**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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** **

**Form 10-Q**

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

 

**Forthe quarterly period ended January 31, 2004**

 

**OR**

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

 

**CommissionFile Number:   001-11807**

 

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**UNIFYCORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **94-2710559**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification  Number) |
|                                                            |   |                                     |
| **2101 Arena Blvd, Suite 100  Sacramento, California 95834**    |
| (Address of principal executive offices)                        |
| **Telephone: (916) 928-6400**                                   |
| (Registrant’s telephone number, including area code)       |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be 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 to suchfiling requirements for the past 90 days.

YES   ý     NO     o   

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

21,631,520 shares of Common Stock, $0.001 parvalue, as of February 29, 2004

 

 

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**UNIFYCORPORATION**

**FORM10-Q**

 

INDEX

 
| PART I.        | FINANCIAL INFORMATION                                                                                                    |   |
|----------------|--------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                     |   |
| Item 1.        | Financial Statements                                                                                                     |   |
|           |                                                                                                                     |   |
|           | Unaudited Condensed Consolidated Balance  Sheets as of January 31, 2004 and April 30, 2003                               |   |
|           |                                                                                                                     |   |
|           | Unaudited Condensed Consolidated Statements  of Operations for the three and nine months ended January 31, 2004 and 2003 |   |
|           |                                                                                                                     |   |
|           | Unaudited Condensed Consolidated Statements of Cash Flows for the  nine months ended January 31, 2004 and 2003           |   |
|           |                                                                                                                     |   |
|           | Notes to Unaudited Condensed Consolidated Financial Statements                                                           |   |
|           |                                                                                                                     |   |
| Item 2.        | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                              |   |
|           |                                                                                                                     |   |
| Item 3.        | Disclosures about Market Risk                                                                                            |   |
|           |                                                                                                                     |   |
| Item 4         | Controls and Procedures                                                                                                  |   |
|           |                                                                                                                     |   |
| PART  II.      | OTHER INFORMATION                                                                                                        |   |
|           |                                                                                                                     |   |
| Item 1.        | Legal Proceedings                                                                                                        |   |
|           |                                                                                                                     |   |
| Item 6.        | Exhibits and Reports on Form 8-K                                                                                         |   |
|           |                                                                                                                     |   |
| SIGNATURE      |                                                                                                                     |
|           |                                                                                                                     |   |
| CERTIFICATIONS |                                                                                                                     |

 

2

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**PART I****.****                        FINANCIALINFORMATION**

**Item 1****.  FinancialStatements**

 

**UNIFYCORPORATIONUNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)**

 
|                                              |   | **January  31,  2004** |   | **April 30,  2003** |   |
|---------------------------------------------------|--------|------------------------|--------|---------------------|--------|
| **Assets**                                        |   |                   |   |                |   |
| Current assets:                                   |   |                   |   |                |   |
|                                              |   |                   |   |                |   |
|  Cash and cash equivalents                   |   | $                      | 2,753  |                | $      | 3,030 |   |
|  Accounts receivable, net                    |   | 2,977                  |   | 2,504               |   |
|  Prepaid expense & other current  assets |   | 463                    |   | 290                 |   |
|  Total current assets                        |   | 6,193                  |   | 5,824               |   |
|                                              |   |                   |   |                |   |
| Property and equipment, net                       |   | 341                    |   | 345                 |   |
| Other investments                                 |   | 214                    |   | 392                 |   |
| Other assets                                      |   | 236                    |   | 114                 |   |
| Total assets                                      |   | $                      | 6,984  |                | $      | 6,675 |   |
|                                              |   |                   |   |                |   |
| **Liabilities and Stockholders’ Equity**     |   |                   |   |                |   |
| Current liabilities:                              |   |                   |   |                |   |
|  Account payable                             |   | $                      | 496    |                | $      | 556 |   |
|  Line of credit                              |   | 95                     |   | —              |   |
|  Current portion of long term debt           |   | 171                    |   | 200                 |   |
|  Other accrued liabilities                   |   | 923                    |   | 822                 |   |
|  Accrued compensation and related  expenses  |   | 703                    |   | 652                 |   |
|  Deferred revenue                            |   | 3,305                  |   | 2,936               |   |
| Total current liabilities                         |   | 5,693                  |   | 5,166               |   |
|                                              |   |                   |   |                |   |
| Commitments and contingencies                     |   |                   |   |                |   |
|                                              |   |                   |   |                |   |
| Stockholders’ equity:                        |   |                   |   |                |   |
|  Common stock                                |   | 22                     |   | 21                  |   |
|  Additional paid in capital                  |   | 59,505                 |   | 59,339              |   |
|  Note receivable from stockholder            |   | —                 |   | (60                 | )      |
|  Accumulated other comprehensive loss        |   | 181                    |   | (43                 | )      |
|  Accumulated deficit                         |   | (58,417                | )      | (57,748             | )      |
| Total stockholders’ equity                   |   | 1,291                  |   | 1,509               |   |
| Total liabilities and stockholders’ equity   |   | $                      | 6,984  |                | $      | 6,675 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**UNIFYCORPORATIONUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**(in thousands, except per share data)

** **
|                                                   |   | **Three  Months Ended  January 31,** |   | **Nine  Months Ended  January 31,** |   |
|--------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                   |   | **2004**                             |   | **2003**                            |   | **2004** |   | **2003** |   |
| Revenues:                                              |   |                                 |   |                                |   |   |   |   |   |
| Software Licenses                                      |   | $                                    | 1,185  |                                | $      | 1,825 |   | $ | 4,427 |   | $ | 4,273 |   |
| Services                                               |   | 1,459                                |   | 1,609                               |   | 4,322 |   | 4,730 |   |
| Total revenues                                         |   | 2,644                                |   | 3,434                               |   | 8,749 |   | 9,003 |   |
|                                                   |   |                                 |   |                                |   |   |   |   |   |
| Cost of Revenues:                                      |   |                                 |   |                                |   |   |   |   |   |
| Software licenses                                      |   | 226                                  |   | 72                                  |   | 413 |   | 206 |   |
| Services                                               |   | 302                                  |   | 324                                 |   | 950 |   | 863 |   |
| Total cost of revenues                                 |   | 528                                  |   | 396                                 |   | 1,363 |   | 1,069 |   |
|                                                   |   |                                 |   |                                |   |   |   |   |   |
| Gross margin                                           |   | 2,116                                |   | 3,038                               |   | 7,386 |   | 7,934 |   |
|                                                   |   |                                 |   |                                |   |   |   |   |   |
| Operating Expenses:                                    |   |                                 |   |                                |   |   |   |   |   |
| Product development                                    |   | 618                                  |   | 971                                 |   | 2,297 |   | 3,160 |   |
| Selling, general and administrative                    |   | 1,960                                |   | 1,722                               |   | 5,344 |   | 4,904 |   |
| Write-down of other investments                        |   | —                               |   | 30                                  |   | 175 |   | 50 |   |
| Special charges (recovery)                             |   | 8                                    |   | —                              |   | 110 |   | (132 | ) |
| Total operating expenses                               |   | 2,586                                |   | 2,723                               |   | 7,926 |   | 7,982 |   |
|                                                   |   |                                 |   |                                |   |   |   |   |   |
| Income (loss) from operations                          |   | (470                                 | )      | 315                                 |   | (540 | ) | (48 | ) |
| Other income (expense), net                            |   | (4                                   | )      | (2                                  | )      | (7 | ) | 4 |   |
| Income (loss) before income taxes                      |   | (474                                 | )      | 313                                 |   | (547 | ) | (44 | ) |
| Provision (benefit) for income taxes                   |   | (4                                   | )      | 7                                   |   | 6 |   | 20 |   |
| Net income (loss)                                      |   | $                                    | (470   | )                                   | $      | 306 |   | $ | (553 | ) | $ | (64 | ) |
|                                                   |   |                                 |   |                                |   |   |   |   |   |
| Net income (loss) per share:                           |   |                                 |   |                                |   |   |   |   |   |
| Basic                                                  |   | $                                    | (0.02  | )                                   | $      | 0.01 |   | $ | (0.03 | ) | $ | (0.00 | ) |
| Dilutive                                               |   | $                                    | (0.02  | )                                   | $      | 0.01 |   | $ | (0.03 | ) | $ | (0.00 | ) |
| Shares used in computing net income (loss)  per share: |   |                                 |   |                                |   |   |   |   |   |
| Basic                                                  |   | 21,596                               |   | 21,072                              |   | 21,471 |   | 20,866 |   |
| Dilutive                                               |   | 21,596                               |   | 21,724                              |   | 21,471 |   | 20,866 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**UNIFY CORPORATIONUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS***(In thousands)*

 
|                                                                  |   | **Nine  Months Ended January 31,** |   |
|-----------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                  |   | **2004**                           |   | **2003** |   |
| Cash flows from operating activities:                                 |   |                               |   |   |   |
| Net loss                                                              |   | $                                  | (553   | ) | $ | (64 | ) |
| Reconciliation of net loss to net cash used  in operating activities: |   |                               |   |   |   |
| Depreciation                                                          |   | 124                                |   | 180 |   |
| Write-down of other investments                                       |   | 178                                |   | 50 |   |
| Employee stock based expense                                          |   | 40                                 |   | 131 |   |
| Non employee stock based expense                                      |   | 12                                 |   | — |   |
|                                                                  |   |                               |   |   |   |
| Changes in operating assets and  liabilities:                         |   |                               |   |   |   |
| Accounts receivable, net                                              |   | (284                               | )      | (233 | ) |
| Prepaid expenses and other current assets                             |   | (187                               | )      | 129 |   |
| Accounts payable                                                      |   | (63                                | )      | (14 | ) |
| Accrued compensation and related expenses                             |   | 13                                 |   | 2 |   |
| Other accrued liabilities                                             |   | 64                                 |   | (336 | ) |
| Deferred revenue                                                      |   | 186                                |   | 83 |   |
| Net cash used in operating activities                                 |   | (470                               | )      | (72 | ) |
|                                                                  |   |                               |   |   |   |
| Cash flows from investing activities:                                 |   |                               |   |   |   |
| Purchases of property and equipment                                   |   | (118                               | )      | (128 | ) |
| (Increase) decrease in other assets                                   |   | (77                                | )      | 14 |   |
| Net cash (used in) investing activities                               |   | (195                               | )      | (114 | ) |
|                                                                  |   |                               |   |   |   |
| Cash flows from financing activities:                                 |   |                               |   |   |   |
| Repayments of long-term debt                                          |   | —                             |   | (180 | ) |
| Proceeds from issuance of common stock, net                           |   | 126                                |   | 120 |   |
| Note payable to minority interest  stockholders                       |   | —                             |   | (309 | ) |
| Collection of notes receivable from  stockholder                      |   | 60                                 |   | — |   |
| Net cash provided by (used in) financing  activities                  |   | 186                                |   | (369 | ) |
|                                                                  |   |                               |   |   |   |
| Effect of exchange rate changes on cash                               |   | 202                                |   | 191 |   |
| Net decrease in cash and cash equivalents                             |   | (277                               | )      | (364 | ) |
| Cash and cash equivalents, beginning of  period                       |   | 3,030                              |   | 2,993 |   |
| Cash and cash equivalents, end of period                              |   | $                                  | 2,753  |   | $ | 2,629 |   |
|                                                                  |   |                               |   |   |   |
| Supplemental cash flow information:                                   |   |                               |   |   |   |
| Cash paid (received) net during the period  for:                      |   |                               |   |   |   |
| Interest                                                              |   | **$**                              | 6      |   | $ | 4 |   |
| Income taxes                                                          |   | $                                  | (113   | ) | $ | (51 | ) |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**UNIFY CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

The condensed consolidated financial statements have been prepared byUnify Corporation (the “Company”) pursuant to the rules and regulations of theSecurities and Exchange Commission (the “SEC”). While the interim financialinformation contained in this filing is unaudited, such financial statementsreflect all adjustments (consisting only of normal recurring adjustments) whichthe Company considers necessary for a fair presentation. The results forinterim periods are not necessarily indicative of the results to be expectedfor the entire fiscal year. These financial statements should be read inconjunction with the Consolidated Financial Statements and Notes thereto,together with Management’s Discussion and Analysis of Financial Condition andResults of Operations, which are included in the Company’s Annual Report onForm 10-K for the fiscal year ended April 30, 2003 as filed with the SEC.

 

*Recently Issued**Accounting Standards*

 

In January 2003, the FASB issued Interpretation Number 46,“Consolidation of Variable Interest Entities - an interpretation of ARB No. 51”(FIN46).  FIN 46 establishes accountingguidance for consolidation of a variable interest entity (“VIE”), formerlyreferred to as special purpose entities. FIN 46 applies to any businessenterprise, both public and private, that has a controlling interest,contractual relationship or other business relationship with a VIE. FIN 46 providesguidance for determining when an entity, the Primary Beneficiary, shouldconsolidate another entity, a VIE.  Thisstatement is effective immediately for variable interest entities created afterJanuary 31, 2003 and by the first interim or annual reporting period commencingafter March 15, 2004, for variable interest entities created prior to February1, 2003.  The Company is continuing toassess the impact of FIN 46.

 

**2.****                    ****Stock CompensationInformation**

 

As permitted by Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based compensation” (SFAS 123) and Statement of FinancialAccounting Standards No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure” (SFAS 148), the Company accounts forstock-based awards using the intrinsic value method of accounting in accordancewith Accounting Principles Board Opinion No. 25, “Accounting For Stock IssuedTo Employees” and related interpretations. As such, compensation is recorded onthe measurement date, generally the date of issuance or grant, as the excess ofthe current estimated fair value of the underlying stock over the purchase orexercise price. Any deferred compensation is amortized over the respectivevesting periods of the equity instruments, if any.  Option valuation models were developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions, including the expected life of the option. Because theCompany’s employee stock options have characteristics significantly differentfrom those of traded options and because changes in the subjective inputassumptions can materially affect the fair value estimates, in management’sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its employee stock options.

 

The Company’s calculations are made using the Black-Scholes optionpricing model, with the following weighted average assumptions for the threemonths ending January 31, 2004 and 2003, respectively: expected option life, 12months following vesting; stock volatility of 121% and 118%; risk-free interestrates of 2.3% and 2.1%; and no dividends during the expected term and for thenine months ending January 31, 2004 and 2003, respectively; expected optionlife, 12

 

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months following vesting; stock volatility of 119% and 118%, andrisk-free interest rates of 2.1% and 2.1%. The Company’s calculations are basedon a multiple option valuation approach and forfeitures are recognized as theyoccur.

 

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

 

 
|                                                                                                |   | **Three  Months Ended January 31,** |   | **Nine  Months Ended January31,** |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|
|                                                                                                |   | **2004**                            |   | **2003**                          |   | **2004** |   | **2003** |   |
| Net income (loss) as reported                                                                       |   | $                                   | (470   | )                                 | $      | 306 |   | $ | (553 | ) | $ | (64 | ) |
|                                                                                                |   |                                |   |                              |   |   |   |   |   |
| Add: stock-based employee compensation  included in reported in net income (loss)                   |   | —                              |   | —                            |   | 40 |   | 131 |   |
|                                                                                                |   |                                |   |                              |   |   |   |   |   |
| Less: stock-based employee compensation  expense, determined under fair value method for all awards |   | (120                                | )      | (103                              | )      | (258 | ) | (452 | ) |
| Proforma net income (loss)                                                                          |   | $                                   | (590   | )                                 | $      | 203 |   | $ | (771 | ) | $ | (385 | ) |
|                                                                                                |   |                                |   |                              |   |   |   |   |   |
| Net income (loss) per share:                                                                        |   |                                |   |                              |   |   |   |   |   |
| Basic per share, as reported                                                                        |   | $                                   | (0.02  | )                                 | $      | 0.01 |   | $ | (0.03 | ) | $ | (0.00 | ) |
| Basic per share, pro forma                                                                          |   | $                                   | (0.03  | )                                 | $      | 0.01 |   | $ | (0.04 | ) | $ | (0.02 | ) |
|                                                                                                |   |                                |   |                              |   |   |   |   |   |
| Diluted per share, as reported                                                                      |   | $                                   | (0.02  | )                                 | $      | 0.01 |   | $ | (0.03 | ) | $ | (0.00 | ) |
| Diluted per share, pro forma                                                                        |   | $                                   | (0.03  | )                                 | $      | 0.01 |   | $ | (0.04 | ) | $ | (0.02 | ) |

 

**3.****                     OtherInvestments**

 

Other investments represent common stock in three closely heldtechnology companies. The Company’s ownership interest in each company is lessthan 15%.  Other investments consistedof the following (in thousands):

 
|                                |   | **January  31,  2004** |   | **April 30,  2003** |   |
|-------------------------------------|--------|------------------------|--------|---------------------|--------|
|                                |   |                   |   |                |   |
| Arango Software International, Inc. |   | $                      | 175    |                | $      | 350 |   |
| Unify Japan                         |   | 39                     |   | 39                  |   |
| Other                               |   | —                 |   | 3                   |   |
|                                |   | $                      | 214    |                | $      | 392 |   |

 

The Company holds a minority interest in Arango Software International,Inc. (or “Arango”), a privately-held corporation headquartered in Panama. We assess the valuation of Arango whenevercircumstances indicate that there is a decline in carrying value below costthat is other-

 

7

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thantemporary. Several factors can trigger an impairment review such as significantunderperformance relative to expected historical or projected future operatingresults and significant negative industry or economic trends. In assessingpotential impairment for such investments, we consider these factors as well asthe forecasted financial performance. When such decline in value is other-than-temporary,we recognize an impairment loss in the current period operating results to theextent of the decline. During the fourth quarter of fiscal 2003, were-evaluated the $500,000 carrying value of this investment and recorded anon-cash charge of $150,000 to bring the carrying amount to $350,000. Duringthe first quarter of fiscal 2004, the Company reduced the carrying value of itsinvestment in Arango by $175,000. Future adverse changes in market conditions or poor operating results ofArango could result in losses or an inability to recover the carrying value ofthe investment that is not currently reflected in the investment’s carryingvalue, thereby possibly requiring an impairment charge in the future.

 

**4.****                     CreditFacility**

 

On June 6, 2003, the Company executed a $1.5 million revolving line ofcredit with Silicon Valley Bank. The line is secured by qualifying accountsreceivable, foreign and domestic, and has a one-year term. The Company incursinterest expense on funds used at the prevailing prime rate, not to be lessthan 4.25% per annum, plus two percent. The line ofcredit has a borrowing limit of $1.5 million; as of January, 2004, based uponthe amount of its eligible assets at that time, the Company had available forborrowing up to $0.6 million. There was a balance of $95,000 on the line of credit as of January 31,2004. This credit facility expires in June, 2004.

 

In connection with the $1.5 million revolving line of credit, theCompany issued warrants to Silicon Valley Bank to purchase 115,385 shares ofCompany stock at a per share price of $0.39 exercisable through June 6,2010.  The Company recorded the fairvalue of the warrants as a debt discount and an increase inadditional-paid-in-capital in the accompanying financial statements.  The Company determined the fair value of thewarrants using the Black-Scholes option pricing model, the fair value of theCompany’s stock at the date of issuance, volatility factor of 70%, riskfree-interest rate of 2.1%, expected life of 10 years and no dividendyield.  This amount totaling $34,600 isbeing amortized over the term of the debt through interest expense.

 

8

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**5.****                     Long-term Debt**

 

The Company’s debt consists of the following at January 31, 2004 andApril 30, 2003 (in thousands):

 
|                                                                                                                                                                                                                                                                                                       |   | **January  31,  2004** |   | **April 30,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|---------------------|--------|
|                                                                                                                                                                                                                                                                                                       |   |                   |   |                |   |
| Unsecured note payable to a third party,  payable in monthly installments of $20                                                                                                                                                                                                                           |   | $                      | — |                | $      | 200 |   |
|                                                                                                                                                                                                                                                                                                       |   |                   |   |                |   |
| Note payable to a financial institution,  accruing interest at prime plus 2.0%, not to be less than 4.25% per annum  (actual interest at January 31, 2004 was 6.25%), and payable in monthly  installments through October 2006 but all due in June, 2004 due to expiration  of credit facility with Bank. |   | 171                    |   | —              |   |
|                                                                                                                                                                                                                                                                                                       |   | 171                    |   | 200                 |   |
| Less current portion                                                                                                                                                                                                                                                                                       |   | (171                   | )      | (200                | )      |
|                                                                                                                                                                                                                                                                                                       |   | $                      | — |                | $      | — |   |

 

At January 31, 2004 the Company failed to comply with the minimumtangible net worth covenant for the date set forth in the credit facilityagreement between the Company and Silicon Valley Bank. In February 2004 SiliconValley Bank waived the default as of January 31, 2004.

 

**6.****                     ComprehensiveIncome (Loss)**

 

The Company’s total comprehensive income (loss) for the periods shownwas as follows:

 
|                              |   | **Three  Months Ended  January 31,** |   | **Nine  Months Ended  January 31,** |   |
|-----------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                              |   | **2004**                             |   | **2003**                            |   | **2004** |   | **2003** |   |
| Net income (loss)                 |   | $                                    | (470   | )                                   | $      | 306 |   | $ | (553 | ) | $ | (64 | ) |
| Foreign currency translation gain |   | 184                                  |   | 55                                  |   | 224 |   | 151 |   |
| Total comprehensive income        |   | $                                    | (286   | )                                   | $      | 361 |   | $ | (329 | ) | $ | 87 |   |

 

**7.****                     SpecialCharges**

 

InJuly 2000, the Company announced that certain matters had come to the attentionof the Company’s Board of Directors that indicated that the Company had engagedin improper accounting practices. Accordingly, the Board of Directorsauthorized its Audit Committee to conduct an investigation of the Company’saccounting and financial reporting practices and to recommend remedial action,if any (for expanded discussion see Form 10-K for the period ended April 30,2003). As a result of the United States Attorney’s office litigation against oneof the Company’s former officers, the Company continues to incur additionallegal costs.  According to published reports, on November20, 2003, the former officer was convicted of 10 counts of

 

9

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securitiesfraud and one count of conspiracy. During the three month periods ended January31, 2004, the Company recorded special charges of $8,000. During the nine monthperiods ended January 31, 2004 and 2003, the Company recorded special chargesof $110,000 and recoveries of $132,000, respectively.

 

**8.****                     EarningsPer Share**

 

SFAS No. 128, *Earnings Per Share,* requires a dualpresentation of basic and diluted income (loss) per share (“EPS”). Basic EPSexcludes dilution and is computed by dividing net income (loss) attributable tocommon stockholders by the weighted average of common shares outstanding forthe period. 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. The following is a reconciliation of the numerators anddenominators of the basic and diluted income (loss) per share computations forthe periods indicated (in thousands, except per share amounts):

 
|                                                          |   | **Three  Months Ended  January 31,** |   | **Nine  Months Ended  January 31,** |   |
|---------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                          |   | **2004**                             |   | **2003**                            |   | **2004** |   | **2003** |   |
| **Net Income (Loss)   (Numerator):**                     |   |                                 |   |                                |   |   |   |   |   |
| Net income (loss), basic and diluted                          |   | $                                    | (470   | )                                   | $      | 306 |   | $ | (553 | ) | $ | (64 | ) |
| **Shares  (Denominator):**                               |   |                                 |   |                                |   |   |   |   |   |
| Weighted average shares of common stock  outstanding, basic   |   | 21,596                               |   | 21,072                              |   | 21,471 |   | 20,866 |   |
| Weighted average common equivalent shares  outstanding        |   | —                               |   | 652                                 |   | — |   | — |   |
| Weighted average shares of common stock  outstanding, diluted |   | 21,596                               |   | 21,724                              |   | 21,471 |   | 20,866 |   |
|                                                          |   |                                 |   |                                |   |   |   |   |   |
| **Per Share Amount:**                                         |   |                                 |   |                                |   |   |   |   |   |
| Net income (loss) per share, basic                            |   | $                                    | (0.02  | )                                   | $      | 0.01 |   | $ | (0.03 | ) | $ | (0.00 | ) |
|                                                          |   |                                 |   |                                |   |   |   |   |   |
| Net income (loss) per share, diluted                          |   | $                                    | (0.02  | )                                   | $      | 0.01 |   | $ | (0.03 | ) | $ | (0.00 | ) |

 

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**9.****                     MaintenanceContracts**

 

The Company offers maintenance contracts to its customers at the timethey enter into a product license agreement and renews those contracts, at thecustomers’ option, annually thereafter. These maintenance contracts are pricedas a percentage of the value of the related license agreement. The specificterms and conditions of these initial maintenance contracts and subsequentrenewals vary depending upon the product licensed and the country in which theCompany does business. Generally, maintenance contracts provide the customerwith unspecified product maintenance updates and customer support services. Revenue from maintenance contracts isinitially deferred and then recognized ratably over the term of the agreements.

 

Changes in the Company’s deferred maintenance revenue during theperiods are as follows:

 
|                                |   | **Three  Months Ended  January 31,** |   | **Nine  Months Ended  January 31,** |   |
|-------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                |   | **2004**                             |   | **2003**                            |   | **2004** |   | **2003** |   |
|                                |   |                                 |   |                                |   |   |   |   |   |
| Balances, beginning of period       |   | $                                    | 2,153  |                                | $      | 2,443 |   | $ | 2,846 |   | $ | 2,932 |   |
|                                |   |                                 |   |                                |   |   |   |   |   |
| Amount recognized during the period |   | (1,393                               | )      | (1,335                              | )      | (4,109 | ) | (4,205 | ) |
|                                |   |                                 |   |                                |   |   |   |   |   |
| Amount of new maintenance contracts |   | 2,488                                |   | 2,196                               |   | 4,511 |   | 4,577 |   |
|                                |   |                                 |   |                                |   |   |   |   |   |
| Balances, end of period             |   | $                                    | 3,248  |                                | $      | 3,304 |   | $ | 3,248 |   | $ | 3,304 |   |

 

**10.****              Commitmentsand Contingencies**

 

TheCompany is subject to legal proceedings and claims that arise in the normalcourse of business.  The Company cannotassure that it would prevail in such matters nor can it assure that any remedycould be reached on mutually agreeable terms, if at all.  Due to the inherent uncertainties oflitigation, were there any such matters, the Company may not be able toaccurately predict their ultimate outcome. As of January 31, 2004, there wereno current proceedings or litigation involving the Company that managementbelieves would have a material adverse impact on its financial position,results of operations, or cash flows.

 

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# **UNIFY CORPORATION**

# ** **

**Item 2****.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*The discussion inthis Quarterly Report on Form 10-Q contains forward-looking statements thathave been made pursuant to the provisions of the Private Securities LitigationReform Act of 1995. Such forward-looking statements are based on currentexpectations, estimates and projections about the software industry and certainassumptions made by the Company’s management. Words such as “anticipates”,“expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, variations ofsuch 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 to updatepublicly 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.*

 

The following discussion should be read in conjunction with theunaudited Condensed Consolidated Financial Statements and Notes thereto in PartI, Item 1 of this Quarterly Report on Form 10-Q and with the auditedConsolidated 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 fiscal yearended April 30, 2003 as filed with the SEC.

 

**Overview**

 

Unifyis a global enterprise software company. Leveraging 24 years of software innovation to more than 2,000 customersand 300 ISV partners worldwide, Unify delivers a comprehensive,vendor-independent application platform suite. With Unify products, customers are able to deliver technologysolutions that significantly enhance revenue opportunities, improveoperational effectiveness and enrich customer relationships. Ourcustomers include healthcare, financial services, government andmanufacturing organizations, among others.

 

TheCompany’s flagship product, Unify NXJ, launched in October 2002, enablesorganizations to effectively automate processes within and betweenorganizations and enterprises, consolidate multiple legacy systems into unifiedcomposite applications, and provide advanced collaborative information systemsfor distributed teams and workforces. The Unify NXJ platform provides a comprehensive set of applicationservices including business process management, reporting, forms processing,portal and portal integration, and enterprise application integration, as wellas assembly and orchestration components. Unify NXJ can be delivered as a completely integrated suite or as anintegrated services platform for delivering solutions across all leading J2EEinfrastructure stacks.

 

Unify’sEnterprise product lines, ACCELL, graphical client/server applicationdevelopment product, VISION, and database management product family,DataServer, enable IT organizations to rapidly develop and deliverclient/server business applications critical to the enterprise.  Unify’s products help companies solvebusiness and IT challenges by providing a broad range of

 

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applicationdevelopment product solutions that are easy to use and cost-effective to changeand maintain.

 

**Critical AccountingPolicies**

 

The following discussion and analysis of the Company’s financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted 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 Company generates revenue from softwarelicense sales and related services, including maintenance and support, trainingservices and consulting services. The Company licenses its products to end usercustomers, independent software vendors and value added resellers. The Companyrecognizes revenue for software license sales in accordance with Statement ofPosition 97-2, “Software Revenue Recognition” as effected by Statement ofPosition 98-4 “Deferral of the Effective Date of a Provision of SOP 97-2” andStaff Accounting Bulletin No. 101, “Revenue Recognition in FinancialStatements.” The nature of each licensing arrangement determines how revenuesand related costs are recognized.

 

The Company’s customer contracts include multi-element arrangementsthat include a delivered element, software license, and undelivered elements,maintenance and support and/or consulting/training. 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/training, regardless of any separateprices stated within the contract. VSOE of fair value is defined as (i) theprice charged when the same element is sold separately, or (ii) if the elementhas not yet been sold separately, the price for the element established bymanagement having the relevant authority when it is probable that the pricewill not change before the introduction of the element into the marketplace.The Company then allocates the remaining balance to the delivered element,software license, regardless of any separate prices stated within the contract.The Company’s customer contracts do not require the Company to performsignificant production, modification or customization of the software.

 

Revenue is recognized when a noncancelable license agreement has beensigned or other persuasive evidence of an arrangement exists, the softwareproduct or service has been shipped or electronically delivered, the licensefees are fixed and determinable and collectibility is probable.

 

An assessment of the ability of the Company’s customers to pay isanother consideration that affects revenue recognition. In some cases, theCompany sells 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 of feesfor ongoing support and unspecified product updates, are recognized ratablyover 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 under time-and-

 

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materials arrangements. Revenues and expenses relating to providingconsulting services are recognized as the services are performed.

* *

*Valuation of Long-Llived Assets*.  Our long-lived assets are comprised oflong-term investments. At January 31, 2004, we had $214,000 in long-terminvestments, which are accounted for under the cost method. We assess thevaluation of long-lived assets whenever circumstances indicate that there is adecline in carrying value below cost that is other-than temporary.  Several factors can trigger an impairmentreview 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 other-than-temporary, we recognize an impairment lossin the current period operating results to the extent of the decline. Werecognized a $175,000 impairment loss related to long-term investments in the ninemonths ended January 31, 2004 in connection with the investment in Arango, aprivately held software company headquartered in Panama. Future adverse changesin market conditions or poor operating results could result in losses or aninability to recover the carrying value of the long-term investments that isnot currently reflected in the investments carrying value, thereby, possiblyrequiring additional impairment charges in the future.

* *

*Deferred Tax Asset Valuation Allowance*.  As of January 31, 2004, we haveapproximately $18.6 million of deferred tax assets related principally to netoperating loss carry forwards, reserves and other accruals, deferred revenue,and foreign tax credits. A valuation allowance has been recorded to offsetthese deferred tax assets. The ability of the Company to ultimately realize itsdeferred tax assets will be contingent upon the Company achieving taxableincome. There can be no assurance that this will occur in amounts sufficient toutilize the deferred tax assets. Should we determine that we would be able torealize the deferred tax assets in the future in excess of the recorded amount,an adjustment to the deferred tax asset would increase income in the periodsuch determination was made.

 

**Resultsof Operations**

** **

The Company generated a net loss for the third quarter of fiscal 2004of $470,000, or a loss of two cents per share compared to net income for thethird quarter of fiscal 2003 of $306,000 or one cent per share.  The net loss for the third quarter of fiscal2004 includes $8,000 in special charges, primarily legal fees, relating to theCompany’s participation in the prosecution of two of the Company’s formerofficers by the United States Attorney’s office, while the net income for the third quarterof the previous year includes no such special charges. The Company incurred anet loss for the nine months ended January 31, 2004 of $553,000, or a loss ofthree cents per share compared to a net loss of $64,000 for the same period inthe previous year. The net loss in the nine months ended January 31, 2004included severance expenses of $200,000 associated with a reduction in forcethat the Company undertook during the first quarter of fiscal 2004, a $175,000write-down of the Company’s investments in other assets, and $110,000 inspecial charges.  The net loss for thefirst nine months of the fiscal 2003 included a $50,000 write-down of theCompany’s investments in other assets, and $132,000 in recoveries of specialcharges. See Part II, Item 1.

 

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

 
|                                     |   | **Three  Months Ended  January 31,** |   | **Nine  Months Ended  January 31,** |   |
|------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                     |   | **2004**                             |   | **2003**                            |   | **2004** |   | **2003** |   |
| Revenues:                                |   |                                 |   |                                |   |   |   |   |   |
| Software Licenses                        |   | 44.8                                 | %      | 53.1                                | %      | 50.6 | % | 47.5 | % |
| Services                                 |   | 55.2                                 | %      | 46.9                                | %      | 49.4 | % | 52.5 | % |
| Total revenues                           |   | 100.0                                | %      | 100.0                               | %      | 100.0 | % | 100.0 | % |
|                                     |   |                                 |   |                                |   |   |   |   |   |
| Cost of Revenues:                        |   |                                 |   |                                |   |   |   |   |   |
| Software licenses                        |   | 8.6                                  | %      | 2.1                                 | %      | 4.7 | % | 2.3 | % |
| Services                                 |   | 11.4                                 | %      | 9.4                                 | %      | 10.9 | % | 9.6 | % |
| Total cost of revenues                   |   | 20.0                                 | %      | 11.5                                | %      | 15.6 | % | 11.9 | % |
|                                     |   |                                 |   |                                |   |   |   |   |   |
| Gross profit                             |   | 80.0                                 | %      | 88.5                                | %      | 84.4 | % | 88.1 | % |
|                                     |   |                                 |   |                                |   |   |   |   |   |
| Operating Expenses:                      |   |                                 |   |                                |   |   |   |   |   |
| Product development                      |   | 23.4                                 | %      | 28.3                                | %      | 26.2 | % | 35.1 | % |
| Selling, general and administrative      |   | 74.1                                 | %      | 50.1                                | %      | 61.1 | % | 54.5 | % |
| Write-down of long-lived assets          |   | 0.0                                  | %      | 0.9                                 | %      | 2.0 | % | 0.5 | % |
| Special charges (recovery)               |   | 0.3                                  | %      | 0.0                                 | %      | 1.2 | % | -1.5 | % |
| Total operating expenses                 |   | 97.8                                 | %      | 79.3                                | %      | 90.5 | % | 88.8 | % |
|                                     |   |                                 |   |                                |   |   |   |   |   |
| Income (loss) from operations            |   | -17.8                                | %      | 9.2                                 | %      | -6.1 | % | -0.5 | % |
| Other income (expense), net              |   | -0.2                                 | %      | -0.1                                | %      | -0.1 | % | 0.0 | % |
| Income   (loss) before income taxes |   | -18.0                                | %      | 9.1                                 | %      | -6.2 | % | -0.5 | % |
| Provision for income taxes               |   | -0.2                                 | %      | 0.2                                 | %      | 0.1 | % | 0.2 | % |
| Net income (loss)                        |   | -17.8                                | %      | 8.9                                 | %      | -6.3 | % | -0.7 | % |

 

*Revenues*

 

Totalrevenue for the three months ended January 31, 2004 decreased 23% to $2.6million from the same quarter of the prior year. The decrease in total revenueswas primarily the result of the decrease in software licenses revenue, whichdecreased $0.64 million or 35% for the three months ended January 31, 2004, andconsulting and training revenues, which decreased $0.2 million or 76% for thethree months ended January 31, 2004 from the same quarter of the prior year.Software license revenues decreased because the increase in Unify NXJ licenserevenues was unable to offset the decline in the Company’s Enterprise productline revenues.  The decline in theEnterprise revenue stems from the Company’s inability to replicate the resultsof the third quarter of fiscal 2003 when the Company closed three largeEnterprise license sales comprising $0.96 million in revenue.  Consulting and training revenues decreasedbecause the Company benefited from a large consulting services contract in lastyear’s third quarter which was not replicated this year.

 

Totalrevenue for the nine months ended January 31, 2004 decreased 3% to $8.7 millionfrom the same period of the prior year. However, software license revenues grewby 4% for the nine months ended January 31, 2004 from the same period of theprior year. This increase resulted primarily from growth in the licenserevenues associated with the Company’s flagship product, Unify NXJ. Theyear-to-date decline in total revenues consists of a $0.1 million decrease insupport and maintenance revenues and a $0.3 million decrease in consulting andtraining 

 

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revenues.Consulting and training revenues decreased because the Company benefited from alarge consulting services contract for the nine months ended January 31, 2003which was not replicated this year.

 

Forthe three months ended January 31, 2004, revenues in North America decreased52% to $0.9 million, while outside North America revenues increased 8% to $1.8million over the same period of the prior year. The decrease in North Americaresulted from the same factors which caused the decline in total revenue.Outside North America revenues increased from 48% to 68% of total revenuesduring the third quarter of fiscal 2004 compared to the same quarter of theprior fiscal year. Outside North America revenues increased as a percentage oftotal revenues from 50% to 67% during the nine months ended January 31, 2004,compared to the same nine-month period of the prior fiscal year. The increasein outside North America revenues as a percentage of total revenues for boththe three and nine months ended January 31, 2004 results primarily fromcontinued software license revenue strength in Europe in fiscal 2004 and thelarge RAD product licenses and consulting service revenues which were includedin revenues in North America for fiscal 2003.

 

Total services revenue for the quarter ended January 31, 2004 declined9% to $1.5 million compared to the same quarter the previous year. However, theportion representing maintenance revenues increased 4% to $1.4 million whilethe portion representing consulting revenues decreased 76% to $0.1 million.Total services revenue for the nine months ended January 31, 2004 decreased$0.4 million, or 9%, to $4.3 million from $4.7 million for the nine monthsended January 31, 2003.  The portionrepresenting maintenance revenues decreased $0.1 million, or 2%, to $4.1million while the portion representing consulting and training revenuesdecreased $0.3 million, 60%, to $0.2 million for the nine-month comparativeperiods. TheCompany continues to renew approximately 85% of its maintenance agreements.Nonrenewals are typically offset by new maintenance revenues as a result of newproduct revenues. The reduction in maintenance revenues for the nine monthsended January 31, 2004 is the result of non-renewing maintenance contractsexceeding the initial maintenance orders, which were lower than expected as aresult of decreased new product sales.

 

*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 androyalties paid for licensed technology. Cost of services consists primarily ofemployee, facilities and travel costs incurred in providing customer supportunder software maintenance contracts, and consulting and training services.Total cost of revenues as a percentage of total revenues increased to 20% forthe three-month period ended January 31, 2004 from 12% for the comparativethree-month period of the prior fiscal year. This increase is primarilyattributable to the decrease in total revenues, as a significant portion of theCompany’s cost of revenues are fixed, and therefore the relative dollar amountdoes not fluctuate as readily with the changes in revenues and increases inroyalties paid for licensed technology. Total cost of revenues as a percentageof total revenues increased to 16% for the nine month period ended January 31,2004 from 12% for the same nine month period of the prior fiscal year. Theseincreases are primarily attributable to increases royalties paid for licensedtechnology and an additional investment in customer support.

 

Costof software licenses as a percentage of software license revenues were 19% and9% for the three-month and nine-month periods ended January 31, 2004,respectively, as compared to 4% and 5% for the three month and nine monthperiods ended January 31, 2003, respectively. The increase in the cost ofsoftware license revenues in the third quarter reflects lower than previousyear revenues as a significant portion of the Company’s cost of revenues arefixed, and therefore the relative dollar amount does not fluctuate as readilywith the changes in revenues and increases in royalties paid for licensedtechnology. The increase in the cost of software license revenues for

 

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thenine month period reflects increases in royalties paid for licensed technology.Revenues and expenses will vary from quarter to quarter primarily because ofdifferences between revenue recognition and the recording of expenses, whichfor the most part are fixed period costs.

 

Total cost of services was unchanged at $0.3 million in the thirdquarter of fiscal 2004 as compared to the same period a year ago and increasedto $1.0 million for the nine months ended January 31, 2004 versus $0.9 millionduring the respective comparative period in fiscal 2003. The cost of service has a high component offixed costs, and therefore the relative dollar amount does not fluctuate asreadily with the changes in revenues. The increase in fiscal 2004 reflects theCompany’s increased investment in customer support as it introduced its newproduct, Unify NXJ, during fiscal 2003.

 

*Product Development*

 

Product development expenses consist primarily of employee andfacilities costs incurred in the development and testing of new products and inthe porting of new and existing products to additional hardware platforms andoperating systems.  For the three-monthperiod ended January 31, 2004, product development expenses decreased 36% to$0.6 million from $1.0 million for the same three-month period of fiscal 2003.For the nine-month period ended January 31, 2003, product development expensesdecreased 27% to $2.3 million from $3.2 million for the same nine-month periodof fiscal 2003. Product development costs as a percentage of total revenuesduring the three month and nine month periods ended January 31, 2004 were 23%and 26% respectively, as compared to 28% and 35% for the three month and ninemonth periods ended January 31, 2003. During the first nine months of fiscal2004, the Company reduced its product development costs as part of a restructuring,in order to afford increased investments in sales and marketing, particularlyfor Unify NXJ. The Company believes that investments in product development arecritical to maintaining technological leadership and therefore intends tocontinue to devote significant resources to product development in line withtypical software industry averages.

 

*Selling, General andAdministrative*

 

Selling, general and administrative (“SG&A”) expenses for thequarter ended January 31, 2004 increased to $2.0 million, or 74% of totalrevenues, as compared to $1.7 million, or 50% of total revenues for the samequarter of the prior year. SG&A expenses for the nine months ended January31, 2004 increased to $5.3 million, or 61% of total revenues, as compared to$4.9 million, or 55% of total revenues, for the same period of the prioryear.  The major components of SG&Afor the third quarter of fiscal 2004 were sales expenses of $1.2 million,marketing expenses of $0.2 million, and general and administrative expenses of$0.6 million. Sales expenses   for thequarter ended January 31, 2004 increased $0.2 million over the quarter endedJanuary 31, 2003 as the Company increased is sales force by three people todrive Unify NXJ sales.  Marketingexpenses was flat at $0.2 million during the same three-month period as theCompany funded the launch of a new version of its flagship product, Unify NXJ.General and administrative expenses, including bad debt expense, were flat at$0.6 million during the same three-month period.

 

The major components of SG&A for the first nine months of fiscal2004 were sales expenses of $3.2 million, marketing expenses of $0.5 million,and general and administrative expenses of $1.7 million, including bad debtrecoveries of $0.1 million. Sales expenses increased $0.5 million compared tothe same nine month period in fiscal 2003 as a result of the increasedinvestments designed to increase the sales of Unify NXJ, including hiring a newvice president of sales and marketing and five new sales representatives.  Marketing expenses increased $59,000 duringthe same two comparative periods. General and administrative expenses, including bad debt expense andrecoveries, increased by $0.1 million during the first nine months of fiscal2004 compared to

 

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the first nine months of fiscal 2003, primarily as a result of thenormal quarter-to-quarter fluctuations that occur throughout the Company’soperating year. The Company expects that total SG&A expenses may fluctuatefrom quarter to quarter primarily because of variability in marketing programspending and sales commission expense.

 

*Write-down of OtherInvestments*

 

Duringthe first nine months of fiscal 2004 and 2003, the Company recorded non-cashcharges of $175,000 and $50,000, respectively, to write-down the carryingamount of its investments in Arango Software International and EvergreenInternet, Inc. to their net estimated realizable values.

 

###### *Special Charges*

###### * *

###### *In July 2000, the Company announced that certain matters hadcome to the attention of the Company’s Board of Directors that indicated thatthe Company had engaged in improper accounting practices during fiscal 2000.Accordingly, the Board of Directors authorized its Audit Committee to conductan investigation of the Company’s accounting and financial reporting practicesand to recommend remedial action, if any. As a result of this financialreporting investigation, the Company incurred special charges related to theinvestigation itself, legal expenses, additional auditing costs and otherlitigation related costs. During the third quarters of fiscal 2004, the Companyrecorded special charges of $8,000. During the first nine months of fiscal 2004and 2003, the Company recorded special charges of $110,000 and recoveries ofspecial charges of $132,000, respectively. The special charges incurred duringthe first nine months of fiscal 2004 were attributable to the costs*relatedto the Company’s cooperation withthe United StatesAttorney office’s prosecution of a former officer of the Company (See Part II,Item 1). According to published reports, on November 20, 2003,the former officer was convicted of 10 counts of securities fraud and one countof conspiracy. The recoveries during fiscal 2003 were due primarilyto the settlement of the class action lawsuit filed against the Company andreimbursements of legal expenses under the Company’s Directors and Officersinsurance policy.

###### * *

*Provision for IncomeTaxes*

 

The Company recorded tax provisions (benefits) for the three-andnine-month periods ended January 31, 2004 and 2003 related to income taxespayable by the Company’s foreign subsidiaries. For the same periods, theCompany recorded no significant federal or state income tax provisions as theCompany had substantial net operating loss carry forwards.

 

**Liquidity and CapitalResources**

 

AtJanuary 31, 2004, the Company had cash, cash equivalents and short-terminvestments of $2.8 million, compared to $3.0 million at April 30, 2003.  Working capital decreased to $0.5 million atJanuary 31, 2004, compared to $0.7 million at April 30, 2003. Under theCompany’s line of credit arrangement with Silicon Valley Bank, which was put inplace during the first quarter of fiscal 2004, the Company had an outstandingdebt balance of $95,000 as of January 31, 2004. The line of credit has aborrowing limit of $1.5 million; as of January 31, 2004, based upon the amountof its eligible assets at that time, the Company had available for borrowing upto $0.6 million.  In addition, as ofJanuary 31, 2004 the Company had a term loan with a balance of $171,000. AtJanuary 31, 2004 the Company failed to comply with the minimum tangible networth covenant for that date set forth in the credit facility agreement betweenthe Company and Silicon Valley Bank. In February, 2004 Silicon Valley Bankwaived the default as of January 31, 2004

 

TheCompany had a net decrease in cash of $0.3 million and $0.4 during the ninemonths ended January 31, 2004 and 2003, respectively.  Cash used in operating activities of $0.5 million for the firstnine months of fiscal 2004 resulted from a net loss of $0.6 million whichincluded various

 

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non-cashcharges of $0.4 million and severance expenses of $0.2 million associated witha reduction in force that the Company undertook during the first quarter.  Operating cash was provided by increases inaccrued compensation and related expenses and other accrued liabilitiestotaling $0.1 million and increases in deferred revenue of $0.2 million.Operating cash was used as a result of increases in accounts receivable of $0.3million and prepaid expenses and other current assets of $0.2 million, anddecreases in accounts payable of $0.1 million. Investing activities during theperiod used cash of $0.2 million from purchases of property and equipment andother assets.  Cash provided byfinancing activities during the period was $0.2 million, which resultedprimarily from the issuance of common stock upon the exercise of employee stockoptions of $126,000, and the collection of notes receivable from stockholder of$60,000.

 

A summary of certain contractual obligations as of January 31, 2004 isas follows:

** **
|                                    |   | **Payments  Due by Period** |      |
|-----------------------------------------|--------|-----------------------------|-----------|
| **Contractual Obligations**             |   | **Total**                   |      | **1 year or  less** |   | **1-3 years** |   | **4 - 5 years** |   | **After 5 years** |   |
| **Long-Term  Debt**                     |   | $                           | 276,000   |   | $ | 276,000 |   | — |   | — |   | — |   |
| **Operating  Leases**                   |   | $                           | 4,097,404 |   | $ | 912,139 |   | $ | 2,777,123 |   | $ | 407,659 |   | $ | 483 |   |
| **Total  Contractual Cash Obligations** |   | $                           | 4,373,404 |   | $ | 1,188,139 |   | $ | 2,777,123 |   | $ | 407,659 |   | $ | 483 |   |

 

**Volatility of StockPrice and General Risk Factors Affecting Quarterly Results**

 

The Company’s common stock price has been and is likely to continue tobe subject to significant volatility.  Avariety of factors could cause the price of the Company’s common stock tofluctuate, perhaps substantially, including: announcements of developmentsrelated to the Company’s business; fluctuations in the Company’s or itscompetitors’ operating results and order levels; general conditions in thecomputer industry or the worldwide economy; announcements of technologicalinnovations; new products or product enhancements by the Company or itscompetitors; changes in financial estimates by securities analysts;developments in patent, copyright or other intellectual property rights;developments in the Company’s relationships with its customers, distributorsand suppliers; legal proceedings brought against the Company or its officers;and significant changes in the Company’s senior management team.  In addition, in recent years the stockmarket in general, and the market for shares of equity securities of many hightechnology companies in particular, has experienced extreme price fluctuationswhich have often been unrelated to the operating performance of those companies.Such fluctuations may adversely affect the market price of the Company’s commonstock.

 

The Company’s quarterly operating results have varied significantly inthe 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; seasonality; changes in pricingpolicies by the Company or its competitors; realignments of the Company’sorganizational structure; changes in the level of the Company’s operatingexpenses; changes in the Company’s sales incentive plans; budgeting cycles ofthe Company’s customers; customer order deferrals in anticipation ofenhancements or new products offered by the

 

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Company or its competitors; product life cycles; product defects andother product 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 revenuesat 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.

 

**Item 3****.  Disclosuresabout Market Risk**

 

*Interest Rate Risk*.  The Company’s exposure to market rate riskfor changes in interest rates relates primarily to its cash equivalents, whichare highly liquid investments with original maturities of three months or lessand are stated at cost. Cash equivalents are generally maintained in moneymarket accounts which have as their objective preservation of principal andwhich hold investments with maturity dates of less than 90 days. The Companydoes not believe its exposure to interest rate risk is material for thesebalances, which totaled $2.8 million at January 31, 2004. Additionally, theCompany has no interest rate risk on its long-term debt. Unify does not usederivative financial instruments and places its cash equivalents with highquality issuers and, by policy, limits the amount of credit exposure to any oneissuer. If market interest rates were to change immediately and uniformly byten percent from levels at January 31, 2004, the fair value of the Company’scash equivalents would change by an insignificant amount.

 

*Foreign Currency Exchange RateRisk*.  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 owed to the Company as a result of local currency sales of softwarelicenses and payments of intercompany royalties thereon, by the Company’sinternational subsidiaries in the United Kingdom and France. At January 31,2004, the Company had $0.1 million and $0.3 million, respectively, in suchreceivables, denominated in British Pounds and Euros. The Company encouragesprompt payment of these intercompany balances in order to minimize its exposureto currency fluctuations, but it engages in no hedging activities to reduce therisk of such fluctuations. A hypothetical ten percent change in foreigncurrency rates would have an insignificant impact on the Company’s business,operating results and financial position. The Company has not experiencedmaterial exchange losses on intercompany balances in the past; however, due tothe substantial volatility of currency exchange

 

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rates,among other factors, it cannot predict the effect of exchange rate fluctuationson its future business, operating results and financial position

 

**Item 4****.  Controls andProcedures**

 

*Disclosure Controls andProcedures.*  Within the 90 days prior tothe date of this report, the Company carried out an evaluation, under the supervisionand with the participation of its management, including its President and ChiefExecutive Officer and its Chief Financial Officer, of the effectiveness of thedesign and operation of its disclosure controls and procedures pursuant toRule 13a-15 under the Securities Exchange Act of 1934. Based upon thatevaluation, the President and Chief Executive Officer, and Chief FinancialOfficer have concluded that the Company’s disclosure controls and proceduresare effective in timely alerting them to material information relating to theCompany that is required to be included in the Company’s periodic SEC filings.

 

*Internal Controls andProcedures. *There were nosignificant changes in internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the evaluation ofthese controls, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

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### **UNIFY CORPORATION**

### ** **

**PARTII****.****                    OTHERINFORMATION**

 

**Item1.  Legal Proceedings**

 

SEC and United States Attorney’s Office Actions: In May2002, the SEC brought an action against the Company and two of its formerofficers.  The SEC charged the Companywith books and records violations only and did not seek disgorgement or civilpenalties against the Company.  In May2002, the Company consented to the entry of a permanent injunction withoutadmitting or denying the allegations in the SEC’s complaint.

 

InMay 2002, the United States Attorney for the Northern District of Californiaannounced the indictment of a former officer of the Company and the guilty pleaof another former officer for violations of federal securities laws. The trialof the indicted former officer commenced on September 15, 2003 and, accordingto published reports, on November 20, 2003, he was convicted of 10 counts ofsecurities fraud and one count of conspiracy. The Company has been advised by the United States Attorney’s Office thatit will not seek to indict the Company for violations of federal securitieslaws.  The Company will continue tocooperate with the SEC and United States Attorney’s Office, as necessary, inconnection with any actions pending against any former executive officers ofthe Company, and cannot predict the outcome of any such matters.

 

TheCompany is subject to legal proceedings and claims that arise in the normalcourse of business.  If such mattersarise, the Company cannot assure that it would prevail in such matters, nor canit assure that any remedy could be reached on mutually agreeable terms, if atall.  Due to the inherent uncertaintiesof litigation, were there any such matters, the Company would not be able toaccurately predict their ultimate outcome. As of January 31, 2004, there wereno current proceedings or litigation involving the Company that managementbelieves would have a material adverse impact on its financial position,results of operations, or cash flows.

 

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**Item 6.  Exhibits and Reportson Form 8-K**

** **
| (a)                                                                                                                                            | 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 |
|                                                                                                                                           |                                                                                                                      |   |
| (b)                                                                                                                                            | Reports on Form 8-K                                                                                                       |
|                                                                                                                                           |                                                                                                                      |
| During the quarter ended January 31, 2004, Unify filed the following  Current Reports on form 8-K with the Securities and Exchange Commission: |
|                                                                                                                                           |
|                                                                                                                                           | Form 8-K filed on December 3, 2003 containing Unify’s fiscal quarter  ended October 31, 2003 earnings press release. |
|                                                                                                                                                |                                                                                                                           |  |  |

 

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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 12, 2004 |                                         | Unify Corporation       |
|----------------------|----------------------------------------------|-------------------------|
|                 |                                         | *(Registrant)*          |
|                 |                                         |                    |
|                 |                                         | By:                     |
|                 |                                         |
|                 |                                         | /s/ PETER J. DICORTI    |
|                 |                                         | Peter J. DiCorti        |
|                 |                                         | Chief Financial Officer |
|                 | (Principal Financial and Accounting Officer) |

 

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