DAEGIS INC. 10-Q 2005
Washington, D.C. 20549
ý Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 2005
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-11807
(Exact name of registrant as specified in its charter)
Blvd, Suite 100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ý NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES o NO ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act),
YES o NO ý
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 28,881,453 shares of Common Stock, $0.001 par value, as of October 31, 2005.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
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). 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 Managements Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Companys Annual Report on Form 10-K for the fiscal year ended April 30, 2005 as filed with the SEC.
The Company implemented its first significant NavRisk software application in the second quarter of fiscal 2006 and is accounting for such revenue under the provisions of Accounting Research Bulletin (ARB) 45, Long-Term Construction-Type Contracts and Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. This guidance is followed since contracts with customers purchasing the NavRisk application require significant configuration to the software and the configuration activities are essential to the functionality of the software. As provided for by SOP 81-1, the Company is using the completed-contract method for revenue recognition as it has limited experience determining the accuracy of progress-to-completion estimates for installation hours and project milestones. Under the completed contract method, revenue is recognized only when the contract is completed. Project costs incurred for contracts in progress are deferred and reflected on the Balance Sheet as Contracts in Progress. When a contract is completed, revenue is recognized and deferred costs are expensed. The Company anticipates it will switch to the percentage-of-completion method to recognize NavRisk revenue when it is capable of accurately establishing progress-to-completion estimates for the NavRisk contracts.
The Companys NavRisk contracts may 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.
Revenue from support and maintenance activities, which consist of fees for ongoing support and unspecified updates, are recognized ratably over the term of the maintenance contract and the associated costs are expensed as incurred.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, Share-Based Payment. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily with respect to transactions in which employee services are obtained in exchange for share-based payment. Statement 123R is effective as of the beginning of the first fiscal year that begins after June 15, 2005. We have not completed the process of evaluating the impact that will result from adopting this pronouncement. The Company is therefore unable to disclose the impact that adopting FASB Statement 123R will have on its financial position and the results of operations when such statement is adopted.
In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. This statement addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. Provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and were required to be adopted by the Company in the second quarter of fiscal 2006. The adoption of Statement 153 did not have a material impact on our financial position, cash flows or results of operations.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections a replacement of APB No. 20 and FAS No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is required to be adopted in fiscal years beginning after December 15, 2005. We do not expect the adoption of this accounting pronouncement to have a material impact on our financial position, cash flows or results of operations.
2. Stock Compensation Information
As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS 148), the Company accounts for stock-based awards using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting For Stock Issued To Employees and related interpretations. As such, compensation is recorded on the measurement date, generally the date of issuance or grant, as the excess of the current estimated fair value of the underlying stock over the purchase or exercise price. Any deferred compensation is amortized over the respective vesting periods of the equity instruments, if any.
SFAS 123 requires the disclosure of pro forma net income (loss) and net income (loss) per share had the Company adopted the fair value method to account for its stock-based awards. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models which were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions. Such options differ significantly from the Companys stock-based awards. These models greatly affect the calculated values. The Companys calculations are made using the Black-Scholes option pricing model, with the following weighted average assumptions for the three months ended October 31, 2005 and 2004, respectively: expected option life, 12 months following vesting; stock volatility of 233% and 239%; risk-free interest rates of 3.9% and 3.0%; and no dividends during the expected term and for the six months ended October 31, 2005 and 2004, respectively; expected option life, 12 months following vesting; stock volatility of 227% and 236%, and risk-free interest rates of 3.8% and 3.1%. The Companys calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur.
The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123, to stock-based employee compensation (in thousands, except per share data):
3. Goodwill and Intangible Assets
The following tables present details of the Companys goodwill and intangible assets as of October 31, 2005 and April 30, 2005 (in thousands):
Acquired finite-lived intangibles are generally amortized on a straight line basis over their estimated useful life. Intangible assets amortization expense for the three months and six months ended October 31, 2005 was $31,000 and $61,000, respectively. The estimated future amortization expense related to intangible assets as of October 31, 2005 is as follows (in thousands):
Goodwill will be tested for impairment on an annual basis as of May 1, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach in accordance with FASB 142, Goodwill and Other Intangible Assets.
4. Credit Facility
On June 5, 2005, the Company renewed its loan agreement with the Silicon Valley Bank. The agreement provides for a $1.0 million revolving line of credit and for term loans up to $250,000 for the purchase of qualifying equipment. The line of credit is secured by qualifying domestic accounts receivable and has a one-year term. The term loan is secured by purchased assets and is repaid over twenty four months. The Company will incur interest expense on the line of credit and the term loan at the prevailing prime rate plus 2.0% and 2.5% per annum, respectively. The prime rate used to determine the interest shall not be less than 4.0%. As of October 31, 2005, the Company had $675,000 outstanding under the line of credit (see Note 5) and $0.2 million in available credit based upon eligible assets at that date. Additionally, as of October 31, 2005 the Company had $47,000 outstanding in term loans (see Note 5).
Borrowings consisted of the following at October 31, 2005 and April 30, 2005 (in thousands):
6. Other Long-Term Liabilities
In February 2005, the Company acquired all of the issued and outstanding equity securities of Acuitrek, Inc. As part of the Acuitrek acquisition, the Company assumed a royalty payable of $600,000 as established by the 2001 funded software development and license arrangement with Acuitreks first customer. A minimum royalty is payable in quarterly installments equal to two percent of all gross revenues received from the sale or licensing of the NavRisk product through June 11, 2011. Any remaining royalty balance as of June 11, 2011 shall become fully due and payable on such date. The Company accrued the estimated costs of providing future support and maintenance services for the support and maintenance contracts as of the acquisition date. The future support obligation periods ranged from less than a year to greater than twenty (20) additional years. The support obligation for periods greater than one year from October 31, 2005 is $122,000.
The Companys other long-term liabilities consist of the following at October 31, 2005 and April 30, 2005 (in thousands):
In France, the Company is subject to mandatory employee severance costs associated with a statutory government regulated plan covering all employees. The plan provides for one month of severance for the first five years of service with an employer and one fifth of one year of severance for every one year of service thereafter. In order to receive their severance payment the employee may not retire before age 65 and must be employed at the time of retirement.
7. Maintenance Contracts
The Company offers maintenance contracts to its customers at the time they enter into a product license agreement and renew those contracts, generally at the customers option, annually thereafter. These maintenance contracts are generally 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. During the second quarter of fiscal 2006 the Company renewed an additional $131,000 of maintenance contracts that now require monthly billing per new General Services Administration (GSA) regulations. As a result of the GSA billing change the amount of new maintenance contracts
reflected in the following table includes only one month of maintenance for GSA contracts for the three months ended October 31, 2005. For the three months ended October 31, 2004 there are twelve months of maintenance for GSA contracts reflected in the new maintenance contracts amount in the following table.
Changes in the Companys deferred maintenance revenue during the periods are as follows (in thousands):
8. Comprehensive Loss
The Companys total comprehensive income (loss) for the periods shown was as follows:
9. Earnings (Loss) Per Share
SFAS No. 128, Earnings per Share, requires a dual presentation of basic and diluted income per share (EPS). Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (e.g. convertible preferred stock, warrants, and common stock options) were exercised or converted into common stock. Potential common shares in the diluted EPS computation are excluded for the three-month period ended October 31, 2004 and the six-month periods ended October 31, 2005 and October 31, 2004 as their effect would be antidilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted income per share computations for the periods indicated (in thousands, except per share data):
10. Segment Information
In the fourth quarter of fiscal 2005, the Company acquired Acuitrek, Inc. This segment is now known as the Insurance Risk Management Division (IRM), which sells and markets the NavRisk application. The Companys technology products, including the Unify NXJ, Dataserver, VISION and ACCELL product families, are included in the Unify Business Solutions (UBS) segment.
Financial information for the Companys reportable segments is summarized below (in thousands):
Net revenues by geographic area were as follows (in thousands):
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 Companys management. Words such as anticipates, expects, intends, plans, believes, seeks, estimates, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those set forth herein under Volatility of Stock Price and General Risk Factors Affecting Quarterly Results and in the Companys 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 Companys 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 Managements Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Companys Annual Report on Form 10-K for the fiscal year ended April 30, 2005, as filed with the SEC.
Unify (the Company, we, us or our) provides business process automation software solutions, including market leading applications for specialty markets within the insurance risk management and transportation industries. Our solutions deliver a broad set of capabilities for automating business processes, integrating existing information systems and delivering collaborative information. Through our industry expertise and technologies, we help organizations reduce risk, drive business optimization, apply governance standards and increase customer and member services.
Our products include vertical application software solutions for the alternative risk insurance and transportation management markets and also infrastructure and database software that helps our customers build business processes. Our products enable organizations to rapidly, efficiently and seamlessly deliver the right information to the right people at the right time. By consolidating, automating and managing data, our customers see increases in efficiencies and services, as well as reductions in costs.
In February 2005, we acquired privately-held Acuitrek Inc., a provider of policy administration and underwriting solutions for the alternative risk market. The acquisition was the result of our expanded strategy to penetrate underserved specialty markets with our solutions. As a result, Unify now offers solutions to the alternative risk market, in particular public entity risk pools made up of cities, counties, special districts, third party administrators and insurance carriers that administer self insurance funds for public entities, captives and other self insured groups.
Our customers also include risk pools, corporate information technology departments (IT), software value-added resellers (VARs), solutions integrators (SIs) and independent software vendors (ISVs) from a variety of industries, including insurance, financial services, healthcare, government, manufacturing and many other industries. We are headquartered in Sacramento, California with a subsidiary office in Paris, France and a sales office in the United Kingdom (UK). We market and sell products directly in the United States, UK and France and indirectly through worldwide distributors in Japan, Russia, South Africa, Italy, Australia, Brazil and Latin America with customers in more than 45 countries.
Our mission is to deliver applications and infrastructure technology solutions that give customers transactional efficiency, a rich user experience and quality information cost effectively and with a high degree of customer satisfaction. Our strategy is to leverage our award-winning process automation technology with our vertical applications to deliver a broad set of solutions that streamline and automate processes and workflow; present rich user experiences; and deliver consolidated information from multiple sources. We believe that by integrating our technology and applications, we have created a unique and compelling offering in our marketplace. By combining best-of-breed capabilities, we offer customers a better way to manage, integrate, view and report data to help them drive their business objectives.
We are organized into two business units comprised of the Insurance Risk Management division (IRM) and Unify Business Solutions division (UBS).
Critical Accounting Policies
The following discussion and analysis of the Companys financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The areas that require significant judgment are as follows.
The Company generates revenue from software license sales and related services, including maintenance and support, and consulting services. The Company licenses its products to end-user customers, independent software vendors and value-added resellers. The Company recognizes revenue for software license sales in accordance with Statement of Position 97-2, Software Revenue Recognition. We exercise judgment in connection with the determination of the amount of software and services revenue to be recognized in each accounting period. The nature of each licensing arrangement determines how revenues and related costs are recognized.
For software license arrangements that do not require significant modification or customization of the underlying software, revenue is recognized when a noncancelable license agreement has been signed or other persuasive evidence of an arrangement exists, the software product or service has been shipped or electronically delivered, the license fees are fixed and determinable, all uncertainties regarding customer acceptance are resolved and collectibility is probable.
For software license arrangements that do require significant modification or customization of the underling software, revenue is recognized based on contract accounting using the completed-contract method. The completed-contract method recognizes income only when the contract is completed. Project costs incurred for these contracts in progress are accumulated and reflected on the Balance Sheet as Contracts in Progress. Currently, the Company uses contract accounting for its NavRisk product. This policy may change to the percentage of completion method in the future.
The Companys 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. The Company then allocates the remaining balance to the delivered element (the 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. Changes in the allocation of the sales price between the elements might impact the timing of revenue recognition, but would not change the total revenue recognized on the contract. We may modify our pricing practices in the future, which could result in changes in our VSOE of fair value for these undelivered elements. As a result, our future revenue recognition for multi-element arrangements could differ significantly from our historical results.
An assessment of the ability of the Companys 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 customers 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 Companys 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 service arrangements are performed on a best efforts basis and are generally billed under time-and-materials arrangements. Revenues and expenses relating to providing consulting services are recognized as the services are performed.
Valuation of Long-Lived Assets
Our long-lived assets are comprised of long-term investments. At October 31, 2005, we had $214,000 in long-term investments, which are accounted for under the cost method. We assess the valuation of long-lived assets whenever circumstances indicate that there is a decline in carrying value below cost that is other-than-temporary. Several factors can trigger an impairment review such as significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. In assessing potential impairment for such investments, we consider these factors as well as the forecasted financial performance. When such decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period operating results to the extent of the decline.
Deferred Tax Asset Valuation Allowance
As of October 31, 2005, we have approximately $20 million of deferred tax assets related principally to net operating loss carry forwards, reserves and other accruals, deferred revenue, and foreign tax credits. A valuation allowance has been recorded to offset these deferred tax assets. The ability of the Company to ultimately realize its deferred tax assets will be contingent upon the Company achieving taxable income. There can be no assurance that this will occur in amounts sufficient to utilize the deferred tax assets. Should we determine that we would be able to realize the deferred tax assets in the future in excess of the recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Results of Operations
The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:
Total revenues for the fiscal 2006 quarter ended October 31, 2005 were $2.7 million compared to total revenues for the second quarter of fiscal 2005 which were $2.8 million. Software license revenue for the quarter ended October 31, 2005 was $1.2 million compared to $1.3 million for the same quarter of the prior year. Services revenue was $1.4 million for the quarter ended October 31, 2005 and $1.5 million for the same quarter of the prior year. Included in the fiscal 2006 software license revenue was $0.2 million from NavRisk, the primary product of Unifys Insurance Risk Management division.
Total revenues for the six months ended October 31, 2005 decreased by 3% to $5.4 million from the same period of the prior year when total revenues were $5.5 million. For the six months ended October 31, 2005 software licenses were $2.4 million and services revenue was $3.0 million. For the same period in the prior year software licenses revenue was $2.5 million and services revenue was $3.1 million. For the six months ended October 31, 2005 total revenue from NavRisk was $.5 million which included $.3 million in software license revenue and $.2 million in services revenue.
Cost of Revenues
Cost of software licenses consists primarily of product packaging and production costs as well as the amortization of royalties and license fees paid for licensed technology. Cost of software licenses was $0.1 million for both the three months ended October 31, 2005 and the three months ended October 31, 2004. For the six months ended October 31, 2005 the cost of software licenses was $.3 million compared to $.2 million for the same period in the prior year. Cost of software licenses as a percent of software licenses revenues for the six months ended October 31, 2005 was 10.8% as compared to 6.8% for the same period of fiscal 2005. The increase in the cost of software licenses was the result of an increase in amortization of purchased software licenses in fiscal year 2006. Costs associated with royalties and other direct production costs are expensed as incurred at the time of the sale and purchased technology from third parties is amortized ratably over their expected useful life. Cost of revenues for NavRisk is comprised of both costs associated with providing consulting services and costs for contracts that were completed in accordance with the completed contract method of accounting. Prior to contract completion, costs are deferred and reflected on the Balance Sheet as Contracts in Progress. When a contract is completed, revenue is recognized and deferred costs are expensed. For the three months ended October 31, 2005 costs of revenues for NavRisk was $0.2 million.
Cost of services consists primarily of employee, facilities and travel costs incurred in providing customer support under software maintenance contracts and consulting services. Total cost of services was $0.4 million for both the second quarter of fiscal 2006 and fiscal 2005. Total cost of services was also consistent for the six months ended October 31, 2005 and 2004 at $0.7 million for both periods. Cost of services as a percent of services revenues was 24% for both the six months ended October 31, 2005 and for the same period of fiscal 2005.
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 were $0.6 million in the second quarter of fiscal 2006 and $0.7 million for the same period in the prior year. Product development costs as a percentage of total revenues were 24% for the six months ended October 31, 2005 compared to 26% in the same period of fiscal 2005.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses consist primarily of salaries and incentive pay, marketing programs, travel expenses, professional services, facilities expenses and bad debt expense or recoveries. SG&A expenses were $1.5 million for the second quarter of fiscal 2006 compared to $2.3 million for the second quarter of fiscal 2005. As a percentage of total revenue, SG&A expenses were 58% in the second quarter of fiscal 2006 and 81% in the second quarter of fiscal 2005. The $0.8 million reduction in SG&A was primarily the result of reductions in sales personnel and marketing expenses. The largest change was in sales expenses which decreased by $0.6 million in the second quarter of fiscal 2006 compared to the same period in fiscal 2005. The major components of SG&A for the second quarter of fiscal 2006 were sales expenses of $0.7 million, marketing expenses of $0.2 million and general and administrative expenses of $0.6 million.
Provision for Income Taxes
No federal or state tax provisions were recorded in the three and six-month periods ended October 31, 2005, as the Company has significant net operating loss carryforwards.
Liquidity and Capital Resources
At October 31, 2005, the Company had cash and cash equivalents of $3.2 million compared to $3.7 million at April 30, 2005. Working capital was $0.9 million as of October 31, 2005 and $0.8 million as of April 30, 2005.
During the first quarter of fiscal 2005 the Company renewed its loan agreement with the Silicon Valley Bank. The agreement provides for a $1.0 million revolving line of credit and for term loans up to $250,000 for the purchase of qualifying equipment. As of October 31, 2005, the Company had $0.7 million outstanding under the line of credit and $0.2 million in available credit based upon eligible assets at that date. As of October 31, 2005, the company had a term loan balance of $0.1 million.
Cash flows used by operations were $1.0 million for the first six months of fiscal 2006, compared to a usage of cash for operations of $2.4 million for the first six months of fiscal 2005. For the six months ended October 31, 2005, operating cash was provided by decreases in accounts receivable of $0.7 million and prepaid expenses of $0.2 million. Operating cash was used as a result of decreases in deferred revenue of $0.9 million, accrued liabilities of $0.4 million, accounts payable of $0.3 million and contracts in progress of $0.2 million. For the six months ended October 31, 2005 investing activities used cash of $0.1 million for the purchase of property and equipment. Cash provided by financing activities in the first six months of fiscal 2006 was $0.7 million as a result of a borrowing on the Companys line of credit of $.7 million, proceeds from issuance of common stock from stock option exercises and purchases of common stock under the employee stock purchase plan of $0.1, offset by payments made on debt obligations of $0.1 million. The Companys cash flow also reflects a decrease of $0.1 million in the first six months of fiscal 2006 as a result of the effect of currency exchange rates related to international operations.
A summary of certain contractual obligations as of October 31, 2005, is as follows (in thousands):
Volatility of Stock Price and General Risk Factors Affecting Quarterly Results
The Companys common stock price has been and is likely to continue to be subject to significant volatility. A variety of factors could cause the price of the Companys common stock to fluctuate, perhaps substantially, including: announcements of developments related to the Companys business; fluctuations in the Companys or its competitors operating results and order levels; general conditions in the computer industry or the worldwide economy; announcements of technological innovations; new products or product enhancements by the Company or its competitors; changes in financial estimates by securities analysts; developments in patent, copyright or other intellectual property rights; developments in the Companys relationships with its customers, distributors and suppliers; legal proceedings brought against the Company or its officers; the structure of acquisitions or potential acquisitions by the Company and the performance of any companies acquired; and significant changes in the Companys senior management team. In addition, in recent years the stock market in general, and the market for shares of equity securities of many high technology companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of those companies. Such fluctuations may adversely affect the market price of the Companys common stock.
The Companys quarterly operating results have varied significantly in the past, and the Company expects that its operating results are likely to vary significantly from time to time in the future. Such variations result from, among other factors, the following: the size and timing of significant orders and their fulfillment; demand for the Companys products; ability to sell new products; the number, timing and significance of product enhancements and new product announcements by the Company and its competitors; ability of the Company to attract and retain key employees; the Companys ability to integrate and manage acquisitions; seasonality; changes in pricing policies by the Company or its competitors; realignments of the Companys organizational structure; changes in the level of the Companys operating expenses; changes in the Companys sales incentive plans; budgeting cycles of the Companys customers; customer order deferrals in anticipation of enhancements or new products offered by the Company or its competitors; product life cycles; product defects and other product quality problems; currency fluctuations; and general domestic and international economic and political conditions.
Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast. Revenues are also difficult to forecast because the market for software continues to evolve and the Companys sales cycle, from initial evaluation to purchase and the provision of maintenance services, can be lengthy and vary substantially from customer to customer. Because the Company normally ships products within a short time after it receives an order, it typically does not have any material backlog. As a result, to achieve its quarterly revenue objectives, the Company is dependent upon obtaining orders in any given quarter for shipment in that quarter. Furthermore, because many customers place orders toward the end of a fiscal quarter, the Company generally recognizes a substantial portion of its license revenues at the end of a quarter. As the Companys expense levels are based in significant part on the Companys expectations as to future revenues and are therefore relatively fixed in the short term, if revenue levels fall below expectations,
operating results are likely to be disproportionately adversely affected. The Company also expects that its operating results will be affected by seasonal trends, and that it may experience relatively weaker demand in fiscal quarters ended July 31 and October 31 as a result of reduced business activity in Europe during the summer months.
Interest Rate Risk. The Companys exposure to market rate risk for changes in interest rates relates primarily to its investment portfolio, which consists of cash equivalents and short-term investments. 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 and which hold investments with maturity dates of less than 90 days. The Company does not believe its exposure to interest rate risk is material for cash and investments, which totaled $3.2 million at October 31, 2005. Unify had no short-term investments at October 31, 2005. The Company had $800,000 in short-term borrowings and $7,000 in long-term debt at October 31, 2005. Subsequent to quarter-end the Company made a payment of $675,000 on its short-term borrowings. The Company does not believe its exposure to interest rate risk is material for debt.
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.
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 Companys business, operating results and financial position. Historically, the Companys 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 intercompany accounts receivable owed to the Company as a result of local currency sales of software licenses by the Companys international subsidiary in France. At October 31, 2005, the Company had the equivalent of $178,000 in such receivables denominated in Euros. The Company encourages prompt payment of these intercompany balances in order to minimize its exposure to currency fluctuations, but it engages in no hedging activities to reduce the risk of such fluctuations. A hypothetical ten percent change in foreign currency rates would have an insignificant impact on the Companys business, operating results and financial position. The Company has not experienced material exchange losses on intercompany balances in the past; however, due to the substantial volatility of currency exchange rates, among other factors, it cannot predict the effect of exchange rate fluctuations on its future business, operating results and financial position.
(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 and procedures 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 quarter ended October 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
The Company is subject to legal proceedings and claims that arise in the normal course of business. If such matters arise, the Company cannot assure that it would prevail in such matters, nor can it assure that any remedy could be reached on mutually agreeable terms, if at all. Due to the inherent uncertainties of litigation, were there any such matters, the Company would not be able to accurately predict their ultimate outcome. As of October 31, 2005, 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.
At the annual meeting of the Companys stockholders held on September 29, 2005, the following matters were voted upon:
1. The election of each of the nominees for director were approved with the following votes:
2. The proposal to ratify the selection of Grant Thornton as the Companys independent auditors for fiscal 2006 was approved as 20,088,085 shares voted in favor of the amendment, representing 97.4% of the shares voted at the meeting. This was sufficient to pass the amendment.
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.