**UNITED STATESSECURITIES 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**

 

**Forthe quarterly period ended October 31, 2005**

 

**OR**

 

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

 

**CommissionFile Number:   001-11807**

 

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**UNIFYCORPORATION**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                     | ** ** | **94-2710559**                   |
|----------------------------------|------------|----------------------------------|
| (State or  other jurisdiction of |       | (I.R.S.  Employer Identification |
| incorporation  or organization)  |       | Number)                          |

 

**2101 ArenaBlvd, Suite 100Sacramento, California 95834**(Address of principal executive offices)

 

**Telephone:(916) 928-6400**(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch 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: 28,881,453 shares of Common Stock,$0.001 par value, as of October 31, 2005.

 

 

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**UNIFYCORPORATIONFORM 10-Q**

 

**INDEX**

 
| **PART I.**   | **FINANCIAL INFORMATION**                                                                                                        | ** ** | ** ** |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **         | ** **                                                                                                                       | ** ** | ** ** |
| **Item 1.**        | **Financial Statements**                                                                                                         | ** ** | ** ** |
| ** **         | ** **                                                                                                                       | ** ** | ** ** |
| ** **         | **Condensed Consolidated Balance Sheets as of October 31, 2005 and  April 30, 2005**                                   | ** ** | ** ** |
| ** **         | ** **                                                                                                                       | ** ** | ** ** |
| ** **         | **Unaudited Condensed Consolidated Statements of Operations for the  three and six months ended October 31, 2005 and 2004** | ** ** | ** ** |
| ** **         | ** **                                                                                                                       | ** ** | ** ** |
| ** **         | **Unaudited Condensed Consolidated Statements of Cash Flows for the six  months ended October 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 4.**        | **Submission of Matters to a Vote of Security Holdings**                                                                         | ** ** | ** ** |
| ** **         | ** **                                                                                                                       | ** ** | ** ** |
| **Item 6.**        | **Exhibits**                                                                                                                     | ** ** | ** ** |
| ** **         | ** **                                                                                                                       | ** ** | ** ** |
| **SIGNATURE**      | ** **                                                                                                                       | ** ** | ** ** |
| ** **         | ** **                                                                                                                       | ** ** | ** ** |
| **CERTIFICATIONS** | ** **                                                                                                                       | ** ** | ** ** |

 

2

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**PART I.  FINANCIALINFORMATION**

 

**Item 1.****          ****Financial Statements**

 

**UNIFYCORPORATIONCONDENSED CONSOLIDATEDBALANCE SHEETS****(Inthousands)**

 
| ** **                                                   | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                   | ** ** | **2005**             | ** ** | **2005**           | ** ** |
| ** **                                                   | ** ** | **(unaudited)**      | ** ** | **(audited)**      | ** ** |
| **ASSETS**                                                   |       |                 |       |               |       |
| Current assets:                                              |       |                 |       |               |       |
| Cash and  cash equivalents                                   |       | $                    | 3,223      |               | $          | 3,675 |   |
| Accounts  receivable, net                                    |       | 1,861                |       | 2,611              |       |
| Prepaid  expenses & other current assets            |       | 406                  |       | 656                |       |
| Contracts in  progress                                       |       | 205                  |       | —             |       |
| Total  current assets                                        |       | 5,695                |       | 6,942              |       |
|                                                         |       |                 |       |               |       |
| Property and equipment, net                                  |       | 347                  |       | 429                |       |
| Other investments                                            |       | 214                  |       | 214                |       |
| Goodwill and intangible assets, net                          |       | 1,678                |       | 1,739              |       |
| Other assets, net                                            |       | 190                  |       | 166                |       |
| Total assets                                                 |       | $                    | 8,124      |               | $          | 9,490 |   |
|                                                         |       |                 |       |               |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**               |       |                 |       |               |       |
| Current liabilities:                                         |       |                 |       |               |       |
| Accounts  payable                                            |       | $                    | 418        |               | $          | 739 |   |
| Short-term  borrowings and current portion of long-term debt |       | 800                  |       | 166                |       |
| Other  accrued liabilities                                   |       | 705                  |       | 1,336              |       |
| Accrued  compensation and related expenses                   |       | 608                  |       | 721                |       |
| Deferred  revenue                                            |       | 2,298                |       | 3,220              |       |
| Total  current liabilities                                   |       | 4,829                |       | 6,182              |       |
|                                                         |       |                 |       |               |       |
| Other long-term liabilities                                  |       | 703                  |       | 741                |       |
|                                                         |       |                 |       |               |       |
| Commitments and contingencies                                |       | —               |       | —             |       |
|                                                         |       |                 |       |               |       |
| Stockholders’ equity:                                   |       |                 |       |               |       |
| Common stock                                                 |       | 29                   |       | 28                 |       |
| Additional  paid-in capital                                  |       | 63,766               |       | 63,588             |       |
| Accumulated  other comprehensive income                      |       | 26                   |       | 73                 |       |
| Accumulated  deficit                                         |       | (61,229              | )          | (61,122            | )          |
| Total  stockholders’ equity                             |       | 2,592                |       | 2,567              |       |
| Total  liabilities and stockholders’ equity             |       | $                    | 8,124      |               | $          | 9,490 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                                             | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                              |       |                   |       |                 |       |   |   |   |   |
| Software  licenses                                     |       | $                      | 1,246      |                 | $          | 1,301 |   | $ | 2,415 |   | $ | 2,465 |   |
| Services                                               |       | 1,415                  |       | 1,509                |       | 2,972 |   | 3,078 |   |
| Total  revenues                                        |       | 2,661                  |       | 2,810                |       | 5,387 |   | 5,543 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Cost of Revenues:                                      |       |                   |       |                 |       |   |   |   |   |
| Software  licenses                                     |       | 121                    |       | 85                   |       | 260 |   | 168 |   |
| Services                                               |       | 398                    |       | 362                  |       | 725 |   | 726 |   |
| Total cost  of revenues                                |       | 519                    |       | 447                  |       | 985 |   | 894 |   |
| Gross profit                                           |       | 2,142                  |       | 2,363                |       | 4,402 |   | 4,649 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Operating Expenses:                                    |       |                   |       |                 |       |   |   |   |   |
| Product  development                                   |       | 612                    |       | 743                  |       | 1,313 |   | 1,432 |   |
| Selling,  general and administrative                   |       | 1,539                  |       | 2,261                |       | 3,204 |   | 4,322 |   |
| Total  operating expenses                              |       | 2,151                  |       | 3,004                |       | 4,517 |   | 5,754 |   |
| Loss from  operations                                  |       | (9                     | )          | (641                 | )          | (115 | ) | (1,105 | ) |
| Other income, net                                      |       | 14                     |       | 17                   |       | 8 |   | 1 |   |
| Income  (loss) before income taxes                     |       | 5                      |       | (624                 | )          | (107 | ) | (1,104 | ) |
| Provision for income taxes                             |       | —                 |       | 10                   |       | — |   | 4 |   |
| Net income  (loss)                                     |       | $                      | 5          |                 | $          | (634 | ) | $ | (107 | ) | $ | (1,108 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Net income (loss) per share:                           |       |                   |       |                 |       |   |   |   |   |
| Basic                                                  |       | $                      | 0.00       |                 | $          | (0.02 | ) | $ | 0.00 |   | $ | (0.04 | ) |
| Dilutive                                               |       | $                      | 0.00       |                 | $          | (0.02 | ) | $ | 0.00 |   | $ | (0.04 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Shares used in computing net income (loss)  per share: |       |                   |       |                 |       |   |   |   |   |
| Basic                                                  |       | 28,851                 |       | 27,629               |       | 28,736 |   | 27,576 |   |
| Dilutive                                               |       | 29,218                 |       | 27,629               |       | 28,736 |   | 27,576 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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

 
| ** **                                                            | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **October 31,** | ** ** |
| ** **                                                            | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                 |       |                 |       |   |   |
| Net loss                                                              |       | $                    | (107       | ) | $ | (1,108 | ) |
| Reconciliation  of net loss to net cash used in operating activities: |       |                 |       |   |   |
| Depreciation                                                          |       | 113                  |       | 82 |   |
| Loss on  disposal of equipment                                        |       | 5                    |       | — |   |
| Amortization                                                          |       | 67                   |       | 33 |   |
| Fulfillment  of support obligations                                   |       | (158                 | )          | — |   |
| Employee  stock based expense                                         |       | 57                   |       | 40 |   |
| Stock based  expense for acquisition earn-out payment                 |       | 65                   |       | — |   |
| Changes in  operating assets and liabilities:                         |       |                 |       |   |   |
| Accounts  receivable                                                  |       | 658                  |       | 410 |   |
| Prepaid  expenses and other current assets                            |       | 232                  |       | (130 | ) |
| Contracts In  Progress                                                |       | (204                 | )          | — |   |
| Accounts  payable                                                     |       | (321                 | )          | (130 | ) |
| Accrued  compensation and related expenses                            |       | (97                  | )          | (64 | ) |
| Other  accrued liabilities                                            |       | (468                 | )          | (447 | ) |
| Deferred  revenue                                                     |       | (886                 | )          | (1,087 | ) |
| Net cash used in operating activities                                 |       | (1,044               | )          | (2,401 | ) |
|                                                                  |       |                 |       |   |   |
| Cash flows from investing activities:                                 |       |                 |       |   |   |
| Purchases of  property and equipment                                  |       | (37                  | )          | (134 | ) |
| Decrease in  other assets                                             |       | —               |       | 4 |   |
| Net cash used in investing activities                                 |       | (37                  | )          | (130 | ) |
|                                                                  |       |                 |       |   |   |
| Cash flows from financing activities:                                 |       |                 |       |   |   |
| Proceeds  from issuance of common stock, net                          |       | 55                   |       | 4 |   |
| Borrowings  under line of credit                                      |       | 675                  |       | 1,560 |   |
| Borrowings  under debt obligations                                    |       | —               |       | 126 |   |
| Principal  payments under debt obligations                            |       | (50                  | )          | (866 | ) |
| Net cash provided by financing activities                             |       | 680                  |       | 824 |   |
|                                                                  |       |                 |       |   |   |
| Effect of exchange rate changes on cash                               |       | (51                  | )          | 68 |   |
| Net decrease in cash and cash equivalents                             |       | (452                 | )          | (1,639 | ) |
| Cash and cash equivalents, beginning of  period                       |       | 3,675                |       | 6,606 |   |
| Cash and cash equivalents, end of period                              |       | $                    | 3,223      |   | $ | 4,967 |   |
|                                                                  |       |                 |       |   |   |
| Supplemental cash flow information:                                   |       |                 |       |   |   |
| Cash paid  (received) during the period for:                          |       |                 |       |   |   |
| Interest                                                              |       | $                    | (54        | ) | $ | 7 |   |
| Income taxes                                                          |       | $                    | —     |   | $ | 6 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**UNIFYCORPORATIONNOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****             ****Basis of Presentation**

 

Thecondensed consolidated financial statements have been prepared by UnifyCorporation (the “Company”, “we”, “us”, “our”) pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). While theinterim financial information contained in this filing is unaudited, suchfinancial statements, in the opinion of management, reflect all adjustments(consisting only of normal recurring adjustments) which the Company considersnecessary for a fair presentation. The results for interim periods are notnecessarily indicative of the results to be expected for the entire fiscalyear. These financial statements should be read in conjunction with theConsolidated Financial Statements and Notes thereto, together with Management’sDiscussion and Analysis of Financial Condition and Results of Operations, whichare included in the Company’s Annual Report on Form 10-K for the fiscalyear ended April 30, 2005 as filed with the SEC.

 

*Revenue Recognition*

 

The Company implemented its first significant NavRisk softwareapplication in the second quarter of fiscal 2006 and is accounting for suchrevenue under the provisions of Accounting Research Bulletin (“ARB”) 45, *Long-Term Construction-Type Contracts* and Statement ofPosition (“SOP”) 81-1, *Accounting for Performanceof Construction-Type and Certain Production-Type Contracts.* Thisguidance is followed since contracts with customers purchasing the NavRiskapplication require significant configuration to the software and theconfiguration activities are essential to the functionality of thesoftware.  As provided for by SOP 81-1,the Company is using the completed-contract method for revenue recognition asit has limited experience determining the accuracy of progress-to-completionestimates for installation hours and project milestones. Under the completedcontract method, revenue is recognized only when the contract is completed.Project costs incurred for contracts in progress are deferred and reflected onthe Balance Sheet as Contracts in Progress. When a contract is completed,revenue is recognized and deferred costs are expensed. The Company anticipatesit will switch to the percentage-of-completion method to recognize NavRiskrevenue when it is capable of accurately establishing progress-to-completionestimates for the NavRisk contracts.

 

The Company’s NavRisk contracts may include multi-element arrangementsthat include a delivered element (a software license) and undelivered elements(such as maintenance and support and/or consulting). The value allocated to theundelivered elements is unbundled from the delivered element based onvendor-specific objective evidence (VSOE) of the fair value of the maintenanceand support and/or consulting, regardless of any separate prices stated withinthe contract. VSOE of fair value is defined as (i) the price charged whenthe same element is sold separately, or (ii) if the element has not yetbeen sold separately, the price for the element established by managementhaving the relevant authority when it is probable that the price will notchange before the introduction of the element into the marketplace. The Companythen allocates the remaining balance to the delivered element (a softwarelicense) regardless of any separate prices stated within the contract using theresidual method.

 

Revenue from support and maintenance activities, which consist of feesfor ongoing support and unspecified updates, are recognized ratably over theterm of the maintenance contract and the associated costs are expensed asincurred.

 

***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 accountingfor transactions in which an entity exchanges its equity instruments for goodsor services, primarily with respect to transactions in which employee servicesare obtained in exchange for share-based payment. Statement 123R is effectiveas of the beginning of the first fiscal year that begins after June 15,2005. We have not completed the process of evaluating the impact that willresult from adopting this pronouncement. The Company is therefore unable todisclose the impact that adopting FASB Statement 123R will have on itsfinancial position and the results of operations when such statement isadopted.

 

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 assetexchanges occurring in fiscal periods beginning after June 15, 2005 andwere required to be adopted by the Company in the second quarter of fiscal2006. The adoption of Statement 153 did not have a material impact on ourfinancial position, cash flows or results of operations.

 

6

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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 changeretrospectively. Therefore, the reporting of a correction of an error byrestating previously issued financial statements is also addressed by SFAS No. 154.SFAS No. 154 is required to be adopted in fiscal years beginning after December 15,2005. We do not expect the adoption of this accounting pronouncement to have amaterial impact on our financial position, cash flows or results of operations.

 

**2.****             ****Stock Compensation 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-based awards. Under SFAS 123, the fair value of stock-based awards toemployees 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 ended October 31, 2005 and 2004, respectively: expected optionlife, 12 months following vesting; stock volatility of 233% and 239%; risk-freeinterest rates of 3.9% and 3.0%; and no dividends during the expected termand for the six months ended October 31, 2005 and 2004, respectively;expected option life, 12 months following vesting; stock volatility of 227% and236%, and risk-free interest rates of 3.8% and 3.1%.  The Company’s calculations are based on amultiple option valuation approach and forfeitures are recognized as theyoccur.

 

Thefollowing table illustrates the effect on net income (loss) and net income(loss) per share if the Company had applied the fair value recognitionprovisions of SFAS 123, to stock-based employee compensation (in thousands,except per share data):

 
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                           | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                                                                                           | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss) as reported                                                                        |       | $                      | 5          |                 | $          | (634 | ) | $ | (107 | ) | $ | (1,108 | ) |
| Add:  stock-based employee compensation included in reported net income (loss)                       |       | —                 |       | —               |       | — |   | 40 |   |
| Less:  stock-based employee compensation expense, determined under fair value method  for all awards |       | (108                   | )          | (42                  | )          | (272 | ) | (160 | ) |
| Proforma net loss                                                                                    |       | $                      | (103       | )                    | $          | (676 | ) | $ | (379 | ) | $ | (1,228 | ) |
|                                                                                                 |       |                   |       |                 |       |   |   |   |   |
| Net loss per share (basic and diluted), as  reported                                                 |       | $                      | 0.00       |                 | $          | (0.02 | ) | $ | — |   | $ | (0.04 | ) |
| Net loss per share (basic and diluted), pro  forma                                                   |       | $                      | 0.00       |                 | $          | (0.02 | ) | $ | (0.01 | ) | $ | (0.04 | ) |

 

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**3.****             ****Goodwill and IntangibleAssets**

 

Thefollowing tables present details of the Company’s goodwill and intangibleassets as of October 31, 2005 and April 30, 2005 (in thousands):

 
| ** **                | ** ** | **Gross**    | ** ** | ** **       | ** ** | **Net**      | ** ** | ** **      | ** ** |
|---------------------------|------------|--------------|------------|------------------|------------|--------------|------------|-----------------|------------|
| ** **                | ** ** | **carrying** | ** ** | **Accumulated**  | ** ** | **carrying** | ** ** | **Estimated**   | ** ** |
| **October 31, 2005** | ** ** | **amount**   | ** ** | **amortization** | ** ** | **amount**   | ** ** | **useful life** | ** ** |
| Infinite Lives:           |       |         |       |             |       |         |       |            |       |
| Goodwill                  |       | $            | 1,405      |             | $          | —       |       | $               | 1,405      |   | — |   |
| Finite Lives:             |       |         |       |             |       |         |       |            |       |
| Technology-based          |       | 200          |       | (50              | )          | 150          |       | 3 years         |       |
| Customer-related          |       | 164          |       | (41              | )          | 123          |       | 3 years         |       |
| Total                     |       | $            | 1,769      |             | $          | (91          | )          | $               | 1,678      |   |   |   |

 
| ** **              | ** ** | **Gross**    | ** ** | ** **       | ** ** | **Net**      | ** ** | ** **      | ** ** |
|-------------------------|------------|--------------|------------|------------------|------------|--------------|------------|-----------------|------------|
| ** **              | ** ** | **carrying** | ** ** | **Accumulated**  | ** ** | **carrying** | ** ** | **Estimated**   | ** ** |
| **April 30, 2005** | ** ** | **amount**   | ** ** | **amortization** | ** ** | **amount**   | ** ** | **useful life** | ** ** |
| Infinite Lives:         |       |         |       |             |       |         |       |            |       |
| Goodwill                |       | $            | 1,405      |             | $          | —       |       | $               | 1,405      |   | — |   |
| Finite Lives:           |       |         |       |             |       |         |       |            |       |
| Technology-based        |       | 200          |       | (16              | )          | 184          |       | 3 years         |       |
| Customer-related        |       | 164          |       | (14              | )          | 150          |       | 3 years         |       |
| Total                   |       | $            | 1,769      |             | $          | (30          | )          | $               | 1,739      |   |   |   |

 

Acquiredfinite-lived intangibles are generally amortized on a straight line basis overtheir estimated useful life. Intangible assets amortization expense for thethree months and six months ended October 31, 2005 was $31,000 and$61,000, respectively. The estimated future amortization expense related tointangible assets as of October 31, 2005 is as follows (in thousands):

 
| **FYE**                     | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|
| **April 30,**          | ** ** | **Amount** | ** ** |
| 2006 (remaining six months) |       | $          | 61         |   |
| 2007                        |       | 121        |       |
| 2008                        |       | 91         |       |
| Total                       |       | $          | 273        |   |

 

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.****             ****Credit Facility**

 

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 October 31, 2005, the Company had$675,000 outstanding under the line of credit (see Note 5) and $0.2 million inavailable credit based upon eligible assets at that date. Additionally, as of October 31,2005 the Company had $47,000 outstanding in term loans (see Note 5).

 

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**5.****             ****Borrowings**

 

Borrowingsconsisted of the following at October 31, 2005 and April 30, 2005 (inthousands):

 
| ** **                                                                                                                                                                                                                                 | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                 | ** ** | **2005**             | ** ** | **2005**           | ** ** |
| Unsecured note payable to a related party,  bears no interest                                                                                                                                                                              |       | $                    | —     |               | $          | 64 |   |
| Note payable, bears no interest, payable in  installments through March 15, 2006                                                                                                                                                      |       | 72                   |       | —             |       |
| Notes  payable to a financial institution, accruing interest at prime plus 2.5%, not  to be less than 4% per annum (actual interest rate at October 31, 2005  was 9.25%), payable in monthly installments through September 2006 |       | 47                   |       | 118                |       |
| Short-term  borrowings, accruing interest at prime plus 2.0%, not to be less than 4% per  annum (actual interest rate at October 31, 2005 was 8.75%), payable in  full by June 5, 2006                                           |       | 675                  |       | —             |       |
| Capital lease payable, payable in monthly  installments through August 2007                                                                                                                                                           |       | 13                   |       | 15                 |       |
|                                                                                                                                                                                                                                       |       | 807                  |       | 197                |       |
| Less current portion                                                                                                                                                                                                                       |       | (800                 | )          | (166               | )          |
|                                                                                                                                                                                                                                       |       | $                    | 7          |               | $          | 31 |   |

 

**6.****             ****Other Long-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) additional years. The support obligation for periods greaterthan one year from October 31, 2005 is $122,000.

 

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

 
| ** **                             | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|----------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                             | ** ** | **2005**             | ** ** | **2005**           | ** ** |
| Long-term debt, net of current portion |       | $                    | 7          |               | $          | 31 |   |
| Royalty payable                        |       | 506                  |       | 514                |       |
| Accrued support obligations            |       | 122                  |       | 124                |       |
| Other long-term liabilities            |       | 68                   |       | 72                 |       |
|                                   |       | $                    | 703        |               | $          | 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.****             ****Maintenance Contracts**

 

TheCompany offers maintenance contracts to its customers at the time they enterinto a product license agreement and renew those contracts, generally at thecustomers’ option, annually thereafter. These maintenance contracts aregenerally priced as a percentage of the value of the related license agreement.The specific terms and conditions of these initial maintenance contracts andsubsequent renewals vary depending upon the product licensed and the country inwhich the Company does business. Generally, maintenance contracts provide thecustomer with unspecified product maintenance updates and customer supportservices. Revenue from maintenance contracts is initially deferred and thenrecognized ratably over the term of the agreements. During the second quarter of fiscal 2006 the Company renewed anadditional $131,000 of maintenance contracts that now require monthly billingper new General Services Administration (“GSA”) regulations. As a result of theGSA billing change the amount of new maintenance contracts

 

9

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reflected in the following table includes only onemonth of maintenance for GSA contracts for the three months ended October 31,2005. For the three months ended October 31, 2004 there are twelve monthsof maintenance for GSA contracts reflected in the new maintenance contractsamount in the following table.

 

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

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                              | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                              | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                    |       |                   |       |                 |       |   |   |   |   |
| Balances, beginning of period           |       | $                      | 2,135      |                 | $          | 2,442 |   | $ | 2,849 |   | $ | 3,068 |   |
| Amount recognized during the period     |       | (1,264                 | )          | (1,392               | )          | (2,586 | ) | (2,765 | ) |
| Amount of new maintenance contracts (1) |       | 1,017                  |       | 1,152                |       | 1,625 |   | 1,899 |   |
| Balances, end of period                 |       | $                      | 1,888      |                 | $          | 2,202 |   | $ | 1,888 |   | $ | 2,202 |   |

 

**8.****             ****Comprehensive Loss**

 

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

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                        | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                 |       | $                      | 5          |                 | $          | (634 | ) | $ | (107 | ) | $ | (1,108 | ) |
| Foreign currency translation gain |       | 88                     |       | 38                   |       | 26 |   | 46 |   |
| Total  comprehensive gain (loss)  |       | $                      | 93         |                 | $          | (596 | ) | $ | (81 | ) | $ | (1,062 | ) |

 

**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 that couldoccur if securities or other contracts to issue common stock (e.g. convertiblepreferred stock, warrants, and common stock options) were exercised orconverted into common stock. Potential common shares in the diluted EPScomputation are excluded for the three-month period ended October 31, 2004and the six-month periods ended October 31, 2005 and October 31, 2004as their effect would be antidilutive. The following is a reconciliation of thenumerators and denominators of the basic and diluted income per sharecomputations for the periods indicated (in thousands, except per share data):

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                                                    | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net income (loss) (Numerator):**                            |       |                   |       |                 |       |   |   |   |   |
| Net income (loss)                                             |       | $                      | 5          |                 | $          | (634 | ) | $ | (107 | ) | $ | (1,108 | ) |
|                                                          |       |                   |       |                 |       |   |   |   |   |
| **Shares (Denominator):**                                     |       |                   |       |                 |       |   |   |   |   |
| Weighted average shares of common stock  outstanding, basic   |       | 28,851                 |       | 27,629               |       | 28,736 |   | 27,576 |   |
| Weighted average common equivalent shares  outstanding        |       | 367                    |       | —               |       | — |   | — |   |
| Weighted average shares of common stock  outstanding, diluted |       | 29,218                 |       | 27,629               |       | 28,736 |   | 27,576 |   |
|                                                          |       |                   |       |                 |       |   |   |   |   |
| **Per Share Amount:**                                         |       |                   |       |                 |       |   |   |   |   |
| Net income (loss) per share, basic                            |       | $                      | 0.00       |                 | $          | (0.02 | ) | $ | 0.00 |   | $ | (0.04 | ) |
| Effect of dilutive securities                                 |       | —                 |       | —               |       | — |   | — |   |
| Net income (loss) per share, diluted                          |       | $                      | 0.00       |                 | $          | (0.02 | ) | $ | 0.00 |   | $ | (0.04 | ) |

 

10

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**10.****                              ****Segment Information**

 

Inthe fourth quarter of fiscal 2005, the Company acquired Acuitrek, Inc.This segment is now known as the Insurance Risk Management Division (“IRM”),which sells and markets the NavRisk application. The Company’s technologyproducts, including the Unify NXJ, Dataserver, VISION and ACCELL productfamilies, are included in the Unify Business Solutions (“UBS”) segment.

 

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

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                          | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total net revenues:                 |       |                   |       |                 |       |   |   |   |   |
| UBS-Americas                        |       | $                      | 1,607      |                 | $          | 1,980 |   | $ | 3,426 |   | $ | 3,771 |   |
| UBS-Europe                          |       | 762                    |       | 830                  |       | 1,500 |   | 1,772 |   |
| Insurance  Risk Management Division |       | 292                    |       | —               |       | 461 |   | — |   |
| Total net  revenues                 |       | $                      | 2,661      |                 | $          | 2,810 |   | $ | 5,387 |   | $ | 5,543 |   |
|                                |       |                   |       |                 |       |   |   |   |   |
| Operating Income (loss):            |       |                   |       |                 |       |   |   |   |   |
| UBS-Americas                        |       | $                      | 200        |                 | $          | (562 | ) | $ | 176 |   | $ | (1,005 | ) |
| UBS-Europe                          |       | 76                     |       | (79                  | )          | 273 |   | (100 | ) |
| Insurance  Risk Management Division |       | (285                   | )          | —               |       | (564 | ) | — |   |
| Total operating loss                |       | $                      | (9         | )                    | $          | (641 | ) | $ | (115 | ) | $ | (1,105 | ) |
|                                |       |                   |       |                 |       |   |   |   |   |
| Interest income                     |       | $                      | 38         |                 | $          | 14 |   | $ | 59 |   | $ | 27 |   |
| Interest expense                    |       | $                      | 2          |                 | $          | 4 |   | $ | 5 |   | $ | 12 |   |

 

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

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                               | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total net revenues:                      |       |                   |       |                 |       |   |   |   |   |
| Americas                                 |       | $                      | 740        |                 | $          | 1,153 |   | $ | 1,733 |   | $ | 2,045 |   |
| International  Distributors              |       | 658                    |       | 402                  |       | 1,260 |   | 856 |   |
| Central  Europe-Germany, Benelux, Others |       | 209                    |       | 425                  |       | 434 |   | 870 |   |
| United  Kingdom                          |       | 309                    |       | 314                  |       | 665 |   | 738 |   |
| France                                   |       | 453                    |       | 516                  |       | 834 |   | 1,034 |   |
| Insurance  Risk Management Division      |       | 292                    |       | —               |       | 461 |   | — |   |
| Total net revenues                       |       | $                      | 2,661      |                 | $          | 2,810 |   | $ | 5,387 |   | $ | 5,543 |   |
|                                          |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |

 

11

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**UNIFYCORPORATION**

 

# **Item 2.  Management’s Discussion and Analysis of FinancialCondition 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 similarexpressions are intended to identify such forward-looking statements. Thesestatements are not guarantees of future performance and are subject to certainrisks, uncertainties and assumptions that are difficult to predict; therefore,actual results may differ materially from those expressed or forecasted in anysuch forward-looking statements. Such risks and uncertainties include, but arenot limited to, those set forth herein under “Volatility of Stock Price andGeneral Risk Factors Affecting Quarterly Results” and in the Company’s AnnualReport on Form 10-K under “Business – Risk Factors.” Unless required bylaw, the Company undertakes no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise. However, readers should carefully review the risk factorsset forth in other reports or documents the Company files from time to timewith the SEC, particularly the Company’s Annual Report on Form 10-K,Quarterly Reports on 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 ConsolidatedFinancial Statements and Notes thereto, together with Management’s Discussionand Analysis of Financial Condition and Results of Operations, which areincluded in the Company’s Annual Report on Form 10-K for the fiscal yearended 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 risk management and transportation industries. Oursolutions deliver a broad set of capabilities for automating businessprocesses, integrating existing information systems and deliveringcollaborative information. Through our industry expertise and technologies, wehelp organizations reduce risk, drive business optimization, apply governancestandards and increase customer and member services.

 

Ourproducts include vertical application software solutions for the alternativerisk insurance and transportation management markets and also infrastructureand database software that helps our customers build business processes. Ourproducts enable organizations to rapidly, efficiently and seamlessly deliverthe right information to the right people at the right time. By consolidating,automating and managing data, our customers see increases in efficiencies andservices, 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 risk pools, corporate information technology departments(“IT”), software value-added resellers (“VARs”), solutions integrators (“SIs”)and independent software vendors (“ISVs”) from a variety of industries,including insurance, financial services, healthcare, government, manufacturingand many other industries. We are headquartered in Sacramento, California witha subsidiary office in Paris, France and a sales office in the United Kingdom (“UK”).We market and sell products directly in the United States, UK and France andindirectly through worldwide distributors in Japan, Russia, South Africa,Italy, Australia, Brazil and Latin America with customers in more than 45countries.

 

Ourmission is to deliver applications and infrastructure technology 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 process automation technologywith our vertical applications to deliver a broad set of solutions that streamlineand automate processes and workflow; present rich user experiences; and deliverconsolidated information from multiple sources. We believe that by integratingour technology and applications, we have created a unique and compellingoffering in our marketplace. By combining best-of-breed capabilities, we offercustomers a better way to manage, integrate, view and report data to help themdrive their business objectives.

 

Weare organized into two business units comprised of the Insurance Risk Managementdivision (“IRM”) and Unify Business Solutions division (“UBS”).

 

12

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**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.

 

Forsoftware license arrangements that do not require significant modification orcustomization of the underlying software, revenue is recognized when anoncancelable license agreement has been signed or other persuasive evidence ofan arrangement exists, the software product or service has been shipped orelectronically delivered, the license fees are fixed and determinable, alluncertainties regarding customer acceptance are resolved and collectibility isprobable.

 

Forsoftware license arrangements that do require significant modification orcustomization of the underling software, revenue is recognized based oncontract accounting using the completed-contract method.  The completed-contract method recognizesincome only when the contract is completed. Project costs incurred for thesecontracts in progress are accumulated and reflected on the Balance Sheet asContracts in Progress. Currently, the Company uses contract accounting for itsNavRisk product. This policy may change to the percentage of completion methodin the future.

 

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 onvendor-specific objective evidence (VSOE) of the fair value of the maintenanceand support and/or consulting, regardless of any separate prices stated withinthe contract. 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.

 

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 pricing practicesin the future, which could result in changes in our VSOE of fair value forthese undelivered elements. As a result, our future revenue recognition formulti-element arrangements could differ significantly from our historicalresults.

 

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 historicalexperience with the customer. Any deterioration in credit worthiness of acustomer may impact the Company’s evaluation of accounts receivable in anygiven period. Revenue from support and maintenance activities, which consist offees for ongoing support and unspecified product updates, are recognizedratably over the term of the maintenance contract, typically one year, and theassociated costs are expensed as incurred. Consulting service arrangements areperformed on a “best efforts” basis and are generally billed undertime-and-materials arrangements. Revenues and expenses relating to providingconsulting services are recognized as the services are performed.

 

13

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*Valuation of Long-Lived Assets*

 

Ourlong-lived assets are comprised of long-term investments. At October 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 October 31, 2005, we have approximately $20 million of deferredtax assets related principally to net operating loss carry forwards, reservesand other 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.

 

**Results of Operations**

 

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

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                           | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                            |       |                   |       |                 |       |   |   |   |   |
| Software  licenses                   |       | 46.8                   | %          | 46.3                 | %          | 44.8 | % | 44.5 | % |
| Services                             |       | 53.2                   | %          | 53.7                 | %          | 55.2 | % | 55.5 | % |
| Total  revenues                      |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
|                                 |       |                   |       |                 |       |   |   |   |   |
| Cost of revenues:                    |       |                   |       |                 |       |   |   |   |   |
| Software  licenses                   |       | 4.5                    | %          | 3.0                  | %          | 4.8 | % | 3.0 | % |
| Services                             |       | 15.0                   | %          | 12.9                 | %          | 13.5 | % | 13.1 | % |
| Total cost  of revenues              |       | 19.5                   | %          | 15.9                 | %          | 18.3 | % | 16.1 | % |
|                                 |       |                   |       |                 |       |   |   |   |   |
| Gross profit                         |       | 80.5                   | %          | 84.1                 | %          | 81.7 | % | 83.9 | % |
|                                 |       |                   |       |                 |       |   |   |   |   |
| Operating expenses:                  |       |                   |       |                 |       |   |   |   |   |
| Product  development                 |       | 23.0                   | %          | 26.4                 | %          | 24.4 | % | 25.8 | % |
| Selling,  general and administrative |       | 57.8                   | %          | 80.5                 | %          | 59.5 | % | 78.0 | % |
| Total  operating expenses            |       | 80.8                   | %          | 106.9                | %          | 83.9 | % | 103.8 | % |
| Loss from  operations                |       | (0.3                   | )%         | (22.8                | )%         | (2.2 | )% | (19.9 | )% |
| Other income, net                    |       | 0.5                    | %          | 0.6                  | %          | 0.2 | % | 0.0 | % |
| Income  (loss) before income taxes   |       | 0.2                    | %          | (22.2                | )%         | (2.0 | )% | (19.9 | )% |
| Provision for income taxes           |       | 0.0                    | %          | 0.4                  | %          | 0.0 | % | 0.1 | % |
| Net income  (loss)                   |       | 0.2                    | %          | (22.6                | )%         | (2.0 | )% | (20.0 | )% |

 

***Revenues***

 

Totalrevenues for the fiscal 2006 quarter ended October 31, 2005 were$2.7 million compared to total revenues for the second quarter of fiscal 2005which were $2.8 million. Software license revenue for the quarter ended October 31,2005 was $1.2 million compared to $1.3 million for the same quarter of theprior year. Services revenue was $1.4 million for the quarter ended October 31,2005 and $1.5 million for the same quarter of the prior year. Included in thefiscal 2006 software license revenue was $0.2 million from NavRisk, the primaryproduct of Unify’s Insurance Risk Management division.

 

14

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Total revenues for the six months ended October 31, 2005 decreasedby 3% to $5.4 million from the same period of the prior year when totalrevenues were $5.5 million. For the six months ended October 31, 2005software licenses were $2.4 million and services revenue was $3.0 million. Forthe same period in the prior year software licenses revenue was $2.5 millionand services revenue was $3.1 million. For the six months ended October 31,2005 total revenue from NavRisk was $.5 million which included $.3 million insoftware license revenue and $.2 million in services revenue.

 

***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 thethree months ended October 31, 2005 and the three months ended October 31,2004. For the six months ended October 31, 2005 the cost of softwarelicenses was $.3 million compared to $.2 million for the same period in theprior year. Cost of software licenses as a percent of software licensesrevenues for the six months ended October 31, 2005 was 10.8% as comparedto 6.8% for the same period of fiscal 2005. The increase in the cost ofsoftware licenses was the result of an increase in amortization of purchasedsoftware licenses in fiscal year 2006. Costs associated with royalties andother direct production costs are expensed as incurred at the time of the saleand purchased technology from third parties is amortized ratably over theirexpected useful life. Cost of revenues for NavRisk is comprised of both costsassociated with providing consulting services and costs for contracts that werecompleted in accordance with the completed contract method of accounting. Priorto contract completion, costs are deferred and reflected on the Balance Sheetas Contracts in Progress. When a contract is completed, revenue is recognizedand deferred costs are expensed. For the three months ended October 31,2005 costs of revenues for NavRisk was $0.2 million.

 

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 $0.4 million for both thesecond quarter of fiscal 2006 and fiscal 2005. Total cost of services was alsoconsistent for the six months ended October 31, 2005 and 2004 at $0.7million for both periods. Cost of services as a percent of services revenueswas 24% for both the six months ended October 31, 2005 and for the sameperiod of fiscal 2005.

 

***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 $0.6 million in the second quarterof fiscal 2006 and $0.7 million for the same period in the prior year.  Product development costs as a percentage oftotal revenues were 24% for the six months ended October 31, 2005 comparedto 26% in the same period of fiscal 2005.

 

***Selling, General and Administrative***

 

Selling,general and administrative (“SG&A”) expenses consist primarily of salaries andincentive pay, marketing programs, travel expenses, professional services,facilities expenses and bad debt expense or recoveries. SG&A expenses were$1.5 million for the second quarter of fiscal 2006 compared to$2.3 million for the second quarter of fiscal 2005. As a percentage oftotal revenue, SG&A expenses were 58% in the second quarter of fiscal 2006and 81% in the second quarter of fiscal 2005. The $0.8 million reduction inSG&A was primarily the result of reductions in sales personnel and marketingexpenses. The largest change was in sales expenses which decreased by $0.6million in the second quarter of fiscal 2006 compared to the same period infiscal 2005. The major components of SG&A for the second quarter of fiscal2006 were sales expenses of $0.7 million, marketing expenses of $0.2 millionand general and administrative expenses of $0.6 million.

 

***Provision for Income Taxes***

 

No federal or state tax provisions were recordedin the three and six-month periods ended October 31, 2005, as the Companyhas significant net operating loss carryforwards.

 

**Liquidity and Capital Resources**

 

At October 31, 2005, the Company had cashand cash equivalents of $3.2 million compared to $3.7 million at April 30,2005. Working capital was $0.9 million as of October 31, 2005 and $0.8million as of 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 October 31, 2005, the Company had $0.7 millionoutstanding under the line of credit and $0.2 million in available credit basedupon eligible assets at that date. As of October 31, 2005, the company hada term loan balance of $0.1 million.

 

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Cash flows used by operations were $1.0 millionfor the first six months of fiscal 2006, compared to a usage of cash foroperations of $2.4 million for the first six months of fiscal 2005. For the sixmonths ended October 31, 2005, operating cash was provided by decreases inaccounts receivable of $0.7 million and prepaid expenses of $0.2 million.Operating cash was used as a result of decreases in deferred revenue of $0.9million, accrued liabilities of $0.4 million, accounts payable of $0.3 millionand contracts in progress of $0.2 million. For the six months ended October 31,2005 investing activities used cash of $0.1 million for the purchase ofproperty and equipment. Cash provided by financing activities in the first sixmonths of fiscal 2006 was $0.7 million as a result of a borrowing on theCompany’s line of credit of $.7 million, proceeds from issuance of common stockfrom stock option exercises and purchases of common stock under the employeestock purchase plan of $0.1, offset by payments made on debt obligations of$0.1 million. The Company’s cash flow also reflects a decrease of $0.1 millionin the first six months of fiscal 2006 as a result of the effect of currencyexchange rates related to international operations.

 

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

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | ** **                 | ** ** | **1 year** | ** ** | **2-3** | ** ** | **4-5** | ** ** | **After 5** | ** ** |
| **Contractual Obligations**        | ** ** | **Total**                  | ** ** | **or less** | ** ** | **years** | ** ** | **years** | ** ** | **years** | ** ** |
| Short-term borrowings              |       | $                          | 675        |   | $ | 675 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-Term Debt                     |       | 119                        |       | 112 |   | 7 |   | — |   | — |   |
| Capital Lease Obligations          |       | 13                         |       | 6 |   | 7 |   | — |   | — |   |
| Other Long-Term Liabilities        |       | 68                         |       | — |   | — |   | — |   | 68 |   |
| Operating Leases                   |       | 2,408                      |       | 992 |   | 1,393 |   | 23 |   | — |   |
| Total Contractual Cash Obligations |       | $                          | 3,283      |   | $ | 1,785 |   | $ | 1,407 |   | $ | 23 |   | $ | 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 to integrateand manage acquisitions; seasonality; changes in pricing policies by theCompany or its competitors; realignments of the Company’s organizationalstructure; changes in the level of the Company’s operating expenses; changes inthe Company’s sales incentive plans; budgeting cycles of the Company’scustomers; customer order deferrals in anticipation of enhancements or newproducts offered by the Company or its competitors; product life cycles;product defects and other product quality problems; currency fluctuations; andgeneral domestic and international economic and political conditions.

 

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 its quarterlyrevenue objectives, the Company is dependent upon obtaining orders in any givenquarter for shipment in that quarter. Furthermore, because many customers placeorders toward the end of a fiscal quarter, the Company generally recognizes asubstantial portion of its license revenues at the end of a quarter. As theCompany’s expense levels are based in significant part on the Company’sexpectations as to future revenues and are therefore relatively fixed in theshort term, if revenue levels fall below expectations,

 

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operatingresults are likely to be disproportionately adversely affected. The Companyalso expects that its operating results will be affected by seasonal trends,and that 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 and Qualitative 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 $3.2 million at October 31, 2005. Unify had no short-terminvestments at October 31, 2005. The Company had $800,000 in short-termborrowings and $7,000 in long-term debt at October 31, 2005. Subsequent toquarter-end the Company made a payment of $675,000 on its short-termborrowings.  The Company does not believeits exposure to interest rate risk is material for debt.

 

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 annualpricing reviews. The Company also has currency exchange rate exposures onintercompany accounts receivable owed to the Company as a result of local currencysales of software licenses by the Company’s international subsidiary in France.At October 31, 2005, the Company had the equivalent of $178,000 in suchreceivables denominated in Euros. The Company encourages prompt payment ofthese intercompany balances in order to minimize its exposure to currencyfluctuations, but it engages in no hedging activities to reduce the risk ofsuch fluctuations. A hypothetical ten percent change in foreign currency rateswould have an insignificant impact on the Company’s business, operating resultsand financial position. The Company has not experienced material exchangelosses on intercompany balances in the past; however, due to the substantialvolatility of currency exchange rates, among other factors, it cannot predictthe effect of exchange rate fluctuations on its future business, operatingresults and financial position.

 

**Item 4.Controls and Procedures**

 

**(a)   *Evaluation of Disclosure Controls and Procedures***.Under the supervision and with the participation of our management, includingour chief executive officer and chief financial officer, we evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended. Based upon that evaluation, our chiefexecutive officer and chief financial officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis quarterly report.

 

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

 

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### **UNIFY CORPORATION**

### ** **

### **PART II.**                        OTHER INFORMATION

### ** **

**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, the Companywould not be able to accurately predict their ultimate outcome. As of October 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.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

At the annual meeting of theCompany’s stockholders held on September 29, 2005, the following matterswere voted upon:

 

1.               The election of each of the nominees fordirector were approved with the following votes:

 
| ** **         | ** ** | **In Favor** | ** ** | **Withheld** | ** ** |
|--------------------|------------|--------------|------------|--------------|------------|
| Todd E. Wille      |       | 19,288,929   |       | 1,343,156    |       |
| Richard M. Brooks  |       | 19,803,463   |       | 828,622      |       |
| Tery R. Larrew     |       | 19,135,113   |       | 1,496,972    |       |
| Robert J. Majteles |       | 19,799,663   |       | 832,422      |       |
| Steven D. Whiteman |       | 18,613,461   |       | 2,018,624    |       |

 

2.         The proposalto ratify the selection of Grant Thornton as the Company’s independent auditorsfor fiscal 2006 was approved as 20,088,085 shares voted in favor of theamendment, representing 97.4% of the shares voted at the meeting. This wassufficient to pass the amendment.

 

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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 1350as 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: November 30, 2005 |                                         | Unify Corporation       |
|------------------------------|----------------------------------------------|-------------------------|
| * *                     | * *                                     | *(Registrant)*          |
|                         |                                         |                    |
|                         |                                         | By:                     |
|                         |                                         |                    |
|                         |                                         | /s/ STEVEN D. BONHAM    |
|                         |                                         | Steven D. Bonham        |
|                         |                                         | Chief Financial Officer |
|                         | (Principal Financial and Accounting Officer) |

 

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