**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** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                             |   |   |   |   |
| **For the quarterly period ended January 31, 2003**                                                                                              |
|                                                                                                                                             |   |   |   |   |
| **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 asspecified in its charter)

 
| **Delaware**(State or  other jurisdiction of   incorporation or organization) |   | **94-2710559**(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.

 

21,163,974 shares of Common Stock, $0.001 parvalue, as of February 28, 2003

** **

 

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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, 2003 and April 30, 2002                               |
|           |                                                                                                                     |
|           | Unaudited Condensed Consolidated Statements  of Operations for the three and nine months ended January 31, 2003 and 2002 |
|           |                                                                                                                     |
|           | Unaudited Condensed Consolidated Statements  of Cash Flows for the nine months ended January 31, 2003 and 2002           |
|           |                                                                                                                     |
|           | 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 |

 

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

**Item 1.    FinancialStatements**

 

**UNIFYCORPORATION**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

*(In thousands)*

 
|                                             |   | **January 31,  2003** |   | **April 30,  2002** |   |
|--------------------------------------------------|--------|-----------------------|--------|---------------------|--------|
| **Assets**                                       |   |                  |   |                |   |
| Current  assets:                                 |   |                  |   |                |   |
| Cash and  cash equivalents                       |   | $                     | 2,629  |                | $      | 2,993 |   |
| Restricted  cash                                 |   | 51                    |   | 43                  |   |
| Accounts  receivable, net                        |   | 3,802                 |   | 3,279               |   |
| Prepaid  expense & other current assets      |   | 236                   |   | 339                 |   |
| Total  current assets                            |   | 6,718                 |   | 6,654               |   |
|                                             |   |                  |   |                |   |
| Property  and equipment, net                     |   | 345                   |   | 396                 |   |
| Other  investments                               |   | 539                   |   | 589                 |   |
| Other  assets                                    |   | 62                    |   | 78                  |   |
| Total  assets                                    |   | $                     | 7,664  |                | $      | 7,717 |   |
|                                             |   |                  |   |                |   |
| **Liabilities  and Stockholders’ Equity**   |   |                  |   |                |   |
| Current  liabilities:                            |   |                  |   |                |   |
| Account  payable                                 |   | $                     | 621    |                | $      | 626 |   |
| Notes  payable to minority interest stockholders |   | —                |   | 291                 |   |
| Accrued  compensation and related expenses       |   | 730                   |   | 689                 |   |
| Current  portion of long term debt               |   | 240                   |   | 240                 |   |
| Other  accrued liabilities                       |   | 1,106                 |   | 1,372               |   |
| Deferred  revenue                                |   | 3,638                 |   | 3,328               |   |
| Total  current liabilities                       |   | 6,335                 |   | 6,546               |   |
|                                             |   |                  |   |                |   |
| Long term  debt                                  |   | 20                    |   | 200                 |   |
|                                             |   |                  |   |                |   |
| Stockholders’  equity:                      |   |                  |   |                |   |
| Common  stock                                    |   | 21                    |   | 20                  |   |
| Paid in  capital                                 |   | 59,339                |   | 59,088              |   |
| Note  receivable from stockholder                |   | (60                   | )      | (60                 | )      |
| Accumulated  other comprehensive loss            |   | (59                   | )      | (210                | )      |
| Accumulated  deficit                             |   | (57,932               | )      | (57,867             | )      |
| Total  stockholders’ equity                 |   | 1,309                 |   | 971                 |   |
| Total  liabilities and stockholders’ equity |   | $                     | 7,664  |                | $      | 7,717 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**UNIFYCORPORATION**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

*(In thousands, except per share data)*

 
|                                            |   | **Three Months Ended   January 31,** |   | **Nine Months Ended   January 31,** |   |
|-------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                            |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
| Revenues:                                       |   |                                 |   |                                |   |   |   |   |   |
| Software  Licenses                              |   | $                                    | 1,825  |                                | $      | 1,972 |   | $ | 4,273 |   | $ | 5,062 |   |
| Services                                        |   | 1,609                                |   | 1,565                               |   | 4,730 |   | 4,808 |   |
| Total  revenues                                 |   | 3,434                                |   | 3,537                               |   | 9,003 |   | 9,870 |   |
|                                            |   |                                 |   |                                |   |   |   |   |   |
| Cost of  Revenues:                              |   |                                 |   |                                |   |   |   |   |   |
| Software  licenses                              |   | 72                                   |   | 92                                  |   | 206 |   | 406 |   |
| Services                                        |   | 324                                  |   | 393                                 |   | 863 |   | 1,162 |   |
| Total  cost of revenues                         |   | 396                                  |   | 485                                 |   | 1,069 |   | 1,568 |   |
|                                            |   |                                 |   |                                |   |   |   |   |   |
| Gross  profit                                   |   | 3,038                                |   | 3,052                               |   | 7,934 |   | 8,302 |   |
|                                            |   |                                 |   |                                |   |   |   |   |   |
| Operating  Expenses:                            |   |                                 |   |                                |   |   |   |   |   |
| Product  development                            |   | 971                                  |   | 918                                 |   | 3,160 |   | 3,027 |   |
| Selling,  general and administrative            |   | 1,722                                |   | 1,632                               |   | 4,904 |   | 4,524 |   |
| Write-down  of other investments                |   | 30                                   |   | 1,100                               |   | 50 |   | 1,100 |   |
| Special  charges (recovery)                     |   | —                               |   | (1,376                              | )      | (132 | ) | (1,315 | ) |
| Total  operating expenses                       |   | 2,723                                |   | 2,274                               |   | 7,982 |   | 7,336 |   |
|                                            |   |                                 |   |                                |   |   |   |   |   |
| Income  (loss) from operations                  |   | 315                                  |   | 778                                 |   | (48 | ) | 966 |   |
| Other  income (expense), net                    |   | (2                                   | )      | (74                                 | )      | 4 |   | (145 | ) |
| Income  (loss) before income taxes              |   | 313                                  |   | 704                                 |   | (44 | ) | 821 |   |
| Provision  for income taxes                     |   | 7                                    |   | 8                                   |   | 20 |   | 45 |   |
| Net  income (loss)                              |   | $                                    | 306    |                                | $      | 696 |   | $ | (64 | ) | $ | 776 |   |
|                                            |   |                                 |   |                                |   |   |   |   |   |
| Net  income (loss) per share:                   |   |                                 |   |                                |   |   |   |   |   |
| Basic                                           |   | $                                    | 0.01   |                                | $      | 0.03 |   | (0.00 | ) | $ | 0.04 |   |
| Dilutive                                        |   | $                                    | 0.01   |                                | $      | 0.03 |   | (0.00 | ) | $ | 0.04 |   |
| Shares  used in computing net income per share: |   |                                 |   |                                |   |   |   |   |   |
| Basic                                           |   | 21,072                               |   | 20,218                              |   | 20,866 |   | 19,684 |   |
| Dilutive                                        |   | 21,724                               |   | 20,633                              |   | 20,866 |   | 20,106 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**UNIFYCORPORATION**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

*(In thousands)*

 
|                                                                           |   | **Nine Months  Ended January 31,** |   |
|--------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                           |   | **2003**                           |   | **2002** |   |
| Cash flows from operating activities:                                          |   |                               |   |   |   |
| Net income (loss)                                                              |   | $                                  | (64    | ) | $ | 776 |   |
| Reconciliation of net income (loss) to net  cash used in operating activities: |   |                               |   |   |   |
| Depreciation                                                                   |   | 180                                |   | 296 |   |
| Loss on disposal of property                                                   |   | —                             |   | 16 |   |
| Gain on sale of investment                                                     |   | —                             |   | (21 | ) |
| Write-down of other investments                                                |   | 50                                 |   | 1,100 |   |
| Changes in operating assets and  liabilities:                                  |   |                               |   |   |   |
| Accounts receivable, net                                                       |   | (233                               | )      | (677 | ) |
| Prepaid expenses and other current assets                                      |   | 129                                |   | 257 |   |
| Accounts payable                                                               |   | (14                                | )      | (1,175 | ) |
| Accrued compensation and related expenses                                      |   | 2                                  |   | (207 | ) |
| Other accrued liabilities                                                      |   | (336                               | )      | (891 | ) |
| Deferred revenue                                                               |   | 83                                 |   | 65 |   |
| Net cash used in operating activities                                          |   | (203                               | )      | (461 | ) |
|                                                                           |   |                               |   |   |   |
| Cash flows from investing activities:                                          |   |                               |   |   |   |
| Maturities/sales of available-for-sale  securities                             |   | —                             |   | 121 |   |
| Decrease in restricted cash                                                    |   | —                             |   | 77 |   |
| Purchases of property and equipment                                            |   | (128                               | )      | (24 | ) |
| Decrease in other assets                                                       |   | 14                                 |   | 85 |   |
| Net cash provided by (used in) investing  activities                           |   | (114                               | )      | 259 |   |
|                                                                           |   |                               |   |   |   |
| Cash flows from financing activities:                                          |   |                               |   |   |   |
| Repayments of long-term debt                                                   |   | (180                               | )      | — |   |
| Proceeds from issuance of common stock, net                                    |   | 251                                |   | 135 |   |
| Note payable to minority interest  stockholders                                |   | (309                               | )      | (204 | ) |
| Net cash used in financing activities                                          |   | (238                               | )      | (69 | ) |
|                                                                           |   |                               |   |   |   |
| Effect of exchange rate changes on cash                                        |   | 191                                |   | 79 |   |
| Net decrease in cash and cash equivalents                                      |   | (364                               | )      | (192 | ) |
| Cash and cash equivalents, beginning of  period                                |   | 2,993                              |   | 2,984 |   |
| Cash and cash equivalents, end of period                                       |   | $                                  | 2,629  |   | $ | 2,792 |   |
|                                                                           |   |                               |   |   |   |
| Supplemental noncash financing activities:                                     |   |                               |   |   |   |
| Conversion of other accrued liabilities to  long-term debt                     |   | $                                  | — |   | $ | 500 |   |
|                                                                           |   |                               |   |   |   |
| Supplemental cash flow information:                                            |   |                               |   |   |   |
| Cash paid (received) net during the period  for:                               |   |                               |   |   |   |
| Interest                                                                       |   | **$**                              | 4      |   | $ | 17 |   |
| Income taxes                                                                   |   | $                                  | (51    | ) | $ | (98 | ) |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**UNIFYCORPORATION**

**NOTESTO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****              Basisof Presentation**

 

The condensed consolidated financial statements have been prepared byUnify Corporation (the “Company”) pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). While the interim financialinformation contained in this filing is unaudited, such financial statements,in the opinion of management, reflect all adjustments (consisting only ofnormal recurring adjustments) which the Company considers necessary for a fairpresentation. The results for interim periods are not necessarily indicative ofthe results to be expected for the entire fiscal year. These financialstatements should be read in conjunction with the Consolidated FinancialStatements and Notes thereto, together with Management’s Discussion andAnalysis of Financial Condition and Results of Operations, which are includedin the Company’s Annual Report on Form 10-K for the fiscal year ended April 30,2002 as filed with the SEC.

 

*Recently Issued Accounting Standards*

 

In April 2002, the FASB issued Statement of Financial AccountingStandards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendmentof FASB Statement No. 13 and Technical Corrections” (“Statement 145”).Statement 145 updates, clarifies and simplifies existing accountingpronouncements. Statement 145 rescinds Statement of Financial AccountingStandards No. 4 (“Statement 4”), which required all gains and losses fromextinguishment of debt to be aggregated and, if material, classified as anextraordinary item, net of related income tax effect. As a result, the criteriain Accounting Principles Board Opinion No. 30 will now be used to classifythose gains and losses because Statement 4 has been rescinded. Statement 145amends Statement of Financial Accounting Standards No. 13 to require thatcertain lease modifications that have economic effects similar tosale-leaseback transactions be accounted for in the same manner assale-leaseback transactions. This amendment is consistent with the FASB’s goalof requiring similar accounting treatment for transactions that have similareconomic effects. Statement 145 also makes technical corrections to existingpronouncements. While those corrections are not substantive in nature, in someinstances, they may change accounting practice. The Company adopted theprovisions of Statement 145 for fiscal 2003, which did not result in a materialimpact to financial position, cash flows or results of operations.

 

In July 2002, the FASB issued Statement of Financial AccountingStandards No. 146, “Accounting for Costs Associated with Exit or DisposalActivities” (“Statement 146”). Statement 146 addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)” (“Issue 94-3”). Theprincipal difference between Statement 146 and Issue 94-3 relates to Statement146’s requirements for recognition of a liability for a cost associated with anexit or disposal activity. Statement 146 requires that a liability for a costassociated with an exit or disposal activity be recognized when the liability isincurred. Under Issue 94-3, a liability for an exit cost as generally definedin Issue 94-3 was recognized at the date of an entity’s commitment to an exitplan. A fundamental conclusion reached by the FASB in Statement 146 is that anentity’s commitment to a plan, by itself, does not create an obligation thatmeets the definition of a liability. Therefore, Statement 146 eliminates thedefinition and requirements for recognition of exit costs in Issue 94-3.Statement 146 also establishes that fair value is the objective for initialmeasurement of the liability. The provisions of Statement 146 are effective forexit or disposal activities that are initiated after December 31, 2002. TheCompany does not expect the adoption of Statement 146 will have a materialimpact on financial position, cash flows or results of operations.

 

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In November 2002, the EITF reached a consensus on Issue 00-21,“Multiple-Deliverable Revenue Arrangements” (“EITF 00-21”). EITF 00-21addresses how to account for arrangements that may involve the delivery orperformance of multiple products, services, and/or rights to use assets. Theconsensus mandates how to identify whether goods or services or both that areto be delivered separately in a bundled sales arrangement should be accountedfor separately because they are “separate units of accounting.” The guidancecan affect the timing of revenue recognition for such arrangements, even thoughit does not change rules governing the timing or pattern of revenue recognitionof individual items accounted for separately. The final consensus will beapplicable to agreements entered into in fiscal years beginning after June 15,2003 with early adoption permitted. Additionally, companies will be permittedto apply the consensus guidance to all existing arrangements as the cumulativeeffect of a change in accounting principle in accordance with APB Opinion No.20, Accounting Changes. We are assessing, but at this point the Company doesnot expect the adoption of EITF 00-21 will have a material impact on financialposition, cash flows or results of operations.

 

In November 2002, the FASB issued Interpretation Number 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). This interpretationelaborates on the disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under certain guarantees thatit has issued. It also clarifies that a guarantor is required to recognize, atthe inception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The disclosure requirements of FIN 45 areeffective for interim and annual periods after December 15, 2002 and theCompany has adopted those requirements for the financial statements included inthis Form 10-Q. The initial recognition and initial measurement requirements ofFIN 45 are effective prospectively for guarantees issued or modified afterDecember 31, 2002.  We are assessing,but at this point the Company does not expect the adoption of FIN 45 will havea material impact on financial position, cash flows or results of operations.

 

In December 2002, the FASB issued Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure” (“Statement 148”). Statement 148 amends Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation,”(“Statement 123”) and provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. Statement 148 also amends the disclosure requirements ofStatement 123 to require more prominent and frequent disclosures in financialstatements about the effects of stock-based compensation. The transitionguidance and annual disclosure provisions of Statement 148 are effective forfinancial statements issued for fiscal years ending after December 15, 2002.The interim disclosure provisions are effective for financial reportscontaining financial statements for interim periods beginning after December15, 2002. The Company does not expect the adoption of Statement 148 will have amaterial impact on financial position, cash flows or results of operations..

 

In January 2003, the FASBissued Interpretation Number 46, “Consolidation of Variable Interest Entities -an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 addresses consolidation by business enterprises of variableinterest entities that have certain characteristics.  Transferors to qualifying special-purpose entities and“grandfathered” qualifying special-purpose entities subject to the reportingrequirements of SFAS 140, “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities,” are excluded from the scope of FIN46. FIN 46 is applicable immediately to variable interest entities created orobtained after January 31, 2003.  TheCompany does not expect the adoption of FIN 46 will have a material impact onfinancial position, cash flows or results of operations.

 

7

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**2.****              Resultsof Operations and Management’s Plan**

 

The accompanying condensed consolidated financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business.  As shown in the accompanying condensedconsolidated financial statements for the nine-month period ended January 31,2003, the Company recorded a net loss of $64,000 and has an accumulated deficitof $57,932,000. In addition, the Company has experienced a decline in annualrevenues and decreases in cash and cash equivalents during the previous threefiscal years. These factors indicate that the Company may potentially be unableto continue as a going concern.

 

The condensed consolidated financial statements do not include anyadjustments relating to the recoverability and classification of recorded assetamounts or the amounts and classification of liabilities that might benecessary should the Company be unable to continue as a going concern.  The Company’s continuation as a goingconcern is dependent upon its ability to sustain profitability and generatesignificant cash flows.  During fiscal2001 and 2002, management realigned the Company’s operations, aggressivelycontrolled costs, including a reduction in force, re-focused on sellingexisting products to the customer base and worked to resolve the lawsuitsdescribed in Part II, Item 1 of this report. During fiscal 2003, management has continued to sell existing productsto the customer base, aggressively sell and market ACCELL/Web to existingcustomers, and launch and sell Unify NXJ to existing and new customers.  There is no assurance that management’splans will be successful or if successful, that they will result in the Companycontinuing as a going concern.

 

**3.****              OtherInvestments**

 

Other investmentsrepresent common stock in three closely held technology companies. TheCompany’s ownership interest in each company is less than 15%.  Other investments consisted of the following(in thousands):

 
|                                  |   | **January 31,  2003** |   | **April 30,  2002** |   |
|---------------------------------------|--------|-----------------------|--------|---------------------|--------|
|                                  |   |                  |   |                |   |
| Arrango  Software International, Inc. |   | $                     | 500    |                | $      | 500 |   |
| Evergreen  Internet, Inc.             |   | —                |   | 50                  |   |
| Unify  Japan                          |   | 39                    |   | 39                  |   |
|                                  |   | $                     | 539    |                | $      | 589 |   |

 

On February 25, 2000, theCompany entered into an agreement to exchange shares of its common stock orcash, or a combination of the two, with an aggregate value of $5.0 million for1,040,993 shares of the common stock of Evergreen Internet, Inc. (“Evergreen”),a developer of software.  On March 14,2000, the Company issued 216,931 shares of its common stock with a value of$2.8 million to Evergreen as partial payment. On August 1, 2000, the Company paid $2.2 million in cash to Evergreen.Based upon a comprehensive review of its investments and long-lived assetsduring fiscal 2001and 2002, the Company recorded noncash charges of $3,650,000and $1,300,000, respectively. During fiscal 2003, the Company re-evaluated itsinvestments and long-lived assets and recorded additional noncash charges of$20,000 and $30,000 during the first and third quarters, respectively, towrite-off the remaining carrying amount of Evergreen to zero.

 

TheCompany holds a minority interest in Arrango SoftwareInternational, Inc. (or “Arrango”), a privately-held corporation.  As of January 31, 2003, the carrying valueof this investment was $500,000.  TheCompany would record an investment impairment charge if and when it believes aninvestment has experienced a decline in market value that is other thantemporary.  Future

8

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adverse changes inmarket conditions or poor operating results of Arrango could result in lossesor an inability to recover the carrying value of the investment that is notcurrently reflected in the investment’s carrying value, thereby possiblyrequiring an impairment charge in the future.

 

**4.****              ComprehensiveIncome (Loss)**

 

The Company’s totalcomprehensive income (loss) for the periods shown was as follows:

 
|                              |   | **Three  Months Ended   January 31,** |   | **Nine  Months Ended   January 31,** |   |
|-----------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                              |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Net income (loss)                 |   | $                                     | 306    |                                 | $      | 696 |   | $ | (64 | ) | $ | 776 |   |
| Foreign currency translation gain |   | 55                                    |   | 31                                   |   | 151 |   | 126 |   |
|                              |   |                                  |   |                                 |   |   |   |   |   |
| Total comprehensive income        |   | $                                     | 361    |                                 | $      | 727 |   | $ | 87 |   | $ | 902 |   |

 

**5.****              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.  As a result of this financialreporting investigation, the Company incurred additional costs during fiscal2002 related to the investigation itself, legal expenses and additionalauditing costs.  During the three-monthperiods ended January 31, 2003 and 2002, the Company recorded recoveries of $0and $1,376,000, respectively. During the nine month periods ended January 31,2003 and 2002, the Company recorded recoveries of $132,000 and $1,315,000,respectively.

 

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**6.****              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,** |   |
|-------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                                |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
| **Net Income (Loss)  (Numerator):**                                            |   |                                 |   |                                |   |   |   |   |   |
| Net income (loss), basic and diluted                                                |   | $                                    | 306    |                                | $      | 696 |   | $ | (64 | ) | $ | 776 |   |
| **Shares   (Denominator):**                                                    |   |                                 |   |                                |   |   |   |   |   |
| Weighted average shares of common stock  outstanding, basic                         |   | 21,072                               |   | 20,218                              |   | 20,866 |   | 19,684 |   |
| Weighted average common equivalent shares  outstanding                              |   | 652                                  |   | 415                                 |   | — |   | 422 |   |
| Weighted average shares of common stock  outstanding, diluted                       |   | 21,724                               |   | 20,633                              |   | 20,866 |   | 20,106 |   |
|                                                                                |   |                                 |   |                                |   |   |   |   |   |
| **Per Share Amount:**                                                               |   |                                 |   |                                |   |   |   |   |   |
| Net income (loss) per share, basic                                                  |   | $                                    | 0.01   |                                | $      | 0.03 |   | $ | (0.00 | ) | $ | 0.04 |   |
| Reduction in net income per share due to  Weighted average common equivalent Shares |   | 0.00                                 |   | 0.00                                |   | — |   | 0.00 |   |
|                                                                                |   |                                 |   |                                |   |   |   |   |   |
| Net income (loss) per share, diluted                                                |   | $                                    | 0.01   |                                | $      | 0.03 |   | $ | (0.00 | ) | $ | 0.04 |   |

 

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**7.****              MaintenanceContracts**

 

The Company offers maintenance contracts to itscustomers at the time they enter into a product license agreement and renewsthose contracts, at the customers’ option, annually thereafter. Thesemaintenance contracts are priced as a percentage of the value of the relatedlicense agreement. The specific terms and conditions of these initialmaintenance contracts and subsequent renewals vary depending upon the productlicensed and the country in which the Company does business. Generally,maintenance contracts provide the customer with unspecified product maintenanceupdates 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 Jan 31,  2003** |   | **Nine  Months  Ended Jan 31,  2003** |   |
|--------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                         |   |                                   |   |                                  |   |
| Beginning balances as of 10/31/02 and  4/30/02, respectively |   | $                                      | 2,443  |                                  | $      | 2,932 |   |
|                                                         |   |                                   |   |                                  |   |
| Amount recognized during the period                          |   | (1,335                                 | )      | (4,205                                | )      |
|                                                         |   |                                   |   |                                  |   |
| Amount of new maintenance contracts                          |   | 2,196                                  |   | 4,577                                 |   |
|                                                         |   |                                   |   |                                  |   |
| Ending balances as of 1/31/03                                |   | $                                      | 3,304  |                                  | $      | 3,304 |   |

 

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**Item 2.****                    Management’sDiscussion and Analysis of Financial 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 toupdate publicly any forward-looking statements, whether as a result of newinformation, future events or otherwise. However, readers should carefullyreview the risk factors set forth in other reports or documents the Companyfiles from time to time with the SEC, particularly the Company’s Annual Reporton Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form8-K.*

 

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, 2002 as filed with the SEC.

 

**Overview**

 

Unify is a leadingprovider of business application platform solutions that enable companies toeffectively deliver Java 2 Enterprise Edition (“J2EE”), Web, graphical andcharacter-based applications quickly and cost effectively.  Unify’s application development, deploymentand database software serves as a platform for running mission critical,enterprise-wide business applications for organizations worldwide.

 

Unify’s products are targeted for today’s mainstream applicationdevelopment organizations requiring software that is easily adopted by theircurrent IT staff, provides for the rapid development of business applications,quickly adapts to changing business requirements and integrates well withexisting IT systems.  Unify helpscompanies solve some of their biggest IT challenges by delivering softwareproducts rich in functionality that increase developer productivity and allowcompanies to deliver applications effectively throughout the application lifecycle.

 

Unify’s customers consistprimarily of independent software vendors (“ISVs”), value added resellers (“VARs”),corporate information technology (“IT”) departments, solutions integrators(“SIs”) and distributors.  The Companysells its products to these markets through its direct sales organizations inthe Americas, United Kingdom and France, and indirectly to end-users throughits worldwide network of distributors, ISVs, and VARs.

 

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**Critical AccountingPolicies**

 

There have been no material changes to the Company’s criticalaccounting policies and estimates as disclosed in its Form 10-K for the yearended April 30, 2002.

#### ** **

#### **Results of Operations**

 

The Company recognizessoftware license revenue when a noncancelable license agreement has beenexecuted, delivery has occurred, fees are fixed and determinable, and collectionof the resulting receivables is deemed probable by management.  Arrangements with payment terms extendingbeyond the Company’s standard terms and conditions, and for which a history hasnot been established of successfully collecting under the original paymentterms without making concessions, are not considered to be fixed anddeterminable.  Revenue from sucharrangements is recognized as the fees become due and payable.  Service revenue includes maintenancerevenue, which is recognized ratably over the maintenance period (generally aone year term), and revenue from consulting and training services, which isrecognized as services are performed. Fees for maintenance are billed in advance and included in deferredrevenue until recognized.  Managementbelieves the Company’s revenue recognition policies are in compliance with theprovisions of the American Institute of Certified Public Accountant’s Statementof Position No. 97-2, *Software Revenue Recognition*, and related interpretations*.*

 

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,** |   |
|-----------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|
|                                    |   | **2003**                            |   | **2002**                           |   | **2003** |   | **2002** |   |
| Revenues:                               |   |                                |   |                               |   |   |   |   |   |
| Software  Licenses                      |   | 53.1                                | %      | 55.8                               | %      | 47.5 | % | 51.3 | % |
| Services                                |   | 46.9                                | %      | 44.2                               | %      | 52.5 | % | 48.7 | % |
| Total  revenues                         |   | 100.0                               | %      | 100.0                              | %      | 100.0 | % | 100.0 | % |
|                                    |   |                                |   |                               |   |   |   |   |   |
| Cost of  Revenues:                      |   |                                |   |                               |   |   |   |   |   |
| Software  licenses                      |   | 2.1                                 | %      | 2.6                                | %      | 2.3 | % | 4.1 | % |
| Services                                |   | 9.4                                 | %      | 11.1                               | %      | 9.6 | % | 11.8 | % |
| Total  cost of revenues                 |   | 11.5                                | %      | 13.7                               | %      | 11.9 | % | 15.9 | % |
|                                    |   |                                |   |                               |   |   |   |   |   |
| Gross  profit                           |   | 88.5                                | %      | 86.3                               | %      | 88.1 | % | 84.1 | % |
|                                    |   |                                |   |                               |   |   |   |   |   |
| Operating  Expenses:                    |   |                                |   |                               |   |   |   |   |   |
| Product  development                    |   | 28.3                                | %      | 26.0                               | %      | 35.1 | % | 30.7 | % |
| Selling,  general and administrative    |   | 50.1                                | %      | 46.1                               | %      | 54.5 | % | 45.8 | % |
| Write-down  of long-lived assets        |   | 0.9                                 | %      | 31.1                               | %      | 0.6 | % | 11.1 | % |
| Special  charges (recovery)             |   | 0.0                                 | %      | -38.9                              | %      | -1.5 | % | -13.3 | % |
| Total  operating expenses               |   | 79.3                                | %      | 64.3                               | %      | 88.7 | % | 74.3 | % |
|                                    |   |                                |   |                               |   |   |   |   |   |
| Income  (loss) from operations          |   | 9.2                                 | %      | 22.0                               | %      | -0.5 | % | 9.8 | % |
| Other  income (expense), net            |   | -0.1                                | %      | -2.1                               | %      | 0.0 | % | -1.5 | % |
| Income  (loss) before income taxes |   | 9.1                                 | %      | 19.9                               | %      | -0.5 | % | 8.3 | % |
| Provision  for income taxes             |   | 0.2                                 | %      | 0.2                                | %      | 0.2 | % | 0.5 | % |
| Net  income (loss)                      |   | 8.9                                 | %      | 19.7                               | %      | -0.7 | % | 7.9 | % |

 

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*Revenues*

 

Total revenue for the three months ended January 31, 2003 decreased 3%to $3.4 million from the same quarter of the prior year. Total revenue for thenine months ended January 31, 2003 decreased 9% to $9.0 million from the sameperiod of the prior year. The decrease in total revenues was primarily theresult of the decrease in software licenses revenue, which decreased $0.15million or 7.5% for the three months ended January 31, 2003, and $0.8 millionor 16% for the nine months ended January 31, 2003, as compared to the sameperiods of the prior fiscal year. Revenues in North America increased 31% to$1.8 million, while outside North America revenues decreased as a percentage oftotal revenues from 62% to 48% during the third quarter of fiscal 2003,compared to the same quarter of the prior fiscal year. Outside North America,revenues decreased as a percentage of total revenues from 62% to 50% during thenine months ended January 31, 2003, compared to the same nine-month period ofthe prior fiscal year. These decreases in software revenues outside NorthAmerica reflect continuing restrictions in corporate information technologydepartmental spending and continuing economic weakness in Japan and Europe. Inaddition, in the first quarter of fiscal 2003, the Company booked a $0.25million reversal of revenue previously recorded in the fourth quarter of fiscal2002 pertaining to a transaction with a foreign distributor, because theCompany subsequently determined that the distributor could not demonstrate anability to honor payment commitments until they collected cash from theircustomer.

 

Total services revenue for the quarter ended January 31, 2003 remainedrelatively flat at $1.6 million compared to the same quarter the previous year.Total services revenue for the nine months ended January 31, 2003 decreased 2%or $0.1 million, to $4.7 million from $4.8 million for the nine months endedJanuary 31, 2002.  The portionrepresenting maintenance revenues decreased for the three-month period by 8%and by 4% for the nine-month comparative periods. The Company generally renews approximately85% of its maintenance agreements. Nonrenewals are typically offset by newmaintenance revenues from new product revenues. The reductions in maintenancerevenues primarily reflect the decrease in initial maintenance orders as aresult of decreased new product sales. Consulting and training revenuesfor the three month and nine month periods ended January 31, 2003 increased$0.2 million to $0.3 million and $0.1 million to $0.5 million respectively, ascompared to the same periods of the prior year.

 

*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 inthe U.S. and royalties paid for licensed technology.  Cost of services consists primarily of employee, facilities andtravel costs incurred in providing customer support under software maintenancecontracts, and consulting and training services.  Total cost of revenues as a percentage of total revenuesdecreased to 12% for the three-month period ended January 31, 2003 from 14% forthe comparative three-month period of the prior fiscal year, and decreased to12% for the nine month period ended January 31, 2003 from 16% for the same ninemonth period of the prior fiscal year.

 

Costof software licenses as a percentage of software license revenues were 4% and5% for the three-month and nine-month periods ended January 31, 2002,respectively, as compared to 5% and 8% for the three month and nine monthperiods ended January 31, 2002, respectively. The decrease in the cost ofsoftware license revenues reflects the liquidation of the Company’s Japanesesubsidiary and a decrease in the use of technology licensed from third parties.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.

 

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Total cost of services decreased to $0.3 million in the third quarterof fiscal 2003 and $0.9 million for the nine months ended January 31, 2003 from$0.4 million and $1.2 million during the respective comparative periods infiscal 2002. In addition, cost of services as a percentage of services revenuedeclined to 20% and 18% for the respective three and nine month periods endedJanuary 31, 2003 from 25% and 24% for the same periods in the prior year. Thedecrease in fiscal 2003 reflects the liquidation of the Company’s Japanesesubsidiary and the reduction in the use of outsourced contract labor forconsulting engagements.

 

*Product Development*

 

Product development expenses consist primarily of employee and facilitiescosts incurred in the development and testing of new products and in theporting of new and existing products to additional hardware platforms andoperating systems.  For the three-monthperiod ended January 31, 2003, product development expenses increased 6% to$1.0 million from $0.9 million for the same three-month period of fiscal 2002.For the nine-month period ended January 31, 2003, product development expensesincreased 4% to $3.2 million from $3.0 million for the same nine-month periodof fiscal 2002.  The increase wasprimarily the result of additional contract labor costs associated with thedevelopment of the Company’s newest product offering, Unify NXJ. Productdevelopment costs as a percentage of total revenues during the three-month and nine-monthperiods ended January 31, 2003 were 28% and 35% respectively, as compared to26% and 31% for the three-month and nine-month periods ended January 31, 2002.The increase results from the increase in absolute expenditure dollars relativeto the decrease in revenues for the respective comparative periods. The Companybelieves that investments in product development are critical to maintainingtechnological leadership and therefore intends to continue to devotesignificant resources to product development.

 

*Selling, General andAdministrative*

 

Selling, general and administrative (“SG&A”) expenses for thequarter ended January 31, 2003 increased to $1.7 million, or 50% of totalrevenues, as compared to $1.6 million, or 46% of total revenues for the samequarter of the prior year. SG&A expenses for the nine months ended January31, 2003 increased to $4.9 million, or 55% of total revenues, as compared to$4.5 million, or 46% of total revenues, for the same period of the prior year.  The major components of SG&A for thethird quarter of fiscal 2003 were sales expenses of $1.0 million, marketingexpenses of $0.2 million, and general and administrative expenses of $0.5million, while bad debt expenses were zero. Sales expenses decreased $0.1million as a result of the liquidation of the Company’s Japanese subsidiaryfrom the quarter ended January 31, 2002. Marketing expenses increased $0.1 million during the same three-monthperiod as the Company funded the launch of its new product, Unify NXJ.  General and administrative expenses(excluding bad debt expenses) were also $0.1 million higher during the samethree-month period, as a result of the normal quarter-to-quarter fluctuationsthat occur throughout the Company’s operating year. Bad debt expenses were alsoflat at $0.0 million during the three-month periods ended January 31, 2003 and2002.

 

The major components of SG&A for the first nine months of fiscal2003 were sales expenses of $2.7 million, marketing expenses of $0.5 million,and general and administrative expenses of $1.7 million. Sales expensesdecreased $0.2 million as a result of the liquidation of the Company’s Japanesesubsidiary from the nine months endedJanuary 31, 2002.****Marketingexpenses increased $0.1 million during the same nine-month period as theCompany funded the launch of its new product, Unify NXJ. General andadministrative expenses increased by $0.2 million during the first nine monthsof fiscal 2003 compared to the first nine months of fiscal 2002, primarily as aresult of the normal quarter-to-quarter fluctuations that occur throughout theCompany’s operating year. Bad debt recoveries declined by $0.3 million duringthe nine months ended January 31, 2003 compared to the nine months endedJanuary 31, 2002. The Company expects

 

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that total SG&A expenses will fluctuate fromquarter to quarter primarily because of variability in marketing programspending and sales commission expense.

 

*Write-down of OtherInvestments*

 

During the third quarter of fiscal 2002, theCompany completed a comprehensive review of its other investments and recordeda non-cash charge of $1.1 million to write-down the carrying amount of itsinvestment in Evergreen Internet, Inc. to its estimated realizable value.  During the third quarter of fiscal 2003, theCompany re-evaluated its position in Evergreen Internet and in light of thecontinued weakness in the e-commerce market, and Evergreen’s continued poorfinancial performance, the Company recorded an additional non-cash charge of$30,000 to reduce the Company’s remaining carrying value of this investment tozero.

 

*Special Charges*

 

In July 2000, Company announcedthat certain matters had come to the attention of the Company’s Board ofDirectors that indicated that the Company had engaged in improper accountingpractices during fiscal 2000. Accordingly, the Board of Directors authorizedits Audit Committee to conduct an investigation of the Company’s accounting andfinancial reporting practices and to recommend remedial action, if any.  As a result of this investigation, theCompany incurred additional costs related to the investigation itself, legalexpenses and additional auditing costs. While during the three months ended January31, 2003, the Company recorded no recoveries of special charges, it did recordrecoveries of special charges of $1,376,000 for the three-month period endedJanuary 31, 2002.  For the nine-monthperiods ended January 31, 2003 and 2002, the Company recorded recoveries of$132,000 and $1,315,000, respectively. These recoveries were primarily due tothe settlement of the class action lawsuit filed against the Company, theresolution of additional billings incurred during the investigation, andreimbursements by the Company’s Directors and Officers insurance carriers.  See Part II, Item 1.

 

*Provision for IncomeTaxes*

 

The Company recorded tax provisions for the three-and nine-monthperiods ended January 31, 2003 and 2002 related to income taxes payable by theCompany’s foreign subsidiaries. For the same periods, the Company recorded nosignificant federal or state income tax provisions as the Company hadsubstantial net operating loss carry forwards.

 

**Liquidity and CapitalResources**

 

At January 31, 2003, the Company had cash, cash equivalents, restrictedcash and investments of $2.7 million, compared to $3.0 million at April 30,2002. Working capital increased to $383,000 at January 31, 2003 from $108,000at April 30, 2002.

 

The accompanying condensed consolidated financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business.  As shown in the accompanying condensedconsolidated financial statements for the nine-month period ended January 31,2003, the Company recorded a net loss of $64,000 and had an accumulated deficitof $57,932,000.

 

TheCompany has experienced a decline in annual revenues and decreases in cash andcash equivalents during the previous three fiscal years.  These factors indicate that the Company maypotentially be unable to continue as a going concern.

 

The condensed consolidated financial statements do not include anyadjustments relating to the recoverability and classification of recorded assetamounts or the amounts and classification of

 

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liabilities that might be necessary should the Company be unable tocontinue as a going concern.  TheCompany’s continuation as a going concern is dependent upon its ability to sustainprofitability and generate significant cash flows.  During fiscal 2001 and 2002, management realigned the Company’soperations, aggressively controlled costs, including a reduction in force,re-focused on selling existing products to the customer base and worked toresolve the lawsuits described in Part II, Item 1 of this report.  During fiscal 2003, management has continuedto sell existing products to the customer base, aggressively sell and marketACCELL/Web to existing customers, and launch and sell Unify NXJ to existing andnew customers.  There is no assurancethat management’s plans will be successful or if successful, that they willresult in the Company continuing as a going concern.

 

The Company’s operations resulted in a decrease in cash of $0.4 millionduring the nine months ended January 31, 2003, as compared to a decrease of$0.2 million for the same period in the prior year.  The decrease in cash provided by operating activities of $0.2million for the first nine months of fiscal 2003 was primarily from increasesin accounts receivable of $0.2 million, decreases in accounts payable, accruedcompensation and related expenses and other accrued liabilities of $0.3million, partially offset by depreciation expenses and non-cash write-downs ofother investments of $0.2 million, prepaid expenses and other current assets of$0.1 million, and increases in deferred revenues of $0.1 million. Cash used ininvesting activities during the period was $0.1 million, representing purchasesof property and equipment. Cash used in financing activities during the periodwas $0.2 million, which represented proceeds from the issuance of common stockunder the Company’s stock option and stock purchase plans of $0.2 millionoffset by the repayment of the note payable to minority interest stockholdersof $0.3 million and repayments of long-term debt of $0.2 million.

 

A summary of certain contractual obligations as of January 31, 2003 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**                     |   | $                          | 260,000   |   | $ | 240,000 |   | $ | 20,000 |   | — |   | — |   |
| **Operating Leases**                   |   | $                          | 5,125,829 |   | $ | 989,039 |   | $ | 3,065,433 |   | $ | 1,069,835 |   | $ | 1,523 |   |
| **Total Contractual Cash Obligations** |   | $                          | 5,385,829 |   | $ | 1,229,039 |   | $ | 3,085,433 |   | $ | 1,069,835 |   | $ | 1,523 |   |

 

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

 

The Company’s commonstock price has been and is likely to continue to be subject to significantvolatility.  A variety of factors couldcause the price of the Company’s common stock to fluctuate, perhapssubstantially, including: announcements of developments related to theCompany’s business; fluctuations in the Company’s or its competitors’ operatingresults and order levels; general conditions in the computer industry or theworldwide economy; announcements of technological innovations; new products orproduct enhancements by the Company or its competitors; changes in financialestimates by securities analysts; developments in patent, copyright or otherintellectual property rights; and developments in the Company’s relationshipswith its customers, distributors and suppliers; legal proceedings broughtagainst the Company or its officers; and significant changes in the Company’ssenior management team.  In addition, inrecent years the stock market in general, and the market for shares of equitysecurities of many

 

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high technology companiesin particular, has experienced extreme price fluctuations which have often beenunrelated to the operating performance of those companies. Such fluctuationsmay adversely affect the market price of the Company’s common stock.

 

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 of theCompany’s customers; customer order deferrals in anticipation of enhancementsor new products offered by the Company or its competitors; product life cycles;product defects and other product quality problems; currency fluctuations; andgeneral domestic and international economic and political conditions.

 

Due to the foregoing factors, quarterly revenues and operating resultsare difficult 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, and that it mayexperience relatively weaker demand in fiscal quarters ending July 31 andOctober 31 as a result of reduced business activity in Europe during the summermonths.

 

Thematters raising doubt about the ability of the Company to continue as a goingconcern are discussed in Note 2 to the Condensed Consolidated FinancialStatements and Item 2. The Company’s products are typically used to developapplications that are critical to a customer’s business.  Customers may be unwilling to build theirbusiness applications around the Company’s products because the Company’sability to continue supporting its products in the future may be in doubt.

 

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**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 $2.6 million at January 31, 2003. 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, 2003, the fair value of the Company’scash equivalents would change by an insignificant amount.

 

*Foreign CurrencyExchange Rate Risk*. As a global concern, the Company faces exposure to adverse movements inforeign currency exchange rates. These exposures may change over time asbusiness practices evolve and could have a material adverse impact on theCompany’s business, operating results and financial position. Historically, theCompany’s primary exposures have related to local currency denominated salesand expenses in Europe, Japan and Australia. Due to the substantial volatilityof currency exchange rates, among other factors, the Company cannot predict theeffect of exchange rate fluctuations on its future operating results. AlthoughUnify takes into account changes in exchange rates over time in its pricingstrategy, it does so only on an annual basis, resulting in substantial pricingexposure as a result of foreign exchange volatility during the period betweenannual pricing reviews. The Company also has currency exchange rate exposureson intercompany accounts receivable and payables owed to and by the Company asa result of local currency sales of software licenses and payments ofintercompany royalties thereon, by the Company’s international subsidiaries inthe United Kingdom and France. At January 31, 2003, the Company had $0.1million in such receivables and $0.1 million in such payables denominated inEuros and British pounds, respectively. The Company encourages prompt paymentof these intercompany balances in order to minimize its exposure to currencyfluctuations, but it engages in no hedging activities to reduce the risk ofsuch fluctuations. A hypothetical ten percent change in foreign currency rateswould have an insignificant impact on the Company’s business, operating resultsand financial position. The Company has not experienced material exchangelosses on intercompany balances in the past; however, due to the substantialvolatility of currency exchange rates, among other factors, it cannot predictthe effect of exchange rate fluctuations on its future business, operatingresults and financial position.

 

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**Item 4.****       ****Controlsand Procedures**

 

***Disclosure Controls and Procedures.*****  Within the 90 days prior to the date ofthis report, the Company carried out an evaluation, under the supervision andwith 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 and Procedures. *****There were no significantchanges in internal controls or in other factors that could significantlyaffect these controls subsequent to the date of the evaluation of thesecontrols, including any corrective actions with regard to significantdeficiencies and material weaknesses.**

 

**PART II.****                                                OTHERINFORMATION**

 

**Item 1.****       ****LegalProceedings**

 

**Litigation**

Class Action and Derivative Litigation.  In April 2002, the Company settled theconsolidated class actions, the individual institutional investor actions andthe consolidated derivative actions which were brought against Unify andcertain of the Company’s present and former directors and officers.  The settlement, which does not constituteany admission of wrongdoing on the part of Unify or the individuals named asdefendants, provided that all defendants pay a total of $5.0 million includingattorney fees for class action, derivative and individual action plaintiffs, ofwhich the amounts to be paid by the Company were paid by the Company’sinsurance carrier.  The settlementagreement has been approved by the courts in which these actions were pendingand the actions have been dismissed.

 

SEC and United States Attorney’s OfficeActions:  In May 2002, the SEC brought an action againstthe Company and two of its former officers. The SEC charged the Company with books and records violations only anddid not seek disgorgement or civil penalties against the Company.  In May 2002, the Company consented to theentry of a permanent injunction without admitting or denying the allegations inthe SEC’s complaint.  The Companyunderstands that the SEC’s action against the former officers is continuing.

 

In May 2002, the United States Attorney forthe Northern District of California announced the indictment of a formerofficer of the Company and the guilty plea of another former officer forviolations of federal securities laws. The trial in that action is presently set for May 12, 2003. The Companyhas been advised by the United States Attorney’s Office that it will not seekto indict the Company for violations of federal securities laws.  The Company will continue to cooperate withthe SEC and United States Attorney’s Office, as necessary, in connection withany actions pending against any former executive officers of the Company andcannot predict the outcome of either matter.

 

InsuranceLitigation:  In May 2001, a lawsuit was brought in theUnited States District Court for the Northern District of California againstthe Company and certain of its present and former officers and directors by aninsurance carrier which issued Unify a directors and officers liability and reimbursementexcess policy.  The action, which sought reformation and rescission of thepolicy, was dismissed by the Court at the request of the insurance company onFebruary 3, 2003.

 

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**Item 6.********       ****Exhibitsand Reports on Form 8-K**

** **
| **(a)  Exhibits**                                                                                                                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                 |
| **99.1**                                                                                                                                                             |   | **Certification Pursuant to 18 U.S.C. Section 1350 as Adopted  Pursuant to Section 906 of the Sarbanes—Oxley Act of 2002.** |
|                                                                                                                                                                 |
| **99.2**                                                                                                                                                             |   | **Certification Pursuant to 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, 2003, Unify filed the following Current Reports  on form 8-K with the Securities and Exchange Commission:                      |
|                                                                                                                                                                 |
| Form  8-K filed on December 20, 2002 announcing that Unify had terminated Deloitte  and Touche and had appointed Ernst & Young LLP as its independent  auditors. |

 

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## **UNIFY CORPORATION**

**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 10, 2003 | Unify Corporation                                                     |
|----------------------------|-----------------------------------------------------------------------|
|                       | *(Registrant)*                                                        |
|                       |                                                                  |
|                       | By:                                                                   |
|                       |                                                                  |
|                       | /s/                                                                   | PETER  J. DICORTI |
|                       |                                                                  | Peter J. DiCorti |
|                       | Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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**CERTIFICATION OF**

 

**CHIEF EXECUTIVE OFFICER**

**I,  Todd E. Wille, certify that:**

 

**1.****                                      ****I havereviewed this quarterly report on Form 10-Q of Unify Corporation;**

 

**2.****                                      ****Based****on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with a respect to the period covered by this quarterly report;**

 

**3.****                                      ****Based****on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;**

 

**4.****                                      ****The****registrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:**

 

**(a)  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;**

 

**(b) evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and**

 

**(c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;**

 

**5.****                                       ****Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit****committee****of theregistrant’s board of directors:**

 

**(a)  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and**

 

**(b)  anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and**

 

**6.****                                       ****I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.**

** **
|                      | **/s/  TODD E. WILLE**                                                 |
|---------------------------|-----------------------------------------------------------------------------|
|                      | **Todd  E. Wille**                                                          |
|                      | ***President and Chief Executive  Officer  (Principal Executive Officer)*** |
|                      |                                                                        |
| **Dated: March 10, 2003** |                                                                        |

 

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**CERTIFICATION OF**

 

**CHIEF FINANCIAL OFFICER**

** **

**I,   Peter J. DiCorti, certify that:**

 

**1.****                                       ****I havereviewed this quarterly report on Form 10-Q of Unify Corporation;**

 

**2.****                                       ****Based onmy knowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with a respect to the period covered by this quarterly report;**

 

**3.****                                       ****Based onmy knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;**

 

**4.****                                       ****Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:**

 

**(a)  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;**

 

**(b) evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and**

 

**(c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;**

 

**5.****                                       ****Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors:**

 

**(a)  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and**

 

**(b)  anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and**

 

**6.****                                       ****I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.**

 
|                      | **/s/  PETER J. DICORTI**                                              |
|---------------------------|-----------------------------------------------------------------------------|
|                      | **Peter  J. DiCorti**                                                       |
|                      | ***Chief Financial Officer  (Principal Financial and Accounting Officer)*** |
| **Dated: March 10, 2003** |                                                                        |

 

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