**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

** **

----

 

**Form 10-Q**

 

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

 

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

** **

**OR**

 

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

** **

**CommissionFile Number:  001-11807**

 
| **UNIFY  CORPORATION**                                     |
|------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)    |
|                                                       |   |
| **Delaware**                                               | **94-2710559** |
| (State  or other jurisdiction of                           | (I.R.S.  Employer Identification Number) |
| incorporation  or organization)                            |   |
|                                                       |   |
| **2101 Arena Blvd, Suite 100**                             | **95834** |
| **Sacramento, California**                                 | (zip  code) |
| (Address  of principal executive offices)                  |   |
| * *                                                   |   |
| **(916) 928-6400**                                         |
| (Registrant’s  telephone number, including area code) |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  YES ý      NO o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of 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.

 

28,274,179 shares of Common Stock, $0.001 par value, as of February 28,2005

 

 

1

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**UNIFY CORPORATION**

**FORM 10-Q**

 

INDEX
|           |                                                                                                                      | PAGE   |
|----------------|---------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                      | NUMBER |
|           |                                                                                                                      |   |
| PART I.        | FINANCIAL INFORMATION                                                                                                     |   |
|           |                                                                                                                      |   |
| Item 1.        | Financial Statements                                                                                                      |   |
|           |                                                                                                                      |   |
|           | Unaudited  Condensed Consolidated Balance Sheets as of January 31, 2005 and April 30,  2004                               | 3      |
|           |                                                                                                                      |   |
|           | Unaudited  Condensed Consolidated Statements of Operations for the three and nine months  ended January 31, 2005 and 2004 | 4      |
|           |                                                                                                                      |   |
|           | Unaudited  Condensed Consolidated Statements of Cash Flows

for  the nine months ended January 31, 2005 and 2004          | 5      |
|           |                                                                                                                      |   |
|           | Notes  to Unaudited Condensed Consolidated

Financial  Statements                                                         | 6      |
|           |                                                                                                                      |   |
| Item  2.       | Management’s  Discussion and Analysis of

Financial  Condition and Results of Operations                             | 11     |
|           |                                                                                                                      |   |
| Item  3.       | Quantitative  and Qualitative** **Disclosures

about  Market Risk                                                    | 18     |
|           |                                                                                                                      |   |
| Item 4         | Controls and  Procedures                                                                                                  | 19     |
|           |                                                                                                                      |   |
| PART II.       | OTHER INFORMATION                                                                                                         |   |
|           |                                                                                                                      |   |
| Item 1.        | Legal Proceedings                                                                                                         | 20     |
|           |                                                                                                                      |   |
| Item 6.        | Exhibits                                                                                                                  | 21     |
|           |                                                                                                                      |   |
| SIGNATURE.     |                                                                                                                      | 22     |
|           |                                                                                                                      |   |
| CERTIFICATIONS |                                                                                                                      |   |

 

2

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**PART I.         FINANCIAL INFORMATION**

**Item 1.            Financial Statements**

** **
| **UNIFY  CORPORATION**                               | ** ** |
|------------------------------------------------------|------------|
| **UNAUDITED CONDENSED  CONSOLIDATED BALANCE SHEETS** | ** ** |
| **(in  thousands)**                                  | ** ** |
| ** **                                           | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
| ** **                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Assets**                                           |       |   |   |   |   |
| Current assets:                                      |       |   |   |   |   |
| Cash and cash equivalents                            |       | $ | 3,915 |   | $ | 6,606 |   |
| Accounts receivable, net                             |       | 3,259 |   | 2,848 |   |
| Prepaid expense & other current assets           |       | 691 |   | 543 |   |
| Total current assets                                 |       | 7,865 |   | 9,997 |   |
|                                                 |       |   |   |   |   |
| Property and equipment, net                          |       | 385 |   | 338 |   |
| Other investments                                    |       | 214 |   | 214 |   |
| Other assets                                         |       | 177 |   | 194 |   |
| Total assets                                         |       | $ | 8,641 |   | $ | 10,743 |   |
|                                                 |       |   |   |   |   |
| **Liabilities and Stockholders’  Equity**       |       |   |   |   |   |
| Current liabilities:                                 |       |   |   |   |   |
| Current portion of long term debt                    |       | $ | 161 |   | $ | 146 |   |
| Account payable                                      |       | 341 |   | 523 |   |
| Other accrued liabilities                            |       | 1,148 |   | 1,340 |   |
| Accrued compensation and related expenses            |       | 736 |   | 812 |   |
| Deferred revenue                                     |       | 3,301 |   | 3,360 |   |
| Total current liabilities                            |       | 5,687 |   | 6,181 |   |
|                                                 |       |   |   |   |   |
| Other long term liabilities                          |       | 79 |   | 70 |   |
| Long term debt                                       |       | 12 |   | — |   |
|                                                 |       |   |   |   |   |
| Commitments and contingencies                        |       |   |   |   |   |
|                                                 |       |   |   |   |   |
| Stockholders’ equity:                           |       |   |   |   |   |
| Common stock                                         |       | 28 |   | 27 |   |
| Additional paid in capital                           |       | 63,275 |   | 63,205 |   |
| Accumulated other comprehensive gain                 |       | 77 |   | 18 |   |
| Accumulated deficit                                  |       | (60,517 | ) | (58,758 | ) |
| Total stockholders’ equity                      |       | 2,863 |   | 4,492 |   |
| Total liabilities and stockholders’ equity      |       | $ | 8,641 |   | $ | 10,743 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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| **UNIFY  CORPORATION**                                         | ** ** |
|----------------------------------------------------------------|------------|
| **UNAUDITED CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS** | ** ** |
| **(in  thousands, except per share data)**                     | ** ** |
| ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                     | ** ** | **January 31,** | ** ** | **January 31,** | ** ** |
| ** **                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                      |       |   |   |   |   |   |   |   |   |
| Software Licenses                                              |       | $ | 1,469 |   | $ | 1,185 |   | $ | 3,934 |   | $ | 4,427 |   |
| Services                                                       |       | 1,518 |   | 1,459 |   | 4,596 |   | 4,322 |   |
| Total revenues                                                 |       | 2,987 |   | 2,644 |   | 8,530 |   | 8,749 |   |
|                                                           |       |   |   |   |   |   |   |   |   |
| Cost of Revenues:                                              |       |   |   |   |   |   |   |   |   |
| Software licenses                                              |       | 96 |   | 226 |   | 264 |   | 413 |   |
| Services                                                       |       | 351 |   | 302 |   | 1,077 |   | 950 |   |
| Total cost of revenues                                         |       | 447 |   | 528 |   | 1,341 |   | 1,363 |   |
|                                                           |       |   |   |   |   |   |   |   |   |
| Gross profit                                                   |       | 2,540 |   | 2,116 |   | 7,189 |   | 7,386 |   |
|                                                           |       |   |   |   |   |   |   |   |   |
| Operating Expenses:                                            |       |   |   |   |   |   |   |   |   |
| Product development                                            |       | 678 |   | 618 |   | 2,110 |   | 2,297 |   |
| Selling, general and administrative                            |       | 2,544 |   | 1,968 |   | 6,866 |   | 5,454 |   |
| Write-down of other investments                                |       | — |   | — |   | — |   | 175 |   |
| Total operating expenses                                       |       | 3,222 |   | 2,305 |   | 8,976 |   | 7,926 |   |
|                                                           |       |   |   |   |   |   |   |   |   |
| Loss from operations                                           |       | (682 | ) | (470 | ) | (1,787 | ) | (540 | ) |
| Other income (expense), net                                    |       | 34 |   | (4 | ) | 35 |   | (7 | ) |
| Loss before income taxes                                       |       | (648 | ) | (474 | ) | (1,752 | ) | (547 | ) |
| Provision (recovery) for income taxes                          |       | 3 |   | (4 | ) | 7 |   | 6 |   |
| Net loss                                                       |       | $ | (651 | ) | $ | (470 | ) | $ | (1,759 | ) | $ | (553 | ) |
|                                                           |       |   |   |   |   |   |   |   |   |
| Net loss per share:                                            |       |   |   |   |   |   |   |   |   |
| Basic                                                          |       | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.06 | ) | $ | (0.03 | ) |
| Dilutive                                                       |       | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.06 | ) | $ | (0.03 | ) |
| Shares used in computing net loss per share:                   |       |   |   |   |   |   |   |   |   |
| Basic                                                          |       | 27,692 |   | 21,596 |   | 27,606 |   | 21,471 |   |
| Dilutive                                                       |       | 27,692 |   | 21,596 |   | 27,606 |   | 21,471 |   |
|                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

See accompanying notes to condensed consolidated financial statements.

 

4

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| **UNIFY  CORPORATION**                                               |
|----------------------------------------------------------------------|
| **UNAUDITED CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS**       |
| ***(In  thousands)***                                                |
| ** **                                                           |
| ** **                                                           | ** ** | **Nine Months Ended January 31,** | ** ** |
| ** **                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                |   |   |   |   |   |
| Net loss                                                             |   | $ | (1759 | ) | $ | (553 | ) |
| Reconciliation of net loss to net cash used in operating activities: |   |   |   |   |   |
| Depreciation                                                         |   | 130 |   | 124 |   |
| Write-down of other investments                                      |   | — |   | 178 |   |
| Stock based expense                                                  |   | 40 |   | 52 |   |
|                                                                 |   |   |   |   |   |
| Changes in operating assets and liabilities:                         |   |   |   |   |   |
| Accounts receivable, net                                             |   | (299 | ) | (284 | ) |
| Prepaid expenses and other current assets                            |   | (150 | ) | (187 | ) |
| Accounts payable                                                     |   | (186 | ) | (63 | ) |
| Accrued compensation and related expenses                            |   | (109 | ) | 13 |   |
| Other accrued liabilities                                            |   | (189 | ) | 64 |   |
| Deferred revenue                                                     |   | (169 | ) | 186 |   |
| Net cash used in operating activities                                |   | (2,691 | ) | (470 | ) |
|                                                                 |   |   |   |   |   |
| Cash flows from investing activities:                                |   |   |   |   |   |
| Purchases of property and equipment                                  |   | (176 | ) | (118 | ) |
| (Increase) decrease in other assets                                  |   | 43 |   | (77 | ) |
| Net cash (used in) investing activities                              |   | (133 | ) | (195 | ) |
|                                                                 |   |   |   |   |   |
| Cash flows from financing activities:                                |   |   |   |   |   |
| Borrowings under line of credit                                      |   | 1,560 |   | — |   |
| Borrowings of long term debt                                         |   | 126 |   | — |   |
| Repayments under line of credit                                      |   | (1,560 | ) | — |   |
| Repayments of long-term debt                                         |   | (128 | ) | — |   |
| Proceeds from issuance of common stock, net                          |   | 31 |   | 126 |   |
| Collection of notes receivable from stockholder                      |   | — |   | 60 |   |
| Net cash provided by financing activities                            |   | 29 |   | 186 |   |
|                                                                 |   |   |   |   |   |
| Effect of exchange rate changes on cash                              |   | 104 |   | 202 |   |
| Net decrease in cash and cash equivalents                            |   | (2,691 | ) | (277 | ) |
| Cash and cash equivalents, beginning of period                       |   | 6,606 |   | 3,030 |   |
| Cash and cash equivalents, end of period                             |   | $ | 3,915 |   | $ | 2753 |   |
|                                                                 |   |   |   |   |   |
| Supplemental cash flow information:                                  |   |   |   |   |   |
| Cash paid (received) net during the period for:                      |   |   |   |   |   |
| Interest                                                             | ** ** | $ | (29 | ) | $ | 6 |   |
| Income taxes                                                         |   | $ | (14 | ) | $ | (113 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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**UNIFY CORPORATION**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Basis of Presentation**

 

Thecondensed consolidated financial statements have been prepared by UnifyCorporation (the “Company”) pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). While the interim financialinformation contained in this filing is unaudited, such financial statements,in the opinion of management, reflect all adjustments (consisting only ofnormal recurring adjustments) which the Company considers necessary for a fairpresentation. The results for interim periods are not necessarily indicative ofthe results to be expected for the entire fiscal year. These financialstatements should be read in conjunction with the Consolidated FinancialStatements and Notes thereto, together with Management’s Discussion andAnalysis of Financial Condition and Results of Operations, which are includedin the Company’s Annual Report on Form 10-K for the fiscal year ended April 30,2004 as filed with the SEC.

 

*RecentlyIssued Accounting Standards*

 

In December, 2004 the Financial Accounting Standards Board (“FASB”)issued Statement No. 123R, *Share-Based Paymen*t.  This Statement establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services, primarily with respect to transactions in which employeeservices are obtained in exchange for share-based payment. Statement 123R iseffective as of the beginning of the first interim or annual reporting periodthat begins after June 15, 2005.  We havenot completed the process of evaluating the impact that will result fromadopting this pronouncement.  The Companyis therefore unable to disclose the impact that adopting FASB Statement 123Rwill have on its financial position and the results of operations when suchstatement is adopted.

 

**2.  Stock Compensation Information**

 

As permitted by Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based compensation” (SFAS123) and Statement of Financial Accounting Standards No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure” (SFAS 148), the Companyaccounts for stock-based awards using the intrinsic value method of accountingin accordance with Accounting Principles Board Opinion No. 25, “Accounting ForStock Issued To Employees” and related interpretations. As such, compensationis recorded on the measurement date, generally the date of issuance or grant,as the excess of the current estimated fair value of the underlying stock overthe purchase or exercise price. Any deferred compensation is amortized over therespective vesting periods of the equity instruments, if any.  Optionvaluation models were developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjectiveassumptions, including the expected life of the option. Because the Company’semployee stock options have characteristics significantly different from thoseof traded options and because changes in the subjective input assumptions canmaterially affect the fair value estimates, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options.

 

The Company’s calculations are made using theBlack-Scholes option pricing model, with the following weighted averageassumptions for the three months ending January 31, 2005 and 2004,respectively: expected option life, 12 months following vesting; stockvolatility of 183% and 121%; risk-free interest rates of 3.4%  and 2.3%;and no dividends during the expected term and for the nine months endingJanuary 31, 2005 and 2004, respectively; expected option life, 12 monthsfollowing vesting; stock volatility of 218% and 119%, and risk-free interestrates of 3.2%  and 2.1%. The Company’s calculations are based on amultiple option valuation approach and forfeitures are recognized as theyoccur.

 

6

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The following table illustrates the effect onnet loss and net loss per share if Unify had applied the fair value recognitionprovisions of SFAS 123, to stock-based employee compensation (in thousands,except per share amounts):

 
| ** **                                                                                          | ** ** | **Three Months Ended January 31,** | ** ** | **Nine Months Ended January 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss) as reported                                                                       |       | $                                       | (651       | )                                      | $          | (470 | ) | $ | (1,759 | ) | $ | (553 | ) |
|                                                                                                |       |                                    |       |                                   |       |   |   |   |   |
| Add: stock-based employee compensation included in reported in net  income (loss)                   |       | —                                  |       | —                                 |       | 40 |   | 40 |   |
|                                                                                                |       |                                    |       |                                   |       |   |   |   |   |
| Less: stock-based employee compensation expense, determined under  fair value method for all awards |       | (238                                    | )          | (120                                   | )          | (398 | ) | (258 | ) |
| Proforma net income (loss)                                                                          |       | $                                       | (889       | )                                      | $          | (590 | ) | $ | (2,117 | ) | $ | (711 | ) |
|                                                                                                |       |                                    |       |                                   |       |   |   |   |   |
| Net loss per share:                                                                                 |       |                                    |       |                                   |       |   |   |   |   |
| Basic per share, as reported                                                                        |       | $                                       | (0.02      | )                                      | $          | (0.02 | ) | $ | (0.06 | ) | $ | (0.03 | ) |
| Basic per share, as pro forma                                                                       |       | $                                       | (0.03      | )                                      | $          | (0.03 | ) | $ | (0.08 | ) | $ | (0.04 | ) |
|                                                                                                |       |                                    |       |                                   |       |   |   |   |   |
| Diluted per share, as reported                                                                      |       | $                                       | (0.02      | )                                      | $          | (0.02 | ) | $ | (0.06 | ) | $ | (0.03 | ) |
| Diluted per share, as pro forma                                                                     |       | $                                       | (0.03      | )                                      | $          | (0.03 | ) | $ | (0.08 | ) | $ | (0.04 | ) |
|                                                                                                     |            |                                         |            |                                        |            |  |  |  |  |  |  |  |  |  |

 

**3.             Exercise of Warrants**

 

InJune, 2004, Silicon Valley Bank (the “Bank”) exercised its warrant to purchase115,385 shares of the Company’s common stock. In conjunction with thisexercise, under the terms of the Warrant Agreement, the Company issued 68,016shares of common stock to the Silicon Valley Bank via a cashless exercise.

 

**4.             Other Investments**

 

Otherinvestments represent common stock in two closely-held technology companies.The Company’s ownership interest in each company is less than 15%.  Other investments consisted of the following(in thousands):

 
| ** **                          | ** ** | **January 31, 2005** | ** ** | **April 30,  2004** | ** ** |
|-------------------------------------|------------|----------------------|------------|--------------------------|------------|
|                                |       |                 |       |                     |       |
| Arango Software International, Inc. |       | $                    | 175        |                     | $          | 175 |   |
| Unify Japan                         |       | 39                   |       | 39                       |       |
|                                |       |                 |       |                     |       |
|                                |       | $                    | 214        |                     | $          | 214 |   |

 

7

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The Company holds a minority interest in ArangoSoftware International, Inc. (or “Arango”), a privately-held corporationheadquartered in Panama. We assess the valuation of Arango whenevercircumstances indicate that there is a decline in the carrying value below costthat is other than temporary. Several factors can trigger an impairment review,such 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.  Duringthe first quarter of fiscal 2004, the Company reduced the carrying value of itsinvestment in Arango by $175,000.  Futureadverse changes in market conditions or poor operating results of Arango couldresult in losses or an inability to recover the carrying value of theinvestment that is not currently reflected in the investment’s carrying value,thereby possibly requiring an impairment charge in the future.

 

**5.             Credit Facility**

 

OnJune 3, 2004, the Company replaced its previous line of credit and termloan with a new $1.0 million revolving line of credit and a $500,000 term loanwith the Bank.  The line of credit issecured by qualifying domestic accounts receivable and has a one-year term. Theterm loan is secured by purchased assets and has a one-year term. The Companywill incur interest expense on the line of credit and the term loan at theprevailing prime rate plus 2.0% and 2.5% per annum, respectively. The primerate used to determine the interest shall not be less than 4.0%. As ofJanuary 31, 2005, the Company had $0 outstanding under the line of creditand $0.8 million in available credit based upon eligible assets at that date.

 

**6.             Long-termDebt**

 

TheCompany’s debt consists of the following at January 31, 2005 and April 30,2004 (in thousands):

 
| ** **                                                                                                                                                                                                                                                         | ** ** | **January 31,  2005** | ** ** | **April 30,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| Term note payable to a financial institution, accruing  interest at prime plus 2.5%, not to be less than 4.0% per annum (actual  interest rate at January 31, 2005 was 7.75%), and payable in monthly  installments of $12,585 with the balance due in June, 2005. |       | $                     | 156        |                     | $          | 146 |   |
|                                                                                                                                                                                                                                                               |       |                  |       |                     |       |
| Capital lease payable, accruing interest at a rate  of 18%, and payable in monthly installments of $693 with the balance due in  August 2007.                                                                                                                      |       | 17                    |       | —                   |       |
|                                                                                                                                                                                                                                                               |       |                  |       |                     |       |
| Subtotal                                                                                                                                                                                                                                                           |       | 173                   |       | (146                     | )          |
|                                                                                                                                                                                                                                                               |       |                  |       |                     |       |
| Less current portion                                                                                                                                                                                                                                               |       | (161                  | )          | (146                     | )          |
|                                                                                                                                                                                                                                                               |       |                  |       |                     |       |
|                                                                                                                                                                                                                                                               |       | $                     | 12         |                     | $          | — |   |

 

 

**7.             OtherLong Term Liabilities**

 

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 

 

8

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servicethereafter. In order to receive their severance payment the employee may notretire before age 65 and must be employed at the time of retirement.

 

**8.             Comprehensive Loss**

 

The Company’s total comprehensive income (loss) forthe periods shown was as follows:

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **January 31,**        | ** ** | **January 31,**       | ** ** |
|                              |       | 2005                   |       | 2004                  |       | 2005 |   | 2004 |   |
| Net income (loss)                 |       | $                      | (651       | )                     | $          | (470 | ) | $ | (1,759 | ) | $ | (553 | ) |
| Foreign currency translation gain |       | 13                     |       | 184                   |       | 59 |   | 224 |   |
|                              |       |                   |       |                  |       |   |   |   |   |
| Total comprehensive income (loss) |       | $                      | (638       | )                     | (286       | ) | $ | (1,700 | ) | $ | (329 | ) |
|                                   |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

 

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

 

SFASNo. 128, *Earnings per Share,* requires a dualpresentation of basic and diluted income per share (“EPS”). Basic EPS excludesdilution and is computed by dividing net income (loss) attributable to commonstockholders by the weighted average of common shares outstanding for theperiod. Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock (e.g. convertible preferredstock, warrants, and common stock options) were exercised or converted intocommon stock.  Potential common shares inthe diluted EPS computation are excluded for the three-month and nine monthperiods ended January 31, 2005 and January 31, 2004 as their effect would beantidilutive.  The following is areconciliation of the numerators and denominators of the basic and dilutedincome per share computations for the periods indicated (in thousands, exceptper share amounts):

 

 

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **January 31,**        | ** ** | **January 31,**       | ** ** |
| ** **                                                   | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net Loss (Numerator):**                                    |       |                   |       |                  |       |   |   |   |   |
| Net loss, basic and diluted                                  |       | $                      | (651       | )                     | $          | (470 | ) | $ | (1,759 | ) | $ | (553 | ) |
| **Shares (Denominator):**                                    |       |                   |       |                  |       |   |   |   |   |
| Weighted average shares of common stock outstanding, basic   |       | 27,692                 |       | 21,596                |       | 27,606 |   | 21,471 |   |
| Weighted average common equivalent shares outstanding        |       | —                 |       | —                |       | — |   | — |   |
| Weighted average shares of common stock outstanding, diluted |       | 27,692                 |       | 21,596                |       | 27,606 |   | 21,471 |   |
|                                                         |       |                   |       |                  |       |   |   |   |   |
| **Per Share Amount:**                                        |       |                   |       |                  |       |   |   |   |   |
| Net loss per share, basic                                    |       | $                      | (0.02      | )                     | $          | (0.02 | ) | $ | (0.06 | ) | $ | (0.03 | ) |
|                                                         |       |                   |       |                  |       |   |   |   |   |
| Net loss per share, diluted                                  |       | $                      | (0.02      | )                     | $          | (0.02 | ) | $ | (0.06 | ) | $ | (0.03 | ) |

 

 

9

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**10.          MaintenanceContracts**

 

TheCompany offers maintenance contracts to its customers at the time they enterinto a product license agreement and renews those contracts, at the customers’ option,annually thereafter. These maintenance contracts are priced as a percentage ofthe value of the related license agreement. The specific terms and conditionsof these initial maintenance contracts and subsequent renewals vary dependingupon the product licensed and the country in which the Company does business.Generally, maintenance contracts provide the customer with unspecified productmaintenance updates and customer support services. Revenue from maintenancecontracts is initially deferred and then recognized ratably over the term ofthe agreements.

 

Changesin the Company’s deferred maintenance revenue during the periods are asfollows:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **January 31,**        | ** ** | **January 31,**       | ** ** |
| ** **                          | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                |       |                   |       |                  |       |   |   |   |   |
| Balances, beginning of period       |       | $                      | 2,202      |                  | $          | 2,153 |   | $ | 3,068 |   | $ | 2,846 |   |
|                                |       |                   |       |                  |       |   |   |   |   |
| Amount recognized during the period |       | (1,387                 | )          | (1,393                | )          | (4,153 | ) | (4,109 | ) |
|                                |       |                   |       |                  |       |   |   |   |   |
| Amount of new maintenance contracts |       | 2,392                  |       | 2,488                 |       | 4,292 |   | 4,511 |   |
|                                |       |                   |       |                  |       |   |   |   |   |
| Balances, end of period             |       | $                      | 3,207      |                  | $          | 3,248 |   | $ | 3,207 |   | $ | 3,248 |   |

 

**11.          Subsequent Events**

On February 2, 2005, the Company acquired all ofthe issued and outstanding equity securities of Acuitrek.  Under the termsof the agreement, Unify made an initial payment of $455,000, and over the nextthree years will make retention-based earn-out payments of $1.1 million andpotential performance-based earn-out payments, all to be paid with 50 percentcash and 50 percent Unify common stock (assuming profitability of the Acuitrekdivision).  Additionally, Unify will assume approximately $150,000 of netliabilities and deferred revenue.

 

10

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# ** **

# **UNIFY CORPORATION**

# ** **

# ** **

# **Item2.   Management’s Discussion and Analysisof Financial Condition and Results** of Operations

 

*Thediscussion in this Quarterly Report on Form 10-Q contains forward-lookingstatements that have been made pursuant to the provisions of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statements arebased on current expectations, estimates and projections about the softwareindustry and certain assumptions made by the Company’s management. Words suchas “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”,variations of such words and similar expressions are intended to identify suchforward-looking statements. These statements are not guarantees of futureperformance and are subject to certain risks, uncertainties and assumptionsthat are difficult to predict; therefore, actual results may differ materiallyfrom those expressed or forecasted in any such forward-looking statements. Suchrisks and uncertainties include, but are not limited to, those set forth hereinunder “Volatility of Stock Price and General Risk Factors Affecting QuarterlyResults” and in the Company’s Annual Report on Form 10-K under “Business — RiskFactors.” Unless required by law, the Company undertakes no obligation toupdate publicly any forward-looking statements, whether as a result of newinformation, future events or otherwise. However, readers should carefullyreview the risk factors set forth in other reports or documents the Companyfiles from time to time with the SEC, particularly the Company’s Annual Reporton Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form8-K.*

 

Thefollowing discussion should be read in conjunction with the unaudited CondensedConsolidated Financial Statements and Notes thereto in Part I, Item 1 of thisQuarterly Report on Form 10-Q and with the audited Consolidated FinancialStatements and Notes thereto, together with Management’s Discussion andAnalysis of Financial Condition and Results of Operations, which are includedin the Company’s Annual Report on Form 10-K for the fiscal year endedApril 30, 2004 as filed with the SEC.

 

**Overview**

 

Unifyis a global provider of enterprise software solutions to mid-size and largeorganizations. For more than 24 years, we have provided our customers andpartners around the world with productive and cost-effective applicationplatform, database and application development solutions for building anddeploying applications. Our software products and services enable businesses torapidly, efficiently and seamlessly deliver applications that deliver the rightinformation to the right people at the right time. Our software givesorganizations the ability to connect multiple data sources, quickly buildforms-based applications, automate business processes and deliver collaborativeinformation. By deploying Unify software, customers can increase revenue,enrich customer and citizen relationships, and enhance operationaleffectiveness. Our customers are leaders in their respective industries,including healthcare, financial services, government and manufacturing amongothers.

 

Unify’ssuite of products includes an application platform, application developmenttools and relational database management systems.  The Unify NXJ application platform enablesorganizations to quickly and effectively automate business processes within andbetween organizations, consolidate multiple legacy systems into unifiedapplications, and provide advanced collaborative information systems.  Unify’s rapid applicationdevelopment product line, ACCELL, graphical client/server applicationdevelopment product, VISION, and database management product family,DataServer, enable IT organizations to rapidly develop and deliver host-basedand client/server business applications critical to the enterprise.

 

Forour third quarter operations, total revenues were $3.0 million, up 13% comparedto $2.6 million in the third quarter of fiscal 2004.  Software licenses revenue was $1.5 million, anincrease of 24 percent, compared to $1.2 million for the fiscal 2004 thirdquarter.  The net loss for the quarterwas $651,000 or $0.02 loss per basic share, compared to a net loss of $470,000or $0.02 loss per basic share in the third quarter of the prior year.

 

Forour first nine months operations, total revenues were $8.5 million, a threepercent decrease, compared to $8.7 million in the first nine months of fiscal2004.  Software licenses revenue was $3.9million, a

 

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decreaseof eleven percent, compared to $4.4 million for the first nine months of fiscal2004.  The net loss for the first ninemonths was $1.8 million or $0.06 loss per basic share, compared to $553,000 or$0.03 loss per basic share in the first nine months of the prior year.

 

**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.*The Companygenerates revenue from software license sales and related services, includingmaintenance and support, and consulting services. The Company licenses itsproducts to end-user customers, independent software vendors, value-addedresellers, and distributors. While the Company recognizes revenue for softwarelicense sales in accordance with Statement of Position 97-2, “Software RevenueRecognition” as effected by Statement of Position 98-4 “Deferral of theEffective Date of a Provision of SOP 97-2” and Staff Accounting BulletinNo. 101, “Revenue Recognition in Financial Statements”, we exercisejudgment in connection with the determination of the amount of software andservices revenue to be recognized in each accounting period. The nature of eachlicensing arrangement determines how revenues and related costs are recognized.

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 relative fair value of themaintenance and support and/or consulting, regardless of any separate pricesstated within the contract. We recognize revenue for delivered elements onlywhen the fair values of undelivered elements are known, uncertainties regardingcustomer acceptance are resolved, and there are no customer-negotiated refundor return rights affecting the revenue recognized for delivered elements.Changes in the allocation of the sales price between the deliverable elementsmight impact the timing of revenue recognition, but would not change the totalrevenue recognized on the contract. We may modify our pricing practices in thefuture, which could result in changes in our VSOE of fair value for theseundelivered elements. As a result, our future revenue recognition formulti-element arrangements could differ significantly from our historicalresults.

Wedefer revenue for any undelivered elements, and recognize revenue when theproduct is delivered or over the period in which the service is performed, inaccordance with our revenue recognition policy for such element. If we cannotobjectively determine the fair value of any undelivered element included inbundled software and service arrangements, we defer revenue until all elementsare delivered and services have been performed, or until fair value canobjectively be determined for any remaining undelivered elements. When the fairvalue of a delivered element has not been established, we use the residualmethod to record revenue if the fair value of all undelivered elements isdeterminable. Under the residual method, the fair value of the undeliveredelements is deferred and the remaining portion of the arrangement fee isallocated to the delivered elements and is recognized as revenue.

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.

*Valuation of long-lived assets.* Our long-livedassets are comprised of long-term investments. At January 31, 2005, we had$214,000 in long-term investments, which are accounted for under the costmethod. We assess the valuation of long-lived assets whenever circumstancesindicate that there is a decline in carrying value below cost that is otherthan temporary.  Several factors cantrigger an impairment review such as significant underperformance relative toexpected historical or projected future operating results and significantnegative industry or economic trends. In assessing potential impairment forsuch investments,

 

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 we consider these factors as well as theforecasted financial performance. When such decline in value is deemed to beother than temporary, we recognize an impairment loss in the current periodoperating results to the extent of the decline. We recognized no impairmentlosses related to long-term investments in the quarter or nine months endedJanuary 31, 2005. Future adverse changes in market conditions or poor operatingresults could result in losses or an inability to recover the carrying value ofthe long-term investments that is not currently reflected in the investmentscarrying value, thereby possibly requiring additional impairment charges in thefuture.

 

*Deferred tax asset valuation allowance.*  As of January 31, 2005, we have approximately$19.1 million of deferred tax assets related principally to net operating losscarry forwards, reserves and other accruals, deferred revenue, and foreign taxcredits. A valuation allowance has been recorded to offset these deferred taxassets. The ability of the Company to ultimately realize its deferred taxassets will be contingent upon the Company achieving taxable income. There canbe no assurance that this will occur in amounts sufficient to utilize thedeferred tax assets. Should we determine that we would be able to realize thedeferred tax assets in the future in excess of the recorded amount, anadjustment to the deferred tax asset would increase income in the period suchdetermination was made.

 

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**Results ofOperations**

 

The following table sets forth, for theperiods indicated, certain financial data as a percentage of total revenue:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **January 31,**        | ** ** | **January 31,**       | ** ** |
| ** **                          | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                           |       |                   |       |                  |       |   |   |   |   |
| Software Licenses                   |       | 49.2                   | %          | 44.8                  | %          | 46.1 | % | 50.6 | % |
| Services                            |       | 50.8                   | %          | 55.2                  | %          | 53.9 | % | 49.4 | % |
| Total revenues                      |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
|                                |       |                   |       |                  |       |   |   |   |   |
| Cost of Revenues:                   |       |                   |       |                  |       |   |   |   |   |
| Software licenses                   |       | 3.2                    | %          | 8.6                   | %          | 3.1 | % | 4.7 | % |
| Services                            |       | 11.8                   | %          | 11.4                  | %          | 12.6 | % | 10.9 | % |
| Total cost of revenues              |       | 15.0                   | %          | 20.0                  | %          | 15.7 | % | 15.6 | % |
|                                |       |                   |       |                  |       |   |   |   |   |
| Gross profit                        |       | 85.0                   | %          | 80.0                  | %          | 84.3 | % | 84.4 | % |
|                                |       |                   |       |                  |       |   |   |   |   |
| Operating Expenses:                 |       |                   |       |                  |       |   |   |   |   |
| Product development                 |       | 22.7                   | %          | 23.4                  | %          | 24.7 | % | 26.2 | % |
| Selling, general and administrative |       | 85.2                   | %          | 74.1                  | %          | 80.5 | % | 61.1 | % |
| Write-down of long-lived assets     |       | 0.0                    | %          | 0.0                   | %          | 0.0 | % | 2.0 | % |
| Special charges (recovery)          |       | 0.0                    | %          | 0.3                   | %          | 0.0 | % | 1.2 | % |
| Total operating expenses            |       | 107.9                  | %          | 97.8                  | %          | 105.2 | % | 90.5 | % |
|                                |       |                   |       |                  |       |   |   |   |   |
| Income (loss) from operations       |       | -22.9                  | %          | -17.8                 | %          | -20.9 | % | -6.1 | % |
| Other income (expense), net         |       | 1.1                    | %          | -0.2                  | %          | 0.4 | % | -0.1 | % |
| Income (loss) before incometaxes    |       | -21.7                  | %          | -18.0                 | %          | -20.5 | % | -6.2 | % |
| Provision for income taxes          |       | 0.1                    | %          | -0.2                  | %          | 0.1 | % | 0.1 | % |
| Net income (loss)                   |       | -21.9                  | %          | -17.8                 | %          | -20.6 | % | -6.3 | % |

 

 

*Revenues*

 

Total revenue for the three months endedJanuary 31, 2005 increased 13% or $0.3 million to $3.0 million from the samequarter of the prior year. The increase in total revenues was the result of theincrease in software licenses revenue, which increased $0.3 million or 24% forthe three months ended January 31, 2005. Software license revenues increased asthe Company’s development tools and database product line revenues rose $0.4million to $1.3 million offsetting the decline in the Unify NXJ revenues of$0.1 million during the quarter. Service revenues, including consulting,training, and support and maintenance, were flat at $1.5 million for thequarter compared to the same period last year.

 

Total revenue for the nine months endedJanuary 31, 2005 decreased 3% to $8.5 million from the same period of the prioryear. Software license revenues decreased by 11% for the nine months endedJanuary 31, 2005 from the same period of the prior year. This decrease resultedprimarily from a decline of $0.6 million or 15% in the license revenuesassociated with the Company’s development tools and database product line whilethe Unify NXJ product license fees grew $0.1 million or 26% during the ninemonths ended January 31, 2005 compared to the same period last year. Theyear-to-date decline in total revenues is net of a $0.2 million increase inconsulting and training revenues. Consulting and training revenues increased asthe Company assisted and trained its customers in the delivery of Unify NXJbased applications. Support and maintenance revenues were flat for the ninemonths ended January 31, 2005 compared to the same period last year.

 

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For the three months ended January 31, 2005,revenues in North America were flat at $0.9 million, while outside NorthAmerica revenues increased 16% to $2.1 million over the same period of theprior year. The increase outside of North America resulted from a largedevelopment tools and database product order recorded in the territory duringthe quarter. Outside North America revenues increased from 68% to 69% of totalrevenues during the third quarter of fiscal 2005 compared to the same quarterof the prior fiscal year. Outside North America revenues decreased as apercentage of total revenues from 67% to 65% during the nine months endedJanuary 31, 2005, compared to the same nine-month period of the prior fiscalyear.

 

 

*Cost of Revenues*

 

TheCompany’s cost of revenues includes cost of software licenses and cost ofservices.  Cost of software licensesconsists primarily of product documentation, packaging and production costs,and royalties paid for licensed technology. Cost of services consists primarilyof employee, facilities and travel costs incurred in providing customer supportunder software maintenance contracts and consulting and training services.  Total cost of revenues decreased 15% or 0.1million to $0.4 million in the third quarter of fiscal 2005 compared to thethird quarter of fiscal 2004 and flat at $1.3 million for the first nine monthsof fiscal 2005 compared to same period of the prior year.

 

Costof software licenses decreased by $0.1 million and $0.15 million in the thirdquarter and first nine months of fiscal 2005, respectively, as compared to thesame periods of fiscal 2004 because of lower third party royalties. While theCompany expects its gross margins on software license revenues to remain withintypical software industry averages, costs of software license revenues are expectedto increase somewhat from the Company’s historical averages as a percentage ofrevenue, as a result of royalties paid for licensed technology included inUnify NXJ.

 

Total cost of services wereflat in the third quarter and increased by $127,000 to $1.1 million during thefirst nine months of fiscal 2005, respectively, over the same periods in fiscal2004. The increase in cost of services for the nine month period results fromthe increase in consulting and training revenues during the period.

 

*ProductDevelopment*

 

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.  For the three-month periodended January 31, 2005, product development expenses increase 10% to $0.7million over the same three-month period of fiscal 2004. For the nine-monthperiod ended January 31, 2005, product development expenses decreased 8% to $2.1million from $2.3 million for the same nine-month period of fiscal 2004. Duringthe first quarter of fiscal 2004, the Company reduced its product developmentcosts as part of a restructuring, in order to afford increased investments insales and marketing for Unify NXJ.  TheCompany believes that investments in product development are critical tomaintaining technological leadership and therefore intends to continue todevote significant resources to product development.

 

 

*Selling,General and Administrative*

 

Selling, general and administrative (“SG&A”)expenses for the quarter ended January 31, 2005 increased $0.5 million to $2.5million compared to $2.0 million for the same quarter of the prior year.SG&A expenses for the nine months ended January 31, 2005 increased $1.4million to $6.9 million as compared to $5.5 million for the same period of theprior year. These increases occurred as the Company executed its strategy toincrease its investments in sales and marketing activities for Unify NXJ.  The major components of SG&A for thethird quarter of fiscal 2005 were sales expenses of $1.4 million, marketingexpenses of $0.5 million, and general and administrative expenses of $0.6million. Sales expenses increased $0.2 million as the Company restructured itssales force in Europe and North America to allow it to invest its sales andmarketing resources in vertical application markets using Unify NXJ as thedevelopment

 

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environment to build these applications.During the quarter, the Company incurred approximately $0.7 million in salesrestructuring charges to accomplish these objectives which will not recur inthe future.  Marketing expenses increased$0.4 million compared to the same three month period for fiscal 2004 as theCompany redeployed its sales and marketing resources to focus on its verticalapplication strategy.  General andadministrative expenses were relatively flat for the third quarter of fiscal2005, compared to the comparable period for the prior year.

 

The major components of SG&A for thefirst nine months of fiscal 2005 were sales expenses of $3.9 million, marketingexpenses of $1.2 million, and general and administrative expenses of $1.8million. Sales expenses increased $0.7 million compared to the same nine monthperiod in fiscal 2004 as the Company restructured its sales force in Europe andNorth America to allow it to invest its sales and marketing resources invertical application markets using Unify NXJ as the development environment tobuild these applications. During the nine months ended January 31, 2005, theCompany incurred approximately $0.7 million in sales restructuring charges toaccomplish these objectives which will not recur in the future. Marketingexpenses increased $0.7 million during the same two comparative periods as theCompany redeployed its sales and marketing resources to focus on its verticalapplication strategy.  General andadministrative expenses were flat at $1.7 million during the first nine monthsof fiscal 2005 compared to the first nine months of fiscal 2004. The Companyexpects that total SG&A expenses may fluctuate from quarter to quarterprimarily because of variability in marketing program spending and salescommission expense.

 

 

*Write-down of Other Investments*

 

During the first nine months of fiscal 2005and 2004, the Company recorded non-cash charges of $0 and $175,000,respectively, to write-down the carrying amount of its investment in ArangoSoftware International to its net estimated realizable value.

###### * *

*Provisionfor Income Taxes*

 

The Company recorded no federal taxprovisions for the three and nine month periods ended January 31, 2005 as theCompany had net operating losses. For the three month and nine month periodsended January 31, 2005, the Company recorded state income tax expense of $3,000and $7,000, respectively. The Company recorded tax provisions for the three andnine month periods ended January 31, 2004 related to income taxes payable bythe Company’s foreign subsidiaries.

 

 

**Liquidity and CapitalResources**

 

At January 31, 2005, the Company had cash,cash equivalents and short-term investments of $3.9 million, compared to $6.6million at April 30, 2004.  Workingcapital decreased to $2.2 million at January 31, 2005 compared to $3.8 millionat April 30, 2004. Under the Company’s line of credit arrangement withSilicon Valley Bank, which was renewed during the first quarter of fiscal 2005,the Company had $0 outstanding to the Bank as of January 31, 2005. The line ofcredit has a borrowing limit of $1.0 million; as of January 31, 2005, basedupon the amount of its eligible assets at that time, the Company had $0.8million of availability for borrowing. In addition, as of January 31, 2005 theCompany had a term loan with a balance of $156,000.

 

The Company had a net decrease in cash of$2.7 million during the nine months ended January 31, 2005, as compared to adecrease of $0.3 million for the same period in the prior year.  Cash used in operating activities of $2.7million for the first nine months of fiscal 2005 includes a net loss of $1.8million.  Operating cash was provided bydepreciation, amortization, and stock based compensation of $0.2 million offsetby increases in accounts receivable of $0.3 million, prepaid expenses and othercurrent assets of $0.1 million. Operating cash was used as a result ofdecreases in accounts payable of $0.2 million, a decrease in accruedcompensation and related expenses of $0.1 million, a decrease in other accruedliabilities of $0.2 million, and a decrease in deferred revenues of $0.2million. Investing activities during the period used cash of $0.1 million forthe purchase of property and equipment. Cash provided by financing activities during the period was $0 resultingfrom borrowings under the line of credit with the Bank of $1.6 million andborrowings of long-term debt of $0.1 million and repayments of $1.7 million.

 

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A summary of certain contractual obligationsas of January 31, 2005 is as follows:

 
| ** **                             | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| **Contractual  Obligations**           | ** ** | **Total**                  | ** ** | **1 year  or less** | ** ** | **2-3  years** | ** ** | **4 - 5  years** | ** ** | **After 5  years** | ** ** |
| **Long-Term Debt**                     |       | 155,860                    |       | 155,860 |   | 0 |   | 0 |   | 0 |   |
| **Other Long-Term Liabilities**        |       | 79,025                     |       | 0 |   | 0 |   | 0 |   | 79,025 |   |
| **Capital Lease Obligations**          |       | 16,998                     |       | 5,380 |   | 11,618 |   | 0 |   | 0 |   |
| **Operating Leases**                   |       | 3,153,634                  |       | 970,166 |   | 2,017,724 |   | 165,745 |   | 0 |   |
| **Total Contractual Cash Obligations** |       | 3,405,517                  |       | 1,131,406 |   | 2,029,342 |   | 165,745 |   | 79,025 |   |

 

**Subsequent Events**

On February 2, 2005, the Company acquired all ofthe issued and outstanding equity securities of Acuitrek.  Under the termsof the agreement, Unify made an initial payment of $455,000, and over the nextthree years will make retention-based earn-out payments of $1.1 million andpotential performance-based earn-out payments, all to be paid with 50 percentcash and 50 percent Unify common stock (assuming profitability of the Acuitrekdivision).  Additionally, Unify will assume approximately $150,000 of netliabilities and deferred revenue.

 

**Volatility of Stock Priceand General Risk Factors Affecting Quarterly Results**

 

TheCompany’s common stock price has been and is likely to continue to be subjectto significant volatility.  A variety offactors could cause the price of the Company’s common stock to fluctuate,perhaps substantially, including: announcements of developments related to theCompany’s business; fluctuations in the Company’s or its competitors’ operatingresults and order levels; general conditions in the computer industry or theworldwide economy; announcements of technological innovations; new products orproduct enhancements by the Company or its competitors; changes in financialestimates by securities analysts; developments in patent, copyright or otherintellectual property rights; developments in the Company’s relationships withits customers, distributors and suppliers; legal proceedings brought againstthe Company 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, in recent years the stock marketin general, and the market for shares of equity securities of many hightechnology companies in particular, have experienced extreme price fluctuationswhich have often been unrelated to the operating performance of thosecompanies. Such fluctuations may adversely affect the market price of theCompany’s common stock.

 

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

 

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bythe Company or its competitors; product life cycles; product defects and otherproduct quality problems; currency fluctuations; and general domestic andinternational 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 web application development software is rapidly evolving, and theCompany’s sales cycle, from initial evaluation to purchase and the provision ofmaintenance services, is lengthy and varies substantially from customer tocustomer. Because the Company normally ships products within a short time afterit receives an order, it typically does not have any material backlog. As aresult, to achieve its quarterly revenue objectives, the Company is dependentupon obtaining orders in any given quarter for shipment in that quarter.Furthermore, because many customers place orders toward the end of a fiscalquarter, the Company generally recognizes a substantial portion of its licenserevenues at the end of a quarter. As the Company’s expense levels are based insignificant part on the Company’s expectations as to future revenues and aretherefore relatively fixed in the short term, if revenue levels fall belowexpectations, operating results are likely to be disproportionately adverselyaffected.  The Company also expects thatits operating results will be affected by seasonal trends, and that it mayexperience relatively weaker demand in fiscal quarters ended July 31 andOctober 31 as a result of reduced business activity in Europe during thesummer months.

 

**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

 

*InterestRate Risk*.  The Company’sexposure to market rate risk for changes in interest rates relates primarily toits cash equivalents, which are highly liquid investments with originalmaturities of three months or less and are stated at cost. Cash equivalents aregenerally maintained in money market accounts which have as their objectivepreservation of principal and which hold investments with maturity dates ofless than 90 days. The Company does not believe its exposure to interest raterisk is material for these balances, which totaled $3.9 million atJanuary 31, 2005. Additionally, the Company has no interest rate risk onits long-term debt. Unify does not use derivative financial instruments andplaces its cash equivalents with high quality issuers and, by policy, limitsthe amount of credit exposure to any one issuer. If market interest rates wereto change immediately and uniformly by ten percent from levels atJanuary 31, 2005, the fair value of the Company’s cash equivalents wouldchange by an insignificant amount.

 

*ForeignCurrency Exchange Rate Risk*.  As a global concern, the Company facesexposure to adverse movements in foreign currency exchange rates. Theseexposures may change over time as business practices evolve and could have amaterial adverse impact on the Company’s business, operating results andfinancial position. Historically, the Company’s primary exposures have relatedto local currency denominated sales and expenses in Europe, Japan andAustralia. Due to the substantial volatility of currency exchange rates, amongother factors, the Company cannot predict the effect of exchange ratefluctuations on its future operating results. Although Unify takes into accountchanges in exchange rates over time in its pricing strategy, it does so only onan annual basis, resulting in substantial pricing exposure as a result offoreign exchange volatility during the period between annual pricing reviews.The Company also has currency exchange rate exposures on intercompany accountsreceivable and payables owed to and by the Company as a result of localcurrency sales of software licenses and payments of intercompany royaltiesthereon, by the Company’s international subsidiaries in the United Kingdom andFrance. At January 31, 2005, the Company had $0.1 million and $0.1 million insuch receivables denominated in British pounds and Euros, respectively. TheCompany encourages prompt payment of these intercompany balances in order tominimize its exposure to currency fluctuations, but it engages in no hedgingactivities to reduce the risk of such fluctuations. A hypothetical ten percentchange in foreign currency rates would have an insignificant impact on theCompany’s business, operating results and financial position. The Company hasnot experienced material exchange losses on intercompany balances in the past;however, due to the substantial volatility of currency exchange rates, amongother factors, it cannot predict the effect of exchange rate fluctuations onits future business, operating results and financial position.

 

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**Item 4.Controls and Procedures**

 

 

(a)           Under the supervision and with the participation of ourmanagement, including our President and Chief Executive Officer and our ChiefFinancial Officer, we evaluated the effectiveness of our disclosure controlsand procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, our President andChief Executive Officer****and ourChief Financial Officer****concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly****report.

 

(b)           There has been no change in ourinternal control over financial reporting during the quarter ended January 31,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

### ** **

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### ** **

### **UNIFY CORPORATION**

### ** **

### **PARTII.                    OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

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

 

TheCompany is subject to legal proceedings and claims that arise in the normalcourse of business. If such matters arise, the Company cannot assure that itwould prevail in such matters, nor can it assure that any remedy could bereached on mutually agreeable terms, if at all. Due to the inherentuncertainties of litigation, were there any such matters, the Company would notbe able to accurately predict their ultimate outcome. As of January 31, 2005,there were no current proceedings or litigation involving the Company thatmanagement believes would have a material adverse impact on its financialposition, results of operations, or cash flows.

 

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**Item 6.********Exhibits**

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

 

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**UNIFYCORPORATION**

**SIGNATURE**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date: March 11, 2005 |                                          | Unify Corporation                                           |
|----------------------|-----------------------------------------------|-------------------------------------------------------------|
| * *             | * *                                      | *(Registrant)*                                              |
|                 |                                          |                                                        |
|                 |                                          | By:                                                         |
|                 |                                          |                                                        |
|                 |                                          | /s/ PETER J. DICORTI                                        |
|                 |                                          |        Peter  J. DiCorti |
|                 |                                          | Chief Financial Officer                                     |
|                 | (Principal Financial and  Accounting Officer) |

 

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