UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

Form 10-Q

 

 

Commission File Number:  001-11807

 

 

UNIFY CORPORATION

(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 reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  ý    NO  o

 

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

 

27,630,168 shares of Common Stock, $0.001 par value, as of August 31, 2004

 

 

UNIFY CORPORATION

FORM 10-Q

 

INDEX

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of July 31, 2004 and April 30, 2004
	Unaudited Condensed Consolidated Statements of Operations for the three months ended July 31, 2004 and 2003
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended July 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 Rate 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.                            FINANCIAL INFORMATION

 

Item 1.                                   Financial Statements

 

UNIFY CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

		July 31, 2004			April 30, 2004
Assets
Current assets:
Cash and cash equivalents		$	5,991		$	6,606
Accounts receivable, net		2,216			2,848
Prepaid expense & other current assets		587			543
Total current assets		8,794			9,997
Property and equipment, net		337			338
Other investments		214			214
Other assets		207			194
Total assets		$	9,552		$	10,743
Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit		$	800		$	—
Current portion of long term debt		121			146
Account payable		147			523
Other accrued liabilities		953			1,340
Accrued compensation and related expenses		694			812
Deferred revenue		2,625			3,360
Total current liabilities		5,340			6,181
Other long term liabilities		71			70
Commitments and contingencies
Stockholders’ equity:
Common stock		28			27
Additional paid in capital		63,319			63,205
Accumulated other comprehensive gain		26			18
Accumulated deficit		(59,232		)	(58,758		)
Total stockholders’ equity		4,141			4,492
Total liabilities and stockholders’ equity		$	9,552		$	10,743

 

See accompanying notes to condensed consolidated financial statements.

 

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UNIFY CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

		Three Months Ended July 31,
		2004			2003
Revenues:
Software licenses		$	1,164		$	1,836
Services		1,569			1,465
Total revenues		2,733			3,301
Cost of Revenues:
Software licenses		83			86
Services		364			320
Total cost of revenues		447			406
Gross profit		2,286			2,895
Operating Expenses:
Product development		689			1,007
Selling, general and administrative		2,061			1,853
Write-down of other investments		—			175
Total operating expenses		2,750			3,035
Loss from operations		(464		)	(140		)
Other income (expense), net		(16		)	(2		)
Loss before income taxes		(480		)	(142		)
Provision (recovery) for income taxes		(6		)	2
Net loss		$	(474	)	$	(144	)
Net loss per share:
Basic		$	(0.02	)	$	(0.01	)
Dilutive		$	(0.02	)	$	(0.01	)
Shares used in computing net loss per share:
Basic		27,523			21,344
Dilutive		27,523			21,344

 

See accompanying notes to condensed consolidated financial statements.

 

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UNIFY CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Three Months Ended July 31,
		2004			2003
Cash flows from operating activities:
Net loss		$	(474	)	$	(144	)
Reconciliation of net loss to net cash used in operating activities:
Depreciation		41			45
Write-down of other investments		—			175
Stock based compensation		40			40
Changes in operating assets and liabilities:
Accounts receivable		657			335
Prepaid expenses and other current assets		(53		)	51
Accounts payable		(377		)	(207		)
Other accrued liabilities		(383		)	(201		)
Accrued compensation and related expenses		(124		)	(95		)
Deferred revenue		(766		)	(524		)
Net cash used in operating activities		(1,439		)	(525		)
Cash flows from investing activities:
Purchases of property and equipment		(35		)	(20		)
Net cash used in investing activities		(35		)	(20		)
Cash flows from financing activities:
Borrowings under line of credit		800			—
Proceeds from issuance of common stock, net		75			34
Payments of long term debt		(36		)	(60		)
Net cash provided by (used in) financing activities		839			(26		)
Effect of exchange rate changes on cash		20			20
Net decrease in cash and cash equivalents		(615		)	(551		)
Cash and cash equivalents, beginning of period		6,606			3,030
Cash and cash equivalents, end of period		$	5,991		2,479
Supplemental cash flow information:
Cash paid during the period for:
Interest		$	3		$	1
Income taxes		$	0		$	9

 

See accompanying notes to condensed consolidated financial statements.

 

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UNIFY CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                      Basis of Presentation

 

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

 

2.                                      Stock Compensation Information

 

Unify accounts for its stock-based compensation plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  Option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the option. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

 

The Company’s calculations are made using the Black-Scholes option pricing model, with the following weighted average assumptions for the three months ending July 31, 2004 and 2003, respectively: 5.0 year expected option life, 12 months following date of vesting; stock volatility of 234% and 109%; risk-free interest rates of 3.1%  and 1.8%; and no dividends. The Company’s calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur.

 

The following table illustrates the effect on net loss and net loss per share if Unify had applied the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123,  “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts):

 

		Three Months Ended July 31,
		2004			2003
Net loss as reported		$	(474	)	$	(144	)
Add: stock-based employee compensation included in reported net loss		40			40
Less: stock-based employee compensation expense, determined under fair value method for all awards		(118		)	(94		)
Proforma net loss		$	(552	)	$	(198	)
Net loss per share:
Basic and diluted net loss per share, as reported		$	(0.02	)	$	(0.01	)
Basic and diluted net loss per share, pro forma		$	(0.02	)	$	(0.01	)

 

3.                                      Exercise of Warrants

 

In June, 2004, Silicon Valley Bank (the “Bank”) exercised its warrant to purchase 115,385 shares of the Company’s common stock. In conjunction with this exercise, under the terms of the Warrant Agreement, the Company issued 68,016 shares of common stock to the Silicon Valley Bank via a cashless exercise.

 

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4.                                      Other Investments

 

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

 

 

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 whenever circumstances indicate that there is a decline in the carrying value below cost that is other than temporary. Several factors can trigger an impairment review, such as significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. In assessing potential impairment for such investments, we consider these factors as well as the forecasted financial performance. When such decline in value is other than temporary, we recognize an impairment loss in the current period operating results to the extent of the decline.  During the first quarter of fiscal 2004, the Company reduced the carrying value of its investment in Arango by $175,000.  Future adverse changes in market conditions or poor operating results of Arango could result in losses or an inability to recover the carrying value of the investment that is not currently reflected in the investment’s carrying value, thereby possibly requiring an impairment charge in the future.

 

5.                                      Credit Facility

 

On June 3, 2004, the Company replaced its previous line of credit and term loan with a new $1.0 million revolving line of credit and a $500,000 term loan with the Bank.  The line of credit is secured by qualifying domestic accounts receivable and has a one-year term. The term loan is secured by purchased assets and has a one-year term. The Company will incur interest expense on the line of credit and the term loan at the prevailing prime rate plus 2.0% and 2.5% per annum, respectively. The prime rate used to determine the interest shall not be less than 4.0%. As of July 31, 2004, the Company had $0.8 million outstanding under the line of credit and an additional $0.04 million in available credit.

 

6.                                      Long-term Debt

 

The Company’s debt consists of the following at July 31, 2004 and April 30, 2004 (in thousands):

 

 

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7.                                      Other Long Term Liabilities

 

In France, the Company is subject to mandatory employee severance costs associated with a statutory government regulated plan covering all employees. The plan provides for one month of severance for the first five years of service with an employer and one fifth of one year of severance for every one year of service thereafter. In order to receive their severance payment the employee may not retire before age 65 and must be employed at the time of retirement.

 

8.                                      Comprehensive Loss

 

The Company’s total comprehensive loss for the periods shown was as follows:

 

 

9.                                      Earnings (Loss) Per Share

 

SFAS No. 128, Earnings per Share, requires a dual presentation of basic and diluted income per share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (e.g. convertible preferred stock, warrants, and common stock options) were exercised or converted into common stock.  Potential common shares in the diluted EPS computation are excluded for the three-month periods ended July 31, 2004 and July 31, 2003 as their effect would be antidilutive.  The following is a reconciliation of the numerators and denominators of the basic and diluted income per share computations for the periods indicated (in thousands, except per share amounts):

 

 

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10.                               Maintenance Contracts

 

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

 

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

 

		Three Months Ended July 31,
		2004			2003
Balances, beginning of period		$	3,068		$	2,846
Amount recognized during the period		(1,373		)	(1,390		)
Amount of new maintenance contracts		747			839
Balances, end of period		$	2,442		$	2,295

 

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UNIFY CORPORATION

 

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

 

The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the software industry and certain assumptions made by the Company’s management. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those set forth herein under “Volatility of Stock Price and General Risk Factors Affecting Quarterly Results” and in the Company’s Annual Report on Form 10-K under “Business – Risk Factors.” Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the SEC, particularly the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

 

The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the audited Consolidated Financial Statements and Notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2004 as filed with the SEC.

 

Overview

 

Unify is a global provider of enterprise software solutions to mid-size and large organizations. For more than 24 years, we have provided our 2,000 customers and 300 ISV partners around the world with productive and cost-effective application platform, database and application development solutions for building and deploying applications. Our software products and services enable businesses to rapidly, efficiently and seamlessly deliver applications that deliver the right information to the right people at the right time. Our software platform today gives organizations the ability to connect multiple data sources, quickly build forms-based applications, automate business processes and integrate disparate information to run, manage and optimize their business. By deploying Unify software, customers can increase revenue, enrich customer and citizen relationships, increase supply chain efficiencies and enhance operational effectiveness. Our customers are leaders in their respective industries, including healthcare, financial services, government and manufacturing among others.

 

Our flagship product, Unify NXJ, is an easy-to-use, productive and standards-based application platform that enables organizations to quickly and effectively automate processes within and between organizations, consolidate multiple legacy systems into unified applications, and provide advanced collaborative information systems for employees, suppliers and partners. Unify NXJ provides a comprehensive set of application services that include business process management, reporting, portal and portal integration, Web services integration, forms processing, and enterprise application integration, as well as assembly and orchestration components. Unify NXJ can be delivered as a complementary offering for delivering applications that deploy across all leading J2EE infrastructure stacks including BEA WebLogic, IBM Websphere and Oracle 10g or as a fully integrated application platform with the JBoss application server.

 

Additionally, Unify provides application development and database management product solutions to organizations worldwide.  Unify’s rapid application development product line, ACCELL, graphical client/server application development product, VISION, and database management product family, DataServer, enable IT organizations to rapid develop and deliver business applications critical to the enterprise.

 

For our first quarter operations, total revenues were $2.7 million, a 17 percent decrease, compared to $3.3 million in the first quarter of fiscal 2004.  Software licenses revenue was $1.2 million, a decrease of 37 percent, compared to $1.8 million for the fiscal 2004 first quarter.  The net loss for the quarter was $474,000 or $0.02 loss per basic share, compared to a $144,000 or $0.01 loss in the first quarter of the prior year.

 

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Critical Accounting Policies

 

The following discussion and analysis of the Company’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The areas that require significant judgment are as follows.

 

Revenue Recognition. The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. The Company licenses its products to end-user customers, independent software vendors and value-added resellers. While the Company recognizes revenue for software license sales in accordance with Statement of Position 97-2, “Software Revenue Recognition” as effected by Statement of Position 98-4 “Deferral of the Effective Date of a Provision of SOP 97-2” and Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, we exercise judgment in connection with the determination of the amount of software and services revenue to be recognized in each accounting period. The nature of each licensing arrangement determines how revenues and related costs are recognized.

 

The Company’s customer contracts include multi-element arrangements that include a delivered element, software license, and undelivered elements, maintenance and support and/or consulting. The value allocated to the undelivered elements is unbundled from the delivered element based on vendor-specific objective evidence (VSOE) of the relative fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. We recognize revenue for delivered elements only when the fair values of undelivered elements are known, uncertainties regarding customer acceptance are resolved, and there are no customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. Changes in the allocation of the sales price between the deliverable elements might impact the timing of revenue recognition, but would not change the total revenue recognized on the contract. We may modify our pricing practices in the future, which could result in changes in our VSOE of fair value for these undelivered elements. As a result, our future revenue recognition for multi-element arrangements could differ significantly from our historical results.

 

We defer revenue for any undelivered elements, and recognize revenue when the product is delivered or over the period in which the service is performed, in accordance with our revenue recognition policy for such element. If we cannot objectively determine the fair value of any undelivered element included in bundled software and service arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, we use the residual method to record revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

 

An assessment of the ability of the Company’s customers to pay is another consideration that affects revenue recognition. In some cases, the Company sells to undercapitalized customers. In those circumstances, revenue recognition is deferred until cash is received, the customer has established a history of making timely payments or the customer’s financial condition has improved. Furthermore, once revenue has been recognized, the Company evaluates the related accounts receivable balance at each period end for amounts that we believe may no longer be collectible. This evaluation is largely done based on a review of the financial condition via credit agencies and historical experience with the customer. Any deterioration in credit worthiness of a customer may impact the Company’s evaluation of accounts receivable in any given period.

 

Valuation of long-lived assets. Our long-lived assets are comprised of long-term investments. At July 31, 2004, we had $214,000 in long-term investments, which are accounted for under the cost method. We assess the valuation of long-lived assets whenever circumstances indicate that there is a decline in carrying value below cost that is other than temporary.  Several factors can trigger an impairment review such as significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. In assessing potential impairment for such investments, we consider these factors as well as the forecasted financial performance. When such decline in value is other than temporary, we recognize an impairment loss in the current period operating results to the extent of the decline. We recognized no impairment losses related to long-term investments in the quarter ended July 31, 2004. Future adverse changes in market conditions or poor operating results could result in losses or an inability to recover the carrying value of the long-term investments that is not currently reflected in the investments carrying value, thereby possibly requiring additional impairment charges in the future.

 

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Deferred tax asset valuation allowance.  As of July 31, 2004, we have approximately $19.1 million of deferred tax assets related principally to net operating loss carry forwards, reserves and other accruals, deferred revenue, and foreign tax credits. A valuation allowance has been recorded to offset these deferred tax assets. The ability of the Company to ultimately realize its deferred tax assets will be contingent upon the Company achieving taxable income. There can be no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Should we determine that we would be able to realize 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 period such determination was made.

 

Results of Operations

 

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

 

 

Revenues

 

Total revenues for the quarter ended July 31, 2004 decreased $0.6 million, or 17%, from the same quarter of the prior year to $2.7 million.  Revenues in North America decreased $0.4 million, or 28%, to $0.9 million during the quarter compared to the same quarter of the prior year. International revenues increased as a percentage of total revenues from 62% to 67% during the first quarter compared to the same quarter of the prior fiscal year.  The decrease in total revenues for the first quarter was primarily the result of software licenses which decreased $0.7 million, or 37%, to $1.2 million as the Company was unable to duplicate the large application development and database product license contracts that had closed during the first quarter of fiscal 2004.

 

Services revenues increased $0.1million compared to the same comparative period a year ago, including maintenance revenues at $1.4 million for both the first quarter of fiscal 2005 and 2004.  The Company generally renews about 79% of its maintenance agreements, which is typically augmented by new maintenance revenues from new product revenues.  Consulting and training revenues increased $121,000, or 161%, during the first quarter of fiscal 2005 to $196,000 as compared to the same period of the prior year as the Company assisted and trained its customers in the development of their applications using Unify NXJ.

 

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Cost of Revenues

 

The Company’s cost of revenues includes cost of software licenses and cost of services.  Cost of software licenses consists primarily of product documentation, packaging and production costs, and royalties paid for licensed technology. Costs of services consist primarily of employee, facilities and travel costs incurred in providing customer support under software maintenance contracts, and consulting and training services.  Total cost of revenues was flat at $0.4 million in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004.

 

Cost of software licenses decreased by $3,000 in the first quarter of fiscal 2005 as compared to the same period of fiscal 2004.  This decrease was attributable to the decrease in software license revenues during the quarter, compared to the same period of the previous year. While the Company expects its gross margins on software license revenues to remain within typical software industry averages, costs of software license revenues are expected to increase somewhat from the Company’s historical averages as a percentage of revenue, as a result of royalties paid for licensed technology.

 

Total cost of services increased by $44,000 to $0.4 million in the first quarter of fiscal 2005 from $0.3 million during the same period in fiscal 2004 as a result of the increase in consulting and training revenues.

 

Product Development

 

Product development expenses consist primarily of employee and facilities costs incurred in the development and testing of new products and in the porting of new and existing products to additional hardware platforms and operating systems.  For the first three-month period of fiscal 2005, product development expenses decreased to $0.7 million compared to $1.0 million during the same three-month period of fiscal 2004.  Product development costs as a percentage of total revenues during the first quarter of fiscal 2005 were 25% of total revenues as compared to 31% for the first quarter of fiscal 2004. During the first quarter of fiscal 2004, the Company reduced its product development costs as part of a restructuring, in order to afford increased investments in sales and marketing, particularly for Unify NXJ.  The Company believes that investments in product development are critical to maintaining technological leadership and therefore intends to continue to devote significant resources to product development.

 

Selling, General and Administrative

 

Selling, general and administrative (“SG&A”) expenses for the quarter ended July 31, 2004 increased 11% to $2.1 million, or 75% of total revenues, as compared to $1.9 million, or 56% of total revenues, for the same quarter of the prior year as the Company executed its strategy to increase its investments in sales and marketing activities for Unify NXJ.  The major components of SG&A for the first three months of fiscal 2005 were sales expenses of $1.3 million, marketing expenses of $0.2 million, general and administrative of $0.6 million offset by bad debt recovery of $0.1 million.  Sales expenses increased $0.2 million over the same period from the previous year as a result of increased sales force related investments designed to increase the sales of Unify NXJ.  While marketing expenses remained at $0.2 million during the same two comparative periods, the focus of marketing activities in the first quarter of 2005 was on lead generation and specific NXJ marketing activities such as press tours to gain visibility for the product in the market place, as well as expenditures for investor relations activities, compared to more general marketing activities during the first quarter of fiscal 2004. General and administrative expenses were flat at during the first quarter of fiscal 2005 as compared to the same period in fiscal 2004. The Company’s net recovery of prior bad debt expense was flat. The Company expects that total SG&A expenses may fluctuate from quarter to quarter primarily because of variability in marketing spending and sales commission expense.

 

Write-down of Other Investments

 

During the first quarter of fiscal 2005 and 2004, the Company recorded non-cash charges of $0 and $175,000, respectively to write-down the carrying amount of its investment in Arango Software International to its estimated realizable value at July 31, 2004 and 2003.

 

Provision for Income Taxes

 

The Company recorded no federal or state income tax provisions for the quarter ended July 31, 2004 as the Company had a net operating loss.  For the first quarter ended July 31, 2004, the Company recorded income tax recoveries related primarily to refunds of previously paid state income taxes.

 

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Liquidity and Capital Resources

 

At July 31, 2004, the Company had cash, cash equivalents and short-term investments of $6.0 million, compared to $6.6 million at April 30, 2004.  Working capital decreased to $3.5 million at July 31, 2004 compared to $3.8 million at April 30, 2004. Under the Company’s line of credit arrangement with Silicon Valley Bank, which was renewed during the first quarter of fiscal 2005, the Company had $0.8 million outstanding to the Bank as of July 31, 2004. The line of credit has a borrowing limit of $1.0 million; as of July 31, 2004, based upon the amount of its eligible assets at that time, the Company had available for borrowing up to an additional $0.04 million.

 

The Company’s operations resulted in decreases in cash of $0.6 million during the three months ended July 31, 2004 and July 31, 2003.  Cash used by operating activities was $1.4 million for the first quarter of fiscal 2005 including a net loss of $0.5 million. Operating cash was provided by decreases in accounts receivable of $0.7 million, depreciation and stock based compensation of $0.1 million offset by increases in prepaid expenses and other current assets of $0.1 million. Operating cash was used as a result of decreases in accounts payable and other accrued liabilities of $0.4 million each,  a decrease in accrued compensation and related expenses of $0.1 million, and a decrease in deferred revenues of $0.8 million. Investing activities during the period used cash of $35,000 from the purchase of property and equipment.  Cash provided by financing activities during the period was $0.8 million primarily from an advance of that amount on the line of credit with the Bank.

 

A summary of certain contractual obligations of the Company as of July 31, 2004 is presented below:

 

		Payments Due by Period
Contractual Obligations		Total		1 year or less		2-3 years		4 - 5 years		After 5 years
Long-Term Debt		120,833		120,833		0		0		0
Line of Credit		800,000		800,000		0		0		0
Other Long-Term Liabilities		70,889		0		0		0		70,889
Capital Lease Obligations		0		0		0		0		0
Operating Leases		3,633,990		1,026,781		1,990,710		616,499		0
Total Contractual Cash Obligations		4,625,712		1,947,614		1,990,710		616,499		70,889

 

Volatility of Stock Price and General Risk Factors Affecting Quarterly Results

 

The Company’s common stock price has been and is likely to continue to be subject to significant volatility.  A variety of factors could cause the price of the Company’s common stock to fluctuate, perhaps substantially, including: announcements of developments related to the Company’s business; fluctuations in the Company’s or its competitors’ operating results and order levels; general conditions in the computer industry or the worldwide economy; announcements of technological innovations; new products or product enhancements by the Company or its competitors; 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, distributors and 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 stock market in general, and the market for shares of equity securities of many high technology companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of those companies. Such fluctuations may adversely affect the market price of the Company’s common stock.

 

The Company’s quarterly operating results have varied significantly in the past, and the Company expects that its operating results are likely to vary significantly from time to time in the future. Such variations result from, among other factors, the following: the size and timing of significant orders and their fulfillment; demand for the Company’s products; ability to sell new products; the number, timing and significance of product enhancements and new product announcements by the Company and its competitors; ability of the Company to attract and retain key employees; seasonality; changes in pricing policies by the Company or its competitors; realignments of the Company’s organizational structure; changes in the level of the Company’s operating expenses; changes in the Company’s sales incentive plans; budgeting cycles of the Company’s customers; customer order deferrals in anticipation of enhancements or new products offered by the Company or its competitors; product life cycles; product defects and other product quality problems; currency fluctuations; and general

 

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domestic and international economic and political conditions.

 

Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast. Revenues are also difficult to forecast because the market for web application development software is rapidly evolving, and the Company’s sales cycle, from initial evaluation to purchase and the provision of maintenance services, is lengthy and varies substantially from customer to customer. Because the Company normally ships products within a short time after it receives an order, it typically does not have any material backlog. As a result, to achieve its quarterly revenue objectives, the Company is dependent upon obtaining orders in any given quarter for shipment in that quarter. Furthermore, because many customers place orders toward the end of a fiscal quarter, the Company generally recognizes a substantial portion of its revenues at the end of a quarter. As the Company’s expense levels are based in significant part on the Company’s expectations as to future revenues and are therefore relatively fixed in the short term, if revenue levels fall below expectations, operating results are likely to be disproportionately adversely affected.  The Company also expects that its operating results will be affected by seasonal trends, and that it may experience relatively weaker demand in fiscal quarters ended July 31 and October 31 as a result of reduced business activity in Europe during the summer months.

 

Item 3.  Disclosures about Market Risk

 

Interest Rate Risk.  The Company’s exposure to market rate risk for changes in interest rates relates primarily to its cash equivalents, which are highly liquid investments with original maturities of three months or less and are stated at cost. Cash equivalents are generally maintained in money market accounts which have as their objective preservation of principal and which hold investments with maturity dates of less than 90 days. The Company does not believe its exposure to interest rate risk is material for these balances, which totaled $6.0 million at July 31, 2004. Additionally, the Company has no interest rate risk on its long-term debt. Unify does not use derivative financial instruments and places its cash equivalents with high quality issuers and, by policy, limits the amount of credit exposure to any one issuer. If market interest rates were to change immediately and uniformly by ten percent from levels at July 31, 2004, the fair value of the Company’s cash equivalents would change by an insignificant amount.

 

Foreign Currency Exchange Rate Risk.  As a global concern, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company’s business, operating results and financial position. Historically, the Company’s primary exposures have related to local currency denominated sales and expenses in Europe, Japan and Australia. Due to the substantial volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on its future operating results. Although Unify takes into account changes in exchange rates over time in its pricing strategy, it does so only on an annual basis, resulting in substantial pricing exposure as a result of foreign exchange volatility during the period between annual pricing reviews. The Company also has currency exchange rate exposures on intercompany accounts receivable and payables owed to and by the Company as a result of local currency sales of software licenses and payments of intercompany royalties thereon, by the Company’s international subsidiaries in the United Kingdom and France. At July 31, 2004, the Company had $0.4 million and $0 in such receivables denominated in British pounds and Euros, respectively. The Company encourages prompt payment of these intercompany balances in order to minimize its exposure to currency fluctuations, but it engages in no hedging activities to reduce the risk of such fluctuations. A hypothetical ten percent change in foreign currency rates would have an insignificant impact on the Company’s business, operating results and financial position. The Company has not experienced material exchange losses on intercompany balances in the past; however, due to the substantial volatility of currency exchange rates, among other factors, it cannot predict the effect of exchange rate fluctuations on its future business, operating results and financial position.

 

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Item 4.  Controls and Procedures

 

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

 

(b)                                 There has been no change in our internal control over financial reporting during the quarter ended July 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.                        OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Litigation

 

The Company is subject to legal proceedings and claims that arise in the normal course of business. If such matters arise, the Company cannot assure that it would prevail in such matters, nor can it assure that any remedy could be reached on mutually agreeable terms, if at all. Due to the inherent uncertainties of litigation, were there any such matters, the Company would not be able to accurately predict their ultimate outcome. As of July 31, 2004, there were no current proceedings or litigation involving the Company that management believes would have a material adverse impact on its financial position, results of operations, or cash flows.

 

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Item 6.                                   Exhibits and Reports on Form 8-K

 

(a)		Exhibits
	31.1	Certificate of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certificate 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 July 31, 2004, Unify filed the following Current Reports on form 8-K with the Securities and Exchange Commission:
		Form 8-K filed on June 10, 2004 containing Unify’s fiscal year ended April 30, 2004 earnings press release.

 

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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 the undersigned thereunto duly authorized.

 

 

Date: September 10, 2004		Unify Corporation
		(Registrant)
		By:
		/s/ PETER J. DICORTI
		Peter J. DiCorti
		Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

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