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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER 18 U.S.C SECTION 1350 - DAEGIS INC.exhibit32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER SECTION 302 - DAEGIS INC.exhibit31-2.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER 18 U.S.C SECTION 1350 - DAEGIS INC.exhibit32-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER SECTION 302 - DAEGIS INC.exhibit31-1.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________

Form 10-Q
 
 
x      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
For the quarterly period ended October 31, 2010
 
OR
 
o   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number: 001-11807
______________________

UNIFY CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware 94-2710559
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
 
Address of principal executive offices: 1420 Rocky Ridge Drive, Suite 380, Roseville, California 95661
 
Registrant’s telephone number, including area code: (916) 218-4700
 
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 x    NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer  o Non-accelerated filer o Smaller reporting company x
    (Do not check if a smaller reporting company)  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act),
 
YES o    NO x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,577,277 shares of common stock, $0.001 par value, as of October 31, 2010.
 



 
 

UNIFY CORPORATION
FORM 10-Q
 
INDEX
 
PART I.       FINANCIAL INFORMATION       3
         
Item 1.   Financial Statements   3
         
    Unaudited Condensed Consolidated Balance Sheets as of October 31, 2010 and April 30, 2010   3
         
    Unaudited Condensed Consolidated Statements of Operations for the three and six months ended
October 31, 2010 and 2009
  4
         
    Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended
October 31, 2010 and 2009
  5
         
    Notes to Unaudited Condensed Consolidated Financial Statements   6
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   17
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   24
         
Item 4.   Controls and Procedures   24
         
PART II.   OTHER INFORMATION   25
         
Item 1.   Legal Proceedings   25
         
Item 1A.   Risk Factors   25
         
Item 6.   Exhibits   26
 
SIGNATURE       27
         
CERTIFICATIONS       28


 

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
UNIFY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
    October 31,   April 30,
         2010        2010
ASSETS                
Current assets:                
     Cash and cash equivalents   $ 3,872     $ 3,055  
     Accounts receivable, net     14,144       6,194  
     Prepaid expenses and other current assets     841       493  
     Total current assets     18,857       9,742  
 
Property and equipment, net     1,927       350  
Goodwill     31,524       15,835  
Intangibles, net     21,470       8,613  
Other assets, net     1,338       228  
     Total assets   $ 75,116     $ 34,768  
  
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
     Accounts payable   $ 1,360     $ 380  
     Current portion of long term debt     1,610       1,397  
     Accrued compensation and related expenses     1,941       1,308  
     Other accrued liabilities     2,405       2,349  
     Deferred revenue     7,202       9,733  
     Total current liabilities     14,518       15,167  
 
Long term debt, net     25,325       12  
Deferred tax liabilities, net     534       557  
Other long term liabilities     784       636  
 
Commitments and contingencies            
 
Stockholders’ equity:                
     Common stock     15       10  
     Additional paid-in capital     97,197       80,312  
     Accumulated other comprehensive income     394       383  
     Accumulated deficit     (63,651 )     (62,309 )
     Total stockholders’ equity     33,955       18,396  
     Total liabilities and stockholders’ equity   $      75,116     $      34,768  
                 
See accompanying notes to condensed consolidated financial statements.
 
3
 

 

UNIFY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
    Three Months Ended   Six Months Ended
    October 31,   October 31,
        2010       2009       2010       2009
Revenues:                                
     Software licenses   $ 874     $ 1,413     $ 2,261     $ 2,832  
     Maintenance and hosting     6,029       3,555       11,335       6,135  
     Consulting and implementation services     5,965       2,119       9,156       2,632  
          Total revenues     12,868       7,087       22,752       11,599  
 
Cost of Revenues:                                
     Software licenses     35       51       59       145  
     Maintenance and hosting     495       485       990       826  
     Consulting and implementation services     2,761       941       4,529       1,100  
          Total cost of revenues     3,291       1,477       5,578       2,071  
Gross profit     9,577       5,610       17,174       9,528  
 
Operating Expenses:                                
     Product development     1,982       1,749       3,766       3,152  
     Selling, general and administrative     6,813       5,127       12,935       9,944  
          Total operating expenses     8,795       6,876       16,701       13,096  
     Income (loss) from operations     782       (1,266 )     473       (3,568 )
Interest expense     (1,093 )     (66 )     (1,526 )     (124 )
Other income (expense), net     (41 )     (10 )     (164 )     129  
     Loss before income taxes     (352 )     (1,342 )     (1,217 )     (3,563 )
Provision for income taxes     129       58       123       66  
     Net loss   $ (481 )   $ (1,400 )   $ (1,340 )   $ (3,629 )
 
Net loss per share:                                
     Basic   $ (0.03 )   $ (0.14 )   $ (0.11 )   $ (0.39 )
     Dilutive   $      (0.03 )   $      (0.14 )   $      (0.11 )   $      (0.39 )
 
Shares used in computing net loss per share:                                
     Basic     13,844       10,119       12,542       9,243  
     Dilutive     13,844       10,119       12,542       9,243  
 
See accompanying notes to condensed consolidated financial statements.
 
4
 

 

UNIFY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
    Six Months Ended
    October 31,
    2010   2009
Cash flows from operating activities:                        
      Net loss   $ (1,340 )   $ (3,629 )
      Reconciliation of net loss to net cash used in operating activities:                
            Depreciation     385       122  
            Amortization of intangible assets     1,943       1,176  
            Amortization of discount on notes payable     173       19  
            Interest added to long term debt principal     167        
            Stock based compensation expense     487       326  
            Changes in operating assets and liabilities:                
                  Accounts receivable     (2,499 )     (4,033 )
                  Prepaid expenses and other current assets     308       545  
                  Other long term assets     (884 )     15  
                  Accounts payable     590       (1,360 )
                  Accrued compensation and related expenses     (440 )     (344 )
                  Other accrued liabilities     259       (1,248 )
                  Accrued acquisition costs           (16 )
                  Deferred revenue     (2,552 )     4,762  
                  Other long term liabilities     (475 )     (186 )
Net cash used in operating activities     (3,878 )     (3,851 )
 
Cash flows from investing activities:                
      Acquisition, net of cash acquired     (21,804 )     59  
      Purchases of property and equipment     (94 )     (29 )
Net cash provided by (used in) investing activities     (21,898 )     30  
 
Cash flows from financing activities:                
      Payments on revolving line of credit     (1,100 )      
      Borrowings on revolving line of credit     4,500       350  
      Borrowings on term loan     24,000        
      Principal payments under debt obligations     (717 )     (716 )
Net cash provided by (used in) financing activities     26,683       (366 )
Effect of exchange rate changes on cash     (90 )     255  
Net increase (decrease) in cash and cash equivalents     817       (3,932 )
Cash and cash equivalents, beginning of period     3,055       6,147  
Cash and cash equivalents, end of period   $ 3,872     $ 2,215  
Supplemental cash flow information:                
      Cash paid during the period for:                
            Interest   $ 770     $ 68  
            Taxes   $ 302     $ 11  
 
Supplemental non-cash financing activities:                
      Common stock issued in conjunction with acquisition   $ 7,217     $ 8,853  
      Common stock issued with conversion of convertible notes   $      6,276     $       

See accompanying notes to condensed consolidated financial statements.
 
5
 

 

UNIFY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2010
 
1. Basis of Presentation
 
The condensed consolidated financial statements have been prepared by Unify Corporation (the “Company”, “we”, “us”, “our”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying condensed consolidated financial statements include our accounts and those of our subsidiaries that we control due to ownership of a controlling interest. Intercompany transactions and balances have been eliminated. 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, 2010, as filed with the SEC.
 
Revenue Recognition
 
The Company generates revenue from software license sales and related services, including maintenance and support, hosting, and consulting and implementation services. The Company licenses its products to end-user customers, including corporate legal and IT departments, law firms, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s products are generally sold with a perpetual license. The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection or special acceptance. The Company exercises judgment in connection with the determination of the amount of revenue to be recognized in each accounting period. The nature of each contractual arrangement determines how revenues and related costs are recognized.
 
For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectability is probable and persuasive evidence of an arrangement exists.
 
For fixed price arrangements that require significant modification or customization of software, the Company uses the percentage-of-completion method for revenue recognition. Under the percentage-of-completion method, progress towards completion is generally measured by labor hours.
 
The Company considers a signed non-cancelable license agreement, a customer purchase order, a customer purchase requisition, or a sales quotation signed by an authorized purchaser of the customer to be persuasive evidence that an arrangement exists such that revenue can be recognized.
 
The Company’s customer contracts include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as 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 fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as: (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace. The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the contract using the residual method as the fair value of all undelivered elements is determinable.
 
We defer revenue for any undelivered elements, and 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. 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.
 
6
 

 

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.
 
Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred. Consulting and implementation services are performed on a “best efforts” basis and may be billed under time-and-materials or fixed price arrangements. Revenues and expenses relating to providing consulting services are generally recognized as the services are performed.
 
Recently Issued Accounting Standards
 
In October 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The new guidance will become effective for Unify beginning May 1, 2011, with earlier adoption permitted. The Company is currently assessing the impact of the adoption of this guidance.
 
Reclassifications
 
Certain reclassifications have been made to the prior period consolidated statement of operations to conform to the current period presentation. These reclassifications had no effect on net income.
 
2. Acquisitions
 
CipherSoft Inc.
 
On January 30, 2009, the Company purchased privately held CipherSoft Inc. (“CipherSoft”), headquartered in Calgary, Canada, for approximately $628,000 plus the assumption of debt of $1,032,000 and future potential royalty payments to be paid over a four year period following the acquisition. The royalty payments are based on a percentage of revenue and will increase goodwill upon being earned. As of October 31, 2010, royalty payments earned totaled $163,000. CipherSoft is a leading Oracle partner for modernization and migration of Oracle applications and provides an additional application migration solution for the Company. Pursuant to the terms of the purchase agreement, Unify acquired all the outstanding stock of CipherSoft. CipherSoft did not represent the addition of a significant subsidiary.
 
The CipherSoft purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on management’s determination of their estimated fair values at the acquisition date, January 30, 2009. Intangible assets include technologies of $1,060,000, non-competition agreements of $85,000, consulting agreements of $110,000 and trade names of $80,000. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill. The Company believes the fair values assigned to the assets acquired and liabilities assumed were based on reasonable assumptions. The following table summarizes the fair values of net assets acquired and represents the opening balance sheet for CipherSoft as of the acquisition date, January 30, 2009 (in thousands):
 
Current assets       $ 236
Long term assets     22
Goodwill     780
Intangibles     1,335
     Total assets   $ 2,373
 
Current Liabilities   $ 1,099
Long term liabilities     646
     Total liabilities assumed   $ 1,745
       
     Total consideration   $ 628
       

7
 

 
 

AXS-One Inc.
 
On June 30, 2009, the Company acquired all of the issued and outstanding shares of common stock and warrants of AXS-One. The common stock and warrants were converted into, in the aggregate, 1,000,000 shares of Unify common stock. The outstanding convertible notes of AXS-One with an aggregate outstanding principal and interest balance of approximately $13 million were exchanged for 1,642,600 shares of Unify common stock. The note holders were also issued additional shares of Unify common stock based on revenue generated from AXS-One’s products over 13 months after the effective date of the merger.
 
AXS-One is a leading provider of integrated content archiving software solutions which enables organizations to implement secure, scalable and enforceable policies that address records management for corporate governance, legal discovery and industry regulations. The acquisition of AXS-One advances the Company’s growth strategy to acquire superior technology companies that can leverage its technology strengths, extensive customer base and worldwide distribution channel while enabling the combined company to meet a broader set of customers’ needs, accelerate direct and channel sales, and achieve cost synergies.
 
The goodwill of $9.1 million arising from the acquisition consists of increased market presence and opportunities, enhanced product mix and operating efficiencies expected from combining the operations of Unify and AXS-One. All of the goodwill was assigned to the eDiscovery and Integrated Content Archiving Solutions segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
 
The following table summarizes the consideration paid for AXS-One and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, June 30, 2009 (in thousands):
 
Consideration      
Equity instruments (2,642,600 common shares of Unify) $      8,853  
Contingent consideration arrangement   1,499  
       
Fair value of total consideration $ 10,352  
       
Recognized amounts of identifiable assets acquired and liabilities assumed      
Financial assets $ 117  
Accounts receivable   561  
Other assets   640  
Property, plant and equipment   132  
Identifiable intangible assets   8,065  
Financial liabilities   (5,772 )
Deferred revenue   (2,493 )
Total identifiable net assets   1,250  
       
Goodwill   9,102  
  $ 10,352  
       
Acquisition related costs (included in selling, general and administrative expense in      
Unify's statement of operations for fiscal year 2010, all of which was in the three months      
ended July 31, 2009.) $ 611  
       
The fair value of the 2,642,600 common shares issued as part of the consideration paid for AXS-One ($8,853,000) was determined on the basis of the closing market price of Unify’s common shares on the acquisition date.
 
The contingent consideration arrangement required Unify to issue to the former holders of AXS-One convertible notes 0.35 shares of Unify common stock for every $1 of AXS-One net license revenue over the first $2,000,000 for the 13 month period following the acquisition date. The number of shares that Unify issued under the contingent consideration arrangement is 415,422. The fair value of the contingent consideration is $1.3 million, which resulted in a reduction in the acquisition liability of $164,000 and a corresponding reduction in selling, general, and administrative expenses that was recorded in the first quarter of fiscal 2011.
 
8
 

 

The amounts of AXS-One’s revenue and earnings included in the Company’s consolidated statement of operations for the year ended April 30, 2010, and the supplemental pro forma revenue and earnings of the combined entity had the acquisition date been May 1, 2009, or May 1, 2008, are:
 
(in thousands, except per share amounts) Revenue       Net loss       Net loss per share
Actual from July 1, 2009 to April 30, 2010 $      8,555   $      (393 )   $                     (0.04 )
Supplemental pro forma from May 1, 2009 to April 30, 2010 $ 30,101   $ (2,693 )   $ (0.28 )
Supplemental pro forma from May 1, 2008 to April 30, 2009 $ 32,827   $ (5,920 )   $ (0.85 )

Strategic Office Solutions, Inc., dba Daegis
 
On June 29, 2010, the Company acquired all of the issued and outstanding shares of common stock of Strategic Office Solutions, Inc., dba Daegis, for approximately $37.4 million. Payment was made in the form of $24.0 million in cash, $7.2 million in equity, and $6.2 million in convertible notes. The Company issued 2,085,714 shares of Unify common stock to the former owners of Daegis at $3.46 per share (closing market price on the acquisition date) for a total of $7.2 million. The notes consisted of a $5.0 million Subordinated Purchase Note and a $1.2 million Subordinated Indemnity (Escrow) Note. Under the terms of the Subordinated Purchase Note the Company incurred interest at 8% per annum. On September 1, 2010 the Company converted the Subordinated Purchase Note and all related accrued interest into 1,448,614 shares of common stock at a conversion price of $3.50 per share. Under the terms of the Subordinated Indemnity (Escrow) Note the Company incurred interest at 3% per annum for the first eighteen months and 8% per annum thereafter. On September 1, 2010 the Company converted the Subordinated Indemnity (Escrow) Note and all related accrued interest into 344,667 shares of common stock at a conversion price of $3.50 per share. Both notes were cancelled upon conversion.
 
Daegis is a provider of eDiscovery solutions for corporate legal departments and law firms. The Company believes Daegis’ eDiscovery solutions compliment its integrated content archiving product. The acquisition of Daegis advances the Company’s growth strategy to acquire superior software and services companies that can leverage its technology strengths and extensive customer base while enabling the combined company to meet a broader set of customer and market needs.
 
The goodwill of $15.7 million arising from the acquisition consists of increased market presence and opportunities, enhanced product mix and operating efficiencies expected from combining the operations of Unify and Daegis. All of the goodwill was assigned to the eDiscovery and Integrated Content Archiving Solutions segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
 
The following table summarizes the consideration paid for Daegis and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, June 29, 2010 (in thousands):
 
Consideration      
Cash $      24,000  
Equity instruments (2,085,714 common shares of Unify)   7,217  
Convertible notes   6,200  
       
Fair value of total consideration $ 37,417  
       
Recognized amounts of identifiable assets acquired and liabilities assumed      
Financial assets $ 2,270  
Accounts receivable   5,422  
Other assets   705  
Property, plant and equipment   1,867  
Identifiable intangible assets   14,800  
Financial liabilities   (3,309 )
Total identifiable net assets   21,755  
       
Goodwill   15,662  
  $ 37,417  
       
Acquisition related costs (included in selling, general and administrative expense in Unify's      
statement of operations for the six months ended October 31, 2010) $ 1,423  
       
9
 

 

The fair value of the 2,085,714 common shares issued as part of the consideration paid for Daegis ($7,216,570) was determined on the basis of the closing market price of Unify’s common shares on the acquisition date.
 
Based on the receipt of a preliminary valuation, acquisition date provisional values were adjusted to increase identifiable intangible assets by $100,000, increase goodwill by $588,000, decrease accounts receivable by $401,000, increase property, plant, and equipment by $161,000, and increase financial liabilities by $448,000. The fair value of the acquired identifiable intangible assets and recorded amounts for deferred income taxes and goodwill remain provisional pending the receipt of a final valuation. Intangible assets include technologies of $3.8 million, trademarks of $7.0 million, non-compete agreements of $0.3 million, and customer relationships of $3.7 million.
 
The amounts of Daegis’s revenue and earnings included in the Company’s consolidated statement of operations for the six months ended October 31, 2010, and the supplemental pro forma revenue and earnings of the combined entity had the acquisition date been May 1, 2010, or May 1, 2009, are:
 
                Net income (loss)
(in thousands, except per share amounts) Revenue       Net income (loss)       per share
Actual from June 29, 2010 to October 31, 2010 $      10,108   $ 2,771     $ 0.22  
Supplemental pro forma from May 1, 2010 to October 31, 2010 $ 23,557   $ (1,591 )   $ (0.13 )
Supplemental pro forma from May 1, 2009 to October 31, 2009 $ 25,906   $                   (3,001 )   $                     (0.32 )

3. Stock Compensation Information
 
Compensation expense includes the estimated fair value of equity awards vested during the reported period. Expense for equity awards vested is determined based on the grant date fair value previously calculated for pro forma disclosures. For the quarter ended October 31, 2010, equity-based compensation expense from operations was comprised of the following (in thousands):
 
  Three Months Ended   Six Months Ended
  October 31,   October 31,
  2010       2009       2010       2009
Cost of Sales $ 14   $ 4   $ 26   $ 8
Product Development   38     34     76     61
Selling, General and Administrative   183     137     385     257
Total Equity-Based Compensation $      235   $      175   $      487   $      326
                       
The following table shows remaining unrecognized compensation expense on a pre-tax basis related to all types of non-vested equity awards outstanding as of October 31, 2010. This table does not include an estimate for future grants that may be issued (amounts in thousands).
 
Fiscal Year Ending April 30, Amount
       Remainder of 2011 $      477
       2012   761
       2013   457
       2014   242
       2015   33
              Total $ 1,970
     
The cost above is expected to be recognized over a weighted-average period of 1.44 years.
 
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The Company continues to use the Black-Scholes option pricing model to estimate fair value of equity awards, which requires the input of highly subjective assumptions, including the expected stock price volatility. The Company’s calculations are made using the Black-Scholes option pricing model, with the following weighted average assumptions for the six months ended October 31, 2010 and 2009, respectively: expected option life, 12 to 18 months following vesting; stock volatility of 87% and 93%; risk-free interest rates of 1.0% and 1.9% and no dividends during the expected term. Not all stock options that have been granted will be exercised. Accordingly, the Company’s calculation of equity-based compensation expense includes an adjustment for the estimated number of options that will be forfeited.
 
In the second quarter of fiscal 2011 the Company’s shareholders approved the 2010 Stock Plan (the “2010 Stock Plan”). Under the 2010 Stock Plan the Company may make awards to issue up to 1,500,000 shares of common stock to eligible employees, consultants and directors. Stock options granted under the 2010 Stock Plan generally vest over four years, are exercisable to the extent vested and expire 10 years from the date of grant. Under the 2010 Stock Plan the Company may grant options at prices not less than the fair market value at the date of grant. Under the 2001 Stock Option Plan (the “2001 Option Plan”) which expired as of September 2010, the Company was able to grant options to eligible employees, directors, and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 2001 Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant. Under the 1991 Stock Option Plan (the “1991 Option Plan”) which expired as of March 2001, the Company was able to grant options to eligible employees, directors and consultants at prices not less than the fair market value at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for non-statutory stock options. Options granted under the 1991 Option Plan generally vest over four years, are exercisable to the extent vested, and expire 10 years from the date of grant.
 
A summary of the Company’s stock option activity for the six months ended October 31, 2010 is as follows:
 
              Weighted      
        Weighted   average remaining   Aggregate
        average   contractual   intrinsic
  Shares       exercise price       term (in years)       value (1)
Outstanding at April 30, 2010      1,663,497     $ 3.31   7.12   $      1,271,375
       Granted 656,100     $ 3.38          
       Exercised     $          
       Canceled or expired (19,978 )   $ 3.28          
Outstanding at October 31, 2010 2,299,619     $ 3.35   7.25   $ 835,252
                     
Exercisable at October 31, 2010 1,080,836     $ 3.27   6.22   $ 629,286

(1)        Aggregate intrinsic value is defined as the difference between the current market value and the exercise price and is estimated using the closing price of the Company’s common stock on the last trading day of the periods ended as of the dates indicated.
 
Total intrinsic value of awards exercised during the quarters ended October 31, 2010 and October 31, 2009 was $0 for both periods. The total fair value of awards vested during the quarters ended October 31, 2010 and October 31, 2009 was $245,647 and $176,630, respectively.
 
A summary of the Company’s nonvested stock option activity for the period ended October 31, 2010 is as follows:
 
        Weighted
        average fair
  Shares       value
Nonvested at April 30, 2010 814,343     $ 3.50
       Granted 656,100     $ 2.11
       Vested (236,181 )   $ 2.32
       Canceled or expired (15,479 )   $ 2.12
Nonvested at October 31, 2010      1,218,783     $ 2.03
           
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4 Goodwill and Intangible Assets
 
The following tables present details of the Company’s goodwill and intangible assets as of October 31, 2010 and April 30, 2010 (in thousands).
 
    Gross           Net    
    carrying   Accumulated   carrying   Estimated
October 31, 2010       amount       amortization       amount       useful life
Infinite Lives:                        
       Goodwill   $      31,524   $               $      31,524  
Finite Lives:                        
       Customer-related     7,836     (1,799 )     6,037   5 to 10 years
       Technology-based     10,587     (3,160 )     7,427   0.5 to 6 years
       Trademarks     8,500     (847 )     7,653   0.5 to 10 years
       Trade name     197     (157 )     40   2 years
       Backlog     100     (100 )       0.5 years
       Non-compete     403     (90 )     313   3 to 3.3 years
       Consulting agreement     133     (133 )       1 year
              Total   $ 59,280   $ (6,286 )   $ 52,994    
                         
    Gross           Net    
    carrying   Accumulated   carrying   Estimated
April 30, 2010   amount   amortization   amount   useful life
Infinite Lives:                        
       Goodwill   $ 15,835   $     $ 15,835  
Finite Lives:                        
       Customer-related     4,136     (1,268 )     2,868   5 to 10 years
       Technology-based     6,787     (2,220 )     4,567   0.5 to 6 years
       Trademarks     1,500     (456 )     1,044   0.5 to 5 years
       Trade name     197     (140 )     57   2 years
       Backlog     100     (100 )       0.5 years
       Non-compete     103     (32 )     71   3 to 3.3 years
       Consulting agreement     133     (127 )     6   1 year
              Total   $ 28,791   $ (4,343 )   $ 24,448    
                         
Acquired finite-lived intangibles are generally amortized on a straight line basis over their estimated useful life. The useful life of finite-lived intangibles is the period over which the asset is expected to contribute directly or indirectly to future cash flows of the Company. Intangible assets amortization expense for the six months ended October 31, 2010, was $1,943,000. Amortization expense for the six months ended October 31, 2009, was $1,176,000. The estimated future amortization expense related to intangible assets as of October 31, 2010, is as follows (in thousands):
 
Fiscal Year Ending April 30,       Amount
Remainder of 2011   $      2,149
2012     3,923
2013     3,368
2014     3,284
2015     3,068
2016     1,832
Thereafter     3,846
       Total   $ 21,470
       
Goodwill at October 31, 2010, represents the excess of purchase prices over the sum of the amounts assigned to assets acquired less liabilities assumed. The Company believes these acquisitions will produce the following results:
  • Increased Market Presence and Opportunities: The addition of the acquired companies should increase the combined company’s market presence and opportunities for growth in sales and earnings.
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  • Enhanced Product Mix: The complementary nature of the Company’s products with its acquisitions should benefit current customers and provide the combined company with the ability to access new customers.
     
  • Operating Efficiencies: The combination of the Company with its acquisitions provides the opportunity for potential economies of scale and cost savings.
The Company believes these primary factors support the amount of goodwill recognized as a result of the purchase price for companies it has acquired. Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach.
 
5. Credit Facility
 
On June 29, 2010, the Company entered into a revolving credit note agreement with Hercules Technology II, L.P. Under the terms of the agreement, the Company is entitled to borrow up to $6.0 million. The amount that can be borrowed under the revolver is determined by the amount of eligible accounts receivable outstanding. As of October 31, 2010, the Company was eligible to borrow the entire $6.0 million. Interest expense is recorded on funds borrowed at the prevailing LIBOR rate plus 7.25% per annum with a minimum rate of 9.25% (9.25% as of October 31, 2010) and has a maturity date of June 29, 2015. As of October 31, 2010, there was $3.8 million outstanding on the revolver.
 
6. Long-Term Debt
 
The Company’s debt consists of the following at October 31, 2010 and April 30, 2010 (in thousands):
 
  October 31,   April 30,
  2010       2010
Term Note Payable to Hercules Technology II, L.P., the proceeds of which were used              
to fund the cash portion of the consideration to acquire Daegis - see Note 2, interest rate              
at the prevailing LIBOR rate plus 8.25% per annum with a minimum rate of 10.25%              
(10.25% at October 31, 2010) plus 2% interest to be paid in kind through maturity on              
June 29, 2015. Principal payments are made monthly with escalating principal              
payments of 5%, 10%, 15%, 20%, and 50%, annually. This note is secured by an              
interest in substantially all of the Company's assets. This note includes certain financial              
covenants and the Company is in compliance with such covenants at October 31, 2010. $        24,167     $       
               
Hercules Technology II, L.P., credit facility, interest rate at prevailing LIBOR rate plus              
7.25% per annum with a minimum rate of 9.25% (9.25% at October 31, 2010), payable              
June 29, 2015.   3,750        
               
Convertible notes payable to ComVest Capital LLC, interest rate of 5%. The Comvest              
notes were repaid on June 29, 2010.         377  
               
Note Payable, interest rate of 5%, payable in installments through April 2011.   308       627  
               
ComVest Capital LLC credit facility, interest rate 5.5%, repaid on June 29, 2010.         350  
               
Other notes payable   3       4  
               
Capital leases payable, payable in monthly installments through June 2013.   701       52  
    28,929       1,410  
Less discount on notes payable   (1,994 )     (1 )
Less current portion   (1,610 )     (1,397 )
Total long term debt, net $ 25,325     $ 12  
               
The discount on notes payable is related to warrants granted to the lender in association with the issuance of the term note. The Company provided the lender with 718,860 warrants to purchase shares of Unify common stock at $3.30 per share. The warrants have an expiration date of June 29, 2020. The Company used the Black-Scholes pricing model to estimate fair value of warrants granted.
 
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The Hercules Loan Agreement requires ongoing compliance with certain affirmative and negative covenants. The affirmative covenants include, but are not limited to: (i) maintenance of existence and conduct of business; (ii) compliance with laws; (iii) use of proceeds; and (iv) books and records and inspection. The negative covenants set forth in the Hercules Loan Agreement include, but are not limited to, restrictions on the ability of the Company (and the Company’s subsidiaries): (i) with certain limited exceptions, to create, incur, assume or allow to exist indebtedness; (ii) with certain limited exceptions, to create, incur, assume or allow to exist liens on properties; (iii) with certain limited exceptions, to make certain payments, transfers of property, or investments; or (iv) with certain limited exceptions, to make additional acquisitions.
 
In addition, the Company is obligated to maintain certain minimum consolidated adjusted EBITDA levels, certain total leverage ratios, and certain fixed charge coverage ratios, all as calculated in accordance with the terms and definitions determining such ratios contained in the Hercules Loan Agreement. The Hercules Loan Agreement also contains various information and reporting requirements. The Company is in compliance with all such covenants and requirements at October 31, 2010.
 
The Hercules Loan Agreement also contains customary events of default, including without limitation events of default based on payment obligations, repudiation of guaranty obligations, material inaccuracies of representations and warranties, covenant defaults, insolvency proceedings, monetary judgments in excess of certain amounts, change in control, certain ERISA events, and defaults under certain other obligations.
 
7. Other Long-Term Liabilities
 
Included in other long term liabilities as of October 31, 2010 is deferred rent resulting from escalation clauses related to the Roseville, San Francisco, New York, and Chicago offices of $188,000, $4,000, $105,000, and $18,000, respectively. Included in other long term liabilities as of April 30, 2010 is $219,000 of deferred rent related to the Roseville, California office. Also included in other long term liabilities as of October 31, 2010 are $80,000 and $288,000 related to the unfavorable lease terms associated with the Rutherford, New Jersey office lease assumed in the acquisition of AXS-One, Inc and the New York office lease assumed in the acquisition of Daegis. Included in other long term liabilities as of April 30, 2010 is $320,000 related to the unfavorable lease terms associated with the Rutherford, New Jersey office lease assumed in the acquisition of AXS-One, Inc. Additionally, as of October 31, 2010 and April 30, 2010, there is $101,000 and $97,000, respectively, related to mandatory employee severance costs associated with a French statutory government regulated plan covering all France employees.
 
8. Maintenance Contracts
 
The Company offers maintenance contracts to its customers at the time they enter into a product license agreement and renew those contracts at the customers’ option, generally 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 (in thousands):
 
  Three Months Ended   Six Months Ended
  October 31,   October 31,
  2010       2009       2010       2009
Deferred maintenance revenue beginning balance $      7,905     $      7,803     $      9,642     $      5,473  
Deferred maintenance revenue recognized during period   (4,100 )     (3,562 )     (8,787 )     (6,142 )
Deferred maintenance revenue of new maintenance contracts   3,346       4,082       6,296       8,992  
Deferred maintenance revenue ending balance $ 7,151     $ 8,323     $ 7,151     $ 8,323  
                               
9. Income Taxes
 
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
 
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The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In general, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the fiscal years before 2005. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. Therefore, no reserves for uncertain income tax positions have been recorded.
 
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of October 31, 2010 and April 30, 2010, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor did the Company record any interest expense associated with any unrecognized tax benefits in the six months ended October 31, 2010 and 2009.
 
10. Comprehensive Income
 
Comprehensive income includes net income and net foreign currency translation adjustments. A comprehensive gain on foreign currency translations for the three months ended October 31, 2010 and 2009 was $32,000 and $250,000, respectively. A comprehensive gain on foreign currency translations for the six months ended October 31, 2010 and 2009 was $11,000 and $218,000, respectively.
 
11. Earnings (Loss) Per Share
 
Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. For the three and six months ended October 31, 2010 and 2009, because of our reported net loss, potentially dilutive securities were excluded from the per share computations due to their anti-dilutive effect.
 
  Three Months Ended   Six Months Ended
(in thousands, except per share amounts) October 31,   October 31,
  2010       2009       2010       2009
Net loss $      (481 )   $      (1,400 )   $      (1,340 )   $      (3,629 )
                               
Weighted average shares of common stock outstanding, basic   13,844       10,119       12,542       9,243  
Effect of dilutive securities                      
Weighted average shares of common stock outstanding, diluted   13,844       10,119       12,542       9,243  
                               
Loss per share of common stock:                              
       Basic $ (0.03 )   $ (0.14 )   $ (0.11 )   $ (0.39 )
       Diluted $ (0.03 )   $ (0.14 )   $ (0.11 )   $ (0.39 )

The dilutive securities above represent only those stock options, warrants and convertible debt whose exercise prices were less than the average market price of the stock during the respective periods and therefore were dilutive. Potentially dilutive securities that are not included in the diluted net loss calculation because they would be antidilutive are employee stock options of 276,814 and common stock warrants of 226,213 for the three months ended October 31, 2010. Potentially dilutive securities that are not included in the diluted net loss calculation because they would be antidilutive are employee stock options of 251,947 and common stock warrants of 262,857 for the three months ended October 31, 2009. Potentially dilutive securities that are not included in the diluted net loss calculation because they would be antidilutive are employee stock options of 293,023 and common stock warrants of 298,676 for the six months ended October 31, 2010. Potentially dilutive securities that are not included in the diluted net loss calculation because they would be antidilutive are employee stock options of 258,799 and common stock warrants of 354,242 for the six months ended October 31, 2009. The number of shares of stock options excluded from the above amount because their exercise prices exceeded the average market price of the stock was 950,794 for the three months ended October 31, 2010 and 577,249 for the three months ended October 31, 2009. The number of shares of stock options excluded from the above amount because their exercise prices exceeded the average market price of the stock was 933,340 for the six months ended October 31, 2010 and 545,558 for the six months ended October 31, 2009.
 
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12. Segment Information
 
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We have evaluated our approach for making operating decisions and assessing the performance of our business and, beginning in the first quarter of fiscal year 2011, we have determined that we have two reportable segments: Database and Development Products (“DDP”) and Modernization and Migration Solutions, and eDiscovery and Integrated Content Archiving Solutions. Prior to the first quarter of fiscal year 2011, the Company maintained three reportable segments, Database and Development Products (“DDP”), Integrated Content Archiving Solutions and Modernization & Migration Solutions. The accounting policies of the segments are the same as those described in Note 1. We evaluate performance based on gross margins (total revenues less costs of revenues) before operating costs. We do not manage our operating costs on a segment basis as many of our sales, marketing and support personnel regularly work with products from all segments. Additionally, we do not track assets by segment and therefore asset disclosures by segment are not relevant and are not presented.
 
For the second quarter of fiscal 2011 and 2010, total revenue from the United States was $9.7 million and $3.0 million, respectively. Total revenue from all other countries was $3.2 million in the second quarter of fiscal 2011 and $4.1 million for the second quarter of fiscal 2010. Total long-lived assets as of October 31, 2010 and April 30, 2010, for the United States, was $54.4 million and $23.0 million, respectively. Total long-lived assets in all other countries were $1.8 million as of October 31, 2010 and $2.0 million as of April 30, 2010.
 
Financial information for the Company’s reportable segments is summarized below (in thousands). Fiscal 2010 segment information has been reclassified to conform to the fiscal 2011 presentation.
 
    Three Months Ended   Six Months Ended
    October 31,   October 31,
      2010    2009    2010    2009
Total revenues:                        
       Database and development products and modernization and migration solutions   $       3,741   $       5,355   $       8,061   $       8,783
       eDiscovery and integrated content archiving solutions     9,127     1,732     14,691     2,816
              Total revenues   $ 12,868   $ 7,087   $ 22,752   $ 11,599
                         
Cost of revenue:                        
       Database and development products and modernization and migration solutions   $ 672   $ 905   $ 1,436   $ 1,318
       eDiscovery and integrated content archiving solutions     2,619     572     4,142     753
              Total cost of revenues   $ 3,291   $ 1,477   $ 5,578   $ 2,071
                         
Gross profit:                        
       Database and development products and modernization and migration solutions   $ 3,069   $ 4,450   $ 6,625   $ 7,465
       eDiscovery and integrated content archiving solutions     6,508     1,160     10,549     2,063
              Total gross profit   $ 9,577   $ 5,610   $ 17,174   $ 9,528
                         
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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. In addition, statements that refer to the anticipated impacts of acquisitions, statements made on goodwill, intangible assets, and impairment, statements about the ability to utilize deferred tax assets, and statements about other characterizations of future events or circumstances are 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, 2010, as filed with the SEC.
 
Overview
 
Unify (the “Company”, “we”, “us” or “our”) is a global provider of application development, data management, migration, archiving software, and eDiscovery solutions. Our tools and database software helps companies to maximize value and reduce cost in the development, deployment, management and retention of business applications and data. Our archiving and eDiscovery solutions meet an organization’s requirement to archive, discover and preserve electronically stored information for eDiscovery, regulatory compliance, information governance and storage savings.
 
The Company sells its solutions through two segments. The segments are the Database and Development Products (“DDP”) and Modernization and Migration Solutions segment and eDiscovery and Integrated Content Archiving Solutions segment.
 
Unify’s customers include corporate legal and information technology (“IT”) departments, law firms, software value-added resellers (“VARs”), solutions integrators (“SIs”) and independent software vendors (“ISVs”) from a variety of industries, including legal, insurance, financial services, healthcare, government, manufacturing, retail, education, and more. We are headquartered in Roseville, California, with offices in San Francisco, New York, Chicago, Boston, Rutherford, Canada, Australia, France, Germany, and the United Kingdom (“UK”). We market and sell our solutions directly in the United States, Europe, Canada, Japan, Singapore and Australia and indirectly through global distributors and resellers representing more than 50 countries.
 
Our application modernization solutions help organizations migrate and maximize investments in their existing applications and data to increase productivity, eliminate risk and substantially reduce time and costs. Our application development and data management software products include Team Developer, SQLBase, SQLBase Treasury, NXJ, DataServer, VISION and ACCELL. Our Modernization and Migration Solutions include Composer™ Notes which delivers a like-for-like migration of Lotus Notes applications to the Microsoft .NET platform, Composer Sabertooth™ which speeds the conversion of Team Developer or SQLWindows applications to Microsoft .NET, Composer CipherSoft which automatically converts Oracle Forms and PL/SQL code to Java and Composer Mainframe which delivers automation migration of legacy COBOL, Ideal and Natural code to modern code and relational databases through best of breed partnerships. We also have an integrated content archiving and eDiscovery software solution. The Unify Central Archive enables organizations to securely capture, index, archive, retrieve, review, share, search, supervise and manage the retention, disposition, preservation and destruction of electronically stored information. Through Daegis, we provide eDiscovery solutions including processing, indexing, culling and review of information related to litigation, as well as consulting, project management, document review, and eDiscovery Analytics Consulting.
 
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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. On an ongoing basis, management evaluates its estimates and judgments. 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, hosting, and consulting and implementation services. The Company licenses its products to end-user customers, including corporate legal and IT departments, law firms, independent software vendors (“ISVs”), international distributors and value-added resellers (“VARs”). The Company’s products are generally sold with a perpetual license. The Company’s contracts with ISVs, VARs and international distributors do not include special considerations such as rights of return, stock rotation, price protection or special acceptance. The Company exercises judgment in connection with the determination of the amount of revenue to be recognized in each accounting period. The nature of each contractual arrangement determines how revenues and related costs are recognized.
 
For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, uncertainties regarding customer acceptance are resolved, collectability is probable and persuasive evidence of an arrangement exists.
 
For fixed price arrangements that require significant modification or customization of software, the Company uses the percentage-of-completion method for revenue recognition. Under the percentage-of-completion method, progress towards completion is generally measured by labor hours.
 
The Company considers a signed non-cancelable license agreement, a customer purchase order, a customer purchase requisition, or a sales quotation signed by an authorized purchaser of the customer to be persuasive evidence that an arrangement exists such that revenue can be recognized.
 
The Company’s customer contracts include multi-element arrangements that include a delivered element (a software license) and undelivered elements (such as 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 fair value of the maintenance and support and/or consulting, regardless of any separate prices stated within the contract. VSOE of fair value is defined as: (i) the price charged when the same element is sold separately, or (ii) if the element has not yet been sold separately, the price for the element established by management having the relevant authority when it is probable that the price will not change before the introduction of the element into the marketplace. The Company then allocates the remaining balance to the delivered element (a software license) regardless of any separate prices stated within the contract using the residual method as the fair value of all undelivered elements is determinable.
 
We defer revenue for any undelivered elements, and 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. 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.
 
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.
 
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Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified product updates, are recognized ratably over the term of the maintenance contract, typically one year, and the associated costs are expensed as incurred. Consulting and implementation services are performed on a “best efforts” basis and may be billed under time-and-materials or fixed price arrangements. Revenues and expenses relating to providing consulting services are generally recognized as the services are performed.
 
Goodwill and Intangible Assets
 
Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment on an annual basis as of April 30, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. No impairment of goodwill has been identified during any of the periods presented. Intangible assets are amortized using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented.
 
Deferred Tax Asset Valuation Allowance
 
Deferred taxes are recorded for the difference between the financial statement and tax basis of the Company’s assets and liabilities and net operating loss carryforwards. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not. U.S. income taxes are not provided on the undistributed earnings of foreign subsidiaries as they are considered to be permanently reinvested.
 
As of April 30, 2010, we had approximately $22.4 million of deferred tax assets related principally to net operating loss and capital loss carryforwards, reserves and other accruals, and various tax credits. The Company’s ability to utilize net operating loss carryforwards may be subject to certain limitations in the event of a change in ownership. In addition, the ability of the Company to ultimately realize its deferred tax assets will be contingent upon the Company achieving taxable income. There is no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Accordingly, a valuation allowance has been recorded to offset these 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.
 
Account Receivable and Allowance for Doubtful Accounts
 
We record trade accounts receivable at the invoiced amount and they do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make these estimates based on an analysis of accounts receivable using available information on our customers’ financial status and payment histories as well as the age of the account receivable. Historically, bad debt losses have not differed materially from our estimates.
 
Accounting for Stock-based Compensation
 
For our share-based payment awards, we make estimates and assumptions to determine the underlying value of stock options, including volatility, expected life and forfeiture rates. Changes to these estimates and assumptions may have a significant impact on the value and timing of stock-based compensation expense recognized, which could have a material impact on our financial statements.
 
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Results of Operations
 
The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:
 
    Three Months Ended   Six Months Ended
    October 31,   October 31,
        2010       2009       2010       2009
Revenues:                        
       Software licenses   6.8 %   19.9 %   10.0 %   24.4 %
       Maintenance and Hosting   46.8 %   50.2 %   49.8 %   52.9 %
       Consulting and Implementation Services   46.4 %   29.9 %   40.2 %   22.7 %
              Total revenues   100.0 %   100.0 %   100.0 %   100.0 %
                         
Cost of Revenues:                        
       Software licenses   0.3 %   0.7 %   0.3 %   1.3 %
       Maintenance and Hosting   3.9 %   6.8 %   4.3 %   7.1 %
       Consulting and Implementation Services   21.4 %   13.3 %   19.9 %   9.5 %
              Total cost of revenues   25.6 %   20.8 %   24.5 %   17.9 %
                         
Gross profit   74.4 %   79.2 %   75.5 %   82.1 %
                         
Operating Expenses:                        
       Product development   15.4 %   24.7 %   16.6 %   27.2 %
       Selling, general and administrative   53.0 %   72.3 %   56.8 %   85.7 %
              Total operating expenses   68.4 %   97.0 %   73.4 %   112.9 %
       Income (loss) from operations   6.0 %   (17.8 )%   2.1 %   (30.8 )%
Interest expense   (8.5 )%   (1.0 )%   (6.7 )   (1.0 )
Other income (expense), net   (0.3 )%   (0.1 )%   (0.7 )%   1.1 %
       Loss before income taxes   (2.8 )%   (18.9 )%   (5.3 )%   (30.7 )%
Provision for income taxes   1.0 %   0.8 %   0.6 %   0.6 %
       Net loss   (3.8 )%   (19.7 )%   (5.9 )%   (31.3 )%
                         
Total Revenues
 
The Company generates revenue from software license sales and related services, including maintenance and hosting, and consulting and implementation services. We license our software through our direct sales force in the United States and Europe, and through indirect channels comprised of distributors, ISVs, VARs, and other partners worldwide.
 
Total revenues in the second quarter of fiscal 2011 were $12.9 million, an increase of $5.8 million from the second quarter of fiscal 2010. This represents an increase of 82% from the second quarter of fiscal 2010 revenues of $7.1 million. Total revenues for the six months ended October 31, 2010 were $22.8 million, an increase of $11.2 million. This represents an increase of 96% over revenues from the six months ended October 31, 2009 of $11.6 million. The increase in total revenues is primarily due to revenue resulting from the June 29, 2010 acquisition of Daegis. Total software license revenues in the second quarter of fiscal 2011 were $0.9 million, a decrease of $0.5 million from the second quarter of fiscal 2010. This represents a decrease of 38% over the second quarter of fiscal 2010 revenues of $1.4 million. Total software license revenues for the six months ended October 31, 2010 were $2.3 million, a decrease of $0.5 million. This represents a decrease of 20% over revenues from the six month period ended October 31, 2009 of $2.8 million. The decrease in software license revenue for the three and six months ending October 31, 2010 is primarily due to fewer large deals being closed combined with customers awaiting new releases of our products. Total maintenance and hosting revenues in the second quarter of fiscal 2011 were $6.0 million, an increase of $2.4 million from the second quarter of 2010. This represents an increase of 70% from the second quarter of fiscal 2010 revenues of $3.6 million. Total maintenance and hosting revenues for the six months ended October 31, 2010 were $11.3 million, an increase of $5.2 million. This represents an increase of 85% over revenues from the six month period ended October 31, 2009 of $6.1 million. The increase in maintenance and hosting revenue is primarily related to increases of approximately $2.3 million and $4.6 million of revenue generated by AXS-One and Daegis for the three and six months ended October 31, 2010, respectively. Total consulting and implementation services revenues in the second quarter of fiscal 2011 were $6.0 million, an increase of $3.9 million from the second quarter of fiscal 2010 revenues of $2.1 million. Total consulting and implementation services revenues for the six months ended October 31, 2010 were $9.2 million, an increase of $6.6 million. This represents an increase of 248% over revenues from the six month period ended October 31, 2009 of $2.6 million. The increase in consulting and implementation services revenue is primarily related to increases of approximately $5.2 million and $7.7 million of revenue generated by AXS-One and Daegis for the three and six months ended October 31, 2010, respectively. AXS-One only had one month of revenue included in the first quarter of fiscal 2010 and Daegis did not have any revenue included in fiscal 2010. This increase is offset by current year delays in large government migration projects. 
 
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For the second quarter of fiscal 2011 and 2010, total revenues from the United States were 75% and 43% of total revenues, respectively. Total revenue from the United States in absolute dollars was $9.7 million for the second quarter of fiscal 2011 and $3.0 million for the second quarter of fiscal 2010. The increase is primarily due to the acquisitions of Daegis and AXS-One, which have historically had a high percentage of total revenue from the United States. Total revenue from all other countries was $3.2 million in the second quarter of fiscal 2011 and $4.1 million for the second quarter of fiscal 2010. On a percentage basis, revenue from other countries was 25% for the second quarter of fiscal 2011 and 57% for the second quarter of fiscal 2010.
 
Cost of Revenues
 
Cost of Software Licenses. Cost of software licenses consists primarily of royalty payments and the amortization of purchased technology from third parties that is amortized ratably over the technology’s expected useful life. Cost of software licenses was $35,000 and $51,000 for the second quarter of fiscal 2011 and fiscal 2010, respectively. For the first six months ended October 31, 2010 and 2009, cost of software licenses was $59,000 and $145,000, respectively.
 
Cost of Maintenance and Hosting. Cost of maintenance and hosting consists primarily of employee, facilities and travel costs incurred in providing customer support under software maintenance contracts and third party consulting services. Cost of maintenance and hosting was $495,000 and $485,000 for the second quarter of fiscal 2011 and fiscal 2010, respectively. For the six months ended October 31, 2010 and 2009, cost of services was $990,000 and $826,000, respectively.
 
Cost of Consulting and Implementation Services. Costs of consulting and implementation services consists primarily of both expenses associated with employees involved in consulting and implementation projects and also expenses related to third party assistance. Cost of consulting and implementation services was $2,761,000 and $941,000 for the second quarter of fiscal 2011 and fiscal 2010, respectively. Approximately $1.9 million of the increase in consulting and implementation services is due to the addition of Daegis employees. For the six months ended October 31, 2010 and 2009, cost of migration solutions was $4,529,000 and $1,100,000, respectively. Approximately $2,525,000 of the increase in consulting and implementation services is due to the addition of Daegis employees. Additionally, AXS-One only had one month of consulting and implementation services costs included in the first quarter of fiscal 2010.
 
Operating Expenses
 
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. Product development costs in the second quarter of fiscal 2011 were $2.0 million compared to $1.7 million in the same period of fiscal 2010. Approximately $0.4 million of the increase in product development expenses in the second quarter of fiscal 2011 were the result of expenses related to our acquisition of Daegis in June 2010. For the six months ended October 31, 2010 and 2009, product development expenses were $3.8 million and $3.2 million, respectively. Approximately $0.5 million of the increase in product development expenses in fiscal 2011 were the result of expenses related to our acquisition of Daegis in June 2010.
 
Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and benefits, marketing programs, travel expenses, professional services, facilities expenses and bad debt expense. SG&A expenses were $6.8 million in the second quarter of fiscal 2011 and $5.1 million for the second quarter of fiscal 2010. The major components of SG&A for the second quarter of fiscal 2011 were sales expenses of $2.3 million, marketing expenses of $0.7 million and general and administrative expenses of $3.8 million. For the second quarter of fiscal 2010, the major components of SG&A were sales expenses of $2.6 million, marketing expenses of $0.4 million and general and administrative expenses of $2.1 million. In the six months ended October 31, 2010 and 2009, our SG&A expenses were $12.9 million and $9.9 million, respectively. The major components of SG&A for the six month period ended October 31, 2010 were sales expenses of $4.0 million, marketing expenses of $1.2 million and general and administrative expenses of $7.7 million. The major components of SG&A for the six month period ended October 31, 2009 were sales expenses of $4.8 million, marketing expenses of $0.7 million and general and administrative expenses of $4.4 million. The decrease in sales expenses for the three and six month periods over the comparable prior year expenses are primarily due to a reallocation of employees to consulting and implementation departments combined with a small reduction in force. The increase in SG&A expenses for the three and six months ended October 31, 2010 was primarily the result of approximately $3.2 million and $4.2 million of expenses, respectively, incurred related to our acquisition of Daegis in June 2010.
 
Interest Expense, Interest expense consists primarily of interest incurred on notes payable resulting from the debt financing in conjunction with the June 2010 acquisition of Daegis, plus the amortization of related debt issuance costs and the amortization of the discount on notes payable. Interest expense for the second quarter of fiscal 2011 and 2010 was $1.1 million and $0.1 million, respectively. For the six months ended October 31, 2010 and 2009, interest expense was $1.5 million and $0.1 million, respectively. 
 
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Other Income (Expense), Net. Other income (expense), net consists primarily of foreign exchange rate gains and losses and other income. Foreign exchange rate losses for the second quarter of fiscal 2011 and 2010 were $87,000 and $13,000, respectively. Foreign exchange rate losses for the six months ended October 31, 2010 were $219,000. Foreign exchange rate gains for the six months ended October 31, 2009 were $64,000. Other income for the second quarter of fiscal 2011 and 2010 was $46,000 and $1,000, respectively. Other income for the six months ended October 31, 2010 was $55,000. Other income for the six months ended October 31, 2009 was $61,000.
 
Provision for Income Taxes. For the second quarter of fiscal 2011, the Company recorded $129,000 in federal, state, and foreign income tax expense. For the second quarter of fiscal 2009, the Company recorded $58,000 in federal and state income tax expenses. For the six months ended October 31, 2010 the Company recorded $123,000 in federal, state, and foreign income tax expense. For the six months ended October 31, 2009, the Company recorded $66,000 in federal and state income tax expenses.
 
Liquidity and Capital Resources
 
At October 31, 2010, the Company had cash and cash equivalents of $3.9 million, compared to $3.1 million at April 30, 2010. The Company had net accounts receivable of $14.1 million as of October 31, 2010, and $6.2 million as of April 30, 2010. The increase in cash and accounts receivable from April 30, 2010 to October 31, 2010 was primarily the result of cash and accounts receivable resulting from the June 29, 2010 acquisition of Daegis.
 
In June 2010, the Company entered into the Hercules Loan Agreement. In order to secure its obligations under the Hercules Loan Agreement, the Company has granted the lender a first priority security interest in substantially all of its assets. The Hercules Loan Agreement consists of a term note and a revolving credit note agreement. The term note is for $24.0 million payable over 5 years with escalating principal payments of 5%, 10%, 15%, 20% and 50% annually. The Company incurs interest on the term note at the prevailing LIBOR rate plus 8.25% per annum with a minimum rate of 10.25% (10.25% at October 31, 2010) plus 2% interest to be paid in kind. As of October 31, 2010 there is $24.2 million outstanding on the term note of which $1.0 million is current. Under the terms of the revolver the Company can borrow up to $6.0 million. The amount that can be borrowed under the revolver is based on the amount of eligible accounts receivable outstanding. As of October 31, 2010, the Company was eligible to borrow the entire $6.0 million. The Company incurs interest expense on funds borrowed on the revolver at the prevailing LIBOR rate plus 7.25% per annum with a minimum rate of 9.25% (9.25% October 31, 2010). As of October 31, 2010 there is $3.8 million outstanding on the revolving line of credit, none of which is current.
 
The Hercules Loan Agreement requires ongoing compliance with certain affirmative and negative covenants. The affirmative covenants include, but are not limited to: (i) maintenance of existence and conduct of business; (ii) compliance with laws; (iii) use of proceeds; and (iv) books and records and inspection. The negative covenants set forth in the Hercules Loan Agreement include, but are not limited to, restrictions on the ability of the Company (and the Company’s subsidiaries): (i) with certain limited exceptions, to create, incur, assume or allow to exist indebtedness; (ii) with certain limited exceptions, to create, incur, assume or allow to exist liens on properties; (iii) with certain limited exceptions, to make certain payments, transfers of property, or investments; or (iv) with certain limited exceptions, to make additional acquisitions.
 
In addition, the Company is obligated to maintain certain minimum consolidated adjusted EBITDA levels, certain total leverage ratios, and certain fixed charge coverage ratios, all as calculated in accordance with the terms and definitions determining such ratios contained in the Hercules Loan Agreement. The Hercules Loan Agreement also contains various information and reporting requirements. The Company is in compliance with all such covenants and requirements at October 31, 2010.
 
The Hercules Loan Agreement also contains customary events of default, including without limitation events of default based on payment obligations, repudiation of guaranty obligations, material inaccuracies of representations and warranties, covenant defaults, insolvency proceedings, monetary judgments in excess of certain amounts, change in control, certain ERISA events, and defaults under certain other obligations.
 
In addition to the Hercules Loan Agreement, as of October 31, 2010 the Company has various notes payable outstanding in the amount of $0.3 million all of which is current. The notes payable have interest rates ranging from 0% to 5%.
 
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In conjunction with the Daegis acquisition in June, 2010, the Company issued $6.2 million in convertible notes. The notes consisted of a $5.0 million Subordinated Purchase Note and a $1.2 million Subordinated Indemnity (Escrow) Note. On September 1, 2010 the Company converted the Subordinated Purchase Note and all related accrued interest into 1,448,614 shares of common stock at a conversion price of $3.50 per share. On September 1, 2010 the Company also converted the Subordinated Indemnity (Escrow) Note and all related accrued interest into 344,667 shares of common stock at a conversion price of $3.50 per share. Both notes were cancelled upon conversion.
 
Operating Cash Flow. For the first six months of fiscal year 2011 cash used by operations was $3.9 million. Cash flows used by operations for the first six months of fiscal 2011 principally resulted from a net loss of $1.3 million, an increase in accounts receivable of $2.5 million, an increase in other long term assets of $0.9 million, a decrease in accrued compensation and related expenses of $0.4 million, a decrease in deferred revenue of $2.6 million, and a decrease in other long term liabilities of $0.5 million. Offsetting these amounts was a decrease in prepaid expenses and other current assets of $0.3 million, an increase in accounts payable of $0.6 million, an increase in other accrued liabilities of $0.3 million, amortization of intangible assets of $1.9 million, depreciation of $0.4 million, amortization of discount on notes payable of $0.2 million, interest added to long term debt principal of $0.2 million, and stock based compensation expense of $0.5 million.
 
For the first six months of fiscal year 2010 cash used by operations was $3.9 million. Cash flows used by operations for the first six months of fiscal 2010 principally resulted from a net loss of $3.6 million, an increase in accounts receivable of $4.0 million, a decrease in accounts payable of $1.4 million, a decrease in accrued compensation and related expenses of $0.3 million, a decrease in other accrued liabilities of $1.2 million, and a decrease in other long term liabilities of $0.2 million. Offsetting these amounts was an increase in deferred revenue of $4.8 million, a decrease in prepaid expenses and other current assets of $0.5 million, amortization of intangible assets of $1.2 million, depreciation of $0.1 million and stock based compensation expense of $0.3 million.
 
Investing Cash Flows. Cash flow used in investing activities was $21.9 million for the first six months of fiscal 2011 and was primarily the result of cash used in the acquisition of Daegis. Net cash from investing activities for the first six months of fiscal 2010 was $0.1 million and was primarily the result of cash acquired through the acquisition of AXS-One.
 
Financing Cash Flows. Net cash from financing activities for the first six months of fiscal 2011 was $26.7 million. Cash from financing activities was the result of borrowings on the term loan and revolving line of credit of $24 million and $4.5 million, respectively. Offsetting this amount was $0.7 million of principal payments on debt obligations and $1.1 million of payments on the revolving line of credit. Net cash used in financing activities for the first six months of fiscal 2010 was $0.4 million. Cash from financing activities was the result of proceeds from debt obligations of $0.4 million. Offsetting this amount was $0.7 million of principal payments on debt obligations.
 
A summary of certain contractual obligations as October 31, 2010 is as follows (in thousands):
 
    Payments Due by Period
          1 year   2-3   4-5   After 5
Contractual Obligations       Total       or less       years       years       years
Notes payable   $ 28,228   $ 1,310   $ 5,800     21,118    
Estimated interest expense     9,488     2,490     4,484     2,514    
Other liabilities     101             101    
Capital leases     701     300     401        
Operating leases     4,691     1,680     2,006     836     169
Total contractual cash obligations   $       43,209   $       5,780   $       12,691   $       24,569   $       169
                               
Other liabilities primarily include mandatory employee severance costs associated with a French statutory government regulated plan covering all France employees.
 
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Interest Rate Risk. The Company’s exposure to market rate risk for changes in interest rates relates primarily to its investment portfolio, which consists of cash equivalents. Cash equivalents 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. The Company does not believe its exposure to interest rate risk is material for cash and cash equivalents, which totaled $3.9 million as of October 31, 2010. Unify had no short-term investments at October 31, 2010.
 
Unify does not use derivative financial instruments in its short-term investment portfolio, and places its investments with high quality issuers only and, by policy, limits the amount of credit exposure to any one issuer. The Company is averse to principal loss and attempts to ensure the safety of its invested funds by limiting default, market and reinvestment risk.
 
In June 2010, the Company entered into the Hercules Loan Agreement. The Hercules Loan Agreement consists of a $24.0 million term note and a revolving credit note agreement whereby Hercules would provide up to $6.0 million. The term note and revolving line of credit have interest rate of LIBOR plus 8.25% and 7.25%, respectively. The minimum LIBOR used in the interest rate is 2.0%. LIBOR at October 31, 2010 is approximately 0.4%. Should the LIBOR interest rate increase above 2.0% during the life of the term loan and of the revolver, the Company would have exposure to interest rate risk. As of October 31, 2010, there was $24.2 million outstanding on the term note and $3.8 million outstanding on the revolver.
 
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 an 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. For example, when the U.S. dollar strengthens against the major European currencies, it results in lower revenues and expenses recorded for those regions when translated into U.S. dollars.
 
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 cash and accounts receivable balances related to activities with the Company’s operations in France, Germany, UK, Australia and Canada. At October 31, 2010 the Company had cash held in foreign currencies of $702,000 in Euros, $57,000 in Canadian dollars, $79,000 in pounds sterling, and $77,000 in Australian dollars. At October 31, 2010 the Company had accounts receivable in foreign currencies of $1,515,000 in Euros, $518,000 in pounds sterling, $162,000 in Australian dollars, $27,000 in Japanese yen, $32,000 in Polish zloty, $4,000 in Korean won, and $304,000 in Malaysian ringgit. The Company engages in no hedging activities to reduce the risk of such fluctuations. A hypothetical ten percent change in foreign currency rates could have a significant impact on the Company’s business, operating results and financial position. The Company has not experienced material exchange losses 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.
 
Item 4. Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our chief executive officer and 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 chief executive officer and chief financial officer concluded that our disclosure controls were effective as of the end of the period covered by this quarterly report.
 
(b) Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the first six months of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
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UNIFY CORPORATION
 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
Litigation
 
The Company is subject to legal proceedings and claims arising in the ordinary 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 October 31, 2010, 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.
 
Item 1A. Risk Factors
 
A description of the risks associated with our business, financial condition, and results of operations is set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended April 30, 2010. There have been no material changes in our risks from such description.
 
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Item 6. Exhibits
 
        Exhibits
31.1   Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
      
31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
      
32.1   Certification of Chief Executive Officer under 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Chief Financial Officer under 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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: December 9, 2010 Unify Corporation
  (Registrant)
   
  By:
   
  /s/ STEVEN D. BONHAM
  Steven D. Bonham
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

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