**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**Form 10-Q**

 

**ý****        Quarterly report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended July 31,2005**

 

**OR**

 

**o****        Transition report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**Commission File Number:   001-11807**

 

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**UNIFYCORPORATION**

(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 ArenaBlvd, Suite 100**

**Sacramento,California 95834**

(Address ofprincipal executive offices)

 

**Telephone:(916) 928-6400**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

YES   ý     NO  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

YES   o     NO  ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act),

 

YES   o     NO  ý

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 28,799,846 shares of Common Stock,$0.001 par value, as of August 31, 2005.

 

 

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**UNIFY CORPORATION**

**FORM 10-Q**

 

INDEX

 
| PART I.   | FINANCIAL INFORMATION                                                                                              |
|----------------|--------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                               |
| Item 1.        | Financial Statements                                                                                               |
|           |                                                                                                               |
|           | Unaudited  Condensed Consolidated Balance Sheets as of July 31, 2005 and  April 30, 2005                 |
|           |                                                                                                               |
|           | Unaudited  Condensed Consolidated Statements of Operations for the three months ended  July 31, 2005 and 2004 |
|           |                                                                                                               |
|           | Unaudited  Condensed Consolidated Statements of Cash Flows for the three months ended  July 31, 2005 and 2004 |
|           |                                                                                                               |
|           | Notes to  Unaudited Condensed Consolidated Financial Statements                                                    |
|           |                                                                                                               |
| Item 2.        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        |
|           |                                                                                                               |
| Item 3.        | Quantitative and Qualitative** **Disclosures about Market Risk                                                |
|           |                                                                                                               |
| Item 4.        | Controls and Procedures.                                                                                           |
|           |                                                                                                               |
| PART II.  | OTHER INFORMATION                                                                                                  |
|           |                                                                                                               |
| Item 1.        | Legal Proceedings                                                                                                  |
|           |                                                                                                               |
| Item 6.        | Exhibits                                                                                                           |
|           |                                                                                                               |
| SIGNATURE      |
|           |                                                                                                               |
| CERTIFICATIONS |
|                |                                                                                                                    |  |

 

2

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**PART I.  FINANCIALINFORMATION**

 

**Item 1.    FinancialStatements**

 

**UNIFYCORPORATIONCONDENSED CONSOLIDATEDBALANCE SHEETS****(Inthousands, except share data)**

** **
| ** **                                      | ** ** | **July 31,   2005** | ** ** | **April 30,   2005** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**          | ** ** | **(audited)**             | ** ** |
| ASSETS                                          |       |                     |       |                      |       |
| Current assets:                                 |       |                     |       |                      |       |
| Cash and cash equivalents                       |       | $                        | 3,581      |                      | $          | 3,675 |   |
| Accounts receivable, net                        |       | 1,454                    |       | 2,611                     |       |
| Prepaid expenses and other current assets       |       | 535                      |       | 656                       |       |
| Total current assets                            |       | 5,570                    |       | 6,942                     |       |
|                                            |       |                     |       |                      |       |
| Property and equipment, net                     |       | 378                      |       | 429                       |       |
| Other investments                               |       | 214                      |       | 214                       |       |
| Goodwill and intangible assets, net             |       | 1,708                    |       | 1,739                     |       |
| Other assets, net                               |       | 160                      |       | 166                       |       |
| Total assets                                    |       | $                        | 8,030      |                      | $          | 9,490 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY      |       |                     |       |                      |       |
| Current liabilities:                            |       |                     |       |                      |       |
| Accounts payable                                |       | $                        | 601        |                      | $          | 739 |   |
| Current portion of long term debt               |       | 78                       |       | 166                       |       |
| Other accrued liabilities                       |       | 1,017                    |       | 1,336                     |       |
| Accrued compensation and related expenses       |       | 557                      |       | 721                       |       |
| Deferred revenue                                |       | 2,528                    |       | 3,220                     |       |
| Total current liabilities                       |       | 4,781                    |       | 6,182                     |       |
|                                            |       |                     |       |                      |       |
| Other long term liabilities                     |       | 718                      |       | 741                       |       |
|                                            |       |                     |       |                      |       |
| Commitments and contingencies                   |       | —                   |       | —                    |       |
|                                            |       |                     |       |                      |       |
| Stockholders’ equity:                      |       |                     |       |                      |       |
| Common stock                                    |       | 29                       |       | 28                        |       |
| Additional paid-in capital                      |       | 63,725                   |       | 63,588                    |       |
| Accumulated other comprehensive income          |       | 11                       |       | 73                        |       |
| Accumulated deficit                             |       | (61,234                  | )          | (61,122                   | )          |
| Total stockholders’ equity                 |       | 2,531                    |       | 2,567                     |       |
| Total liabilities and stockholders’ equity |       | $                        | 8,030      |                      | $          | 9,490 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

3

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**UNIFYCORPORATIONUNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS****(Inthousands, except per share data)**

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **July 31,**      | ** ** |
| ** **                                    | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Revenues:                                     |       |                   |       |   |   |
| Software licenses                             |       | $                      | 1,169      |   | $ | 1,164 |   |
| Services                                      |       | 1,557                  |       | 1,569 |   |
| Total revenues                                |       | 2,726                  |       | 2,733 |   |
|                                          |       |                   |       |   |   |
| Cost of revenues:                             |       |                   |       |   |   |
| Software licenses                             |       | 139                    |       | 83 |   |
| Services                                      |       | 327                    |       | 364 |   |
| Total cost of revenues                        |       | 466                    |       | 447 |   |
| Gross profit                                  |       | 2,260                  |       | 2,286 |   |
|                                          |       |                   |       |   |   |
| Operating expenses:                           |       |                   |       |   |   |
| Product development                           |       | 701                    |       | 689 |   |
| Selling, general and administrative           |       | 1,666                  |       | 2,061 |   |
| Total operating expenses                      |       | 2,367                  |       | 2,750 |   |
| Loss from operations                          |       | (107                   | )          | (464 | ) |
| Other income (expense), net                   |       | (6                     | )          | (16 | ) |
| Loss before income taxes                      |       | (113                   | )          | (480 | ) |
| Provision (benefit) for income taxes          |       | —                 |       | (6 | ) |
| Net loss                                      |       | $                      | (113       | ) | $ | (474 | ) |
|                                          |       |                   |       |   |   |
| Net loss per share:                           |       |                   |       |   |   |
| Basic                                         |       | $                      | (0.00      | ) | $ | (0.02 | ) |
| Diluted                                       |       | $                      | (0.00      | ) | $ | (0.02 | ) |
|                                          |       |                   |       |   |   |
| Shares used in computing net loss per  share: |       |                   |       |   |   |
| Basic                                         |       | 28,620                 |       | 27,523 |   |
| Diluted                                       |       | 28,620                 |       | 27,523 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

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**UNIFYCORPORATIONUNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS****(Inthousands)**

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | **July 31,**      | ** ** |
| ** **                                                                      | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                           |       |                   |       |   |   |
| Net loss                                                                        |       | $                      | (113       | ) | $ | (474 | ) |
| Reconciliation of net loss to cash provided  by (used in) operating activities: |       |                   |       |   |   |
| Depreciation                                                                    |       | 56                     |       | 41 |   |
| Loss on disposal of equipment                                                   |       | 5                      |       | — |   |
| Amortization                                                                    |       | 30                     |       | — |   |
| Fulfillment of support obligations                                              |       | (156                   | )          | — |   |
| Employee stock based expense                                                    |       | 50                     |       | 40 |   |
| Stock based expense for acquisition  earn-out payment                           |       | 32                     |       | — |   |
| Changes in operating assets and  liabilities:                                   |       |                   |       |   |   |
| Accounts receivable                                                             |       | 1,078                  |       | 657 |   |
| Prepaid expenses and other current assets                                       |       | 119                    |       | (53 | ) |
| Accounts payable                                                                |       | (76                    | )          | (377 | ) |
| Accrued compensation and related expenses                                       |       | (147                   | )          | (124 | ) |
| Other accrued liabilities                                                       |       | (214                   | )          | (383 | ) |
| Deferred revenue                                                                |       | (653                   | )          | (766 | ) |
| Net cash provided by (used in) operating  activities                            |       | 11                     |       | (1,439 | ) |
|                                                                            |       |                   |       |   |   |
| Cash flows from investing activities:                                           |       |                   |       |   |   |
| Purchases of property and equipment                                             |       | (7                     | )          | (35 | ) |
| Net cash used in investing activities                                           |       | (7                     | )          | (35 | ) |
| Cash flows from financing activities:                                           |       |                   |       |   |   |
| Borrowing under line of credit                                                  |       | —                 |       | 800 |   |
| Proceeds from issuance of common stock, net                                     |       | 56                     |       | 75 |   |
| Principal payments under debt obligations                                       |       | (87                    | )          | (36 | ) |
| Net cash provided by (used in) financing  activities                            |       | (31                    | )          | 839 |   |
|                                                                            |       |                   |       |   |   |
| Effect of exchange rate changes on cash                                         |       | (67                    | )          | 20 |   |
| Net decrease in cash and cash equivalents                                       |       | (94                    | )          | (615 | ) |
| Cash and cash equivalents, beginning of  period                                 |       | 3,675                  |       | 6,606 |   |
| Cash and cash equivalents, end of period                                        |       | $                      | 3,581      |   | $ | 5,991 |   |
| Supplemental cash flow information:                                             |       |                   |       |   |   |
| Cash paid (received) during the period for:                                     |       |                   |       |   |   |
| Interest                                                                        |       | $                      | (18        | ) | $ | 3 |   |
| Income taxes                                                                    |       | $                      | —     |   | $ | — |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

5

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**UNIFYCORPORATION**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.     Basis of Presentation**

 

Thecondensed consolidated financial statements have been prepared by UnifyCorporation (the “Company”) pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). While the interim financialinformation contained in this filing is unaudited, such financial statements,in the opinion of management, reflect all adjustments (consisting only ofnormal recurring adjustments) which the Company considers necessary for a fairpresentation. The results for interim periods are not necessarily indicative ofthe results to be expected for the entire fiscal year. These financialstatements should be read in conjunction with the Consolidated FinancialStatements and Notes thereto, together with Management’s Discussion andAnalysis of Financial Condition and Results of Operations, which are includedin the Company’s Annual Report on Form 10-K for the fiscal year ended April 30,2005 as filed with the SEC.

 

***Recently Issued Accounting Standards***

 

InDecember 2004 the Financial Accounting Standards Board (“FASB”) issuedStatement No. 123R, *Share-Based Paymen*t.This Statement establishes standards for the accounting for transactions inwhich an entity exchanges its equity instruments for goods or services,primarily with respect to transactions in which employee services are obtainedin exchange for share-based payment. Statement 123R is effective as of thebeginning of the first fiscal year that begins after June 15, 2005. Wehave not completed the process of evaluating the impact that will result fromadopting this pronouncement. The Company is therefore unable to disclose theimpact that adopting FASB Statement 123R will have on its financial positionand the results of operations when such statement is adopted.

 

InDecember 2004, the FASB issued Statement No. 153, *Exchanges of Nonmonetary Assets*, anamendment of APB Opinion No. 29, *Accountingfor Nonmonetary Transactions*. This statement addresses themeasurement of exchanges of nonmonetary assets and redefines the scope oftransactions that should be measured based on the fair value of the assetsexchanged. Provisions of this Statement are effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005 and are requiredto be adopted by the Company in the second quarter of fiscal 2006. The Companyanticipates the adoption of Statement 153 will not have a material impact onour financial position, cash flows or results of operations.

 

InJune 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections – a replacement of APB No. 20and FAS No. 3*.  SFAS No. 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. SFAS No. 154 also provides guidancefor determining whether retrospective application of a change in accountingprinciple is impracticable and for reporting a change when retrospectiveapplication is impracticable. The correction of an error in previously issuedfinancial statements is not an accounting change. However, the reporting of anerror correction involves adjustments to previously issued financial statementssimilar to those generally applicable to reporting an accounting change retrospectively.Therefore, the reporting of a correction of an error by restating previouslyissued financial statements is also addressed by SFAS No. 154. SFAS No. 154is required to be adopted in fiscal years beginning after December 15,2005. We do not expect the adoption of this recently issued accountingpronouncement to have a material impact on our financial position, cash flowsor results of operations.

 

6

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**2.     StockCompensation Information**

 

Aspermitted by Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation*(SFAS 123) and Statement of Financial Accounting Standards No. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure* (SFAS 148), the Company accounts for stock-basedawards using the intrinsic value method of accounting in accordance withAccounting Principles Board Opinion No. 25, *Accounting For Stock Issued To Employees* and relatedinterpretations. As such, compensation is recorded on the measurement date,generally the date of issuance or grant, as the excess of the current estimatedfair value of the underlying stock over the purchase or exercise price. Anydeferred compensation is amortized over the respective vesting periods of theequity instruments, if any.

 

SFAS123 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 forits stock-basked awards. Under SFAS 123, the fair value of stock-based awardsto employees is calculated through the use of option pricing models which weredeveloped to estimate the fair value of freely tradable, fully transferableoptions without vesting restrictions. Such options differ significantly fromthe Company’s stock-based awards. These models greatly affect the calculatedvalues. The Company’s calculations are made using the Black-Scholes optionpricing model, with the following weighted average assumptions for the threemonths ending July 31, 2005 and 2004, respectively: expected option life,12 months following vesting; stock volatility of 230% and 234%; risk-freeinterest rates of 3.8% and 3.1%; and no dividends during the expectedterm. The Company’s calculations are based on a multiple option valuationapproach and forfeitures are recognized as they occur.

 

Thefollowing table illustrates the effect on net loss and net loss per share ifUnify had applied the fair value recognition provisions of SFAS 123, tostock-based employee compensation (in thousands, except per share amounts):

 
| ** **                                                                                          | ** ** | **Three Months Ended  July 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net loss as reported                                                                                |       | $                                     | (113       | ) | $ | (474 | ) |
| Add: stock-based employee compensation  included in reported net loss                               |       | $                                     | 50         |   | $ | 40 |   |
| Less: stock-based employee compensation  expense, determined under fair value method for all awards |       | $                                     | (164       | ) | $ | (118 | ) |
| Pro forma net loss                                                                                  |       | $                                     | (227       | ) | $ | (552 | ) |
|                                                                                                |       |                                  |       |   |   |
| Net loss per share (basic and diluted), as  reported                                                |       | $                                     | (0.00      | ) | $ | (0.02 | ) |
| Net loss per share (basic and diluted), pro  forma                                                  |       | $                                     | (0.01      | ) | $ | (0.02 | ) |

 

**3.     Goodwilland Intangible Assets**

 

Thecomponents of goodwill and intangible assets at July 31, 2005, are asfollows (in thousands):

 
| ** **       | ** ** | **Gross   carrying   amount** | ** ** | **Accumulated  amortization** | ** ** | **Net   carrying   amount** | ** ** | **Estimated  useful life** | ** ** |
|------------------|------------|-------------------------------|------------|-------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Infinite Lives:  |       |                          |       |                          |       |                        |       |                            |       |
| Goodwill         |       | $                             | 1,405      |                          | $          | —                      |       | $                               | 1,405      |   | — |   |
| Finite Lives:    |       |                          |       |                          |       |                        |       |                            |       |
| Technology-based |       | 200                           |       | (33                           | )          | 167                         |       | 3 years                         |       |
| Customer-related |       | 164                           |       | (28                           | )          | 136                         |       | 3 years                         |       |
| Total            |       | $                             | 1,769      |                          | $          | (61                         | )          | $                               | 1,708      |   |   |   |

 

7

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Acquired finite-lived intangibles aregenerally amortized on a straight line basis over their estimated useful life.Intangible assets amortization expense was $30,000 for the three months ended July 31,2005. The estimated future amortization expense related to intangible assets asof July 31, 2005 is as follows (in thousands):

 
| **FYE   April 30,** | ** ** | **Amount** | ** ** |
|--------------------------|------------|------------|------------|
| 2006                     |       | $          | 91         |   |
| 2007                     |       | 121        |       |
| 2008                     |       | 91         |       |
| Total                    |       | $          | 303        |   |

 

Goodwillwill be tested for impairment on an annual basis as of May 1, and betweenannual tests if indicators of potential impairment exist, using afair-value-based approach in accordance with FASB 142, Goodwill and OtherIntangible Assets.

 

**4.     CreditFacility**

 

OnJune 5, 2005, the Company renewed its loan agreement with the SiliconValley Bank. The agreement provides for a $1.0 million revolving line of creditand for term loans up to $250,000 for the purchase of qualifying equipment. Theline of credit is secured by qualifying domestic accounts receivable and has aone-year term. The term loan is secured by purchased assets and is repaid overtwenty four months. The Company will incur interest expense on the line ofcredit and the term loan at the prevailing prime rate plus 2.0% and 2.5% perannum, respectively. The prime rate used to determine the interest shall not beless than 4.0%. As of July 31, 2005, the Company had $0outstanding under the line of credit and $0.9 million in available credit basedupon eligible assets at that date. Additionally, as of July 31, 2005 theCompany had $80,000 outstanding in term loans (see Note 5).

 

**5.     Long-TermDebt**

 

TheCompany’s debt consists of the following at July 31, 2005 and April 30,2005 (in thousands):

 
| ** **                                                                                                                                                                                                                           | ** ** | **July 31,   2005** | ** ** | **April 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                                                           | ** ** | ** **               | ** ** | ** **                   | ** ** |
| Unsecured note payable to a related party,  bears no interest                                                                                                                                                                        |       | $                        | —     |                         | $          | 64 |   |
| Note payable to a financial institution,  accruing interest at prime plus 2.0%, not to be less than 4% per annum  (actual interest rate at July 31, 2005 was 8.75%), payable in monthly  installments through October 2006 |       | 80                       |       | 118                          |       |
|                                                                                                                                                                                                                                 |       |                     |       |                         |       |
| Capital lease payable, payable in monthly  installments through August 2007                                                                                                                                                     |       | 14                       |       | 15                           |       |
|                                                                                                                                                                                                                                 |       | 94                       |       | 197                          |       |
| Less current portion                                                                                                                                                                                                                 |       | (78                      | )          | (166                         | )          |
|                                                                                                                                                                                                                                 |       | $                        | 16         |                         | $          | 31 |   |

 

**6.     OtherLong-Term Liabilities**

 

InFebruary 2005, the Company acquired all of the issued and outstandingequity securities of Acuitrek, Inc. As part of the Acuitrek acquisition,the Company assumed a royalty payable of $600,000 as established by the 2001funded software development and license arrangement with Acuitrek’s firstcustomer. A minimum royalty is payable in quarterly installments equal to twopercent of all gross revenues received from the sale or licensing of theNavRisk product through June 11, 2011. Any remaining royalty balance as ofJune 11, 2011 shall become fully due and payable on such date. The Companyaccrued the estimated costs of providing future support and maintenanceservices for the support and maintenance contracts as of the acquisition date.The future support obligation periods ranged from less than a year to greaterthan twenty (20) 

 

8

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additional years. The support obligation forperiods greater than one year from July 31, 2005 is $122,000.

 

TheCompany’s other long term liabilities consists of the following at July 31,2005 and April 30, 2005 (in thousands):

 
| ** **                             | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|----------------------------------------|------------|--------------|------------|---------------|------------|
| ** **                             | ** ** | **2005**     | ** ** | **2005**      | ** ** |
| Long term debt, net of current portion |       | $            | 16         |          | $          | 31 |   |
| Royalty payable                        |       | 512          |       | 514           |       |
| Accrued support obligations            |       | 122          |       | 124           |       |
| Other long term liabilities            |       | 68           |       | 72            |       |
|                                   |       | $            | 718        |          | $          | 741 |   |

 

InFrance, the Company is subject to mandatory employee severance costs associatedwith a statutory government regulated plan covering all employees. The planprovides for one month of severance for the first five years of service with anemployer and one fifth of one year of severance for every one year of servicethereafter. In order to receive their severance payment the employee may notretire before age 65 and must be employed at the time of retirement.

 

**7.     MaintenanceContracts**

 

TheCompany offers maintenance contracts to its customers at the time they enterinto a product license agreement and renew those contracts, at the customers’option, annually thereafter. These maintenance contracts are generally pricedas a percentage of the value of the related license agreement. The specificterms and conditions of these initial maintenance contracts and subsequentrenewals vary depending upon the product licensed and the country in which theCompany does business. Generally, maintenance contracts provide the customerwith unspecified product maintenance updates and customer support services.Revenue from maintenance contracts is initially deferred and then recognizedratably over the term of the agreements.

 

Changesin the Company’s deferred maintenance revenue during the periods are as follows(in thousands):   

 
| ** **                          | ** ** | **Three Months Ended  July 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Balances, beginning of period       |       | $                                     | 2,849      |   | $ | 3,068 |   |
| Amount recognized during the period |       | (1,322                                | )          | (1,373 | ) |
| Amount of new maintenance contracts |       | 608                                   |       | 747 |   |
| Balances, end of period             |       | $                                     | 2,135      |   | $ | 2,442 |   |

 

**8.     ComprehensiveLoss**

 

TheCompany’s total comprehensive income (loss) for the periods shown was asfollows:

 
| ** **                               | ** ** | **Three Months Ended  July 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net loss                                 |       | $                                     | (113       | ) | $ | (474 | ) |
| Foreign currency translation gain (loss) |       | (62                                   | )          | 8 |   |
| Total comprehensive loss                 |       | $                                     | (175       | ) | $ | (466 | ) |

 

9

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**9.     Earnings(Loss) Per Share**

 

SFASNo. 128, *Earnings per Share,*requires a dual presentation of basic and diluted income per share (“EPS”).Basic EPS excludes dilution and is computed by dividing net income (loss)attributable to common stockholders by the weighted average of common sharesoutstanding for the period. Diluted EPS reflects the potential dilution thatcould occur if securities or other contracts to issue common stock (e.g.convertible preferred stock, warrants, and common stock options) were exercisedor converted into common stock. Potential common shares in the diluted EPScomputation are excluded for the three-month periods ended July 31, 2005and July 31, 2004 as their effect would be antidilutive. The following isa reconciliation of the numerators and denominators of the basic and dilutedincome per share computations for the periods indicated (in thousands, exceptper share amounts):

 
| ** **                                                    | ** ** | **Three Months Ended  July 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net loss (Numerator):                                         |       |                                  |       |   |   |
| Net loss, basic and diluted                                   |       | $                                     | (113       | ) | $ | (474 | ) |
|                                                          |       |                                  |       |   |   |
| **Shares (Denominator):**                                     |       |                                  |       |   |   |
| Weighted average shares of common stock  outstanding, basic   |       | 28,620                                |       | 27,523 |   |
| Weighted average common equivalent shares  outstanding        |       | —                                |       | — |   |
| Weighted average shares of common stock  outstanding, diluted |       | 28,620                                |       | 27,523 |   |
|                                                          |       |                                  |       |   |   |
| **Per Share Amount:**                                         |       |                                  |       |   |   |
| Net loss per share, basic                                     |       | $                                     | 0.00       |   | $ | (0.02 | ) |
| Effect of dilutive securities                                 |       | —                                |       | — |   |
| Net loss per share, diluted                                   |       | $                                     | 0.00       |   | $ | (0.02 | ) |

 

10

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**10.  SegmentInformation**

 

InQ4 of fiscal 2005 the Company acquired Acuitrek. This segment is now known asthe Insurance Risk Management division, which sells and markets the NavRiskapplication.

 

Financialinformation for the Company’s reportable segments is summarized below (inthousands):

 
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **July 31,**      | ** ** |
| ** **                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Total net revenues:                |       |                   |       |   |   |
| UBS—Americas                  |       | $                      | 1,595      |   | $ | 1,346 |   |
| UBS—Europe                    |       | 963                    |       | 1,387 |   |
| Insurance Risk Management Division |       | 168                    |       | — |   |
| Total net revenues                 |       | $                      | 2,726      |   | $ | 2,733 |   |
|                               |       |                   |       |   |   |
| Operating income (loss):           |       |                   |       |   |   |
| UBS—Americas                  |       | $                      | (24        | ) | $ | (791 | ) |
| UBS—Europe                    |       | 197                    |       | 327 |   |
| Insurance Risk Management Division |       | (280                   | )          | — |   |
| Total operating loss               |       | $                      | (107       | ) | $ | (464 | ) |
|                               |       |                   |       |   |   |
| Interest income                    |       | $                      | 21         |   | $ | 13 |   |
| Interest expense                   |       | $                      | 3          |   | $ | 8 |   |

 

Netrevenues by geographic area were as follows (in thousands):

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **July 31,**      | ** ** |
| ** **                                   | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Total net revenues:                          |       |                   |       |   |   |
| Americas                                     |       | $                      | 597        |   | $ | 892 |   |
| International Distributors                   |       | 998                    |       | 454 |   |
| Subtotal Americas                            |       | 1,595                  |       | 1,346 |   |
| United Kingdom                               |       | 358                    |       | 424 |   |
| Central Europe—Germany, Benelux, Others |       | 224                    |       | 445 |   |
| France                                       |       | 381                    |       | 518 |   |
| Subtotal Europe                              |       | 963                    |       | 1,387 |   |
| Insurance Risk Management Division           |       | 168                    |       | — |   |
| Total net revenues                           |       | $                      | 2,726      |   | $ | 2,733 |   |

 

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**UNIFY CORPORATION**

 

# **Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*The discussion in this Quarterly Report on Form 10-Qcontains forward-looking statements that have been made pursuant to theprovisions of the Private Securities Litigation Reform Act of 1995. Suchforward-looking statements are based on current expectations, estimates andprojections about the software industry and certain assumptions made by theCompany’s management. Words such as “anticipates”, “expects”, “intends”, “plans”,“believes”, “seeks”, “estimates”, variations of such words and similar expressionsare intended to identify such forward-looking statements. These statements arenot guarantees of future performance and are subject to certain risks,uncertainties and assumptions that are difficult to predict; therefore, actualresults may differ materially from those expressed or forecasted in any suchforward-looking statements. Such risks and uncertainties include, but are notlimited to, those set forth herein under “Volatility of Stock Price and GeneralRisk Factors Affecting Quarterly Results” and in the Company’s Annual Report onForm 10-K under “Business – Risk Factors.” Unless required by law, theCompany undertakes no obligation to update publicly any forward-lookingstatements, whether as a result of new information, future events or otherwise.However, readers should carefully review the risk factors set forth in otherreports or documents the Company files from time to time with the SEC,particularly the Company’s Annual Report on Form 10-K, Quarterly Reportson Form 10-Q and any Current Reports on Form 8-K.*

 

Thefollowing discussion should be read in conjunction with the unaudited CondensedConsolidated Financial Statements and Notes thereto in Part I, Item 1 ofthis Quarterly Report on Form 10-Q and with the audited Consolidated FinancialStatements and Notes thereto, together with Management’s Discussion andAnalysis of Financial Condition and Results of Operations, which are includedin the Company’s Annual Report on Form 10-K for the fiscal year ended April 30,2005, as filed with the SEC.

 

**Overview**

 

Unify(the “Company”, “we”, “us” or “our”) provides business process automationsoftware solutions, including market leading applications for specialty marketswithin the insurance and transportation industries. Our solutions deliver a broadset of capabilities for automating business processes, integrating existinginformation systems and delivering collaborative information. Through ourindustry expertise and technologies, we help organizations reduce risk, drivebusiness optimization, apply governance, and increase customer and memberservices.

 

Ourproducts include vertical application software for alternative risk insurancemarkets and transportation labor standards, and infrastructure and databasesoftware that helps our customers build business process, information-rich anddatabase-driven applications. Our products enable organizations to rapidly,efficiently and seamlessly deliver the right information to the right people atthe right time. By consolidating, automating and managing data, our customerssee increases in efficiencies and services, as well as reductions in costs.

 

InFebruary 2005, we acquired privately-held Acuitrek Inc., a provider ofpolicy administration and underwriting solutions for the alternative riskmarket. The acquisition was the result of our expanded strategy to penetrateunderserved specialty markets with our solutions. As a result, Unify now offerssolutions to the alternative risk market, in particular public entity riskpools made up of cities, counties, special districts, third partyadministrators and insurance carriers that administer self insurance funds forpublic entities, captives and other self insured groups.

 

Ourcustomers also include corporate information technology departments (“IT”),software value added resellers (“VARs”), solutions integrators (“SIs”) andindependent software vendors (“ISVs”) from a variety of industries, includinginsurance, financial services, healthcare, government, manufacturing and manyother industries. We are headquartered in Sacramento, 

 

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California with a subsidiary office in Paris,France and a sales office in the United Kingdom (“UK”). We market and sellproducts directly in the United States, UK and France and indirectly throughworldwide distributors in Japan, Russia, South Africa, Italy, Australia, Braziland Latin America with customers in more than 45 countries.

 

Ourmission is to deliver infrastructure and application software solutions thatgive customers transactional efficiency, a rich user experience and qualityinformation cost effectively and with a high degree of customer satisfaction.Our strategy is to leverage our award-winning technology with our newlyacquired vertical applications to deliver a broad set of solutions to themarket that streamline and automate processes and workflow; present rich userexperiences; and deliver consolidated information from multiple sources. Webelieve that by integrating our technology and applications, we have created aunique and compelling offering in our marketplace. By combining best-of-breedcapabilities, we offer customers a better way to manage, integrate, view andreport data to help them drive their business objectives.

 

Weare organized into two business units comprised of the Insurance RiskManagement division and Unify Business Solutions division.

 

**Critical Accounting Policies**

 

Thefollowing discussion and analysis of the Company’s financial condition andresults of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent liabilities. We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. The areas that require significantjudgment are as follows.

 

*Revenue Recognition*

 

TheCompany generates revenue from software license sales and related services,including maintenance and support, and consulting services. The Companylicenses its products to end-user customers, independent software vendors andvalue-added resellers. The Company recognizes revenue for software licensesales in accordance with Statement of Position 97-2, “Software RevenueRecognition”. We exercise judgment in connection with the determination of theamount of software and services revenue to be recognized in each accountingperiod. The nature of each licensing arrangement determines how revenues andrelated costs are recognized.

 

Revenueis recognized when a noncancelable license agreement has been signed or otherpersuasive evidence of an arrangement exists, the software product or servicehas been shipped or electronically delivered, the license fees are fixed anddeterminable, all uncertainties regarding customer acceptance are resolved andcollectibility is probable.

 

TheCompany’s customer contracts include multi-element arrangements that include adelivered element (a software license) and undelivered elements (such asmaintenance and support and/or consulting). The value allocated to theundelivered elements is unbundled from the delivered element based on vendor-specificobjective evidence (VSOE) of the fair value of the maintenance and supportand/or consulting, regardless of any separate prices stated within thecontract. The Company then allocates the remaining balance to the deliveredelement (the software license) regardless of any separate prices stated withinthe contract using the residual method as the fair value of all undeliveredelements is determinable.

 

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Wedefer revenue for any undelivered elements, and recognize revenue for deliveredelements only when the fair values of undelivered elements are known,uncertainties regarding customer acceptance are resolved, and there are nocustomer-negotiated refund or return rights affecting the revenue recognizedfor delivered elements. If we cannot objectively determine the fair value ofany undelivered element included in bundled software and service arrangements,we defer revenue until all elements are delivered and services have beenperformed, or until fair value can objectively be determined for any remainingundelivered elements. Changes in the allocation of the sales price between theelements might impact the timing of revenue recognition, but would not changethe total revenue recognized on the contract. We may modify our pricingpractices in the future, which could result in changes in our VSOE of fairvalue for these undelivered elements. As a result, our future revenuerecognition for multi-element arrangements could differ significantly from ourhistorical results.

 

Anassessment of the ability of the Company’s customers to pay is anotherconsideration that affects revenue recognition. In some cases, the Companysells to undercapitalized customers. In those circumstances, revenuerecognition is deferred until cash is received, the customer has established ahistory of making timely payments or the customer’s financial condition hasimproved. Furthermore, once revenue has been recognized, the Company evaluatesthe related accounts receivable balance at each period end for amounts that webelieve may no longer be collectible. This evaluation is largely done based ona review of the financial condition via credit agencies and historical experiencewith the customer. Any deterioration in credit worthiness of a customer mayimpact the Company’s evaluation of accounts receivable in any given period.  Revenue from support and maintenanceactivities, which consist of fees for ongoing support and unspecified productupdates, are recognized ratably over the term of the maintenance contract,typically one year, and the associated costs are expensed as incurred.Consulting service arrangements are performed on a “best efforts” basis and aregenerally billed under time-and-materials arrangements. Revenues and expensesrelating to providing consulting services are recognized as the services areperformed.

 

*Valuation of Long-Lived Assets*

 

Ourlong-lived assets are comprised of long-term investments. At July 31,2005, we had $214,000 in long-term investments, which are accounted for underthe cost method. We assess the valuation of long-lived assets whenevercircumstances indicate that there is a decline in carrying value below costthat is other-than temporary. Several factors can trigger an impairment reviewsuch as significant underperformance relative to expected historical orprojected future operating results and significant negative industry oreconomic trends. In assessing potential impairment for such investments, weconsider these factors as well as the forecasted financial performance. Whensuch decline in value is deemed to be other-than-temporary, we recognize animpairment loss in the current period operating results to the extent of thedecline.

 

*Deferred Tax Asset Valuation Allowance*

 

Asof July 31, 2005, we have approximately $20 million of deferred taxassets related principally to net operating loss carry forwards, reserves andother accruals, deferred revenue, and foreign tax credits. A valuationallowance has been recorded to offset these deferred tax assets. The ability ofthe Company to ultimately realize its deferred tax assets will be contingentupon the Company achieving taxable income. There can be no assurance that thiswill occur in amounts sufficient to utilize the deferred tax assets. Should wedetermine that we would be able to realize the deferred tax assets in thefuture in excess of the recorded amount, an adjustment to the deferred taxasset would increase income in the period such determination was made.

 

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**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated, certain financial dataas a percentage of total revenue:

 
| ** **                           | ** ** | **Three Months ended July 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Revenues:                            |       |                                 |       |   |   |
| Software licenses                    |       | 42.9                                 | %          | 42.6 | % |
| Services                             |       | 57.1                                 | %          | 57.4 | % |
| Total revenues                       |       | 100.0                                | %          | 100.0 | % |
|                                 |       |                                 |       |   |   |
| Cost of revenues:                    |       |                                 |       |   |   |
| Software licenses                    |       | 5.1                                  | %          | 3.0 | % |
| Services                             |       | 12.0                                 | %          | 13.4 | % |
| Total cost of revenues               |       | 17.1                                 | %          | 16.4 | % |
|                                 |       |                                 |       |   |   |
| Gross profit                         |       | 82.9                                 | %          | 83.6 | % |
|                                 |       |                                 |       |   |   |
| Operating expenses:                  |       |                                 |       |   |   |
| Product development                  |       | 25.7                                 | %          | 25.2 | % |
| Selling, general and administrative  |       | 61.1                                 | %          | 75.4 | % |
| Total operating expenses             |       | 86.8                                 | %          | 100.6 | % |
| Loss from operations                 |       | (3.9                                 | )%         | (17.0 | )% |
| Other income (expense), net          |       | (0.2                                 | )%         | (0.6 | )% |
| Loss before income taxes             |       | (4.1                                 | )%         | (17.6 | )% |
| Provision (benefit) for income taxes |       | 0.0                                  | %          | (0.2 | )% |
| Net Loss                             |       | (4.1                                 | )%         | (17.4 | )% |

 

***Revenues***

 

Totalrevenues for the fiscal 2006 quarter ended July 31, 2005 were$2.7 million and were consistent with total revenues for the first quarterof fiscal 2005 which were also $2.7 million.  Software license revenue and services revenuewere also consistent for the first three months of fiscal 2006 and fiscal 2005with software licenses revenues totaling $1.2 million in each period andservices revenues totaling $1.6 million in each period. Included in softwarelicenses was $50,000 in revenue from NavRisk, the primary product of theAcuitrek, which was the company we acquired in February 2005. We expectrevenue from the NavRisk application to provide significant revenue in futureperiods.

 

Forthe first quarter of fiscal 2006, consulting and training revenues were$236,000 compared to $196,000 for the first quarter of fiscal 2005. Maintenancerevenues for the first quarter of 2006 were $1.3 million compared to $1.4million for the first quarter of fiscal 2005.

 

***Cost of Revenues***

 

Costof software licenses consists primarily of product packaging and productioncosts as well as the amortization of royalties and license fees paid forlicensed technology. Cost of software licenses was $0.1 million for both thefirst three months of fiscal 2006 and the first three months of fiscal 2005.Cost of software licenses as a percent of software licenses revenues for thefirst three months of fiscal 2006 was 12% as compared to 7% in the first threemonths of fiscal 2005 as a result of an increase in personnel providingsoftware license support. Costs associated with royalties and other directproduction costs are expensed as incurred at the time of the sale and purchasedtechnology from third parties is amortized ratably over their expected usefullife.

 

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Costof services consists primarily of employee, facilities and travel costsincurred in providing customer support under software maintenance contracts andconsulting services. Total cost of services was $0.3 million for the firstthree months of fiscal 2006 and $0.4 million for the first three months offiscal 2005. Cost of services as a percent of services revenues for the firstthree months of fiscal 2006 was 21% as compared to 23% in the first threemonths of fiscal 2005. We continue to carefully monitor and strive to improvethe efficiency of our support, consulting and training operations. In fiscal2006, we expect to expand our consulting and implementation teams as ourapplication product customer wins increase. As a result, our service costs willincrease and, as there is generally a period of time between when additionalconsulting personnel are hired and when they become fully productive, ourresults of operations may be adversely affected by the expansion of ourservices teams.

 

***Product Development***

 

Productdevelopment expenses consist primarily of employee and facilities costsincurred in the development and testing of new products and in the porting ofnew and existing products to additional hardware platforms and operatingsystems. Product development costs were $0.7 million in both the first threemonths of fiscal 2006 and fiscal 2005. Product development costs as apercentage of total revenues were 26% in the first three months of fiscal 2006and 25% in fiscal 2005. The Company believes that investments in productdevelopment are critical to maintaining technological leadership and thereforeintends to continue to devote significant resources to product development.

 

***Selling, General and Administrative***

 

Selling,general and administrative (“SG&A”) expenses consist primarily of salariesand incentive pay, marketing programs, travel expenses, professional services,facilities expenses and bad debt expense or recoveries. SG&A expenses were$1.7 million for the first three months of fiscal 2006 compared to$2.1 million for the first three months of 2005. As a percentage of totalrevenue, SG&A expenses were 61% in the first quarter of fiscal 2006 and 75%in the first quarter of fiscal 2005. The $0.4 million reduction in SG&A wasprimarily the result of expense reductions in North American sales personneland also a decrease in SG&A expenses resulting from the consolidation ofEuropean operations in the latter part of fiscal 2005. The major components ofSG&A for the first three months of fiscal 2006 were sales expenses of $0.9million, marketing expenses of $0.2 million and general and administrativeexpenses of $0.6 million.  The primarychange was in sales expenses which decreased by $0.4 million in the first threemonths of fiscal 2006 compared to the same period in fiscal 2005.

 

***Provision for Income Taxes***

 

No federal or state tax provisions were recordedin the first quarter of 2006 as the Company has significant net operating losscarryforwards. For the first quarter of fiscal 2005, the Company had income taxrecoveries totaling $6,000 primarily related to refunds of previously paidstate income taxes.

 

**Liquidity and Capital Resources**

 

At July 31, 2005, the Company had cash andcash equivalents of $3.6 million, compared to $3.7 million at April 30,2005. Working capital was $0.8 million as of July 31, 2005 and April 30,2005.

 

Duringthe first quarter of fiscal 2005 the Company renewed its loan agreement withthe Silicon Valley Bank. The agreement provides for a $1.0 million revolvingline of credit and for term loans up to $250,000 for the purchase of qualifyingequipment. As of July 31, 2005, the Company had $0 outstanding under theline of credit and $0.9 million in available credit based upon eligible assetsat that date. As of July 31, 2005 the company had a term loan balance of$0.1 million.

 

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Cash flows provided by operations totaled$11,000 for the first quarter of fiscal 2006 compared to a usage of cash foroperations of $1.4 million for the first quarter of fiscal 2005. Operating cashwas provided by decreases in accounts receivable of $1.1 million and prepaidexpenses of $119,000. Operating cash was used as a result of decreases indeferred revenue of $653,000, accrued compensation and related expenses of$147,000 and other accrued liabilities of $214,000. For the first quarter offiscal 2006 investing activities used cash of $7,000 for the purchase ofproperty and equipment. Cash used by financing activities in the first quarterof fiscal 2006 was $31,000 as a result of payments made on debt totaling$87,000 offset by $56,000 in proceeds from issuance of common stock from stockoption exercises and purchases of common stock under the employee stockpurchase plan. The Company’s cash flow also reflects a decrease of $67,000 inthe first quarter of fiscal 2006 as a result of the effect of currency exchangerates related to international operations.

 

Asummary of certain contractual obligations as of July 31, 2005 is asfollows (in thousands):

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**        | ** ** | **Total**                  | ** ** | **1 year  or less** | ** ** | **2-3  years** | ** ** | **4 - 5  years** | ** ** | **After  5  years** | ** ** |
| Long-Term Debt                     |       | $                          | 80         |   | $ | 72 |   | $ | 8 |   | $ | — |   | $ | — |   |
| Capital lease obligations          |       | 14                         |       | 6 |   | 8 |   | — |   | — |   |
| Other Long-Term Liabilities        |       | 68                         |       | — |   | — |   | — |   | 68 |   |
| Operating Leases                   |       | 2,645                      |       | 806 |   | 1,820 |   | 19 |   | — |   |
| Total Contractual Cash Obligations |       | $                          | 2,807      |   | $ | 884 |   | $ | 1,836 |   | $ | 19 |   | $ | 68 |   |

 

**Volatility of Stock Price and General Risk Factors Affecting QuarterlyResults**

 

TheCompany’s common stock price has been and is likely to continue to be subjectto significant volatility. A variety of factors could cause the price of theCompany’s common stock to fluctuate, perhaps substantially, including:announcements of developments related to the Company’s business; fluctuationsin 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 productenhancements by the Company or its competitors; changes in financial estimatesby securities analysts; developments in patent, copyright or other intellectualproperty rights; developments in the Company’s relationships with itscustomers, distributors and suppliers; legal proceedings brought against theCompany or its officers; the structure of acquisitions or potentialacquisitions by the Company and the performance of any companies acquired; andsignificant changes in the Company’s senior management team. In addition, inrecent years the stock market in general, and the market for shares of equitysecurities of many high technology companies in particular, have experiencedextreme price fluctuations which have often been unrelated to the operatingperformance of those companies. Such fluctuations may adversely affect themarket price of the Company’s common stock.

 

TheCompany’s quarterly operating results have varied significantly in the past,and the Company expects that its operating results are likely to varysignificantly from time to time in the future. Such variations result from,among other factors, the following: the size and timing of significant ordersand their fulfillment; demand for the Company’s products; ability to sell newproducts; the number, timing and significance of product enhancements and newproduct announcements by the Company and its competitors; ability of theCompany to attract and retain key employees; the Company’s ability tointegrated and manage acquisitions; seasonality; changes in pricing policies bythe Company or its competitors; realignments of the Company’s organizationalstructure; 

 

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changes in the level of the Company’soperating expenses; changes in the Company’s sales incentive plans; budgetingcycles of the Company’s customers; customer order deferrals in anticipation ofenhancements or new products offered by the Company or its competitors; productlife cycles; product defects and other product quality problems; currencyfluctuations; and general domestic and international economic and politicalconditions.

 

Dueto the foregoing factors, quarterly revenues and operating results aredifficult to forecast. Revenues are also difficult to forecast because themarket for software continues to evolve and the Company’s sales cycle, frominitial evaluation to purchase and the provision of maintenance services, canbe lengthy and vary substantially from customer to customer. Because theCompany normally ships products within a short time after it receives an order,it typically does not have any material backlog. As a result, to achieve itsquarterly revenue objectives, the Company is dependent upon obtaining orders inany given quarter for shipment in that quarter. Furthermore, because manycustomers place orders toward the end of a fiscal quarter, the Company generallyrecognizes a substantial portion of its license revenues at the end of aquarter. As the Company’s expense levels are based in significant part on theCompany’s expectations as to future revenues and are therefore relatively fixedin the short term, if revenue levels fall below expectations, operating resultsare likely to be disproportionately adversely affected. The Company alsoexpects that its operating results will be affected by seasonal trends, andthat it may experience relatively weaker demand in fiscal quarters ended July 31and October 31 as a result of reduced business activity in Europe duringthe summer months.

 

**Item 3. Quantitative andQualitative Disclosures about Market Risk**

 

***Interest Rate Risk***.The Company’s exposure to market rate risk for changes in interest ratesrelates primarily to its investment portfolio, which consists of cashequivalents and short-term investments. Cash equivalents are highly liquidinvestments with original maturities of three months or less and are stated atcost. Cash equivalents are generally maintained in money market accounts whichhave as their objective preservation of principal and which hold investmentswith maturity dates of less than 90 days. The Company does not believe itsexposure to interest rate risk is material for cash and investments, whichtotaled $3.6 million at July 31, 2005. Unify had no short-terminvestments at July 31, 2005. Additionally, the Company does not believeits exposure to interest rate risk is material for debt. On a combined basis,the current and long-term portions of debt totaled $0.1 million at July 31,2005.

 

Unify does not use derivative financialinstruments in its short-term investment portfolio, and places its investmentswith high quality issuers only and, by policy, limits the amount of creditexposure to any one issuer. The Company is averse to principal loss andattempts to ensure the safety of its invested funds by limiting default, marketand reinvestment risk.

 

***Foreign Currency Exchange RateRisk****.*As a global concern, the Company faces exposure to adverse movements in foreigncurrency exchange rates. These exposures may change over time as businesspractices evolve and could have an adverse impact on the Company’s business,operating results and financial position. Historically, the Company’s primaryexposures have related to local currency denominated sales and expenses inEurope, Japan and Australia. For example, when the U.S. dollar strengthensagainst the major European currencies, it results in lower revenues andexpenses recorded for those regions when translated into U.S. dollars.

 

Due to the substantial volatility of currencyexchange rates, among other factors, the Company cannot predict the effect ofexchange rate fluctuations on its future operating results. Although Unifytakes into account changes in exchange rates over time in its pricing strategy,it does so only on an annual basis, resulting in substantial pricing exposureas a result of foreign exchange volatility during the period between annual pricingreviews. The Company also has currency exchange rate exposures on intercompanyaccounts receivable owed to the Company as a result of local currency sales ofsoftware licenses by the Company’s international subsidiary in France. At July 31,2005, the Company had the equivalent of $48,000 in such receivables denominatedin 

 

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Euros.The Company encourages prompt payment of these intercompany balances in orderto minimize its exposure to currency fluctuations, but it engages in no hedgingactivities to reduce the risk of such fluctuations. A hypothetical ten percentchange in foreign currency rates would have an insignificant impact on theCompany’s business, operating results and financial position. The Company hasnot experienced material exchange losses on intercompany balances in the past;however, due to the substantial volatility of currency exchange rates, amongother factors, it cannot predict the effect of exchange rate fluctuations onits future business, operating results and financial position.

 

**Item 4. Controls and Procedures**

 

**(a)   *Evaluation of DisclosureControls and Procedures***. Under thesupervision and with the participation of our management, including our chiefexecutive officer and chief financial officer, we evaluated the effectivenessof our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon thatevaluation, our chief executive officer and chief financial officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report.

 

**(b)   *Changes in Internal Controls***.There have been no changes in our internal controls over financial reportingthat occurred during the quarter ended July 31, 2005 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

 

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### **UNIFY CORPORATION**

### ** **

### **PART II.        OTHERINFORMATION**

### ** **

**Item 1.  Legal Proceedings**

 

###### ***Litigation***

###### * *

The Company is subject to legal proceedings andclaims that arise in the normal course of business. If such matters arise, theCompany cannot assure that it would prevail in such matters, nor can it assurethat any remedy could be reached on mutually agreeable terms, if at all. Due tothe inherent uncertainties of litigation, were there any such matters, theCompany would not be able to accurately predict their ultimate outcome. As of July 31,2005, there were no current proceedings or litigation involving the Companythat management believes would have a material adverse impact on its financialposition, results of operations, or cash flows.

 

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**Item 6.  Exhibits**

 
| ** ** | ** ** | **Exhibits**                                                                                                                                                | ** ** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|       |       |                                                                                                                                                        |       |
| 31.1       |       | Certification of Chief Executive Officer under Section 302 of  the Sarbanes-Oxley Act of 2002.                                                         |       |
|       |       |                                                                                                                                                        |       |
| 31.2       |       | Certification of Chief Financial Officer under Section 302 of  the Sarbanes-Oxley Act of 2002.                                                         |       |
|       |       |                                                                                                                                                        |       |
| 32.1       |       | Certification of Chief Executive Officer under 18 U.S.C  Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002       |       |
|       |       |                                                                                                                                                        |       |
| 32.2       |       | Certification of Chief Financial Officer under 18 U.S.C  Section 1350  as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |       |

 

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**UNIFYCORPORATION**

**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hascaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| Date: September 14, 2005 | Unify Corporation                            |
|-------------------------------|----------------------------------------------|
|                          | *(Registrant)*                               |
|                          |                                         |
|                          | By:                                          |
|                          |                                         |
|                          | /s/ STEVEN D. BONHAM                         |
|                          | Steven D. Bonham                             |
|                          | Chief Financial Officer                      |
|                          | (Principal Financial and Accounting Officer) |
|                               |                                              |  |

 

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