets acquired and represents the opening balance sheet for Gupta Technologies LLC as of the acquisition date, November 20, 2006 (in thousands):
Unaudited Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of the operations of Unify and Gupta, on a pro forma basis, as though the companies had been combined as of May 1, 2006. The pro forma information gives effect to the acquisition of Gupta and the sale of both the Company’s IRM division and its ViaMode Product. The pro forma information also assumes the financing raised in connection with the acquisition took place on May 1, 2006.
The unaudited pro forma financial information combines the historical results of Unify for the twelve months ended April 30, 2007.
The unaudited pro forma information is not necessarily indicative of the operational results, or of the financial position that would have occurred if the acquisition had been consummated on the dates indicated, nor is it necessarily indicative of future operating results or financial position of the consolidated enterprise.
Active Data Corporation
On May 22, 2007, the Company purchased privately held Active Data Corporation (“ADC”) for approximately $420,000 plus potential earn-out payments over a two year period following the acquisition. ADC provided application migration software that added Microsoft’s .NET functionality to Unify’s Team Developer product and provided an additional application migration solution for the Company. Pursuant to the terms of the purchase agreement, Unify acquired all the outstanding stock of ADC. ADC did not represent the addition of a significant subsidiary as the investment in ADC was less than 10% of the Company’s assets, ADC’s total assets at date of acquisition were less than 10% of Unify’s assets and ADC’s net loss represented less than 10% of Unify’s net loss. The acquisition of Active Data did not have a material impact on the financials of Unify and the results of operations for Active Data Corporation are included in the Company’s results from the date of acquisition. The ADC purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on management’s determination of their estimated fair values. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill. The Company believes the fair values assigned to the assets acquired and liabilities assumed were based on reasonable assumptions.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CipherSoft Inc.
On January 30, 2009, the Company purchased privately held CipherSoft Inc. (“CipherSoft”), headquartered in Calgary, Canada, for approximately $628,000 plus the assumption of debt of $1,032,000 and future potential royalty payments to be paid over a four year period following the acquisition. The royalty payments are based on a percentage of revenue and will increase goodwill upon being earned. CipherSoft is a leading Oracle partner for modernization and migration of Oracle applications and provides an additional application migration solution for the Company. Pursuant to the terms of the purchase agreement, Unify acquired all the outstanding stock of CipherSoft. CipherSoft did not represent the addition of a significant subsidiary.
The CipherSoft purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on management’s determination of their estimated fair values at the acquisition date, January 30, 2009. Intangible assets include technologies of $1,060 million, non-competition agreements of $85,000, consulting agreements of $110,000 and trade names of $80,000. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill. The Company believes the fair values assigned to the assets acquired and liabilities assumed were based on reasonable assumptions. The following table summarizes the fair values of net assets acquired and represents the opening balance sheet for CipherSoft as of the acquisition date, January 30, 2009 (in thousands):
AXS-One Inc.
On April 16, 2009, Unify Corporation, UCAC, Inc., a Delaware corporation and wholly-owned subsidiary of Unify (“Merger Sub”) and AXS-One Inc. (“AXS-One”), entered into an Agreement and Plan of Merger (the “Agreement”), whereby Merger Sub will merge with and into AXS-One and AXS-One shall become a wholly-owned subsidiary of Unify (the “Merger”). The Agreement and the Merger were unanimously approved by the Board of Directors of Unify and AXS-One. Pursuant to the terms of the Merger Agreement:
All of the issued and outstanding shares of common stock of AXS-One, and all warrants to purchase shares of common stock of AXS-One, will be converted into, in the aggregate, 1,000,000 shares of Unify common stock, or warrants to purchase shares of Unify common stock, as the case may be;
The outstanding convertible notes of AXS-One with an aggregate outstanding principal and interest balance of approximately $13 million were exchanged for 2,100,000 shares of Unify common stock, subject to certain adjustments based on AXS-One’s working capital at the effective time of the merger. The note holders may also be issued additional shares of Unify common stock based on revenue generated from AXS-One’s products over the 12 months after the effective date of the Merger.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Both Unify and AXS-One held a special meeting of their stockholders on June 30, 2009 whereby both groups of stockholders approved the merger. Since the acquisition of AXS-One commenced on June 30, 2009, it is impractical to include the additional disclosures as described in SFAS 141(R).
Discontinued Operations
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of the Company’s IRM division and ViaMode software product have been reported as discontinued operations for the year ended April 30, 2007. The divestitures of these businesses were made pursuant to the Company’s strategy to refocus on its core software development and embedded database products.
The IRM division sold and marketed the NavRisk application. The NavRisk application is a policy administration and underwriting software application used by underwriters, administrators and risk managers of risk pools, risk retention groups, captives and self-insured entities. ViaMode is a software and services solution that is used for driver performance management within the transportation industry. Both IRM and ViaMode’s historic revenues were the result of sales solely in North America. The IRM division was previously reported as a separate segment and ViaMode was included in the Americas segment. Operating results for the IRM division and ViaMode software product are summarized as follows (in thousands):
Note 3. Property and Equipment
Property and equipment at April 30, 2009 and 2008 consisted of the following (in thousands):
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4. Goodwill and Intangible Assets
The following tables present details of the Company’s goodwill and intangible assets as of April 30, 2009 and April 30, 2008 (in thousands). The April 30, 2008 amounts relate entirely to the purchase of Gupta Technologies LLC. See Note 2. The April 30, 2009 amounts relates to the purchase of Gupta Technologies LLC, Active Data Corporation and CipherSoft Inc.
Acquired finite-lived intangibles are generally amortized on a straight line basis over their estimated useful life. The useful life of finite-lived intangibles is the period over which the asset is expected to contribute directly or indirectly to future cash flows of the Company. Intangible assets amortization expense for continuing operations for fiscal 2009 was $809,000. Amortization expense for the fiscal year ended April 30, 2008, was $770,000. The estimated future amortization expense related to intangible assets as of April 30, 2009, is as follows (in thousands):
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill at April 30, 2009, represents the excess of the Gupta, Active Data Corporation and CipherSoft Inc. purchase prices over the sum of the amounts assigned to assets acquired less liabilities assumed. The Company believes the acquisition of Gupta, Active Data Corporation and CipherSoft Inc. will produce the following results:
Increased Market Presence and Opportunities: The combination of the Company, Gupta, Active Data and CipherSoft Inc. should increase the combined company’s market presence and opportunities for growth in sales and earnings.
Enhanced Product Mix: The complementary nature of the Company’s products with those of Gupta, Active Data and CipherSoft Inc. should benefit current customers of both companies and provide the combined company with the ability to access new customers.
Operating Efficiencies: The combination of the Company, Gupta, Active Data and CipherSoft Inc. provides the opportunity for potential economies of scale and cost savings.
The Company believes these primary factors support the amount of goodwill recognized as a result of the purchase price for Gupta, Active Data and CipherSoft Inc. Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach in accordance with FASB 142, Goodwill and Other Intangible Assets. Based on our testing as of April 30, 2009, we do not believe goodwill is impaired and accordingly have made no adjustments to its carrying value.
Note 5. Credit Facility
On November 20, 2006, the Company entered into a revolving credit note agreement with ComVest Capital LLC. Under the terms of the agreement the Company can borrow up to $2.5 million. As of April 30, 2009, there was no amount outstanding on the revolver. The amount that can be borrowed under the revolver is based on the amount of eligible foreign and domestic accounts receivable outstanding. The revolver has an expiration date of November 30, 2010, and the Company incurs interest expense on funds borrowed at the prevailing prime rate plus 2.25% per annum (5.5% as of April 30, 2009).
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6. Long-Term Debt
The Company’s long-term debt consists of the following at April 30, 2009 and April 30, 2008 (in thousands):
A summary future payments on long-term debt obligations as of April 30, 2009 is as follows (in thousands):
Note 7. Other Long Term Liabilities
In France, the Company is subject to mandatory employee severance costs associated with a statutory government regulated plan covering all employees. The plan provides for one month of severance for the first five years of service with an employer and one fifth of one year of severance for every one year of service thereafter. In order to receive their severance payment the employee may not retire before age 65 and must be employed at the time of retirement. The balance as of April 30, 2009 and 2008 is $81,000 and $121,000, respectively and is reflected as other long-term liabilities. Also, included in other long term liabilities as of April 30, 2009 is $541,000 of deferred tax liabilities and $271,000 of deferred rent related to the Roseville office.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 8. Maintenance Contracts
The Company offers maintenance contracts to its customers at the time they enter into a product license agreement and renew those contracts, at the customers’ option, annually thereafter. These maintenance contracts are priced as a percentage of the value of the related license agreement. The specific terms and conditions of these initial maintenance contracts and subsequent renewals vary depending upon the product licensed and the country in which the Company does business. Generally, maintenance contracts provide the customer with unspecified product maintenance updates and customer support services. Revenue from maintenance contracts is initially deferred and then recognized ratably over the term of the agreements.
Changes in the Company’s deferred maintenance revenue from continuing operations during the periods are as follows (in thousands):
Note 9. Stockholders’ Equity
Preferred Stock
The Company may issue up to 7,931,370 shares of preferred stock in one or more series upon authorization by its board of directors. The board of directors, without further approval of the stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges and restrictions applicable to each series of preferred stock.
Stock Option Plan
Under the 2001 Stock Option Plan (the “2001 Option Plan”), the Company may grant options to purchase up to 2,000,000 shares of common stock to eligible employees, directors, and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 2001 Stock Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant. Under the 1991 Stock Option Plan (the “1991 Option Plan”) which expired as of March 2001, the Company was able to grant options to eligible employees, directors and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 1991 Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of stock option activity is as follows:
Additional information regarding options outstanding at April 30, 2009 is as follows:
Options to purchase 616,091 and 422,278 shares at weighted average prices of $3.33 and $3.06 were exercisable at April 30, 2009 and 2008. At April 30, 2009, there were 1,147,189 shares reserved for future grants under the Stock Option Plan.
Restricted Stock
On May 1, 2002, the Company established the 2002 Director Restricted Stock Plan (“Director Restricted Stock Plan”) as part of a compensation program designed to attract and retain independent members for our board of directors. The maximum aggregate number of shares of common stock that may be issued under the Director Restricted Stock Plan is 100,000. There were no shares awarded under the plan in fiscal 2009 or fiscal 2008 leaving a balance of 3,862 shares reserved for future awards at April 30, 2009.
Private Placement
On April 23, 2004, the Company issued through a private placement 1,126,780 shares of common stock to a group of institutional investors at a price of $3.55 per share and 5-year warrants to purchase an aggregate of 450,712 shares of common stock at an exercise price of $4.50 per share. Net proceeds from the private placement were $3,696,000, net of estimated accrued costs of $304,000. The Company’s actual costs for the private placement were $397,000 which resulted in a further reduction of additional paid-in-capital of $93,000 during fiscal 2005. The warrants were subject to an anti-dilution provision such that future stock issuances would cause an adjustment to the number of warrants.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As a result of issuances of additional common stock the number of warrant shares purchasable as of April 30, 2009 was increased to 491,792. On April 24, 2009, the warrant agreement was amended and the exercise price was reduced to $2.50 per share as an inducement to have the warrant holder exercise the warrants. On April 24, 2009, 475,456 of the warrants were exercised at $2.50 per share and the remaining 16,336 warrants expired. Further, in consideration of the exercise of the warrants, the Company granted an additional 190,182 warrants at an exercise price of $2.75 per share. Under certain circumstances, where the closing bid price of a share of common stock equals or exceeds $5.50, appropriately adjusted for any stock split, reverse stock split, stock dividend or other reclassification or combination of common stock, for 20 consecutive trading days commencing after the registration statement covering the warrants shares has been declared effective, the Company, upon 20 days’ prior written notice to the warrant holders within one business day immediately following the end of such 20 day trading period, may call the warrants for 25% of the shares of the common stock initially purchasable pursuant to the warrants at a redemption price equal to $0.01 per share of common stock then purchasable pursuant to the warrants. If the call conditions are met again during the 30 day period immediately after consummation of a previous call, the Company may once again call the warrants for an additional increment of 25% of the shares of common stock initially purchasable pursuant to the warrants or such less amount as shall then remain purchasable and in the same manner and subject to the same notice requirements as the initial call, until all of the shares have been called.
Reverse Stock Split
On June 24, 2007, the Company implemented a 1 for 5 reverse stock split. The reverse stock split had been previously approved by the Company’s stockholders as part of the Company’s March 29, 2007 Annual Meeting. All amounts have been adjusted to reflect the impact of the split.
Note 10. Income Taxes
Income (loss) from continuing operations before income taxes and provision for income taxes, which consisted solely of current tax expense, for the years ended April 30 were as follows (in thousands):
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The provision for income taxes for the years ended April 30, 2009, 2008 and 2007 differs from the amounts computed by applying the statutory U.S. federal income tax rate to pretax income (loss) as a result of the following (in thousands):
The Company provides deferred income taxes which reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at April 30 were as follows (in thousands):
Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $1.2 million in fiscal 2009, increased by $298,000 in fiscal 2008 and decreased by $14.3 million in fiscal 2007. At April 30, 2009, the Company had approximately $40.3 million in federal net operating loss carryforwards that begin to expire in fiscal year 2010 through 2028, approximately $5.8 million in state net operating loss carryforwards that expire in fiscal years 2016 to 2021, approximately $1.5 million in foreign net operating loss carryforwards that do not expire and approximately $4.3 million in capital loss carryforwards that expire in 2010. The Company’s ability to utilize these net operating loss carryforwards may be subject to certain limitations in the event of a change in ownership.
FIN 48 Disclosure
The Company adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, on May 1, 2007. As required by Interpretation 48, which clarifies Statement 109, Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied Interpretation 48 to all tax positions for which the statute of limitations remained open. The adoption of FIN No. 48 did not have a material effect on the Company’s consolidated financial position or results of operations.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In FY09, the Company identified some uncertain tax positions and accrued the FIN 48 reserve accordingly. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
If recognized, the entire amount of unrecognized tax benefits would be recorded as a reduction in income tax expense. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of April 30, 2009, the Company did not have material interest or penalties associated with any unrecognized tax benefits. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In general, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the fiscal years before 2004.
Note 11. Other Income (Expenses)
Other income (expenses), net for the years ended April 30, consisted of the following (in thousands):
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 12. Earnings (loss) per Share
Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. For fiscal 2007, because of our reported net loss, potentially dilutive securities were excluded from the per share computations due to their antidilutive effect.
The dilutive securities above represent only those stock options, warrants and convertible debt whose exercise prices were less than the average market price of the stock during the respective periods and therefore were dilutive. The number of shares of stock options excluded from the above amounts because their exercise prices exceeded the average market price of the stock during the respective periods was 584,688 in fiscal 2009, 85,319 in fiscal 2008, and 453,200 in fiscal 2007. The number of shares of common stock warrants excluded from the above amounts because their exercise prices exceeded the average market price of the stock during the respective periods was none in fiscal 2009 and fiscal 2008, and 1,124,600 in fiscal 2007.
Note 13. Related Party Transactions
Prior to its write off in fiscal 2008, Unify had an investment of less than 15% in Unify Japan KK who is the Company’s master distributor in Japan. Sales to Unify Japan KK in fiscal 2009 and 2008 were $0.2 million for both periods, respectively. Accounts receivable from Unify Japan KK as of April 30, 2009 and 2008 were $13,000 for both periods, respectively.
Other investments represent stock in closely held companies, which are accounted for under the cost method. At April 30, 2009, we had no long-term investments. The Company has an ownership interest in Unify Japan KK which is less than 15%. In April 2008, we wrote off our investment in Unify Japan of $39,000 based on our assessment that there was a permanent decline in value for this investment. Unify Japan KK is a Japanese corporation that is a master distributor for the Company in Japan. Sales to Unify Japan KK in fiscal 2009 and 2008 were $0.2 million for both periods, respectively. Accounts receivable from Unify Japan KK as of April 30, 2009 and 2008 were $13,000 for both periods, respectively. The Company records an investment impairment charge if and when the Company believes an investment has experienced a decline in market value that is other than temporary. Several factors can trigger an impairment review such as significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. In assessing potential impairment for such investments, we consider these factors as well as the forecasted financial performance.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 14. Employee Retirement Plan
The Company maintains a 401(k) profit sharing plan (the “401(k) Plan”). Eligible employees may contribute up to 100% of their pre-tax annual compensation to the 401(k) Plan, subject to certain statutory limitations. The Company can, at its discretion, voluntarily match the participating employees’ contributions not to exceed 6% of each employee’s annual compensation. In fiscal years 2009, 2008 and 2007, the Company contributed $140,000, $114,000 and $72,000, respectively, to the 401(k) Plan.
Note 15. Commitments and Contingencies
Operating Leases
The Company leases office space and equipment under non-cancelable operating lease arrangements expiring at various dates through fiscal 2014. Future minimum rental payments under these leases as of April 30, 2009 are as follows (in thousands):
Rent expense under operating leases was $667,200, $1,095,500 and $1,038,400 for the years ended April 30, 2009, 2008 and 2007, respectively.
Litigation
The Company is subject to legal proceedings and claims that arise in the normal course of business. If such matters arise, the Company cannot assure that it would prevail in such matters, nor can it assure that any remedy could be reached on mutually agreeable terms, if at all. Due to the inherent uncertainties of litigation, were there any such matters, the Company would not be able to accurately predict their ultimate outcome. As of April 30, 2009, there were no current proceedings or litigation involving the Company that management believes would have a material adverse impact on its financial position, results of operations, or cash flows.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 16. Segment Information
FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We have evaluated our approach for making operating decisions and assessing the performance of our business and, beginning in the first quarter of fiscal year 2009, we have determined that we have two reportable segments: Database and Development Products (“DDP”) and our Modernization & Migration Solutions Products. Prior to the first quarter of fiscal year 2009, the Company maintained reportable segments based on its geographic structure, the segments were the Americas and Europe. The accounting policies of the segments are the same as those described in Note 1. We evaluate performance based on gross margins (total revenues less costs of licenses, services and migration solutions) before operating costs. We do not manage our operating costs on a segment basis as many of our sales, marketing and support personnel regularly work with product from both segments. Additionally, we do not track assets by segment and therefore asset disclosures by segment are not relevant and are not presented.
For the fourth quarter of fiscal 2009 and 2008, total revenue from the United States was $1.6 million and $1.2 million, respectively. Total revenue from all other countries was $3.1 million in the fourth quarter of fiscal 2009 and $3.9 million for the fourth quarter of fiscal 2008. Total long-lived assets as of April 30, 2009 and 2008, for the United States, was $9.6 million and $8.3 million, respectively. Total long-lived assets in all other countries were $68,000 as of April 30, 2009 and $98,000 as of April 30, 2008.
Financial information for the Company’s reportable segments is summarized below (in thousands). Fiscal 2008 and 2007 segment information has been reclassified to conform to the fiscal 2009 presentation.
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 17. Quarterly Results of Operations (Unaudited)
The following interim financial information presents the fiscal 2009 and 2008 results on a quarterly basis:
INDEX OF EXHIBITS