UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-11807
UNIFY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2710559
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
2101 ARENA BLVD, SUITE 100
SACRAMENTO, CALIFORNIA 95834
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE: (916) 928-6400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $0.0005 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES / / NO /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on December
13, 2000 as reported on over the counter market was approximately $4,015,000
($0.25 per share). Shares of Common Stock held by each officer and director and
by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes. As of December 13, 2000, the Registrant had 18,931,766 shares of
Common Stock outstanding.
EXPLANATORY STATEMENT
In July 2000, Unify Corporation ("Unify" or the "Company") announced that
certain matters had come to the attention of the Company's Board of Directors
that indicated that the Company had engaged in improper accounting practices.
Accordingly, the Company delayed the filing of its Form 10-K for the fiscal
year ended April 30, 2000, and the Board of Directors authorized its Audit
Committee to conduct an investigation of the Company's accounting and
financial reporting practices and to recommend remedial action, if any, as a
result of the findings of its investigation. In connection with the ongoing
investigation, the Company placed its chief executive officer and its chief
financial officer on administrative leave, and in November 2000, the Company
terminated its chief executive officer and its chief financial officer
resigned. Based on the results of the Audit Committee's investigation, the
Company concluded that revenue, and in some cases expenses, had been
improperly accounted for in certain transactions during fiscal year 2000, and
adjustments were made during the fiscal year ended April 30, 2000 for such
transactions, including restatements of previously reported quarterly
financial statements. The investigation also included a review of
transactions in earlier fiscal years. After evaluating information from the
results of the investigation, the Company concluded that its financial
statements for the fiscal year ended April 30, 1999 and earlier were not
materially misstated. Also, the Company concluded that the effect on the
financial statements for fiscal year 2000 of adjustments relating to
transactions of earlier years not being made in those years was not material.
The Company filed its Form 10-K for fiscal year ended April 30, 2000 on
December 22, 2000. On January 30, 2001, Unify filed amended Quarterly Reports
on Forms 10-Q/A for the fiscal quarters ended July 31, 1999, October 31, 1999
and January 31, 2000. As a result of the Company's conclusion that its
financial statements for the fiscal year ended April 30, 2000 and earlier
years were not materially misstated as a result of adjustments relating to
transactions in 1999 and earlier years not being made in those years, such
adjustments were not reflected in the Company's financial statements
contained in such Form 10-K and Form 10Q/As. Subsequently, in connection with
comments by the Staff of the Securities and Exchange Commission (the "Staff")
relating to the Staff's review of the Company's Form 10-K and Form 10-Q/As for
the year ended April 30, 2000, the Company and the Staff had extensive
communications regarding the materiality of the adjustments relating to
transactions in 1999 and earlier years referred to above. Following such
communications, management determined that the Company would record the
adjustments in the applicable years. Accordingly, the accompanying financial
statements for the fiscal years ended April 30, 2000, 1999 and 1998 have been
restated from amounts previously reported to reflect those adjustments. A
summary of the effects of the restatement is presented in Notes 16 and 18 to
the financial statements.
The information set forth in the Company's original Form 10-K was presented as
of the December 22, 2000 filing date. Unless otherwise stated, such information
has not been updated in this amended filing. Financial statement and related
disclosures contained in this amended filing reflect, where appropriate, changes
to conform to the additional restatement
PART I
THE DISCUSSION IN THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE
PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS,
ESTIMATES AND PROJECTIONS ABOUT THE SOFTWARE INDUSTRY AND CERTAIN ASSUMPTIONS
MADE BY THE COMPANY'S MANAGEMENT. WORDS SUCH AS "ANTICIPATES", "EXPECTS",
"INTENDS", "PLANS", "BELIEVES", "SEEKS", "ESTIMATES", VARIATIONS OF SUCH WORDS
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH HEREIN UNDER "RISK FACTORS."
UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS
SET FORTH IN OTHER REPORTS OR DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), PARTICULARLY THE COMPANY'S
QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT REPORTS ON FORM 8-K.
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ITEM 1. BUSINESS
THE COMPANY
Unify develops, markets and supports software for extending business
applications to the Web. The Company delivers feature rich products and services
for organizations growing their business on the Web based on open, Java
technologies. Unify's products provide a robust, scalable foundation for
building, deploying and managing online applications that help companies run
their e-commerce and e-business sites.
According to Giga Information Group, the size of the Enterprise JavaBeans
("EJB") application server market is estimated to have been $585 million in
1999. Giga Information Group expects the market to grow to $1.64 billion in 2000
and reach $9 billion by 2003. Also, in less than two years the application
server market has grown to include more than 40 vendors. Additionally, Sun
Microsystems estimates that there are approximately 750,000 Java developers
around the world and growing. These developers and the companies employing these
developers are using EJB technology and Web application server technology to
build robust Java-based Web sites.
Unify is pursuing this market opportunity with its flagship product line, Unify
eWave. Unify eWave provides organizations with production-ready, scalable and
affordable software for building, deploying and managing applications built on
the Java 2, Enterprise Edition (J2EE) Platform. The Unify eWave line features a
Web application server and an EJB application server in Unify eWave Engine, and
an e-commerce framework in Unify eWave Commerce. These products enable
developers to rapidly build production-ready, scalable Internet and e-commerce
applications that are easy to manage and run with minimal down time.
In addition to the Unify eWave product line, the Company offers Unify VISION,
which is a comprehensive fourth generation language ("4GL") application server.
The Company also continues to enhance and support its legacy product Unify
DataServer, a family of database management system products, and ACCELL/SQL, a
family of client/server application development tools. In addition to software
products, the Company offers training, consulting and support services to its
customers.
The Company's customers consist primarily of corporate information technology
("IT") departments, solutions integrators ("SIs"), application service providers
("ASPs"), independent software vendors ("ISVs"), value added resellers ("VARs")
and distributors. The Company markets its products directly to these markets
through its sales organizations in the United States, United Kingdom, France and
Japan and indirectly to end-users through a worldwide network of 15
distributors. The Company markets products to organizations in vertical
industries in the Americas, Europe, Japan, Asia Pacific, Australia, South
Africa, India and Russia.
In addition to its facilities in Sacramento, the Company also has offices in the
United Kingdom, France and Japan. The Company closed its San Jose office in
October 2000. The principal geographic markets for the Company's products are in
the Americas, Europe, Japan, Asia Pacific and Australia.
On September 30, 2000 the Company moved its principal executive offices to
Sacramento, California. On October 30, 2000 the Company relocated its operation
to a new facility at 2101 Arena Blvd. Suite 100, Sacramento, California 95834.
The telephone number is (916) 928-6400.
In April 2000, the Company acquired privately held New Atlanta Communications,
LLC ("New Atlanta"), a provider of Java Servlet and Java Server Pages ("JSP")
technology. In November 2000, New Atlanta and the Company agreed to rescind the
acquisition agreement and enter into a three year OEM agreement in which the
Company is able to embed New Atlanta's ServletExec with Unify eWave products.
The agreement is renewable for an additional three years.
Unify was initially incorporated in California in 1980 and was reincorporated in
Delaware in 1996.
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RESTATEMENTS OF HISTORICAL FINANCIAL STATEMENTS
The consolidated financial statements and summarized quarterly financial
information included in this Form 10-K/A have been restated. For information
regarding the restatement of the financial statements, see Notes 16 and 18 to
the consolidated financial statements.
PRODUCTS
The Unify eWave product family provides organizations with enterprise-level
technology for successfully developing and deploying dynamic Internet and
e-commerce applications built on the J2EE platform. The Unify eWave product line
consists of Unify eWave Engine and Unify eWave Commerce. Unify's other products
include the Unify VISION, Unify DataServer and ACCELL/SQL product families.
UNIFY eWAVE
UNIFY eWAVE ENGINE
Unify eWave Engine allows organizations to take advantage of the latest industry
standards in the J2EE platform including JavaServer Pages (JSP), servlets, and
EJB technology to build dynamic Web applications that range from corporate
intranets to full-featured e-commerce sites. Unify eWave Engine extends and
enhances web servers to deliver dynamic web pages that leverage an
organization's existing business systems. Unify eWave Engine provides powerful
Java functionality at the server level so companies can provide dynamic,
real-time, secure access to data by customers, employees, partners and
suppliers. Unify eWave Engine also provides advanced features such as dynamic
application replication, which allows the high throughput that is required for
e-commerce sites that must be kept online 24/7/365. Unify eWave Engine supports
all major Web servers and operating systems, including Microsoft IIS, Netscape
Enterprise Server, iPlanet Web Server, and Apache Web Server across UNIX,
Microsoft Windows, and Linux.
UNIFY eWAVE COMMERCE
Unify eWave Commerce is a private label e-commerce framework for building
Web-based storefronts and e-business sites based on J2EE technology. Unify eWave
Commerce provides a standards-based, open platform for traditional
"brick-and-mortar" companies to seamlessly extend their existing business
applications to the Web, creating an online enterprise. Delivered as a Java
component framework, Unify eWave Commerce provides pre-built components
including a shopping cart, order management, pricing, payment processing and
merchandising management, as well as multi-store capabilities, and browser-based
back office management. Unify eWave Commerce supports all major Web servers and
operating systems, including Microsoft IIS, Netscape Enterprise Server, iPlanet
Web Server, and Apache Web Server across UNIX, Microsoft Windows, and Linux.
UNIFY VISION
The Unify VISION product family is comprised of Unify VISION AppServer, Unify
VISION AppBuilder and WebNow!.
UNIFY VISION APPSERVER
VISION AppServer is a 4GL application server that allows IT organizations to
integrate custom-built and packaged applications with the Internet. VISION's
universal client architecture enables end users to access server-based
application services from all client technologies such as Windows, HTML-based
and Java-based applications. Unify VISION AppServer has a scalable architecture
that delivers a high level of performance, availability and reliability by
offering server replication, load balancing, fail-over and recovery, and
publish-and-subscribe capabilities. These services are designed to lower total
cost of ownership by allowing organizations to
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effectively manage their applications from a single point of control. VISION
AppServer is available for Microsoft Windows NT, Linux, and all leading UNIX
server platforms.
UNIFY VISION APPBUILDER
The development environment for VISION AppServer is VISION AppBuilder, an object
oriented, repository-based component framework designed to enable developers to
rapidly create and easily modify application components. Its powerful pre-built
components enable developers to focus on the business components and processes
that make up the heart of their applications. VISION AppBuilder supports
components developed in C, C++ and Java, and provides a high-level business
language that allows developers to focus on defining business rules rather than
on the complexity of the underlying technologies.
UNIFY WEBNOW!
Unify WebNow! is a dynamic Web page engine that allows companies to provide Web
access to their database applications without complex programming. Unify WebNow!
combines user-profile, database and access control information to generate
user-centric Web site content on the fly. It is designed for organizations that
want to provide access to any standard database via a Web browser.
UNIFY DATASERVER
Unify DataServer is a family of database management products. Unify DataServer
is a high performance, easy-to-use family of products with minimal maintenance
and memory requirements that can quickly accommodate the growth of user
requirements over time. Unify DataServer allows developers to create graphical
applications and migrate existing database applications to enterprise network
and Internet environments. Unify DataServer products support all major UNIX
platforms, Linux, and Microsoft Windows NT.
ACCELL/SQL
Unify's ACCELL/SQL is a family of UNIX-based and Linux-based application
development tools designed for the cost-effective development of
mission-critical enterprise network applications. They are designed to maximize
developer productivity through tight integration of 4GL technologies and
optimized database features in a flexible development environment. ACCELL/SQL's
database independent technology supports native interfaces to leading database
products including Oracle, Informix, Sybase and Unify DataServer.
MARKETS
The Company's products are marketed and distributed to a wide range of customers
ranging from Internet startups to small and medium size companies to Global 2000
businesses. As of September 30, 2000, the Company's customers worldwide,
included Ameritech, AT&T, Bear Stearns, Bell Atlantic, Cisco Systems, ezgov.com,
i2 Technologies, Lucent Technologies, mysimon.com, Morgan Stanley Dean Witter &
Co., Motorola, Netegrity Inc., Pacific Bell, Remedy Corp, Hitachi Systems
Europe, Credit Lyonnais and Barclays Capital.
No customer accounted for more than 10% of the Company's revenues for fiscal
2000, 1999 or 1998.
Unify's products help organizations develop applications that reduce the total
cost of ownership of the application lifecycle. Companies are deploying Web
applications to address a wide range of strategic business needs including
selling direct over the Internet, Web-enabling their supply chain or
distribution channel or any other business-to-business initiative.
The use of open standards, including Java technology, to achieve the low cost of
deploying Web applications helps companies achieve a significant competitive
advantage because they are not locked into one vendor or a proprietary
technology for their applications. The Company believes that the openness,
scalability and
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affordability of the Unify eWave product line makes Unify attractive to
rapidly growing companies. Unify's target market includes mid-market IT
organizations, ISVs, VARs and ASPs.
SALES, MARKETING AND DISTRIBUTION
Unify markets its products and professional services domestically through a
combination of direct sales and indirect sales channels, including VARs,
distributors and SIs. The Company's marketing efforts are primarily directed at
broadening the market for Unify eWave by increasing awareness and informing
customers of the capabilities and benefits of the products and services, and
stimulating demand across all market segments. Marketing activities include
public relations and advertising, publishing newsletters, direct mailings,
product datasheets, attending trade shows, coordinating the Company's
participation in industry programs and forums, establishing and maintaining
close relationships with partners, and establishing and maintaining close
relationships with recognized industry analysts.
The Company markets its products internationally through subsidiaries in the
United Kingdom, France, and Japan, and through distributors in Europe, Japan,
Asia Pacific, Australia, Latin America, South Africa, India, and Russia.
International revenues accounted for 55%, 52% and 56% of total revenues in
fiscal 2000, 1999 and 1998, respectively. The Company's network of international
distributors supplements its targeted direct sales presence.
The Company complements its domestic and international direct sales efforts with
its indirect sales channels. Indirect sales channels include VARs, SIs, and
distributors. Such indirect sales channels leverage the Company's own sales,
support and consulting resources in providing complete solutions to customers.
In addition, the Company plans to continue to leverage its installed base of
Unify DataServer and ACCELL/SQL customers. The Company's sales and marketing
strategy in part targets this installed base with the objective of generating
Unify Vision and Unify eWave Engine license revenues, as a segment of this
customer base migrates to enterprise network and Internet applications. The
Company also continues to market and support its Unify DataServer and ACCELL/SQL
product families to serve customers that are not yet ready to move to enterprise
network and Internet environments.
In November 2000, the Company launched its e-commerce site, www.unifyewave.com,
that allows visitors to download, evaluate and purchase products. Electronic
distribution provides the Company with a low-cost, globally accessible, 24-hour
sales channel.
As of April 30, 2000, the Company had 39 employees engaged in sales and
marketing activities, 19 in North America, 14 in Europe, and 6 in Japan.
SUPPORT AND PROFESSIONAL SERVICES
The Company believes that superior support and professional services, including
product support and maintenance, consulting services and customer training, are
critical for achieving and maintaining customer satisfaction and continued
license sales.
SUPPORT
Due to the complexity of enterprise network computing and the emergence of the
Internet, support services must be able to address issues which arise from
components of the customer's system beyond the Company's products such as
multiple databases, computing platforms and operating systems. The Company has
extensive experience in supporting Web application development and database
products.
The Company offers modular customer support programs which can be customized to
match the customers' development cycles and modified as needs change. All
support levels provide telephone, e-mail and facsimile access, enabling
customers to log inquiries for resolution by the Company's support staff.
Customers can tailor service levels including response time, information
reporting, and other features such as 24-hour a day, seven-day a week support.
Also, the Company uses customer feedback as a source of ideas for product
improvements and
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enhancements. During each of the past three fiscal years, over 80% of the
Company's support customers have renewed their support contracts.
CONSULTING
The Company offers a full range of consulting services through its consulting
organization as well as through partnerships with third party solution
providers. The objective of Unify's consulting services organization ("UCS") is
to deliver solutions that help companies maximize return on investment and get
to market quickly. UCS provides a level of consulting support that is tailored
to customer-defined needs. This means that UCS is prepared to guide customers on
development plans, assist with hands-on development tasks, or take complete
responsibility for project completion. Engagement terms can range from the use
of a single consultant for completion of a one-week task to a full project team
engaged to complete an effort that stretches over several months.
TRAINING
The Company is committed to offering its customers a comprehensive selection of
training courses and materials. Customers may attend a broad range of courses
provided on a regularly scheduled basis at Unify training centers located in
Sacramento, California; London, England; Paris, France; and Tokyo, Japan. The
Company also offers on-site training at customers' facilities.
As of April 30, 2000, the Company had a total of 26 employees engaged in
providing professional services, 20 in support and 6 in consulting and training.
Of those employees, 17 were located in the United States, 5 were located in
Europe and 4 were located in Japan.
PRODUCT DEVELOPMENT
The computer software industry is highly competitive and rapidly changing. Since
its inception, the Company has made substantial investments in product
development and anticipates that it will continue to commit significant
resources to product development in the future to enhance existing product lines
and to develop new products to meet new market opportunities. Most of the
Company's current software products have been developed internally; however, the
Company has acquired certain software components from third parties in the past
and expects that it will do so again in the future.
Due to various factors, the Company may change the development projects that it
pursues in fiscal 2001 or may not be successful in completing these projects.
Even if completed, the Company cannot be sure that such projects will be
completed without errors or that the products, which result from such projects,
will achieve market acceptance.
The Company's product development activities are conducted at its Sacramento,
California facility. As of April 30, 2000, the Company had a total of 47
employees in product development and porting, including 42 software development
engineers. The market for qualified development engineers remains highly
competitive. The Company's product development expenditures for fiscal 2000,
1999, and 1998 were $6.3 million, $5.6 million and $5.7 million, respectively,
representing approximately 30%, 19% and 23% of total revenues for those periods.
COMPETITION
The Company has experienced and expects to continue to experience intense
competition from current and future competitors. With the introduction of Unify
eWave, the Company's competition includes Internet application server vendors
BEA Systems Inc. ("BEA"), Allaire Corporation ("Allaire"), SilverStream
Software, Inc. ("SilverStream") and IBM. With its VISION AppServer and VISION
AppBuilder products, the Company competes with Sybase, Progress Software
Corporation ("Progress") and Sun .
For its Unify DataServer and ACCELL/SQL products, the Company's business
generally derives from sales of license upgrades or additional deployment
licenses. As a result, the competitive factors are generally the
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consideration by a customer as to whether to develop a new application rather
than whether to use a competitor's products with the existing application
built using the Company's products. Vendors of products that compete with the
Company's Unify DataServer and ACCELL/SQL products include companies such as
Oracle, Informix and Sybase.
Many of the Company's competitors have significantly greater financial,
technical, marketing and other resources than Unify. The Company's competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sale of their products than the Company. Also, many current and
potential competitors have greater name recognition and more extensive customer
bases that could be leveraged.
The Company also expects to face additional competition as other established and
emerging companies enter the Internet application server and e-commerce tools
markets, and new products and technologies are introduced. Increased competition
could result in price reductions, fewer customer orders, reduced gross margins
and loss of market share, any one of which could materially and adversely affect
the Company's business, operating results, and financial condition. In addition,
current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third parties, thereby
increasing the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Such competition could materially adversely affect the
Company's ability to sell additional licenses and maintenance and support
renewals on terms favorable to the Company. Further, competitive pressures could
require the Company to reduce the price of its products and related services,
which could materially adversely affect the Company's business, operating
results, and financial condition. There can be no assurance that the Company
will be able to compete successfully against current and future competition, and
the failure to do so would have a material adverse effect upon the Company's
business, operating results, and financial condition.
The Company believes that the most significant competitive factors include ease
of use and time to market for application development and deployment;
application management functionality; product performance and quality; product
architecture and scalability; conformance applicable standards, customer
support; consulting and training services; and price. The Company believes that
it presently competes favorably with respect to each of these factors. However,
the Company's market is continually evolving and there can be no assurance that
the Company will be able to compete successfully against current and future
competitors; the failure to do so would have a material adverse effect upon the
Company's business, operating results, and financial condition.
INTELLECTUAL PROPERTY
The Company relies on a combination of copyright, trademark and trade-secret
laws, non-disclosure agreements and other methods to protect its proprietary
technology. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights as fully as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights in the United
States or abroad will be adequate or that competition will not independently
develop similar technology.
Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any notices that the Company is infringing the intellectual property rights of
others, there can be no assurance that such infringement claims will not be
asserted by third parties in the future. If any such claims are asserted, there
can be no assurance that the Company will be able to defend such claim or obtain
licenses on reasonable terms. The Company's involvement in any patent dispute or
other intellectual property dispute or action to protect trade secrets and
know-how may have a material adverse effect on the Company's business, operating
results, and financial condition. Adverse determinations in any litigation may
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subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third parties, and prevent the Company from
developing and selling its products. Any of these situations could have a
material adverse effect on the Company's business, operating results, and
financial condition.
The Company is dependent on third-party suppliers for software, which is
embedded in certain of its products. Although the Company believes that the
functionality provided by software which is licensed from third parties is
obtainable from multiple sources or could be developed by the Company if any
such third-party licenses were terminated or not renewed or if these third
parties fail to develop new products in a timely manner, the Company could be
required to develop an alternative approach to developing its products, which
could require payment of substantial fees to third parties, internal development
costs and delays and might not be successful in providing the same level of
functionality. Such delays, increased costs, or reduced functionality could
materially adversely affect the Company's business, operating results, and
financial condition.
EMPLOYEES
As of April 30, 2000, the Company had a total of 136 employees, including 47 in
product development, 39 in sales and marketing, 26 in support, consulting, and
training, and 24 in finance, information systems, operations and general
administration. Of these employees, 98 were located in the United States, 24
were located in Europe, and 14 were located in Japan.
The success of the Company depends in large part upon its ability to attract and
retain qualified employees, particularly senior management, engineering, direct
sales and support personnel. The competition for such employees is intense.
There can be no assurance that the Company will be successful in attracting or
retaining key employees. Any failure by the Company to attract and retain
qualified senior management, engineering, direct sales, and support personnel
could materially adversely affect the Company's business, operating results, and
financial condition. None of the Company's employees are represented by a
collective bargaining agreement, nor has the Company experienced any work
stoppage. The Company considers its relations with its employees to be good.
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RISK FACTORS
IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS
WITH THE SEC.
UNCERTAINTY ABOUT ABILITY TO CONTINUE AS GOING CONCERN
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company incurred a net loss of $7,684,000
during the fiscal year ended April 30, 2000, and has an accumulated deficit of
$47,103,000 as of April 30, 2000. Additionally, the Company has experienced a
decline in revenues and, as a result of the Audit Committee's investigation as
discussed in Item 7, and shareholder litigation, as discussed in Item 3, has
incurred and may continue to incur a significant increase in expenses. The
Company believes that it will need additional financing to meet cash
requirements for its operation, and the availability of such financing on terms
acceptable to the Company is uncertain. These factors, among others, indicate
that the Company may be unable to continue as a going concern.
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The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or to the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to obtain additional financing or
refinancing as may be required, and ultimately to attain successful operations.
Management has realigned the Company's operation, including a reduction in its
workforce. Management plans to further reduce operating costs, seek financing
acceptable to the Company, and increase marketing and sales efforts. There is no
assurance that management's plans will be successful or, if successful, that
they will result in the Company continuing as a going concern. There can be no
assurance that additional financing will be available, or that, if available, it
will be available on terms acceptable to the Company. The Company's ability to
obtain additional financing on acceptable terms will be adversely affected by
the fact that NASDAQ has suspended trading in the Company's Common Stock and
subsequently delisted the Company's Common Stock from the NASDAQ National
Market. If adequate funds are not available to satisfy the Company's short-term
or long-term capital requirements, the Company will be required to further
reduce its operations.
PENDING LITIGATION AND SEC INVESTIGATION
Beginning on July 31, 2000 and through October 2000, a series of class action
complaints were filed in the U.S. District Court for the Northern District of
California, against Unify and certain of its directors and former officers. The
plaintiffs in each of these actions claim to be suing on behalf of a class of
persons who purchased the Company's Common Stock during periods specified in the
complaint. These actions have been consolidated and the court has selected lead
plaintiffs' counsel. In April 2001, the United States district court stayed the
consolidated actions, pursuant to the stipulation of the parties, until June
2001, to give the parties an opportunity to mediate the dispute in conjunction
with other litigation discussed below.
From August through October 2000, five shareholder derivative actions were
filed; four in the Superior Court of the State of California and one in the
U.S. District Court for the Northern District of California. The plaintiffs
in these actions each claims to be suing on behalf of the Company. These
actions name as defendants certain of the Company's present and former
officers and directors. The complaints allege substantially the same conduct,
and concern the same time period, as the shareholder class actions filed in
the U.S. District Court for the Northern District of California. The
complaints allege that, as a result of this conduct, certain of the present
and former officers and directors breached their fiduciary duties to Unify
and engaged in improper insider trading. The complaints seek an unspecified
amount in damages and injunctive relief. The action pending in U.S. District
court has been voluntarily stayed by the parties pending resolution of the
derivative actions in state court. The parties to the derivative actions in
state court have agreed to attempt to mediate the derivative actions in
conjunction with the federal class actions discussed above.
In February 2001, an alleged institutional investor filed an action in U.S.
District Court for the Northern District of California against the Company
and its former chief executive officer and chief financial officer alleging
violations of the federal securities laws. The complaint alleges the same
conduct and concerns generally the same time period as that alleged in the
shareholder class actions discussed above. The Company intends to seek
mediation of this dispute with the other pending litigation arising from the
same alleged facts and circumstances.
The Company intends to participate in mediation of the litigation discussed
above with the goal of resolving all of the litigation. However, the ultimate
outcome of these matters cannot be presently determined. There can be no
assurance that any of the complaints discussed above will be resolved without
costly litigation, or in a manner that is not materially adverse to the
Company's financial position, results of operations or cash flows. No estimate
can be made of the possible loss or possible range of loss associated with the
resolution of these contingencies.
The Company has become aware that the SEC is conducting an investigation into
the facts and circumstances surrounding the Company's restatement of its
quarterly financial statements and other matters. The Company is cooperating
fully with the investigation.
ADVERSE EFFECTS OF THE UNCERTAINTY ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN AND PENDING LITIGATION
The matters raising doubt about the ability of the Company to continue as a
going concern and pending litigation discussed above may have an adverse effect
on the Company's future sales and its ability to attract and retain
11
qualified personnel. The Company's products are typically used to develop
applications that are critical to a customer's business, and the purchase of
the Company's products is often part of a customer's larger business process
re-engineering initiative or implementation of enterprise network or Internet
computing. Customers may be unwilling to build their computing environment
around the Company's products, or devote the time and resources necessary to
install and configure such products because there is doubt about the
Company's ability to continue supporting its products in the future.
Moreover, the Company may encounter increasing employee turnover in light of
the risks facing employees as a result of the Company's current circumstances.
INTENSE COMPETITION
The Company has experienced and expects to continue to experience intense
competition from current and future competitors. With the introduction of Unify
eWave, the Company began competing with Internet application server vendors
including BEA, Allaire and IBM. In addition, Unify competes with e-commerce
solution providers, among them BroadVision, IBM, Oracle, and Informix. The
Company also continues to compete with vendors of traditional enterprise network
development tools including, among others, Sun, Oracle and Sybase. Companies
offering products competitive with the Company's Unify DataServer and ACCELL/SQL
products include Oracle, Sybase and Informix.
Many of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than the Company. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged. The Company expects to face
additional competition as other established and emerging companies enter the
Internet application server, e-commerce, and enterprise network development
tools markets and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any one of which could materially
adversely affect the Company's business, operating results, and financial
condition. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of the Company's prospective customers. Accordingly, it is possible that
new competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to sell additional licenses and
maintenance and support renewals on terms favorable to the Company. Further,
competitive pressures could require the Company to reduce the price of its
products and related services, which could materially adversely affect the
Company's business, operating results, and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competition, and the failure to do so would have a material adverse
effect upon the Company's business, operating results, and financial condition.
See "Business - Competition."
EMPLOYEE RETENTION
The Company's future performance depends on the continued service of key
technical, sales and senior management personnel. The Company's technical, sales
or senior management personnel are not bound by an employment agreement. The
loss of the services of one or more of the Company's officers or other key
employees could seriously harm the business, operating results and financial
condition. Future success also depends on the Company's continuing ability to
attract and retain highly qualified technical, sales and managerial personnel.
Competition for such personnel is intense, and the Company may fail to retain
its key technical, sales and managerial employees, or attract, assimilate or
retain other highly qualified technical, sales and managerial personnel in the
future.
HISTORY OF OPERATING LOSSES; TRANSITION OF BUSINESS
The Company has incurred net losses in four of the past five fiscal years. The
Company's ability to achieve revenue growth and profitability are substantially
dependent upon the success of its current and future Internet products. No
assurance can be given that Unify's current or future Internet products will
achieve market
12
acceptance or that the Company will attain profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FLUCTUATING QUARTERLY RESULTS AND SEASONALITY; UNCERTAINTY OF OPERATING RESULTS
The Company's quarterly operating results have varied significantly in the past,
and the Company expects that its operating results are likely to vary
significantly from time to time in the future. Such variations result from,
among other factors, the following: the size and timing of significant orders
and their fulfillment; demand for the Company's products; the number, timing and
significance of product enhancements and new product announcements by the
Company and its competitors; ability of the Company to attract and retain key
employees; seasonality; changes in pricing policies by the Company or its
competitors; realignments of the Company's organizational structure; changes in
the level of the Company's operating expenses; changes in the Company's sales
incentive plans; budgeting cycles of the Company's customers; customer order
deferrals in anticipation of enhancements or new products offered by the Company
or its competitors; product life cycles; product defects and other product
quality problems currency fluctuations; and general domestic and international
economic and political conditions.
Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. Revenues are also difficult to forecast because the
market for Internet and e-commerce application development software is rapidly
evolving, and the Company's sales cycle, from initial evaluation to purchase and
the providing of maintenance services, is lengthy and varies substantially from
customer to customer. Because the Company normally delivers products within a
short time of receiving an order, it typically does not have any material
backlog. As a result, to achieve its quarterly revenue objectives, the Company
is dependent upon obtaining orders in any given quarter for shipment in that
quarter. Furthermore, because many customers place orders toward the end of a
fiscal quarter, the Company generally recognizes a substantial portion of its
revenues at the end of a quarter. As the Company's expense levels are based in
significant part on the Company's expectations as to future revenues and are
therefore relatively fixed in the short term, if revenue levels fall below
expectations, operating results are likely to be disproportionately adversely
affected.
The Company expects that its operating results will be affected by seasonal
trends. The Company also anticipates that it may experience relatively weaker
demand in fiscal quarters ending July 31 and October 31 as a result of reduced
business activity in Europe during the summer months.
LENGTHY SALES CYCLE
The Company's products are typically used to develop applications that are
critical to a customer's business, and the purchase of the Company's products is
often part of a customer's larger business process re-engineering initiative or
implementation of enterprise network or Internet computing. As a result, the
licensing and implementation of the Company's software products generally
involve a significant commitment of management attention and resources by
prospective customers. Accordingly, the Company's sales process is subject to
delays associated with the long approval process that typically accompanies
significant initiatives or capital expenditures. The Company's business,
operating results, and financial condition could be materially adversely
affected if customers reduce or delay orders. There can be no assurance that the
Company will not continue to experience these and additional delays in the
future. Such delays may contribute to significant fluctuations of quarterly
operating results in the future and may adversely affect those results.
DEPENDENCE ON NEW PRODUCT ACCEPTANCE; DEPENDENCE ON GROWTH OF INTERNET AND
E-COMMERCE TOOLS MARKET
The Company currently expects its Internet products and related services to
account for an increasingly significant percentage of the Company's future
revenues and accordingly the Company is devoting a substantial portion of its
resources to these products. As a result, factors adversely affecting the
pricing of or demand for Unify's Internet
13
products such as, but not limited to, competition or technological change,
would have a material adverse effect on the Company's business, operating
results, and financial condition. The Company's future financial performance
will depend in significant part on the successful development, introduction
and customer acceptance of new and enhanced versions of its Internet
products. There can be no assurance that the Company will timely and
successfully develop, introduce and sell such new or enhanced versions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview;" "Business - Products" and "- Product Development."
To date, a limited number of the Company's customers have completed the
development and deployment of Internet and e-commerce applications using its
Internet products. If the Company's customers are not able to successfully
develop and deploy Internet and e-commerce applications with the Unify eWave
product family or Unify VISION, the viability of these products could be
questioned and the Company's reputation could be damaged, which could have
material adverse effects on the Company's business, operating results, and
financial condition. In addition, the Company expects that a significant
percentage of its future revenues will be derived from sales to existing
customers of its client/server products. If these existing customers fail to
migrate to Internet and e-commerce applications, purchase competitive products,
or have difficulty deploying applications built with Unify's Internet products,
the Company's relationships with these customers, revenues from sales of the
Company's Internet products and other products, and the Company's business,
operating results, and financial condition could be materially adversely
affected. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
There can be no assurance that the market for Internet and e-commerce
applications and associated development tools will continue to grow. If the
Internet and e-commerce market fails to grow, or grows more slowly than the
Company currently anticipates, the Company's business, operating results, and
financial condition could be materially adversely affected.
DECLINE IN REVENUE FROM MATURE PRODUCTS
A significant portion of the Company's revenues to date have been attributable
to its client/server products. Revenues derived from the sales of these products
declined in relationship to newer product lines during the last several fiscal
years. While the Company expects that this decline may continue, revenues from
the sales of these products will continue to represent an important portion of
the Company's revenues for at least the next few years. Although the Company is
continuing to selectively invest in the development, sales, marketing and
support of such products, there can be no assurance that revenues from such
products will not decline faster than expected. If revenues from such products
decline materially or at a more rapid rate than the Company currently
anticipates, the Company's business, operating results, and financial condition
would be materially adversely affected. See "Business - Products", "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RAPID TECHNOLOGICAL CHANGE
The software market in which the Company competes is characterized by rapid
technological change, frequent introductions of new and enhanced products,
changes in customer demands and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The Company's future
success will depend in part upon its ability to address the increasingly
sophisticated needs of its customers by supporting existing and emerging
hardware, software, database and networking platforms and by developing and
introducing enhancements to the Unify eWave product family, Unify VISION and any
other new products in a timely way that keep pace with such technological
developments, emerging industry standards and customer requirements. There can
be no assurance that the Company will be successful in developing and marketing
enhancements to Unify eWave, Unify VISION and new products that respond to
technological change, evolving industry standards or customer requirements, that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements or products
or that such enhancements or products will adequately meet the requirements of
the marketplace and achieve any significant degree of market acceptance. If the
release dates of any future Unify eWave or Unify VISION enhancements, or new
products are delayed or if when
14
released they fail to achieve market acceptance, the Company's business,
operating results, and financial condition would be materially adversely
affected. In addition, the introduction or announcement of new product
offerings or enhancements by the Company or the Company's competitors may
cause customers to defer or forgo purchases of current versions of Unify
eWave or Unify VISION, which could have a material adverse effect on the
Company's business, operating results, and financial condition. See "Business
- - Product Development."
DEPENDENCE ON INDIRECT SALES CHANNELS
A significant portion of the Company's total revenues are derived from indirect
sales channels, including VARs and distributors. Revenues from VARs and
distributors accounted for approximately 57%, 57%, and 57% of the Company's
software license revenues for fiscal 2000, 1999 and 1998, respectively. The
success of the Company therefore depends in part upon the performance of its
indirect sales channels, over which the Company has limited influence. The
Company's ability to achieve significant revenue growth in the future will
depend in part on its success in maintaining and expanding its indirect sales
channels worldwide. The loss of any of the Company's major channel partners,
either to competitive products offered by other companies or to products
developed internally by those partners, or the failure to attract effective new
channel partners could have a material adverse effect on the Company's business,
operating results, and financial condition. See "Business - Sales, Marketing and
Distribution."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND SALES
Revenues derived from international customers accounted for 55%, 52% and 56% of
total revenues in fiscal 2000, 1999 and 1998, respectively. If the revenues
generated by international operations are not adequate to offset the expense of
maintaining such operations, the Company's business, operating results, and
financial condition will be materially adversely affected. Although the Company
has had international operations for a number of years, there can be no
assurance that the Company will be able to successfully market, sell and deliver
its products in these markets. In addition to the uncertainty as to the
Company's ability to expand its international presence, there are certain risks
inherent in doing business on an international level, such as: unexpected
changes in regulatory requirements; export restrictions, tariffs and other trade
barriers; difficulties in staffing and managing foreign operations; longer
payment cycles; problems in collecting accounts receivable; political
instability; fluctuations in currency exchange rates; seasonal reductions in
business activity during the summer months in Europe and certain other parts of
the world; and potentially adverse tax consequences, any of which could
adversely impact the success of the Company's international operations. There
can be no assurance that one or more of these factors will not have a material
adverse effect on the Company's future international operations and,
consequently, on the Company's business, operating results, and financial
condition. In addition, the Company's subsidiaries in Europe and Japan operate
in local currencies. Foreign currency gains and losses on local currency
intercompany accounts held in the U.S. have been immaterial to date; however, if
the value of the U.S. dollar increases relative to foreign currencies, the
Company's business, operating results, and financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Business - Sales, Marketing and
Distribution" and Note 9 of Notes to Consolidated Financial Statements.
EUROPEAN MONETARY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
("EU") entered into a three-year transition phase during which a common
currency, the "Euro," was introduced. Between January 1, 1999 and January 1,
2002, governments, companies and individuals may conduct business in these
countries using both the Euro and existing national currencies. On January 1,
2002, the Euro will become the sole currency in these countries.
During this transition phase, the Company continues to evaluate the impact of
conversion to the Euro on its business. In particular, Unify is reviewing
whether its internal software systems can process transactions denominated
either in current national currencies or in the Euro, including converting
currencies using computation methods specified by the EU. The Company is also
reviewing the potential cost if it must modify or replace any of its internal
software systems. Finally, Unify is analyzing the effect of the conversion to
the Euro on the prices of its products in the affected countries.
15
Based on current information, the Company does not expect the cost of any
necessary corrective action to have a material adverse effect on its business.
However, the Company will continue to evaluate the impact of these and other
possible effects of the conversion to the Euro on its business. There can be no
guarantee that the costs associated with conversion to the Euro will not have a
material adverse effect on the Company's business, operating results, and
financial position in the future.
SOFTWARE DEFECTS AND POTENTIAL RELEASE DELAYS
Software products frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Although the
Company has not experienced material adverse effects resulting from any such
defects or errors to date, there can be no assurance that, despite testing by
the Company and by current and potential customers, defects and errors will not
be found in current versions, new versions or enhancements after commencement of
commercial shipments, resulting in loss of revenues, delay in market acceptance,
or unexpected re-programming costs, which could have a material adverse effect
upon the Company's business, operating results, and financial condition.
Additionally, if the release dates of any future Unify eWave product line or
Unify VISION additions or enhancements are delayed or if when released they fail
to achieve market acceptance, the Company's business, operating results,
financial condition and cash flows would be materially adversely affected.
See "Business - Product Development."
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in the Company's license agreements may not be effective as a result of existing
or future federal, state or local laws or ordinances or unfavorable judicial
decisions. The sale and support of current and future Internet products by the
Company may involve the risk of such claims, any of which are likely to be
substantial in light of the use of these products in the development of core
business applications. A successful product liability claim brought against the
Company could have a material adverse effect upon the Company's business,
operating results, and financial condition.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends largely on the efforts and abilities of certain
key personnel. The loss of the services of one or more of the Company's
executive officers or the inability to attract and retain additional senior
management could have a material adverse effect on the Company's business,
operating results, and financial condition. On July 31, 2000 the Company placed
its chief executive officer and its chief financial officer on administrative
leave pending the completion of the Audit Committee's investigation as discussed
in Item 7. In November 2000, the chief executive officer was terminated and the
chief financial officer resigned. Loss of other management and/or key personnel
could also have a material adverse effect on the Company's business, operating
results, and financial condition. See "Business - Employees."
The success of the Company also depends in large part upon the ability of the
Company to attract and retain qualified employees, particularly highly skilled
engineering, direct sales and support personnel. The competition for such
employees is intense. Uncertainty regarding the Company's future could harm its
ability to attract and retain key personnel. On October 23, 2000 the Company
completed a reorganization which resulted in the elimination of 18 positions,
primarily in its international and administrative areas. This reduction in
personnel may make it more difficult to retain and recruit key personnel and
there can be no assurance that the Company will be successful in such effort.
Any failure by the Company to attract and retain engineering, sales and support
personnel could materially adversely affect the Company's business, operating
results, and financial condition. See "Business - Employees."
16
MANAGEMENT OF GROWTH
The Company's potential expansion may significantly strain the Company's
management, financial, customer support, operational and other resources. If the
Company achieves successful market acceptance of its current and future Internet
products, the Company may undergo a period of rapid growth. To accommodate this
growth, the Company is continuing to implement a variety of new and upgraded
operating and financial systems, procedures and controls, including the
improvement of its internal management systems. There can be no assurance that
such efforts can be accomplished successfully. Any failure to expand these areas
in an efficient manner, could have a material adverse effect on the Company's
business, operating results, and financial condition. Moreover, there can be no
assurance that the Company's systems, procedures and controls will be adequate
to support the Company's future operations. Any rapid growth could require that
the Company secure additional facilities or expand in its current facilities.
Any move to new facilities or expansion of its present facilities could be
disruptive and could have a material adverse effect on the Company's business,
operating results, and financial condition.
THIRD-PARTY LICENSES
The Company is dependent on third-party suppliers for software which is embedded
in certain of its products. Although the Company believes that the functionality
provided by software which is licensed from third parties is obtainable from
multiple sources or could be developed by the Company, if any such third-party
licenses were terminated or not renewed or if these third parties fail to
develop new products in a timely manner, the Company could be required to
develop an alternative approach to developing its products, which could require
payment of substantial fees to third parties, internal development costs and
delays and might not be successful in providing the same level of functionality.
Such delays, increased costs or reduced functionality could materially adversely
affect the Company's business, operating results, and financial condition. See
"Business - Intellectual Property."
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of copyright, trademark and trade secret
laws, non-disclosure agreements and other intellectual property protection
methods to protect its proprietary technology. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights as fully as do the laws of the United
States. There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate or that
competition will not independently develop similar technology.
Although there are no pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any notices that the Company is infringing the intellectual property rights of
others, there can be no assurance that such infringement claims will not be
asserted by third parties in the future. If any such claims are asserted, there
can be no assurance that the Company will be able to defend such claim or obtain
licenses on reasonable terms. The Company's involvement in any patent dispute or
other intellectual property dispute or action to protect trade secrets and
know-how may have a material adverse effect on the Company's business, operating
results, and financial condition. Adverse determinations in any litigation may
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third parties and prevent the Company from
developing and selling its products. Any of these situations could have a
material adverse effect on the Company's business, operating results, and
financial condition. See "Business - Intellectual Property."
VOLATILITY OF STOCK PRICE
The Company's common stock price has been and is likely to continue to be
subject to significant volatility. A variety of factors could cause the price of
the Company's common stock to fluctuate, perhaps substantially, including:
announcements of developments related to the Company's business; fluctuations in
the Company's or its competitors' operating results and order levels; general
conditions in the computer industry or the worldwide economy; announcements of
technological innovations; new products or product enhancements by the Company
or its competitors; changes in financial estimates by securities analysts;
developments in patent, copyright or other
17
intellectual property rights; and developments in the Company's relationships
with its customers, distributors and suppliers; legal proceedings brought
against the Company or its officers; significant changes in the Company's
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, has experienced extreme price
fluctuations which have often been unrelated to the operating performance of
those companies. Such fluctuations may adversely affect the market price of
the Company's common stock.
The NASDAQ halted trading on the Company's stock on July 31, 2000. On October
23, 2000, the Company's stock was delisted from the NASDAQ National Market.
The Company's stock is now traded over the counter on the "pink sheets."
Companies whose shares trade over-the-counter generally receive less exposure
and are subject to greater price volatility than those trading on NASDAQ.
ITEM 2. PROPERTIES
The Company previously maintained its headquarters in San Jose, California in a
2,000 square foot facility under a lease, which expires in August 2003. On
September 30, 2000, the Company consolidated its headquarters with its operation
in Sacramento and has subleased the San Jose facility for the remainder of the
lease term. On October 30, 2000 the Company moved its Sacramento operations to a
new location. The lease for the new location is for 38,000 square feet and will
expire at the end of March 2008. In addition, the Company leases international
sales and support offices in the United Kingdom, France and Japan. The Company
closed its sales office in Reston, Virginia, and has subleased that space. The
Company believes that its existing facilities are adequate for its current needs
and that suitable additional or alternative space will be available in the
future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
Beginning on July 31, 2000 and through October 2000, a series of class action
complaints were filed in the U.S. District Court for the Northern District of
California, against Unify and certain of its directors and former officers. The
plaintiffs in each of these actions claim to be suing on behalf of a class of
persons who purchased the Company's Common Stock during periods specified in the
complaint. These actions have been consolidated and the court has selected lead
plaintiffs' counsel. In April 2001, the United States district court stayed the
consolidated actions, pursuant to the stipulation of the parties, until June
2001, to give the parties an opportunity to mediate the dispute in conjunction
with other litigation discussed below.
From August through October 2000, five shareholder derivative actions were
filed; four in the Superior Court of the State of California and one in the
U.S. District Court for the Northern District of California. The plaintiffs in
these actions each claims to be suing on behalf of the Company. These actions
name as defendants certain of the Company's present and former officers and
directors. The complaints allege substantially the same conduct, and concern the
same time period, as the shareholder class actions filed in the U.S. District
Court for the Northern District of California. The complaints allege that, as a
result of this conduct, certain of the present and former officers and directors
breached their fiduciary duties to Unify and engaged in improper insider
trading. The complaints seek an unspecified amount in damages and injunctive
relief. The action pending in U.S. District court has been voluntarily stayed by
the parties pending resolution of the derivative actions in state court. The
parties to the derivative actions in state court have agreed to attempt to
mediate the derivative actions in conjunction with the federal class actions
discussed above.
In February 2001, an alleged institutional investor filed an action in U.S.
District Court for the Northern District of California against the Company
and its former chief executive officer and chief financial officer alleging
violations of the federal securities laws. The complaint alleges the same
conduct and concerns generally the same time period as that alleged in the
shareholder class actions discussed above. The Company intends to seek
mediation of this dispute with the other pending litigation arising from the
same alleged facts and circumstances.
The Company has become aware that the SEC is conducting an investigation into
the facts and circumstances surrounding the Company's restatement of its
quarterly financial statements and other matters. The Company is cooperating
fully with the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal 2000.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
During fiscal 1999 and 2000, the Company's common stock was listed on the NASDAQ
National Market under the symbol UNFY. On July 31, 2000, NASDAQ placed a
suspension of trading in the Company's stock as a result of its announcement
regarding the investigation of improper accounting and financial reporting
practices. On August 22, 2000, an "E" was appended to Unify's trading symbol,
indicating that the Company is delinquent in its filings with the Securities
Exchange Commission as it pertains to Form 10-K for fiscal 2000 and Form 10-Q
for the first quarter of fiscal 2001. On October 23, 2000, NASDAQ advised the
Company that it would discontinue the listing of its securities on the NASDAQ
National Market. As a result, the Company's stock is currently traded on the
over-the-counter market. The following table sets forth the high and low closing
sales prices as reported by NASDAQ for shares of the Company's common stock for
the periods indicated. Such prices represent prices between dealers, do not
include retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
Share prices have been adjusted to reflect the 2-for-1 split of the Company's
common stock, which was effective December 21, 1999.
HIGH LOW
-------- --------
FISCAL 2000
Fourth Quarter $ 26.00 $ 8.81
Third Quarter 34.22 13.97
Second Quarter 15.41 5.16
First Quarter 8.69 5.19
FISCAL 1999
Fourth Quarter 8.28 6.00
Third Quarter 6.32 1.50
Second Quarter 1.50 1.07
First Quarter 1.75 1.08
COMMON STOCKHOLDERS OF RECORD
At June 30, 2000, there were approximately 146 stockholders of record of the
Company's common stock, as shown in the records of the Company's transfer agent,
excluding stockholders whose stock was held in nominee or street name by
brokers.
DIVIDENDS
The Company has never paid dividends on its common stock and its present policy
is to retain anticipated future earnings for use in its business.
19
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto in Item 8
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7.
YEARS ENDED APRIL 30,
------------------------------------------------------------------
2000 1999 1998 1997 1996
(AS RESTATED, (AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 18) SEE NOTE 18) SEE NOTE 18) SEE NOTE 18)
------------ ------------ ------------ ------------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses $12,576 $19,768 $ 15,580 $14,856 $20,444
Services 8,475 9,680 9,342 9,409 9,721
--------- --------- --------- --------- ---------
Total revenues 21,051 29,448 24,922 24,265 30,165
---------- --------- --------- --------- ---------
Cost of revenues:
Software licenses 1,342 849 647 1,266 2,059
Services 4,037 4,404 4,389 4,493 4,332
---------- --------- --------- --------- ---------
Total cost of revenues 5,379 5,253 5,036 5,759 6,391
---------- --------- --------- --------- ---------
Gross margin 15,672 24,195 19,886 18,506 23,774
---------- --------- --------- --------- ---------
Operating expenses:
Product development 6,696 5,928 5,733 6,974 5,805
Selling, general and administrative 16,835 14,463 16,353 22,903 18,920
---------- --------- --------- --------- ---------
Total operating expenses 23,531 20,391 22,086 29,877 24,725
---------- --------- --------- --------- ---------
Income (loss) from operations (7,859) 3,804 (2,200) (11,371) (951)
Other income, net 367 304 167 764 176
---------- --------- --------- --------- ---------
Income (loss) before income taxes (7,492) 4,108 (2,033) (10,607) (775)
Provision for income taxes 192 231 182 192 163
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (7,684) $ 3,877 $ (2,215) $ (10,799) $ (938)
=========== ========== ========== ========== ==========
Net income (loss) per share:
Basic $ (0.42) $ 0.23 $ (0.13) $ (0.77) $ (0.45)
========== ========= ========= ========= =========
Diluted $ (0.42) $ 0.21 $ (0.13) $ (0.77) $ (0.45)
========== ========= ========= ========= =========
Shares used in computing net income (loss) per share:
Basic 18,127 17,110 16,412 14,016 2,098
========== ========= ========= ========= =========
Diluted 18,127 18,102 16,412 14,016 2,098
========== ========= ========= ========= =========
APRIL 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
(AS RESTATED, (AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 18) SEE NOTE 18) SEE NOTE 18) SEE NOTE 18)
------------ ------------ ------------ ------------
(In thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 11,194 $ 11,387 $ 10,739 $ 16,646 $ 3,028
Working capital (deficit) 5,835 12,336 7,440 8,365 (3,183)
Total assets 21,792 22,951 19,099 24,438 12,997
Long-term debt, net of current portion - - 4 58 2,456
Redeemable preferred stock - - - - 26,726
Total stockholders' equity (deficit) 10,286 13,945 9,449 10,917 (29,173)
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO IN ITEM 8 AND REFLECTS CERTAIN RESTATEMENTS TO THE
COMPANY'S PREVIOUSLY REPORTED RESULTS OF OPERATIONS FOR THOSE PERIODS. SEE NOTE
18 TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR DISCUSSION OF THESE
RESTATEMENTS. THIS ANNUAL REPORT ON FORM 10-K/A CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
RISK FACTORS AND IN THE COMPANY'S OTHER FILINGS WITH THE SEC.
OVERVIEW
Founded in 1980, Unify develops, markets and supports Internet software
extending business applications to the Web. The Company provides feature rich
products and services for organizations growing their business on the Web, based
on open, Java technologies. Unify's products provide enterprise, scalable and
affordable software for building and managing online applications. The Company's
flagship product line, Unify eWave, includes a robust Web application server,
enterprise application server and commerce framework built on the J2EE
technology. These products are designed to enable developers to rapidly build
production-ready, scalable Internet and e-commerce applications that are easy to
manage and run with minimal down-time.
In fiscal 2000, the Company shifted its product development and sales and
marketing focus to its Unify eWave family of products. Revenue from these
products alone were less than expected. Accordingly, the growth in Unify
eWave product sales was not sufficient to offset lower levels of revenues
from its other products resulting from reduced sales and marketing efforts.
The Company expects that its ability to achieve significant revenue growth in
the future will be substantially dependent upon the success of the Unify
eWave product family. Revenues from the Company's client/server products are
not expected to show significant growth and may continue to decline. As a
result, factors adversely affecting the revenue from the Unify eWave family
could have a material adverse effect on the Company's business, operating
results, and financial condition.
The Company licenses its software through its direct sales force in the United
States, Europe and Japan and through distributors, VARs, and other partners
worldwide. Revenues from partners accounted for approximately 57%, 57% and 57%
of the Company's software license revenues for fiscal 2000, 1999 and 1998,
respectively. The Company's ability to achieve significant revenue growth in the
future will depend in part on its success in maintaining existing and
establishing additional relationships with partners worldwide.
The Company recognizes software license revenue when a noncancelable license
agreement has been executed, delivery has occurred, fees are fixed and
determinable, and collection of the resulting receivable is deemed probable by
management. Software licenses include both development and deployment licenses,
with pricing for Unify eWave based on the number of computer processing units
(CPUs) and Unify VISION generally based upon the number of developers or end
users, as applicable. Customer maintenance revenues are recognized ratably over
the maintenance period. Payments for maintenance fees are generally received in
advance and are nonrefundable. Revenues from consulting and training services
are recognized as the services are performed.
The Company continues to support its extensive installed base of client/server
products, which the Company believes represents a significant source of
potential customers for its Internet products. The Company also generates
significant revenues from services, including customer maintenance, consulting
and training.
In June 2000, certain matters came to the attention of the Company's Board of
Directors that indicated that the Company had engaged in improper accounting
practices. The Company's Board of Directors authorized its Audit Committee to
conduct an investigation of the Company's accounting and financial reporting
practices and to recommend remedial action, if any, as a result of the findings
of its investigation. In July 2000, in connection with the ongoing
investigation, the Company placed its chief executive officer and its chief
financial officer on administrative leave, and in November 2000, the Company
terminated its chief executive officer and its chief financial officer resigned.
Based on the results of the Audit Committee's investigation, the Company
concluded
21
that revenue, and in some cases expenses, had been improperly accounted for in
certain transactions during the fiscal year ended April 30, 2000, primarily
related to the following:
o Reciprocal agreement transactions for which there was insufficient support
for the fair market valuation of inventory, funded development activities,
or consulting services received by the Company, or equity investments made
by the Company in connection with the Company delivering products or
providing services.
o Improper application of AICPA Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2") in which all of the conditions for revenue
recognition required by SOP 97-2 had not been met.
o Contingent revenue transactions in which sales of software, services and
other related items were contingent upon future events, including
contingencies that were contained in side agreements.
o Service revenue which was recognized during the first month of the
contract, rather than ratably over the term of the contract in accordance
with SOP 97-2.
o Other adjustments including insufficiently supported journal entries and
improper recording of marketing co-operative agreements.
Based on the results of the Audit Committee's investigation, adjustments were
made during the fiscal year ended April 30, 2000 for such transactions,
including restatements of previously reported quarterly financial statements.
The investigation also identified commissions, bonuses and other payments
made to the Company's former chief executive officer during the fiscal year
ended April 30, 2000, which the Company believes were not appropriate. Such
payments in the amount of approximately $500,000 have been charged to expense
in that fiscal year; however, the Company is seeking to have these amounts and
amounts paid in prior years and amounts related to other issues repaid by the
former chief executive officer. The investigation also included a review of
transactions in earlier fiscal years. After evaluating information from the
results of the investigation, the Company concluded that its financial
statements for the fiscal year ended April 30, 1999 and earlier were not
materially misstated. Also, the Company concluded that the effect on the
financial statements for fiscal 2000 of adjustments relating to transactions
of earlier years not being made in those years was not material.
Subsequent to the issuance of the Company's financial statements for the fiscal
year ended April 30, 2000, and in connection with comments by the Staff of the
Securities and Exchange Commission (the "Staff") relating to the Staff's review
of the Company's Form 10-K for the year ended April 30, 2000, the Company and
the Staff had extensive communications regarding the materiality of the
adjustments relating to transactions in 1999 and earlier years referred to
above. Following such communications, management determined that the Company
would record the adjustments in the applicable years. Accordingly, the
accompanying financial statements for the fiscal years ended April 30, 2000,
1999 and 1998 have been restated from amounts previously reported to reflect
those adjustments. A summary of the effects of the restatement is presented in
Note 18 to the financial statements, and the amounts herein have been adjusted
for the restatement.
22
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations data of
the Company expressed as a percentage of total revenues for the periods
indicated:
YEARS ENDED APRIL 30,
----------------------------------------------
2000 1999 1998
----------- ----------- ----------
Revenues:
Software licenses 59.7 % 67.1 % 62.5 %
Services 40.3 32.9 37.5
-------- ------- --------
Total revenues 100.0 100.0 100.0
-------- ------- -----
Cost of revenues:
Software licenses 6.4 2.9 2.6
Services 19.2 14.9 17.6
-------- ------- --------
Total cost of revenues 25.6 17.8 20.2
-------- ------- --------
Gross margin 74.4 82.2 79.8
-------- ------- --------
Operating expenses:
Product development 31.8 20.1 23.0
Selling, general and administrative 79.9 49.1 65.6
-------- ------- --------
Total operating expenses 111.7 69.2 88.6
-------- ------- --------
Income (loss) from operations (37.3) 13.0 (8.8)
Other income, net 1.7 1.0 0.6
-------- ------- --------
Income (loss) before income taxes (35.6) 14.0 (8.2)
Provision for income taxes 0.9 0.8 0.7
---------- ------- --------
Net income (loss) (36.5)% 13.2 % (8.9) %
========= ======= ========
TOTAL REVENUES
The Company's total revenues include software license revenues from sales of its
Internet and client/server products and service revenues for customer
maintenance, consulting and training. Total revenues for fiscal year 2000
decreased 29% to $21.1 million from $29.4 million for fiscal year 1999. In 1999,
total revenues had increased by 18% from $24.9 million in 1998.
The decrease in total revenues was primarily driven by software license
revenues, which decreased by 36%, or $7.2 million in fiscal year 2000 from $19.8
in 1999. This was a reversal of the prior years' trend which reflected increases
of 27% and 5% in 1999 and 1998. The decrease was primarily related to the
Company's shift in focus from its client/server product line to the Unify eWave
product line where revenues did not meet the Company's expectations. As the
Company emphasized the sale and marketing of the Unify eWave product line only,
the Unify VISION and client/server software license revenues also declined,
further accelerating the Company's total revenue decrease. In fiscal year 1999,
software license revenues increased 27% to $19.8 million from $15.6 million for
fiscal year 1998. License revenues in fiscal year 1999 increased primarily as a
result of a larger number of VAR's marketing its products.
Total service revenues for fiscal year 2000 decreased 12% to $8.5 million
from $9.7 million for fiscal year 1999. Consulting revenues for the fiscal
year 2000 decreased to $1.3 million from $2.2 million for the fiscal year
1999. Maintenance revenues for the fiscal year 2000 remained flat at $7.0
million and $7.0 million for the fiscal year 1999. The decrease in consulting
revenues was primarily the result of an increased emphasis on product sales
and the deferral of revenue on a large consulting project due to concern over
the customer's ability to pay. Maintenance revenues decreased primarily as a
result of the reduction in license revenues.
23
Total service revenues increased 4% to $9.7 million. The majority of this
increase was consulting and training revenues as the Company was focused on
providing application development solutions.
International revenues include all software license and service revenues from
customers located outside the United States. International revenues from the
Company's direct sales organizations in Europe and Japan and from value added
resellers, distributors, and other partners in all international locations
accounted for 55%, 52% and 56% of total revenues in fiscal years 2000, 1999 and
1998, respectively.
COST OF REVENUES
COST OF SOFTWARE LICENSES. Cost of software licenses consists primarily of
product documentation, packaging and production costs in the U.S. and Japan and
royalties paid for licensed technology. Cost of software licenses was $1.3
million for fiscal year 2000, $0.8 million for 1999 and $0.6 million in 1998.
Costs associated with royalties and other direct production cost are incurred at
the time of the sale, while the software license revenue may be recognized in
different periods, depending on the terms of the contract. Accordingly, these
costs may fail to directly correlate to the changes in related revenues from
period to period, as occurred in fiscal 2000, when sales revenues decreased
while the related expenses increased.
COST OF SERVICES. Cost of services consists primarily of employee, facilities
and travel costs incurred in providing customer support under software
maintenance contracts and consulting and training services. Total cost of
services in absolute dollars has remained stable at approximately $4.0 million
for fiscal year 2000, and $4.4 for 1999 and 1998, with customer maintenance
costs decreasing slightly and consulting and training costs increasing slightly
during those periods. The cost of services has a high component of fixed costs,
and therefore does not fluctuate as readily with the changes in revenues as can
be seen when comparing prior year expenses and associated revenues.
Due to the decrease in service revenues in fiscal year 2000, total cost of
services as a percentage of service revenues increased to 48% in fiscal year
2000, from 45% of service revenues in fiscal year 1999. The Company plans to
expand its expertise in e-commerce and Internet application development
solutions in fiscal 2001 in order to capitalize on these opportunities and as a
result it expects that its consulting service costs may increase. Because there
is generally a delay in time when additional consulting personnel are hired and
when they become fully productive, the Company's results of operations may be
adversely affected by the expansion of the Company's consulting services.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses consist primarily of
employee and facilities costs incurred in the development and testing of new
products and in the porting of new and existing products to additional
hardware platforms and operating systems. Product development costs have
remained relatively constant over the last several years, from $5.7 million
in fiscal year 1998, $5.6 million in 1999 and $6.3 million in 2000. The
increases in 1999 and 2000 are primarily the result of the design and
development of the Unify eWave family of products. The Company believes that
substantial investment in product development is critical to maintaining
technological leadership and therefore expects to continue to devote
significant resources to product development in fiscal 2001.
Software development costs have been accounted for in accordance with Statement
of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. See Note 1 of Notes to
Consolidated Financial Statements. In accordance with this policy, there were no
capitalizable software development costs in fiscal year 2000, 1999 or 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries, bonuses and commissions,
promotional and travel expenses, professional services, facilities expenses and
bad debt expense. SG&A expenses were $16.8 million for 2000, $14.5 million for
1999 and $16.4 for 1998. SG&A expenses for fiscal year 2000 were higher compared
to the prior year primarily due to increased bad debt expenses which increased
from $0.4 million in fiscal year 1999 to $1.7 million in fiscal year 2000. Other
24
components of SG&A that impacted fiscal 2000 included expenses for Professional
Services of approximately $ 0.7 million for various acquisitions and issues
pertaining to customer licensing and approximately $0.5 million in variable
compensation paid to certain officers during fiscal year 2000. Also as a result
of the investigation into the revenue recognition issues, and the pending
litigation expenses related to those issues, professional fees (legal and
accounting) will increase substantially in fiscal year 2001. The Company is
unable to make an estimation of expenses associated with the resolution of these
matters. SG&A expenses for fiscal year 1999 were lower in absolute dollars
compared to the prior year primarily due to the continuation of a cost control
program adopted in the second quarter of fiscal year 1998. SG&A expenses
decreased as a percentage of total revenues as a result of lower expenses in
absolute dollars and higher total revenues in fiscal year 1999 as compared to
fiscal year 1998.
OTHER INCOME, NET. Other income, net consists primarily of foreign exchange
gains and losses, interest earned by the Company on its cash, cash equivalents
and short-term investments net of interest expense on long-term debt. Other
income was $0.4 million in fiscal year 2000, $0.3 million in 1999, and $0.2
million in 1998. The increase in other income in fiscal year 2000 was due to
increased interest income of $0.1 million as a result of an increase in the
average amount of investments for fiscal year 2000. The increase in other income
between fiscal years 1999 and 1998 was principally due to losses on liquidation
of the Company's Benelux and German subsidiaries totaling $0.3 million in fiscal
year 1998 offset by $0.1 million in lower interest income relating to the
Company's lower cash balances in the first part of fiscal year 1999. The
Company's subsidiaries in the United Kingdom, France and Japan operate in local
currencies. Foreign currency gains and losses on local currency intercompany
accounts held in the U.S. have been immaterial to date; however, if the value of
the U.S. dollar increases relative to foreign currencies, the Company's
business, operating results, and financial condition could be materially
adversely affected.
PROVISION FOR INCOME TAXES. The Company recorded no significant federal income
tax provisions for fiscal years 2000, 1999 and 1998 due to the availability of
federal net operating loss carryforwards in 1999 and to net losses in fiscal
years 2000 and 1998. The Company recorded tax provisions in those years which
related primarily to foreign income tax withholding on software license
royalties paid to the Company by certain foreign licensees. At April 30, 2000,
the Company had available federal net operating loss carryforwards of
approximately $24.1 million.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000, the Company had cash, cash equivalents and short-term
investments of $11.2 million, compared to $11.4 million at April 30, 1999.
Working capital decreased to $5.8 million at April 30, 2000 from $12.3 million
at April 30, 1999.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company incurred a net loss of
$7,684,000 during the fiscal year ended April 30, 2000, and has an
accumulated deficit of $47,103,000 as of April 30, 2000. Additionally, the
Company has experienced a decline in revenues and, as a result of the Audit
Committee's investigation, as discussed above, and shareholder litigation, as
discussed in Item 3, has incurred and may continue to incur a significant
increase in expenses. The Company believes that it will need additional
financing to meet cash requirements for its operation, and the availability
of such financing on terms acceptable to the Company is uncertain. These
factors indicate that the Company may be unable to continue as a going
concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing or refinancing
as may be required, and ultimately to attain successful operations. Management
has realigned the Company's operations including a reduction of its workforce.
Management plans to further reduce operating costs, seek financing acceptable to
the Company, and increase marketing and sales efforts. There is no assurance
that management's plans will be successful or if successful, that they will
result in the Company continuing as a going concern. The Company's ability to
obtain additional financing on acceptable
25
terms will be adversely affected by the fact that NASDAQ has suspended trading
in the Company's Common Stock and subsequently delisted the Company's Common
Stock from the NASDAQ National Market. If adequate funds are not available to
satisfy the Company's short-term or long-term capital requirements, the Company
will be required to significantly reduce its operations. Additionally, the sale
of additional equity or other securities will result in dilution of the
Company's stockholders.
OPERATING CASH FLOWS. The Company generated negative cash flows from operations
totaling $0.6 million for fiscal year 2000 as compared to generating $0.7
million of positive cash flows in fiscal year 1999. In fiscal year 1998, the
Company had a negative operating cash flow of $3.7 million. The negative
operating cash flows for fiscal year 2000 resulted from a net loss of $7.7
million, offset primarily by depreciation of $0.9 million and increases in
deferred revenue of $1.3 million and other liabilities of $1.6 million and an
increase to accounts receivable of $3.8 million. Net cash provided by operation
in fiscal year 1999 consisted primarily of net income of $4.0 million, plus
depreciation of $1.1 million, offset by the changes in accounts receivable of
$3.6 million, and deferred revenue of $0.4 million. Cash provided by operations
in fiscal year 1998 consisted primarily of net loss of $2.2 million and the
change in accounts receivable and accrued liabilities and accounts payable of
$1.1 million, $1.1 million and $0.6 million, offset by depreciation of $1.2
million.
INVESTING CASH FLOWS. Net cash and cash equivalents provided by investing
activities totaled $1.5 million for fiscal year 2000, compared to cash used of
$1.3 million in fiscal year 1999 and cash provided of $1.2 million in fiscal
year 1998. Net cash provided by investing activities of $1.5 million in fiscal
year 2000 consisted primarily of $6.0 million in sales from available for sale
securities and a decrease in other assets of $0.3 million, offset by $3.7
million in securities purchases and $0.6 million in property and equipment
purchases and $0.6 million in other investments. Net cash used of $1.3 million
in fiscal year 1999 consisted primarily of the net increase of securities of
$0.6 million and the purchase of property and equipment of $0.6 million. Cash
provided of $1.2 million in fiscal year 1998 consisted primarily of the net
increase in securities of $1.6 million partially offset by the sale of other
assets.
FINANCING CASH FLOWS. Financing activities provided cash of $1.5 million in
fiscal year 2000, and $0.7 million in fiscal year 1999, and used cash of $1.9
million in fiscal year 1998. Cash provided by financing activities in fiscal
year 2000 of $1.3 million was provided from stock option exercises and purchases
under the employee stock purchase plan. Cash provided by financing activities
for fiscal year 1999 consisted primarily of the proceeds from the sales of
common stock under the Company's stock option and stock purchase plans. In
fiscal year 1998, cash used in financing was principally for the retirement of a
$2.4 million stockholder line of credit offset by proceeds from the sales of
common stock totaling $0.5 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The statement requires balance sheet recognition of derivatives as assets or
liabilities measured at fair value. Accounting for gains and losses resulting
from changes in the values of derivatives is dependent on the use of the
derivative and whether it qualifies for hedge accounting. The Company believes
that the adoption of SFAS No. 133 will not have a material impact on its
financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. The accounting
and disclosure prescribed by SAB 101 will be effective for fiscal year beginning
May 1, 2001. The Company believes that it complies with the provisions of SAB
101.
26
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 and short-term investments. Cash equivalents are highly liquid
investments with original maturities of three months or less and are stated at
cost. Cash equivalents are generally maintained in money market accounts which
have as their objective preservation of principal and which hold investments
with maturity dates of less than 90 days. The Company does not believe its
exposure to interest rate risk is material for cash and short-term investments,
which totaled $11.2 million at April 30, 2000. The securities in the Company's
investment portfolio are generally classified as available for sale and,
consequently, are recorded on the consolidated balance sheet at fair value with
unrealized gains or losses reported as a separate component of stockholders'
equity.
Short-term investments totaled $3.7 million at April 30, 2000. Unify does not
use derivative financial instruments in its short-term investment portfolio,
places its investments with high quality issuers and, by policy, limits the
amount of credit exposure to any one issuer. The Company is averse to principal
loss and attempts to ensure the safety of its invested funds by limiting
default, market and reinvestment risk. Unify's investments at April 30, 2000
consisted of $1.0 million in government bonds and $2.6 million in corporate
bonds maturing within one year, and $0.1 million in corporate bonds maturing
within two years, both are exposed to changes in market interest rates as an
indicator of changes in the level of interest rates for those maturities. If
market interest rates were to change immediately and uniformly by ten percent
from levels at April 30, 2000, the fair value of the Company's cash equivalents
and short-term investments would change by an insignificant amount.
FOREIGN CURRENCY EXCHANGE RATE RISK. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company's business, operating results and
financial position. Historically, the Company's primary exposures have related
to local currency denominated sales and expenses in Europe, Japan and Australia.
For example, 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 owed to
the Company as a result of local currency sales of software licenses by the
Company's international subsidiaries in the United Kingdom, France and Japan. At
April 30, 2000, the Company had $0.6 million, $0.2 million and $0.8 million in
such receivables denominated in British pounds, French francs and Japanese yen,
respectively. The Company encourages prompt payment of these intercompany
balances in order to minimize its exposure to currency fluctuations, but it
engages in no hedging activities to reduce the risk of such fluctuations. A
hypothetical ten percent change in foreign currency rates would have an
insignificant impact on the Company's business, operating results and financial
position. The Company has not experienced material exchange losses on
intercompany balances in the past; however, due to the substantial volatility of
currency exchange rates, among other factors, it cannot predict the effect of
exchange rate fluctuations on its future business, operating results and
financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the financial statements and supplementary
financial information, which are filed, as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the Company's
Directors and Executive officers:
NAME AGE POSITION WITH THE COMPANY
- ---- --- ----------------------------------------------------
Todd Wille 38 President and Chief Executive Officer
David Adams 56 Corporate Controller and Acting Chief Financial Officer
Frank Verardi 51 Vice President, Enterprise Products and International
Dave Glende 39 Chief Technology Officer
Steve Whiteman 49 Director
Kurt M. Garbe 40 Director
Reza Mikailli 48 Director
TODD WILLE joined the Company on October 1, 2000 as the Chief Operating Officer
and Acting Chief Financial Officer. In November 2000, Mr. Wille was appointed
President and Chief Executive Officer. Mr. Wille originally joined the Company
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 CFO. Subsequently, Mr. Wille was promoted to Senior
Vice President of Operations. Mr. Wille continues to serve on the FRx Software
board of advisors. Mr. Wille received a B.A. in Business Administration with
concentrations in Accounting, Finance and MIS from Wartburg College.
DAVID ADAMS joined Unify as the Corporate Controller and Acting Chief Financial
Officer in November 2000, after serving as a consultant to the Company since
June 2000. Mr. Adams has more than 30 years experience in financial management
and Securities and Exchange Commission reporting. Mr. Adams served as Senior
Vice President and CFO for Bancorp Financial Services from 1997 to 1999. Prior
to that Mr. Adams served as Senior Vice President and CFO for Commerce Security
Bank from 1994 until the bank was sold in 1996. Mr. Adams received a B.A. in
Business Administration with concentrations in Accounting from Humboldt State
University and is a graduate of the Pacific Coast Banking School.
FRANK VERARDI joined the Company in August 1988 as Manager of Consulting
Services and was named Director of Client Services in 1989. In November 1995,
Mr. Verardi was appointed Vice President of Worldwide Product Delivery and
Customer Support and in May 1999 he was appointed Vice President of Worldwide
Professional Services. In November, 2000 Mr. Verardi was appointed Vice
President, Enterprise Product and International. Before joining Unify, Mr.
Verardi held various positions with Computer Sciences Corporation where his most
recent assignment was Director of Commercial Professional Services. Mr. Verardi
received a B.S. in Computer Science from California State University, Chico.
DAVID GLENDE Dave Glende joined Unify in 1985 and has held various management
positions in product development over the past 15 years before being appointed
Chief Technology Officer in February 2000. Mr. Glende oversees product strategy
and product marketing for the Company's Unify eWave product family. Prior to
joining Unify, Mr. Glende served as the manager of engineering for Advance Data
Institute. Mr. Glende holds a bachelor's degree in computer science from
California State University, Sacramento.
STEVEN D. WHITEMAN was appointed Acting Chief Executive Officer and Acting Chief
Financial Officer on July 31, 2000 and served in those positions until October
2000. He has served as a director of the Company since May
28
1997. From May 1993 until June 2000, Mr. Whiteman served as President of
Viasoft, Inc., a publicly traded software products and services company, where
he also served as Chief Executive Officer and a Director from February 1994 to
June 2000, and Chairman of the Board of Directors from April 1997 to June 2000.
Mr. Whiteman is also a director of Actuate Corporation and Netpro. Mr. Whiteman
holds a B.A. in Business Administration from Taylor University and a M.B.A. from
the University of Cincinnati.
KURT M. GARBE has served as a director of the Company since August 1999. Mr
Garbe has served as the Chief Operating officer for Asera Inc., a leading
eBusiness service provider of pre-integrated custom software solutions, since
September 1999. Mr. Garbe previously served as Executive Vice President of Field
Operations at U.S. Web/CKS, a strategic Internet and marketing communications
services company, from October 1997 to September 1999. From September 1995 to
June 1997, he was Vice President and General Manager of Professional Services at
Synopsys, Inc., an engineering design automation software company, and from 1991
to August 1995, he was Vice President at Gemini Consulting, a
management-consulting firm. Mr. Garbe holds a B.S. in Electrical Engineering
from Clarkson University, a M.E. degree from Cornell University, and a M.B.A.
from the Wharton School of the University of Pennsylvania.
REZA MIKAILLI has served as a director of the Company since November 1994. Mr.
Mikailli served as the Company's President and Chief Executive Officer from
November 1994 until June 2000, when he was placed on medical leave. Mr. Mikailli
was subsequently placed on administrative leave pending the conclusion of the
Audit Committee's investigation of improper accounting practices. In November
2000, Mr. Mikailli was terminated as President and Chief Executive Officer. From
October 1992 to November 1994, Mr. Mikailli served as the Company's Senior Vice
President of Products. Mr. Mikailli holds an M.S. degree in computer science
from Santa Clara University, and a B.S. degree in Computer Science and an M.S.
degree in Mathematics from the University of Tehran, Iran.
The Company's bylaws currently authorize up to four directors. Each director
holds office until the next annual meeting of stockholders and until his
successor is duly elected and qualified. The executive officers of the Company
serve at the discretion of the Board. There are no family relationships between
any of the directors or executive officers of the Company.
29
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of the
Chief Executive Officer of the Company and the four other most highly
compensated executive officers of the Company whose total salary and bonus for
fiscal 2000 exceeded $100,000 for services in all capacities to the Company
during fiscal 2000, 1999 and 1998.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------- ------------
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS (#) COMPENSATION
- --------------------------- ---- ------ -------- ------------ ------------
Reza Mikailli(2) 2000 $ 275,000 $717,699(3) - $ 266,448
President, Chief Executive Officer, 1999 275,000 303,500 970,000 246,600
and Director 1998 236,000 129,500 - -
Richard Medeiros(4) 2000 165,000 67,620 - -
Vice President, Americas Sales 1999 165,000 78,400 - -
1998 165,000 75.300 20,000 -
Jeremy Jackson(5) 2000 123,300 91,790 20,000 -
Vice President, Europe and 1999 115,600 166,700 - -
International Operations 1998 111,800 110,700 20,000 -
Frank Verardi(6) 2000 128,000 35,350 10,000 -
Vice President, Professional 1999 120,000 45,000 - -
Services 1998 110,000 27,750 20,000 -
Gary Pado(7) 2000 120,000 41,098 18,000 -
Chief Financial Officer, and Vice 1999 103,750 29,907 52,000 -
President of Finance and 1998 55,689 3,284 28,000 -
Administration
- -------------
30
(1) Bonuses for fiscal year 2000 were based on financial performance that
included significantly greater revenues than as reported in this Form 10-K.
The Company is therefore reviewing its alternatives regarding the payments
of the bonus amounts shown on the table.
(2) Mr. Mikailli's employment as President and Chief Executive Officer was
terminated in November 2000. Amounts shown under "All Other Compensation,"
for fiscal 2000, represent additional compensation of $24,000 for living
expenses and $202,726 to pay off Mr. Mikailli's promissory note to the
Company in accordance with his employment agreement, and $39,722 to
reimburse the Company for travel advances. For fiscal 1999 "All Other
Compensation" represents $24,000 for living expenses and $222,600 to pay
down Mr. Mikailli's promissory note.
(3) Includes $400,000 in sales commissions that the Company believes were not
properly earned and for which the Company is demanding reimbursement from
Mr. Mikailli.
(4) Mr. Medeiros left the Company in May 2000.
(5) Mr. Jackson was appointed Vice President, Europe and International
Operations in November 1998, and left the Company in November, 2000.
(6) Mr. Verardi was appointed Vice President, Enterprise Products and
International in November 2000.
(7) Mr. Pado was appointed Chief Financial Officer in November 1998, and
resigned in November 2000.
The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year ended
April 30, 2000 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO POTENTIAL REALIZABLE VALUE
UNDERLYING EMPLOYEES EXERCISE AT ASSUMED ANNUAL RATES OF
OPTIONS IN FISCAL PRICE EXPIRATION STOCK PRICE APPRECIATION
NAME GRANTED(1) YEAR ($/SH)(2) DATE FOR OPTION TERM(3)
- ---- ---------- ------------ ------- ----- -------------------------
5% ($) 10% ($)
-------- -------
Reza Mikailli - -% - - - -
Richard Medeiros - -% - - - -
Jeremy Jackson 20,000 3.8% $ 6.38 6/03/09 $ 80,184 $203,202
Frank Verardi 10,000 1.9% $ 5.16 8/03/09 $ 32,428 $ 82,178
Gary Pado 18,000 3.4% $ 5.88 8/25/09 $ 66,506 $168,538
- -----------------
(1) All options were granted under the Company's 1991 Stock Option Plan and
vest as to one forty-eighth of the subject shares upon completion of each
full month of continuous employment with the Company. The Company granted
an aggregate of 530,800 shares of Common Stock during the fiscal year ended
April 30, 2000. The Board of Directors retains discretion to modify the
terms, including the price, of outstanding options.
31
(2) 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 closing sales price on the NASDAQ National Market.
(3) Potential gains are net of the exercise price, but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with the rules of the Securities and Exchange Commission and
do not represent the Company's estimate or projection of the future Common
Stock price. Actual gains, if any, on stock option exercises are dependent
on the future financial performance of the Company, overall market
conditions, and the option holder's continued employment through the
vesting period.
The following table provides the specified information concerning exercises of
options to purchase the Company's Common Stock during the fiscal year ended
April 30, 2000 and unexercised options held as of April 30, 2000 by the persons
named in the Summary Compensation Table:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ACQUIRED OPTIONS AT 4/30/00(1) THE-MONEY OPTIONS AT 4/30/00(2)
ON VALUE ------------------------------ --------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
Reza Mikailli(3) 511,059 $ 5,514,126 - 505,209 $ - $ 5,517,893
Jeremy Jackson 15,730 204,240 1,000 29,834 10,625 216,986
Richard Medeiros 140,000 1,455,801 3,333 - 34,063 -
Frank Verardi 11,428 205,190 51,666 18,334 539,877 153,610
Gary Pado(4) 30,665 368,823 4,584 62,751 48,873 587,095
- ---------------------------
(1) Options granted under the Company's 1991 Stock Option Plan are generally
exercisable to the extent vested and generally vest as to one fourth of the
subject shares on the first anniversary of the grant date and an additional
one forty-eighth of the subject shares upon completion of each full month
of continuous employment with the Company thereafter.
(2) Valuation based on the difference between the option exercise price and the
fair market value of the underlying securities as of April 28, 2000 of
$12.00 per share, based on the closing sales price on the last trading day
of fiscal 2000 as reported by the NASDAQ National Market.
(3) Mr. Mikailli's employment with the Company was terminated in November 2000,
and his options are no longer exercisable.
(4) Mr. Pado's employment with the Company terminated upon his resignation in
November 2000, and his options are no longer exercisable.
32
EMPLOYMENT AGREEMENTS AND TERMINATION AND CHANGE OF CONTROL ARRANGEMENTS
The Company had an employment agreement with Mr. Mikailli, the Company's former
President and Chief Executive Officer. Mr. Mikailli's employment with the
Company terminated in November 2000. Under the agreement, as amended, Mr.
Mikailli received an annual salary of $275,000 and was eligible to receive
certain bonus payments upon the Company's achieving certain levels of its
business plan. The agreement also provided for forgiveness of Mr. Mikailli's
promissory note in favor of the Company (see "Certain Relationships and Related
Transactions - Amounts Due from Officers, Directors and Principal
Stockholders"). If Mr. Mikailli was terminated within twelve months following a
merger of the Company or a sale by the Company of all or substantially all of
its assets, the unvested portion of all options held by him as of the date of
such termination would have automatically vested. The employment agreement
further provided that if Mr. Mikailli was terminated under any other
circumstances, such options would have the benefit of one additional year of
vesting and Mr. Mikailli would have received an amount equal to six months'
salary and bonus, based upon the actual bonus earned for the prior year. Mr.
Mikailli would have also received his annual base salary, benefits and bonus for
an additional six months from the date of the earlier of termination or until he
commenced new employment. The Company terminated Mr. Mikailli's employment in
November 2000, but, the Company has not paid him any of the foregoing severance
benefits and does not believe he is entitled to them. Mr. Mikailli has not
requested payment of these benefits.
The Company's 1991 Stock Option Plan contains provisions pursuant to which
the unvested portions of all outstanding options become fully vested and
immediately exercisable upon a merger of the Company in which the Company's
stockholders do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Company or its successor,
if the successor corporation fails to assume the outstanding options or
substitute options for the successor corporation's stock to replace the
outstanding options. The outstanding options will terminate to the extent
they are not exercised as of consummation of the merger or assumed or
substituted for by the successor corporation.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of July 31, 2000 with
respect to the beneficial ownership of the Company's Common Stock by (i) each
director of the Company, (ii) the Chief Executive Officer and the four other
most highly compensated executive officers of the Company as of April 30, 2000
whose salary and bonus for fiscal 2000 exceeded $100,000, (iii) all current
directors and executive officers of the Company as a group, and (iv) each person
known by the Company to own more than 5% of the Company's Common Stock.
NAME AND ADDRESS OF
BENEFICIAL OWNER SHARES OWNED (1)
---------------- ------------------------
NUMBER PERCENTAGE
OF SHARES OF CLASS
--------- --------
5% STOCKHOLDERS
Morgan Stanley Dean Witter (2)............................ 1,525,710 8.1
1585 Broadway
New York, NY 10036
Gardner Lewis Asset Management (3)....................... 1,088,524 5.6
285 Wilmington-West
Chester Pike
Chadds Ford, PA 19317
DIRECTORS
Reza Mikailli (4)........................................ 20,209 *
Kurt M. Garbe (5)......................................... 17,985 *
Steven D. Whiteman (6)................................... 62,183 *
EXECUTIVE OFFICERS
Jeremy Jackson (7)....................................... 11,834 *
Richard Medeiros (8)...................................... 146,000 *
Gary Pado (9)............................................ 46,003 *
Frank Verardi (10) ...................................... 28,919 *
All directors and executive
officers as a group (9
persons) (11)............................................ 470,722 2.5
* Less than 1%
- ---------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options or warrants held by that person
that are currently exercisable, or will become exercisable within 60 days
of July 31, 2000, are deemed outstanding. Such shares, however, are not
deemed
34
outstanding for purposes of computing the percentage ownership of any other
person. Except as indicated in the footnotes to this table, the persons
named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable. Unless otherwise indicated, the
individuals in the table may be contacted in care of Unify Corporation,
2101 Arena Blvd, Suite 100, Sacramento, California 95834.
(2) Based on a Schedule 13G/A filed by Morgan Stanley Dean Witter & Co. with
the Securities and Exchange Commission on February 1, 2000.
(3) Based on a Schedule 13G/A filed by Gardner Lewis Asset Management with the
Securities and Exchange Commission on April 11, 2000.
(4) Consists entirely of shares subject to options held by Mr. Mikailli which
are exercisable within 60 days of July 31, 2000.
(5) Consists entirely of shares subject to options held by Mr. Garbe which are
exercisable within 60 days of July 31, 2000.
(6) Consists entirely of shares subject to options held by Mr. Whiteman which
are exercisable within 60 days of July 31, 2000.
(7) Mr. Jackson was Vice President, Europe and International Operations before
leaving the Company in November 2000. Consists entirely of shares subject
to options held by Mr. Jackson which are exercisable within 60 days of July
31, 2000.
(8) Mr. Medeiros was Vice President, Americas Sales before leaving the Company
in May, 2000
(9) Includes 5,733 shares subject to options, which are exercisable within 60
days of July 31, 2000.
(10) Mr. Verardi is Vice President, Enterprise Products and International.
Includes 8,541 shares subject to options, which are exercisable within 60
days of July 31, 2000.
(11) Includes 261,646 shares subject to options, which are exercisable within 60
days of July 31, 2000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of the Company'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 the Company
with copies of all Section 16(a) reports filed by them.
Based solely on the Company's review of such reports furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and more than 10% stockholders for the fiscal year ended April 30,
2000 were complied with, except that executive officer Reza Mikailli, filed four
late reports on Form 5 for disposition of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AMOUNTS DUE FROM OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS. In January
1996, the Company accepted a full-recourse promissory note in the principal
amount of $195,000 from Mr. Mikailli in payment of the exercise price for
options, which were granted in fiscal 1994, 1995 and 1996. The note bore
interest at 5% per annum and was secured by the related 769,462 shares of Common
Stock. Under the terms of an employment agreement with
35
Mr. Mikailli which was effective May 1, 1998, this promissory note was paid down
at the rate of $25,000 per quarter and the due date for the note and accrued
interest thereon were extended quarterly, both contingent upon his continued
employment with the Company. As of April 30, 2000 this note has been paid in
full.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS. The Company's Restated
Certificate of Incorporation (the "Certificate") limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that a corporation's certificate of incorporation may contain a provision
eliminating or limiting the personal liability of a director for monetary
damages for breach of their fiduciary duties as directors, except for liability
for (i) any breach of their duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law, or (iv) any transactions from which
the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors,
executive officers, and trustees to the fullest extent permitted by law. The
Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. The
Company's Bylaws also permit the Company to secure insurance on behalf of any
executive officer, director, employee or other agent for any liability arising
out of his or her actions in such capacity, regardless of whether the Bylaws
would permit indemnification.
The Company has entered into agreements to indemnify its directors and executive
officers, in addition to the indemnification provided for in the Company's
Bylaws. These agreements, among other things, indemnify the Company's directors
and executive officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company or
any other company or enterprise to which the person provides services at the
request of the Company. The Company believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS ANNUAL REPORT ON FORM
10-K:
1. CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER
-----------
Independent Auditors' Report 40
Consolidated Balance Sheets as of April 30, 2000 and 1999 41
Consolidated Statements of Operations for the years ended April 30, 2000,
1999 and 1998 42
Consolidated Statements of Stockholders' Equity for the years ended
April 30, 2000, 1999 and 1998 43
Consolidated Statements of Cash Flows for the years ended April 30, 2000,
1999 and 1998 44
Notes to Consolidated Financial Statements 45
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts 64
All other schedules are omitted because they are not applicable, or
the required information is shown in the Consolidated Financial
Statements or Notes thereto.
3. EXHIBITS - See Item 14(c) below.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended April 30, 2000.
(c) EXHIBITS
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Registrant (1)
4.1 Form of Stock Certificate (1)
4.2 Series E Stock Purchase Agreement by and among the Company and the
purchasers named therein, dated April 2, 1992 (1)
10.1* Employment Agreement by and between Reza Mikailli and the Registrant
dated May 1, 1998 (2)
10.2* 1991 Stock Option Plan, as amended (1)
10.3* 1996 Employee Stock Purchase Plan (1)
10.4 Form of Indemnification Agreement (1)
10.5 Joint Venture Agreement, dated September 3, 1990, as amended, by and
among the Registrant, Unify Japan Corporation, Sumitomo Metals
Industries, Ltd. and Artificial Intelligence Research (1)
10.6 Office Building Lease for Sacramento Facility, Dated December 17, 1999
10.7 ServletExec OEM Agreement by Registrant and New Atlanta Communications, LLC
21.1 Subsidiaries of the Registrant (1)
23.1 Independent Auditors' Consent
37
- ----------------------
(1) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form S-1 Registration Statement (No. 333-3834) declared
effective by the Securities and Exchange Commission on June 14, 1996.
(2) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form 10-Q on December 15, 1998.
* Exhibit pertains to a management contract or compensatory plan or
arrangement.
(d) FINANCIAL STATEMENT SCHEDULE
See Item 14(a)(2) above.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNIFY CORPORATION
By: /s/ TODD E. WILLE
------------------------------------------
Todd E. Wille
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: April 26, 2001
39
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Unify Corporation:
We have audited the accompanying consolidated balance sheets of Unify
Corporation and subsidiaries (the "Company") as of April 30, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended April 30, 2000. Our audit
also comprehended the Company's financial statement schedule listed in item
14(a)2. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Unify Corporation and subsidiaries
as of April 30, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended April 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's net loss during the year ended
April 30, 2000, its accumulated deficit as of April 30, 2000, the decline in the
Company's revenues, the significant increase in expenses as a result of the
Audit Committee's investigation and shareholder litigation, and the uncertainty
of the availability of financing needed to fund the Company's operating cash
requirements, raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
As discussed in Note 18 to the consolidated financial statements, the
accompanying consolidated financial statements have been restated.
DELOITTE & TOUCHE LLP
Sacramento, California
December 19, 2000
(April 26, 2001 as to the effects of the restatement discussed in Note 18)
40
UNIFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
APRIL 30, APRIL 30,
2000 1999
(AS RESTATED, (AS RESTATED,
SEE NOTE 18) SEE NOTE 18)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,525 $ 5,315
Investments 3,669 6,072
Accounts receivable, net of allowances of $1,757 in 2000,
and $850 in 1999 5,313 9,207
Prepaid expenses and other current assets 834 748
----------- -----------
Total current assets 17,341 21,342
Property and equipment, net 1,033 1,417
Other investments 3,370 -
Other assets 48 192
----------- -----------
Total assets $ 21,792 $ 22,951
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,125 $ 1,152
Other accrued liabilities 3,075 1,584
Accrued compensation and related expenses 1,412 1,650
Notes payable to minority interest stockholders 471 608
Deferred revenue 5,423 4,012
----------- -----------
Total current liabilities 11,506 9,006
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
no shares issued or outstanding in 2000 and 1999 - -
Common stock, $0.0005 par value; 80,000,000 shares authorized;
18,745,079 and 17,467,172 shares outstanding in 2000 and 1999,
respectively 9 9
Additional paid-in capital 58,272 54,123
Note receivable from stockholder - (125)
Accumulated other comprehensive loss (892) (643)
Accumulated deficit (47,103) (39,419)
------------ -----------
Total stockholders' equity 10,286 13,945
----------- -----------
Total liabilities and stockholders' equity $ 21,792 $ 22,951
=========== ===========
See accompanying notes to consolidated financial statements
41
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEARS ENDED APRIL 30,
----------------------------------------------
2000 1999 1998
(AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 18) SEE NOTE 18) SEE NOTE 18)
------------ ------------ ------------
Revenues:
Software licenses $ 12,576 $ 19,768 $ 15,580
Services 8,475 9,680 9,342
----------- ----------- -----------
Total revenues 21,051 29,448 24,922
----------- ----------- -----------
Cost of revenues:
Software licenses 1,342 849 647
Services 4,037 4,404 4,389
----------- ----------- -----------
Total cost of revenues 5,379 5,253 5,036
----------- ----------- -----------
Gross margin 15,672 24,195 19,886
----------- ----------- -----------
Operating expenses:
Product development 6,696 5,928 5,733
Selling, general and administrative 16,835 14,463 16,353
----------- ----------- -----------
Total operating expenses 23,531 20,391 22,086
----------- ----------- -----------
Income (loss) from operations (7,859) 3,804 (2,200)
Other income, net 367 304 167
----------- ----------- -----------
Income (loss) before income taxes (7,492) 4,108 (2,033)
Provision for income taxes 192 231 182
----------- ----------- -----------
Net income (loss) $ (7,684) $ 3,877 $ (2,215)
=========== =========== ===========
Net income (loss) per share:
Basic $ (0.42) $ .23 $ (0.13)
=========== =========== ===========
Diluted $ (0.42) $ .21 $ (0.13)
=========== =========== ===========
Shares used in computing net income (loss) per share:
Basic 18,127 17,110 16,412
=========== =========== ===========
Diluted 18,127 18,102 16,412
=========== =========== ===========
See accompanying notes to consolidated financial statements.
42
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
ACCUMULATED
NOTE OTHER COMPRE-
COMMON STOCK ADDITIONAL RECEIVABLE COMPRE- ACCUM- TOTAL HENSIVE
-------------------- PAID-IN FROM HENSIVE ULATED STOCKHOLDERS' INCOME
SHARES AMOUNT CAPITAL STOCKHOLDER INCOME(LOSS) DEFICIT EQUITY (LOSS)
------ ------ ------- ----------- ------------ ------- ------ ------
Balances at May 1, 1997
(as restated, see note 18) 16,128,868 $ 8 $ 52,965 $(207) $ (768) $(41,081) $ 10,917
Comprehensive loss
Net loss (as restated,
see note 18) - - - - - (2,215) (2,215) $ (2,215)
Translation adjustments - - - - (85) - (85) (85)
Liquidation of subsidiaries - - - - 332 - 332 332
--------
Total comprehensive loss $ (1,968)
Exercise of stock options 141,890 - 43 - - - 43
Issuance of common stock
under employee stock
purchase plan 445,044 - 469 - - - 469
Repurchase of common stock (25,288) - (3) - - - (3)
Accrual of interest on note
receivable from stockholder - - - (9) - - (9)
Balances at April 30, 1998 ---------- --- ------ ----- ----- -------- ------
(as restated, see note 18) 16,690,514 8 53,474 (216) (521) (43,296) 9,449
Comprehensive income
Net income ( as restated,
see note 18) - - - - - 3,877 3,877 $ 3,877
Translation adjustments - - - - (122) - (122) (122)
--------
Total comprehensive income $ 3,755
Exercise of stock options 645,752 1 580 - - - 581
Issuance of common stock
under employee stock
purchase plan 235,906 - 228 - - - 228
Repurchase of common stock (105,000) - (159) - - - (159)
Payment on note receivable
from stockholder, net of
interest - - - 91 - - 91
Balances at April 30, 1999 ---------- --- ------ ---- ----- ------ ------
(as restated, see note 18) 17,467,172 9 54,123 (125) (643) (39,419) 13,945
Comprehensive loss
Net loss (as restated,
See note 18) - - - - - (7,684) (7,684) $ (7,684)
Translation adjustments - - - - (210) - (210) (210)
Unrealized loss on investments - - - - (39) - (39) (39)
---------
Total comprehensive loss $ (7,933)
Exercise of stock options 945,840 - 1,112 - - - 1,112
Issuance of common stock :
Under employee stock
purchase plan 111,755 - 217 - - - 217
Acquisition of investment 216,931 2,820 - - - 2,820
Payment on note receivable
from stockholder, net of
interest - - - 125 - - 125
Other 3,381 - - - - - -
Balances at April 30, 2000
---------- --- -------- ----- ------- -------- --------
(as restated, see note 18) 18,745,079 $ 9 $ 58,272 $ 0 $ (892) $(47,103) $ 10,286
========== === ======== ===== ======= ======== ========
See accompanying notes to consolidated financial statements.
43
UNIFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED APRIL 30,
--------------------------------------------
2000 1999 1998
(AS RESTATED, (AS RESTATED, (AS RESTATED,
SEE NOTE 18) SEE NOTE 18) SEE NOTE 18)
------------- ------------- ------------
Cash flows from operating activities:
Net income (loss) $ (7,684) $ 3,877 $ (2,215)
Reconciliation of net income (loss) to cash
provided by (used in) operating activities:
Depreciation 942 1,099 1,155
Liquidation of subsidiaries - - 332
Changes in operating assets and liabilities:
Accounts receivable 3,805 (3,638) (1,063)
Prepaid expenses and other current assets (103) 38 (262)
Accounts payable (43) 99 (559)
Note payable to minority interest stockholders (207) (216) (24)
Accrued compensation and related expenses (226) (242) (78)
Other accrued liabilities 1,620 (740) (1,053)
Deferred revenue 1,250 383 112
--------- --------- --------
Net cash provided by (used in) operating activities (646) 660 (3,655)
---------- --------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (3,669) (4,072) (6,981)
Sales of available-for-sale securities 6,033 3,459 8,655
Purchases of property and equipment (564) (596) (666)
Decrease in other investments (550) - -
Other assets 298 (97) 234
--------- ---------- --------
Net cash provided by (used in) investing activities 1,548 (1,306) 1,242
--------- ---------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,329 651 509
Principal payments under debt obligations - (22) (2,414)
Collection of notes receivable from stockholders,
net of interest accrual 125 91 (9)
--------- --------- ---------
Net cash provided by (used in) financing activities 1,454 720 (1,914)
--------- --------- ---------
Effect of exchange rate changes on cash (146) (38) 93
--------- ---------- --------
Net increase (decrease) in cash and cash equivalents 2,210 36 (4,234)
Cash and cash equivalents, beginning of year 5,315 5,279 9,513
--------- --------- --------
Cash and cash equivalents, end of year $ 7,525 $ 5,315 $ 5,279
========= ========= ========
Supplemental noncash investing and financing activities:
Common stock issued for acquisition of investment $ 2,820 $ - $ -
Supplemental cash flow information: Cash paid during the year for:
Interest $ 115 $ 53 $ 330
Income taxes $ 464 $ 119 $ 162
See accompanying notes to consolidated financial statements.
44
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTIGATION
In June 2000, certain matters came to the attention of Unify Corporation's
(the "Company") Board of Directors that indicated that the Company had
engaged in improper accounting practices. The Company's Board of Directors
authorized its Audit Committee to conduct an investigation of the Company's
accounting and financial reporting practices and to recommend remedial
action, if any, as a result of the findings of their investigation. In July
2000, in connection with the ongoing investigation, the Company placed its
chief executive officer and its chief financial officer on administrative
leave, and in November 2000, the Company terminated its chief executive
officer and its chief financial officer resigned. Based on the results of the
Audit Committee's investigation, the Company concluded that revenue, and in
some cases expenses, had been improperly accounted for in certain
transactions during the fiscal year ended April 30, 2000, and adjustments
were made for such transactions, including restatements of previously
reported quarterly financial statements. The investigation also identified
commissions, bonuses and other payments made to the Company's former chief
executive officer during the fiscal year ended April 30, 2000, which the
Company believes were not appropriate. Such payments in the amount of
approximately $500,000 have been charged to expense in that fiscal year;
however, the Company is seeking to have the amounts repaid by the former
chief executive officer. The investigation also included a review of
transactions in earlier fiscal years. After evaluating information from the
results of the investigation, the Company concluded that its financial
statements for the fiscal year ended April 30, 1999 and earlier were not
materially misstated. Also, the Company concluded that the effect on the
financial statements for fiscal 2000 of adjustments relating to transactions
of earlier years not being made in those years was not material.
Subsequent to the issuance of the Company's financial statements for the fiscal
year ended April 30, 2000, and in connection with comments by the Staff of the
Securities and Exchange Commission (the "Staff") relating to the Staff's review
of the Company's Form 10-K for the year ended April 30, 2000, the Company and
the Staff had extensive communications regarding the materiality of the
adjustments relating to transactions in 1999 and earlier years referred to
above. Following such communications, management determined that the Company
would record the adjustments in the applicable years. Accordingly, the
accompanying financial statements for the fiscal years ended April 30, 2000,
1999 and 1998 have been restated from amounts previously reported to reflect
those adjustments. A summary of the effects of the restatement is presented in
Note 18.
THE COMPANY
Unify Corporation develops, markets and supports the Unify eWave and Unify
VISION software products which extend business applications to the web and
enable information technology organizations to deliver e-commerce applications
by integrating enterprise custom-built and packaged applications with the
Internet. The Company also enhances, markets and supports Unify DataServer, a
family of database management system products, and markets and supports
ACCELL/SQL, a family of fourth generation language application development
tools.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and Unify Japan KK, which is 66% owned by
the Company. All significant intercompany balances and transactions have been
eliminated. At April 30, 2000, Unify Japan KK was in a negative equity position,
and as a result, the Company did not allocate any of Unify Japan KK net earnings
or loss to the minority interest shareholders.
The functional currencies of the Company's foreign subsidiaries are their local
currencies. Assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at period-end exchange rates. Income and
45
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
expense accounts are translated at average rates of exchange in effect during
the reporting period. Foreign currency transaction gains or losses are included
in other income, net. Foreign currency adjustments resulting from the
translation process are excluded from net income and accumulated in other
comprehensive income.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturities of three
months or less when purchased and are stated at cost. Cash equivalents consist
primarily of demand deposits with banks, certificates of deposit, money market
funds, and corporate debt securities.
INVESTMENTS
The Company's investments are classified as available-for-sale under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The
investments are carried at fair value, which approximated cost at April 30, 2000
and 1999. Unrealized gains or losses are reported as accumulated other
comprehensive income. Realized gains and losses and declines in value judged to
be other than temporary on available-for-sale securities are included in other
income, net. The cost of securities sold is based on the specific identification
method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, notes
receivable and accounts payable approximate fair value because of the short-term
maturity of these instruments. It is not practicable to determine the fair value
of amounts due to minority interest stockholders because of the nature of the
related party relationships.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments potentially subjecting the Company to concentrations of
credit risk consist primarily of cash, cash equivalents, accounts receivable and
investments. The Company places its cash, cash equivalents and investments
primarily with three financial institutions. The Company licenses its products
principally to companies in the United States, Europe, and Japan and no single
customer accounted for 10% or more of consolidated revenues in the years ended
April 30, 2000, 1999 and 1998. The Company performs periodic credit evaluations
of its customers and generally does not require collateral. Allowances are
maintained for potential credit losses.
OTHER INVESTMENTS
The Company carries other investments at cost, subject to evaluation for
impairment.
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.
46
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CAPITALIZED SOFTWARE
Software development costs are accounted for in accordance with SFAS No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE
MARKETED. Under this standard, capitalization of software development costs
begins upon the establishment of technological feasibility, which for the
Company is usually upon completion of a working model, and ends when the product
is offered for sale. There are generally no significant capitalizable costs for
the Company's software development projects. In the event that capitalizable
software development costs do arise, amortization of those costs is computed on
a product-by-product basis as the greater of the ratio of current product
revenues to the total of current and anticipated product revenues or the
straight-line method over the software's estimated economic life, generally one
to three years.
LONG-LIVED ASSETS
The Company accounts for the impairment of long-lived assets in accordance with
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. As required by the statement, 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 not be 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 as well as the strategic
significance of any intangible asset in the Company's business objectives.
REVENUE RECOGNITION
Software license revenue is recognized when a noncancelable license agreement
has been executed, delivery has occurred, fees are fixed and determinable, and
collection of the resulting receivable is probable. Service revenue includes
support revenue, which is recognized ratably over the support period (generally
a one year term), and revenue from consulting and training services, which is
recognized as services are performed. Fees for support are billed in advance and
included in deferred revenue until recognized. The Company's revenue recognition
policies are in compliance with the provisions of the American Institute of
Certified Public Accountants' Statement of Position No. 97-2, SOFTWARE REVENUE
RECOGNITION.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards using the intrinsic value method of
accounting in accordance with Accounting Principles Board Opinion ("APB") No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations. As
such, compensation is recorded on the measurement date, generally the date of
issuance or grant, as the excess of the current estimated fair value of the
underlying stock over the purchase or exercise price. Any deferred compensation
is amortized over the respective vesting periods of the equity instruments, if
any.
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 invested.
47
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
EARNINGS PER SHARE
SFAS 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 years 2000 and 1998 as their effect would be antidilutive.
COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the period
from nonowner sources. The adoption of this statement resulted in a change in
financial statement presentation but had no impact on the Company's consolidated
financial position, results of operations, or cash flows.
SEGMENT REPORTING
On May 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement establishes standards for
the reporting of information about operating segments, including related
disclosures about products and services, geographic areas and major customers,
and requires selected information about operating segments in interim financial
statements. The adoption of this statement did not impact the Company's
consolidated financial position, results of operations, or cash flows. The
required segment data is presented in Note 15.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The statement requires balance sheet recognition
of derivatives as assets or liabilities measured at fair value. Accounting for
gains and losses resulting from changes in the values of derivatives is
dependent on the use of the derivative and whether it qualifies for hedge
accounting. The Company believes that the adoption of SFAS No. 133 will not have
a material impact on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. The accounting
and disclosures prescribed by SAB 101 is effective for the Company's fiscal year
beginning May 1, 2001. The Company believes that it complies with the provisions
of SAB 101.
NOTE 2. RESULTS OF OPERATIONS AND MANAGEMENT'S PLAN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company incurred a net loss of $7,684,000
during the year ended April 30, 2000, and has an accumulated deficit of
$47,103,000 as of April 30, 2000. Additionally, the Company has experienced a
decline in revenues and as a result of the Audit Committee's investigation and
shareholder litigation, has incurred and may continue to incur a significant
increase in expenses. The Company
48
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
believes that it will need additional financing to meet cash requirements for
its operations, and the availability of such financing on terms acceptable to
the Company is uncertain. These factors indicate that the Company may be unable
to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern. The Company's continuation as a
going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to obtain additional financing or
refinancing as may be required, and ultimately to attain successful
operations. Management has realigned the Company's operations including a
reduction of its workforce. Management plans to further reduce operating
costs, seek financing acceptable to the Company, and increase marketing and
sales efforts. There is no assurance that management's plans will be
successful or if successful, that they will result in the Company continuing
as a going concern.
NOTE 3. ACQUISITIONS
In April 2000, the Company acquired privately held New Atlanta Communications,
LLC a developer of a leading high-performance, scalable Web application server
and servlet engine that implements the Java Servlet API and JSP standards.
Pursuant to the terms of the purchase agreement, the Company agreed to purchase
all of the outstanding membership interests of New Atlanta in exchange for
500,000 shares of the Company's common stock with a guaranteed value of
$15,000,000 at the end of a two year period. The Company and New Atlanta
subsequently agreed to rescind the purchase agreement retroactive to April 1,
2000. Accordingly, the purchase has not been reflected in the financial
statements as of April 30, 2000. The operations of New Atlanta for the period of
April 1, 2000 to April 30, 2000 were immaterial.
Under the terms of the rescission agreement, Unify has transferred its interests
in New Atlanta back to the original owners in exchange for the Unify stock that
was to be issued in the original acquisition. Unify and New Atlanta entered into
a three year OEM agreement in which the Company is able to embed ServletExec
with the Unify eWave Engine, the Company's Java 2 Enterprise Edition Application
Server. Unify will continue to market, sell and support New Atlanta's product
until April 30, 2001, at which date responsibility for selling, marketing and
distributing the product will revert to New Atlanta.
NOTE 4. INVESTMENTS
Investments at April 30, 2000 consisted of $2,569,000 in corporate bonds and
$1,000,000 in government bonds maturing within one year; and $100,242 in
corporate bonds maturing within two years. Investments at April 30, 1999
consisted of $2,072,000 in money market funds and $4,000,000 in municipal bonds
maturing after 10 years.
NOTE 5. ACCOUNTS RECEIVABLE
During fiscal years 2000 and 1999, the Company had agreements to factor accounts
receivable on a non-recourse and full recourse basis. Such agreements terminated
in July 2000. During fiscal years 2000 and 1999, $5,600,000 and $2,200,000
respectively, of accounts receivable were sold under such agreements. As of
April 30, 2000, all receivables factored were sold on a non-recourse basis. As
of April 30, 1999, no receivables were factored.
49
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment at April 30 consisted of the following (in thousands):
2000 1999
---- ----
Equipment $ 5,127 $ 5,294
Furniture and leasehold improvements 1,229 1,271
----------- -----------
6,356 6,565
Less accumulated depreciation and amortization (5,323) (5,148)
----------- -----------
Property and equipment, net $ 1,033 $ 1,417
=========== ===========
NOTE 7. OTHER INVESTMENTS
Other investments represents common stock in three closely held technology
companies. The Company's ownership interest in each company is less than 10%. At
April 30, 2000 and 1999 other investments consisted of the following (in
thousands):
2000 1999
---- ----
Arrango Software International, Inc. $ 500 $ -
Ichatterbox, Inc. 50 -
Evergreen Internet, Inc. 2,820 -
----------- -----------
$ 3,370 -
=========== ===========
On February 25, 2000, the Company entered into an agreement to exchange shares
of its common stock or cash, or a combination of the two, with an aggregate
value of $5.0 million for 1,040,993 shares of the common stock of Evergreen
Internet, Inc. ("Evergreen"), a developer of software. On March 14, 2000, the
Company issued 216,931 shares of its common stock with a value of $2.8 million
to Evergreen as partial payment. On August 1, 2000, the Company paid $2.2
million in cash to Evergreen.
NOTE 8. STOCKHOLDERS' EQUITY
COMMON STOCK
In fiscal year 2000, the Company split its stock 2 for 1 for shareholders of
record on December 21, 1999. The effect of the split has been reflected in the
consolidated financial statements for all years presented.
PREFERRED STOCK
The Company may issue up to 5,000,000 shares of preferred stock in one or more
series upon authorization by the Company's board of directors. The board of
directors, without further approval of the stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, and any other rights, preferences,
privileges and restrictions applicable to each series of preferred stock.
COMMON STOCK REPURCHASE PLAN
In September 1998, the Company announced that its board of directors had
authorized the repurchase of up to 1,000,000 of its outstanding common shares.
During fiscal year 1999, 105,000 shares of common stock were repurchased and
retired under this program at an average price of $1.52 per share. The Company
did not repurchase any shares in fiscal year 2000.
50
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
STOCK OPTION PLAN
Under the 1991 Stock Option Plan (the "Option Plan"), the Company may grant
options to purchase up to 5,400,000 shares of common stock to eligible
employees, directors, and consultants at prices not less than the fair market
value at the date of grant for incentive stock options and not less than 85% of
the fair market value at the date of grant for non-statutory stock options.
Options granted under the Option Plan generally vest over four years, are
exercisable to the extent vested, and expire 10 years from the date of grant. A
summary of stock option activity under the Option Plan is as follows:
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------------ ----------
Outstanding at April 30, 1997 1,821,712 $ 1.35
Granted (weighted average fair value of $0.63) 713,500 1.27
Exercised (141,890) 0.30
Canceled/expired (519,282) 1.44
------------
Outstanding at April 30, 1998 1,874,040 1.38
Granted (weighted average fair value of $0.94) 1,430,704 1.63
Exercised (645,752) 0.90
Canceled/expired (382,872) 1.31
------------
Outstanding at April 30, 1999 2,276,120 1.49
Granted (weighted average fair value of $4.99) 530,800 7.92
Exercised (945,840) 1.18
Cancelled/expired (176,680) 4.04
------------
Outstanding at April 30, 2000 1,684,400 3.42
============
Additional information regarding options outstanding at April 30, 2000 is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING PRICE
--------------- ------------- ------------- -------------- ----------- --------
$0.18 - 1.06 99,404 5.87 $ 0.69 90,045 $ 0.66
1.08 - 1.08 505,209 2.00 1.08 - -
1.08 - 1.50 345,597 5.75 1.29 236,117 1.30
1.52 - 1.78 159,506 7.27 1.67 83,891 1.73
5.16 - 5.88 194,000 9.30 5.69 - -
6.03 - 8.81 315,684 8.88 6.78 31,375 6.06
11.03 - 17.75 36,000 9.40 14.28 - -
18.38 - 32.31 29,000 9.67 23.50 - -
------------- -------------
0.18 - 32.31 1,684,400 5.92 3.42 441,428 1.59
============= =============
Options to purchase 821,988 and 776,436 shares at weighted average prices of
$1.19 and $1.31 were exercisable at April 30, 1999 and 1998. At April 30, 2000,
810,211 shares were reserved for future grants under the Option Plan.
51
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the "Purchase Plan"), as Amended
effective August 7, 1997, eligible employees may purchase the Company's common
stock through payroll deductions of up to 15% of their base compensation.
Offering periods under the Purchase Plan are of 24 months' duration with
purchases occurring every six months. Common stock is purchased for the accounts
of participating employees at a price per share equal to the lower of (i) 85% of
the fair market value of a share of common stock at the beginning of the
offering period or (ii) 85% of the fair market value of a share of common stock
on the date of purchase. Common stock issued under the Purchase Plan during
fiscal 2000, 1999 and 1998 totaled 111,755, 235,906 and 445,044 shares at
weighted average prices of $1.93, $0.97 and $1.05, respectively. The weighted
average fair values of the fiscal 2000, 1999 and 1998 awards were $9.43, $1.28
and $0.46 per share, respectively. At April 30, 2000, 692,192 shares were
reserved for future issuance under the Purchase Plan.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements issued at fair value.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the disclosure
of pro forma net income (loss) and net income (loss) per share had the Company
adopted the fair value method to account for its stock-based awards. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated through
the use of option pricing models which were developed to estimate the fair value
of freely tradeable, fully transferable options without vesting restrictions.
Such options differ significantly from the Company's stock-based awards. These
models require subjective assumptions, including future stock price volatility
and expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value method for the periods
prior to June 1996, the date of the Company's initial public offering of common
stock and the Black-Scholes option pricing model for subsequent periods, with
the following weighted average assumptions: expected option life, 12 months
following vesting; stock volatility, 93% in fiscal 2000, 83% in fiscal 1999 and
67% in fiscal 1998; risk-free interest rates, 5.9% in fiscal 2000, 5.1% in
fiscal 1999 and 5.8% in fiscal 1998; and no dividends during the expected term.
The Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
Company's stock-based awards had been amortized to expense over the vesting
period of the awards, pro forma net loss would have been $9,042,000 or $0.50 per
basic share and diluted share in fiscal 2000 while pro forma earnings would have
been $3,193,000 or $0.19 per basic and $0.18 per diluted share in fiscal 1999
and a proforma net loss of $2,831,000 or $0.17 per basic and diluted share in
fiscal 1998.
NOTE RECEIVABLE FROM STOCKHOLDER
Note receivable from stockholder at April 30, 1999 consisted of the principal
balance and accrued interest due on a $195,000 full recourse note from one of
the Company's officers. The note has an interest rate of 5% annually. The note
was paid in full during the year ended April 30, 2000.
52
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9. INCOME TAXES
The Company recorded no significant federal income tax provisions for the years
ended April 30, 2000 and 1998 due to a net loss. No significant federal income
tax provisions were recorded for the year ended April 30, 1999 due to the use of
federal net operating loss carryforwards. The Company's tax provisions in those
years which were primarily related to foreign income tax withholding on software
license royalties paid to the Company by certain licensees. Income (loss) before
income taxes and provisions for income taxes, which consisted of current tax
expense, for the years ended April 30 were as follows (in thousands):
2000 1999 1998
------------ ----------- ------------
Domestic $ (6,216) $ 3,921 $ (1,339)
Foreign (1,276) 187 (694)
------------ ----------- ------------
Total income (loss) before income taxes $ (7,492) $ 4,108 $ (2,033)
============ =========== ============
Foreign taxes $ 190 $ 130 $ 108
Federal and state income taxes 2 101 74
----------- ----------- -----------
Total provision for income tax $ 192 $ 231 $ 182
=========== =========== ===========
The provision for income taxes for the years ended April 30, 2000, 1999 and 1998
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):
2000 1999 1998
----------- ---------- -----------
Computed tax expense (benefit) $ (2,622) $ 1,438 $ (712)
Increases (reductions) in tax expense resulting from:
Foreign withholding taxes 190 130 108
Increase (decrease) in valuation allowance for
deferred tax assets 2,767 (2,006) 789
Other (143) 669 (3)
----------- ----------- -----------
Actual provision for income tax $ 192 $ 231 $ 182
=========== =========== ===========
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):
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 10,091 $ 9,180
Foreign tax credits 1,463 1,068
Deferred revenue 2,285 1,037
Reserves and other accruals 388 385
Allowance for losses on accounts receivable 789 422
Other 113 270
----------- -----------
Total deferred tax assets 15,129 12,362
Valuation allowance (15,129) (12,362)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
53
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Due primarily to changes in the deferred tax assets recorded for net
operating loss carryforwards, and deferred revenue, the valuation allowance
increased by $2,767,000 in the year ended April 30, 2000 and decreased by
$2,006,000 in the year ended April 30, 1999. At April 30, 2000, the Company
had approximately $24,113,000 in federal net operating loss carryforwards,
approximately $5,687,000 in state net operating loss carryforwards,
approximately $4,692,000 in foreign net operating loss carryforwards, and
approximately $1,463,000 in foreign tax credit carryforwards. The Company's
federal net operating loss carryforwards expire beginning in fiscal 2006. The
Company's other net operating loss and tax credit carryforwards have various
expiration dates beginning in fiscal year 2001. The Company's ability to
utilize these net operating loss carryforwards may be subject to certain
limitations in the event of a change in ownership.
NOTE 10. OTHER INCOME
Other income, net for the years ended April 30, consisted of the following (in
thousands):
2000 1999 1998
----------- ----------- -----------
Interest income $ 471 $ 448 $ 509
Interest expense (118) (53) (113)
Foreign currency translation loss (61) (99) (46)
Loss on liquidation of subsidiaries - - (332)
Other 75 8 149
----------- ----------- -----------
Other income, net $ 367 $ 304 $ 167
=========== =========== ===========
NOTE 11. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years ended April 30.
All share and per share amounts have been adjusted to give effect to the 2 for 1
stock split in fiscal 2000 (in thousands except per share amounts):
2000 1999 1998
------------ ----------- -----------
Net Income (Loss) (Numerator):
Net income (loss), basic and diluted $ (7,684) $ 3,877 $ (2,215)
============ =========== ===========
Shares (Denominator):
Weighted average shares of common stock
outstanding, basic 18,127 17,110 16,412
Effect of dilutive securities (stock options) - 992 -
----------- ----------- -----------
Weighted average shares of common stock
outstanding, diluted 18,127 18,102 16,412
=========== =========== ===========
Per Share Amount:
Net income (loss) per share, basic $ (0.42) $ 0.23 $ (0.13)
Effect of dilutive securities - (0.02) -
----------- ------------ -----------
Net income (loss) per share, diluted $ (0.42) $ 0.21 $ (0.13)
=========== =========== ===========
Antidilutive Shares: 1,533 - 2,150
=========== =========== ===========
54
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12. RELATED PARTY TRANSACTIONS
Unify Japan KK ("Unify Japan") has been the exclusive distributor and master
licensee for the Company's products in Japan since July 1994. Prior to March
1999, the Company, Sumitomo Metals Industries, Ltd. ("SMI") and Artificial
Intelligence Research, Ltd. ("AIR") owned 51%, 34% and 15% interests,
respectively, in Unify Japan. In March 1999, the Company purchased AIR's entire
interest in Unify Japan. At April 30, 2000, the Company and "SMI" own 66% and
34% of Unify Japan respectively.
TRANSACTIONS WITH SMI
Total revenues include revenues from SMI of $413,000, $549,000 and $772,000 in
fiscal years 2000, 1999 and 1998, respectively. Unify Japan leases office space
from SMI; rent expense for this office space totaled approximately $63,000,
$74,000 and $112,000 in fiscal years 2000, 1999 and 1998, respectively. Unify
Japan also paid SMI approximately $26,000, $61,000 and $169,000 for the services
of SMI employees in fiscal years 2000, 1999 and 1998, respectively. In September
1995, Unify Japan entered into a 100 million yen loan agreement with a bank
affiliated with SMI. The loan bears interest at the Tokyo International Bank
Offered Rate ("TIBOR") plus 50 basis points (approximately 1% at April 30,
2000), and is secured by the assets of Unify Japan. The agreement due date has
been extended to September 2001. At April 30, 2000, 50 million yen, or $471,000,
was outstanding under this loan agreement. Amounts due to minority interest
stockholders at April 30, 2000 and 1999 consisted entirely of the balances due
under this loan agreement.
TRANSACTIONS WITH DIRECTORS
Included in prepaid expenses and other current assets at April 30, 2000 is a
note receivable from the Company's former chief executive officer in the amount
of $43,560 for the purchase of the Company's common stock, upon the exercise of
stock options. This note was paid in full in May 2000.
As discussed in Note 1, the investigation conducted by the Audit Committee
identified commissions, bonuses and other payments made to the Company's former
chief executive officer which the Company believes were not appropriate.
Although these payments have been charged to expense, the Company is seeking to
have these amounts repaid.
NOTE 13. EMPLOYEE RETIREMENT PLAN
The Company maintains a 401(k) profit sharing plan (the "401(k) Plan"). Eligible
employees may contribute up to 15% of their pre-tax annual compensation to the
401(k) Plan, subject to certain statutory limitations. The Company voluntarily
matches 75% of participating employees' contributions up to 6% of each
employee's annual compensation. In fiscal years 2000, 1999 and 1998, the Company
contributed $254,000, $187,000 and $99,000, respectively, to the 401(k) Plan.
55
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and equipment under noncancelable operating
lease arrangements. Future minimum rental payments under these leases as of
April 30, 2000 were as follows, (in thousands):
Years Ending April 30,
2001 $ 1,241
2002 1,083
2003 979
2004 920
2005 910
Thereafter 2,630
-----------
$ 7,763
-----------
-----------
Rent expense under operating leases was $1,400,000, $1,398,000, and $1,561,000
for the years ended April 30, 2000, 1999 and 1998, respectively.
EMPLOYMENT AGREEMENTS AND TERMINATION AND CHANGES OF CONTROL ARRANGEMENTS
The Company had an employment agreement with its former chief executive officer
that contained termination and change in control arrangements. In November 2000,
the Company terminated the employment of its chief executive officer. In light
of the circumstances of the termination, the Company does not believe that he is
entitled to any termination benefits under the employment agreement.
LITIGATION
Beginning on July 31 and through October 2000, a series of purported class
action complaints were filed in the U.S. District Court, Northern District of
California, against the Company and certain of its directors and officers. The
plaintiffs in each of these actions claim to be suing on behalf of a class of
persons who purchased the Company's common stock during periods specified in the
complaint.
The class periods generally alleged are May 19, 1999 to July 28, 2000. The
complaints allege that Unify and certain of its executives caused materially
false and misleading financial statements to be issued for the fiscal year 1999
and for each of its fiscal year 2000 quarters. The complaints allege that, as a
result of Unify's alleged misrepresentations and omissions, the price of Unify's
stock was artificially inflated during the class period, allowing company
insiders to sell their stock at artificially high prices and inducing investors
to buy the stock at artificially high prices. The complaints seek an unspecified
amount in damages.
From August through October, 2000, five shareholder derivative actions were
filed, four in the Superior Court of the State of California and one in the
US District Court for the Northern District of California. The plaintiffs in
these actions claim to be suing on behalf of the Company. These actions name as
defendants certain of the Company's present and former officers and directors.
The complaints allege substantially the same conduct, and concern the same time
period, as the shareholder class action filed in U.S. District Court. The
complaints assert that, as a result of this conduct, certain of the Company's
officers, directors and former officers and directors breached their fiduciary
duties to Unify and engaged in improper insider trading. The complaint seeks an
unspecified amount in damages and injunctive relief on the Company's behalf. The
Company and the individual defendants intend to defend all of these actions
vigorously. The ultimate outcome of these matters cannot
56
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
presently be determined. There can be no assurance that any of the complaints
discussed above will be resolved without costly litigation, or in a manner that
does not have a material adverse effect on the Company's financial position,
results of operations or cash flows. No estimate can be made of the possible
loss or possible range of loss associated with the resolution of these
contingencies.
57
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15. SEGMENT INFORMATION
The Company has three reportable operating segments, the United States, Europe,
and Japan, which are organized, managed and analyzed geographically and operate
in one industry segment: the development and marketing of Internet and
client/server software and related services. The Company evaluates operating
segment performance primarily based on net revenues and certain operating
expenses. The Company's products and services are marketed internationally
through the Company's subsidiaries in the United Kingdom, France and Japan, and
through distributors, value added resellers and OEMs. No single customer
accounted for 10% or more of the consolidated revenues of the Company in fiscal
2000, 1999 or 1998.
Financial information for the Company's reportable operating segments is
summarized below (in thousands):
2000 1999 1998
---- ---- ----
Total net revenues: (1)
Americas $ 11,024 $ 16,899 $ 15,048
Europe 7,417 9,346 6,887
Japan 2,610 3,203 3,057
----------- ----------- -----------
Total net revenues $ 21,051 $ 29,448 $ 24,992
=========== =========== ===========
Operating income (loss):
Americas (2) $ (6,111) $ 4,106 $ (891)
Europe (1,356) (239) (1,148)
Japan (392) (63) (161)
------------ ------------ -----------
Total operating income (loss) $ (7,859) $ 3,804 $ (2,200)
============ =========== ===========
Interest income (3) $ 471 $ 448 $ 509
=========== =========== ===========
Interest expense (3) $ 118 $ 53 $ 113
=========== ========== ===========
Identifiable assets:
Americas $ 8,159 $ 7,993 $ 5,056
Europe 4,121 5,808 4,194
Japan 1,848 1,851 1,089
----------- ----------- -----------
Subtotal identifiable assets 14,128 15,652 10,339
Corporate assets (4) 13,256 9,184 10,231
Elimination of inter-company balances (5,592) (1,885) (1,471)
----------- ----------- -----------
Total assets $ 21,792 $ 22,951 $ 19,099
=========== =========== ===========
Depreciation expense (5) $ 942 $ 1,099 $ 1,155
=========== =========== ===========
Capital expenditures (5) $ 564 $ 596 $ 666
=========== ========== ===========
- -----------------------
(1) The Company allocates revenues to operating segments based on the location
of the country where the license is installed or service is delivered.
There were no transfers between segments during the periods presented. The
accounting policies of the segments are the same as those described in
Note 1.
(2) Americas operating income (loss) is net of corporate product development
and administrative expenses.
(3) Interest income and interest expense were primarily attributable to the
United States in the periods presented. Interest income and interest
expense in Europe and Japan were not significant in those periods.
(4) Corporate assets consist primarily of United States cash and cash
equivalents, investments, purchased technology, and property and equipment.
(5) The majority of the Company's capital expenditures are incurred for
software (which occurs exclusively in the United States) and for corporate
infrastructure. Consequently, capital expenditures and depreciation expense
were primarily attributable to the United States in the periods presented.
58
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net revenues and long-lived assets by geographic area were as follows (in
thousands):
2000 1999 1998
----------- ----------- -----------
Total net revenues:
Americas $ 11,024 $ 16,899 $ 15,048
United Kingdom 4,599 6,480 4,258
France 2,818 2,866 2,279
Other - - 350
----------- ----------- -----------
Subtotal Europe 7,417 9,346 6,887
----------- ----------- -----------
Japan 2,610 3,203 3,057
----------- ----------- -----------
Total net revenues $ 21,051 $ 29,448 $ 24,992
=========== =========== ===========
Long-lived assets:
Americas $ 4,238 $ 1,350 $ 1,780
Foreign 213 259 233
----------- ----------- -----------
Total long-lived assets $ 4,451 $ 1,609 $ 2,013
=========== =========== ===========
59
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16. RESTATEMENT OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited selected quarterly financial information
for fiscal years 2000 and 1999. As discussed in Notes 1 and 18, subsequent to
the issuance of its financial statements for the year ended April 30, 2000, the
Company determined that it would restate its consolidated financial statements
for the fiscal years ending April 30, 2000, 1999 and 1998. The effects of the
restatement on the selected quarterly financial information for fiscal years
2000 and 1999 is presented below:
FIRST QUARTER SECOND QUARTER
------------------------ ----------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- ----------- ---------- --------
(In thousands, except per share data)
2000:
Total revenues $ 5,282 $ 5,393 $ 5,614 $ 5,819
Gross margin $ 3,910 $ 4,035 $ 4,275 $ 4,480
Net income (loss) $ (1,311) $ (2,411) $ (1,512) $ (1,307)
Net income (loss) per share, basic $ (0.07) $ (0.14) $ (0.09) $ (0.07)
Net income (loss) per share, diluted $ (0.07) $ (0.14) $ (0.09) $ (0.07)
THIRD QUARTER FOURTH QUARTER
-------------------------- -----------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
----------- ----------- -------- -----------
(In thousands, except per share data)
2000:
Total revenues $ 4,991 $ 5,254 $ 4,538 $ 4,585
Gross margin $ 3,997 $ 4,260 $ 2,850 $ 2,897
Net income (loss) $ (1,107) $ (844) $ (3,169) $ (3,122)
Net income (loss) per share, basic $ (0.06) $ (0.05) $ (0.17) $ (0.16)
Net income (loss) per share, diluted $ (0.06) $ (0.05) $ (0.17) $ (0.16)
FIRST QUARTER SECOND QUARTER
----------------------- ------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- ----------- ---------- --------
(In thousands, except per share data)
1999:
Total revenues $ 6,660 $ 6,344 $ 7,200 $ 6,912
Gross margin $ 5,381 $ 5,065 $ 5,890 $ 5,602
Net income (loss) $ 258 $ (94) $ 856 $ 577
Net income (loss) per share, basic $ 0.02 $ 0.00 $ 0.05 $ 0.03
Net income (loss) per share, diluted $ 0.01 $ 0.01 $ 0.05 $ 0.03
60
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
THIRD QUARTER FOURTH QUARTER
-------------------------------------------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
----------- -------- --------- -----------
(In thousands, except per share data)
1999:
Total revenues $ 8,077 $ 7,668 $ 8,873 $ 8,524
Gross margin $ 6,817 $ 6,408 $ 7,469 $ 7,120
Net income (loss) $ 1,408 $ 1,072 $ 1,900 $ 2,322
Net income (loss) per share, basic $ 0.08 $ 0.06 $ 0.11 $ 0.14
Net income (loss) per share, diluted $ 0.07 $ 0.06 $ 0.11 $ 0.13
NOTE 17. SUBSEQUENT EVENTS
In July 2000, the Company announced that it had acquired privately-held Unify
InterAmerica, the Company's master distributor in Latin America. The acquisition
was in support of Unify's strategy to rapidly expand into the growing Latin
America e-commerce market. The Company has since re-evaluated the strategic
value of the Latin American market, and as a result, the original stockholders
have agreed to repurchase Unify InterAmerica, which will result in the Company
recording a loss of approximately $300,000.
In October 2000, the National Association of Security Dealers delisted the
Company's common stock on the NASDAQ National Market.
In August 2000, the Company amended its lease agreement for its executive office
and production facility. Under the terms of the amended agreement, the Company
has provided a full security interest in the Company's investment in Evergreen
Internet, Inc. (Note 7). This security interest may be cancelled upon the
issuance by the Company of a stand by letter of credit in the amount of
$500,000.
61
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 18. RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS
As discussed in Note 1, following extensive communications with the Staff of the
Securities and Exchange Commission, management determined that the Company would
restate its consolidated financial statements for the fiscal years ended April
30, 2000, 1999 and 1998. The following is a summary of the effects of the
restatement:
YEAR ENDED APRIL 30,
-----------------------------------------------------------
2000 1999
------------------------ --------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues:
Software licenses $ 12,313 $ 12,576 $ 20,320 $ 19,768
Services 8,112 8,475 10,490 9,680
-------- --------- --------- ---------
Total revenues $ 20,425 $ 21,051 $ 30,810 $ 29,448
-------- --------- --------- ---------
Gross margin $ 15,032 $ 15,672 $ 25,557 $ 24,195
Selling, general and administrative expenses $ 15,932 $ 16,835 $ 15,151 $ 14,463
Income (loss) from operations $ (7,596) $ (7,859) $ 4,478 $ 3,804
Other income, net $ 689 $ 367 $ 175 $ 304
Net income (loss) $ (7,099) $ (7,684) $ 4,422 $ 3,877
Net income (loss) per share:
Basic $ (0.39) $ (0.42) $ 0.26 $ 0.23
========== ========== ========== =========
Diluted $ (0.39) $ (0.42) $ 0.24 $ 0.21
========== ========== ========== =========
APRIL 30,
-----------------------------------------------------------
2000 1999
------------------------- --------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
(In thousands, except per share data)
CONSOLIDATED BALANCE SHEET:
ASSETS
Accounts receivable, net of allowances $ 9,156 $ 9,207
Other assets $ 242 $ 192
Total assets $ 22,934 $ 22,951
LIABILITIES
Accounts payable $ 1,138 $ 1,152
Other accrued liabilities $ 2,621 $ 1,584
Deferred revenue $ 3,326 $ 4,012
Minority Interest $ 265 $ -
STOCKHOLDERS' EQUITY
Accumulated other comprehensive loss $ (868) $ (892) $ (653) $ (643)
Accumulated deficit $(47,127) $(47,103) $(40,028) $(39,419)
Total stockholders' equity $ 13,326 $ 13,945
Total liabilities and stockholders' equity $ 22,934 $ 22,951
62
UNIFY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
YEAR ENDED APRIL 30,
------------------------------------
1998
------------------------------------
AS
PREVIOUSLY AS
REPORTED RESTATED
---------- --------
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues:
Software licenses $ 15,580 $ 15,580
Services 9,229 9,342
-------- ---------
Total revenues $ 24,809 $ 24,922
-------- ---------
Gross margin $ 19,773 $ 19,886
Selling, general and administrative expenses $ 16,389 $ 16,353
Income (loss) from operations $ (2,349) $ (2,200)
Other income, net $ 118 $ 167
Net income (loss) $ (2,413) $ (2,215)
Net income (loss) per share:
Basic $ (0.15) $ (0.13)
========== ==========
Diluted $ (0.15) $ (0.13)
========== ==========
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY:
(in thousands)
AS
PREVIOUSLY AS
REPORTED RESTATED
---------- --------
Accumulated deficit, May 1, 1997 $ (42,037) $(41,081)
63
SCHEDULE II
UNIFY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
ADDITIONS
ADDITIONS DEDUCTIONS: (DEDUCTIONS): BALANCE
BALANCE AT CHARGED TO WRITE-OFFS TRANSFERS AT
BEGINNING OPERATING OF BETWEEN END OF
OF PERIOD EXPENSES ACCOUNTS ACCOUNTS PERIOD
--------- -------- -------- -------- ------
As restated-See Note 18 to Consolidated
Financial Statements
Allowance for doubtful accounts receivable:
Year ended April 30, 1998 $ 485 $ 237 $ (159) $ - $ 563
Year ended April 30, 1999 $ 563 $ 607 $ (294) $ (26) $ 850
Year ended April 30, 2000 $ 850 $ 2,009 $ (612) $ (490) $ 1,757
Allowance for amounts due from minority interest stockholders:
Year ended April 30, 1998 $ 326 $ - $ - $ - $ 326
Year ended April 30, 1999 $ 326 $ - $ $ - $ 326
Year ended April 30, 2000 $ 326 $ - $ (326) $ - $ -
Allowance for long-term accounts and notes receivable - other assets:
Year ended April 30, 1998 $ 303 $ 220 $ (9) $ (257) $ 257
Year ended April 30, 1999 $ 257 $ - $ (222) $ 26 $ 61
Year ended April 30, 2000 $ 61 $ 23 $ - $ 541 $ 625
64
UNIFY CORPORATION
INDEX TO EXHIBITS
PRIOR FILING
OR SEQUENTIAL
EXHIBIT PAGE NUMBER
NO. DESCRIPTION HEREIN
------- ----------- ------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Registrant (1)
4.1 Form of Stock Certificate (1)
4.2 Series E Stock Purchase Agreement by and among the Company and the
purchasers named therein, dated April 2, 1992 (1)
10.1 * Employment Agreement by and between Reza Mikailli and the
Registrant dated May 1, 1998 (2)
10.2 * 1991 Stock Option Plan, as amended (1)
10.3 * 1996 Employee Stock Purchase Plan (1)
10.4 Form of Indemnification Agreement (1)
10.5 Joint Venture Agreement, dated September 3, 1990, as amended,
by and among the Registrant, Unify Japan Corporation, Sumitomo
Metals Industries, Ltd. and Artificial Intelligence Research (1)
10.6 Office Building Lease for Sacramento Facility, Dated December 17,
1999
10.7 Servletexec OEM Agreement by Registrant and New Atlanta
Communication, LLC.
21.1 Subsidiaries of the Registrant (1)
23.1 Independent Auditors' Consent
- ------------------
(1) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form S-1 Registration Statement (No. 333-3834) declared
effective by the Securities and Exchange Commission on June 14, 1996.
(2) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form 10-Q on December 15, 1998.
* Exhibit pertains to a management contract or compensatory plan or
arrangement.
1525-AR-00
65