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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
Commission File Number: 0-21683
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GraphOn Corporation
(Exact name of Registrant as specified in its charter)
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Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11711 South East 8th Street, Suite 215
Bellevue, WA 98005
(Address of principal executive offices)
Registrant's telephone number: (425) 818-1400
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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 [ ]
As of August 5, 2002 there were issued and outstanding 17,500,052 shares
of the Registrant's Common Stock, par value $0.0001.
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GRAPHON CORPORATION
FORM 10-Q
Table of Contents
Page
PART I.
Item 1.Financial Statements
Condensed Balance Sheets 2
Condensed Statements of Operations 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 22
PART II.
Item 6.Exhibits and Reports on Form 8-K 23
Signatures 24
PART I--FINANCIAL INFORMATION
ITEM I Financial Statements
GRAPHON CORPORATION
CONDENSED BALANCE SHEETS
June 30, December 31,
2002 2001
ASSETS ------------ ------------
------------ (Unaudited)
Current Assets:
Cash and cash equivalents ...................... $ 811,800 $ 3,952,600
Available-for-sale securities .................. 2,517,500 3,008,000
Accounts receivable, net of allowance for
doubtful accounts of $150,000 and $350,000 .... 386,900 620,400
Prepaid expenses and other current assets ...... 104,200 251,300
------------ ------------
Total Current Assets ........................... 3,820,400 7,832,300
------------ ------------
Purchased technology, net ........................ 2,474,300 3,132,400
Other assets ..................................... 1,126,300 2,021,100
------------ ------------
TOTAL ASSETS .................................. $ 7,421,000 $ 12,985,800
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable ............................... $ 457,400 $ 319,900
Other current liabilities ...................... 729,300 762,100
Deferred Revenue ............................... 503,300 577,800
------------ ------------
Total Current Liabilities ...................... 1,690,000 1,659,800
------------ ------------
Stockholders' Equity
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding .... - -
Common stock, $0.0001 par value, 45,000,000
shares authorized, 17,500,052 and 17,226,004
shares issued and outstanding ................... 1,900 1,700
Additional paid in capital ....................... 45,981,300 45,925,900
Deferred compensation ............................ (52,400) (193,800)
Notes receivable ................................. (50,000) -
Accumulated other comprehensive income ........... (2,100) 1,500
Accumulated deficit .............................. (40,147,700) (34,409,300)
------------ ------------
Total Stockholders' Equity ....................... 5,731,000 11,326,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 7,421,000 $ 12,985,800
============ ============
See accompanying notes to condensed financial statements.
2
GRAPHON CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue ..................... $ 525,400 $ 1,935,600 $ 1,111,100 $ 4,256,200
Cost of revenue ............. 461,900 367,900 916,500 749,900
----------- ----------- ----------- -----------
Gross Profit .............. 63,500 1,567,700 194,600 3,506,300
----------- ----------- ----------- -----------
Operating Expenses:
Selling and marketing ....... 516,700 1,543,000 1,325,500 2,968,500
General and administrative .. 835,800 1,348,200 1,479,400 2,855,400
Research and development .... 884,600 1,116,100 1,697,400 2,469,300
Restructuring charge ........ - - 1,490,400 -
----------- ----------- ----------- -----------
Total Operating Expenses .... 2,237,100 4,007,300 5,992,700 8,293,200
----------- ----------- ----------- -----------
Loss From Operations ........ (2,173,600) (2,439,600) (5,798,100) (4,786,900)
Other Income (Expense):
Other income (expense), net 25,600 139,500 59,700 329,600
Loss on joint venture ..... - (27,100) - (40,700)
----------- ----------- ----------- -----------
Total Other Income ........ 25,600 112,400 59,700 288,900
----------- ----------- ----------- -----------
Loss Before Provision for
Income Taxes ............... (2,148,000) (2,327,200) (5,738,400) (4,498,000)
Provision for Income Taxes .. - - - -
----------- ----------- ----------- -----------
Net Loss .................... $(2,148,000) $(2,327,200) $(5,738,400) $(4,498,000)
----------- ----------- ----------- -----------
Basic and Diluted Loss
per Common Share............ $ (0.12) $ (0.16) $ (0.33) $ (0.31)
=========== =========== =========== ===========
Weighted Average Common
Shares Outstanding.......... 17,500,052 14,778,768 17,428,431 14,742,910
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
3
GRAPHON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2002 2001
----------- -----------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss ............................................. $(5,738,400) $(4,498,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ...................... 1,076,000 978,100
Restructuring charge ............................... 559,800 -
Amortization of deferred compensation .............. 141,400 740,100
Provision for doubtful accounts .................... (200,000) -
Loss on joint venture - related party .............. - 40,700
Changes in operating assets and liabilities:
Accounts receivable ................................ 433,500 (2,365,900)
Prepaid expenses and other assets .................. 147,100 255,600
Accounts payable ................................... 137,500 133,700
Accrued expenses ................................... (6,200) 25,600
Deferred revenue ................................... (74,500) 1,602,100
----------- -----------
Net Cash Used In Operating Activities ................ (3,523,800) (3,088,000)
----------- -----------
Cash Flows From Investing Activities:
Purchase of available-for-sale securities ............ (768,300) (2,214,300)
Proceeds from sale of available-for-sale securities .. 1,256,000 4,910,400
Capitalization of software development costs ......... - (132,500)
Capital expenditures ................................. (82,900) (313,600)
Other assets ......................................... - (56,000)
Investment in joint venture - related party .......... - (105,200)
----------- -----------
Net Cash Provided By Investing Activities .......... 404,800 2,088,800
----------- -----------
Cash Flows From Financing Activities:
Repayment of note payable ............................ (26,600) (90,300)
Net proceeds from issuance of common stock ........... 5,400 118,500
----------- -----------
Net Cash (Used In) Provided By Financing Activities (21,200) 28,200
----------- -----------
Effect of exchange rate fluctuations on cash and
cash equivalents ................................... (600) (300)
----------- -----------
Net Decrease in Cash and Cash Equivalents ............ (3,140,800) (971,300)
Cash and Cash Equivalents, beginning of period ....... 3,952,600 8,200,100
----------- -----------
Cash and Cash Equivalents, end of period ............. $ 811,000 $ 7,228,800
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest expense $ 200 $ 3,200
Noncash Investing and Financing Activities:
Notes receivable issued for purchase of common stock $ 50,000 $ -
See accompanying notes to condensed financial statements.
4
GRAPHON CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed financial statements of GraphOn Corporation (the
Company) included herein have been prepared in accordance with the instructions
for Form 10-Q and, therefore, do not include all information and footnotes
necessary for a complete presentation of the Company's results of operations,
financial position and cash flows.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments, except for the
restructuring charge, as described below) that are, in the opinion of
management, necessary to state fairly the results for the periods presented.
This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's audited financial statements contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001, which was filed with the
Securities and Exchange Commission (the Commission) on March 29, 2002. The
interim results presented herein are not necessarily indicative of the results
of operations that may be expected for the full fiscal year ending December 31,
2002, or any future period.
The Company's financial statements have been presented on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. The Company has suffered from
recurring losses and has absorbed significant cash in its operating activities.
Further, the Company's revenues have declined significantly during the six-month
period ended June 30, 2002 compared to the comparable period of 2001. These
trends are expected to continue in the near-term. As a result, based on the
Company's current amount of cash on hand and level of operations, the Company
expects to absorb its remaining cash within the next six to twelve months. These
matters raise substantial doubt about the ability of the Company to continue in
existence as a going concern. The condensed financial statements do not include
any adjustments relating to the recoverability and classification of assets or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern. In order to realize assets and
settle liabilities within the normal course of business, the Company must
continue to aggressively adjust its current level of operations in order to
match the Company's currently available resources. Such adjustments will likely
include further work force reductions, exiting of facilities or the disposition
of certain operations.
The Company will continue to develop its Windows-based product line,
particularly its Windows enterprise edition, GG:XP, as it strives to further
penetrate the Windows market. The Company anticipates incurring further
development costs for GG:XP until it is ready for distribution, currently
expected to be towards the end of the third quarter of 2002. Management expects
to fund this development through working capital and cash flow from operations.
Management believes that the Company will be able to attain sufficient levels
of sales from its UNIX products and current Windows customers that, coupled with
its cash and cash equivalents and available-for-sale securities, it will be able
to meet its current operational needs for the balance of the year. There can be
no assurance that the Company will be able to attain the necessary sales level
5
to sustain the current operations in which case, current operations would need
to be severely reduced, which in turn would materially impact the Company's
ability for future growth and viability.
The Company has announced that it has signed a Letter of Intent to acquire three
privately held affiliated entities in the telecommunications industry. The
Company believes that should the acquisition be successful, the newly acquired
entities would have available financial resources to provide for the Company's
operations. Consummation of the proposed acquisition is subject to a number of
conditions including the negotiation and execution of a definitive acquisition
agreement, the performance of customary due diligence investigations, the
Company's receipt of a fairness opinion, filing and clearance of proxy
solicitation materials and receipt of shareholder approval, among others.
If any of these strategic initiatives were to be not successful, there would
be a material uncertainty as to whether or not the Company would be able to
realize its assets and settle its liabilities in the normal course of its
business operations.
2. Earnings Per Share
Basic earnings per share are calculated using the weighted average number of
shares outstanding during the period. Diluted earnings per share are calculated
using the weighted average number of shares outstanding during the period plus
the dilutive effect of outstanding stock options and warrants using the
"treasury stock", method and are not included since they are antidilutive.
3. Stockholders' Equity
During the six-month period ended June 30, 2002, the Company issued 11,720
shares of common stock to employees pursuant to the exercise by those employees
of stock options granted under the 1998 Stock Option/Stock Issuance Plan,
resulting in cash proceeds of $5,400. Also during the six-month period ended
June 30, 2002, the Company issued 200,000 shares of common stock to directors
pursuant to the exercise by those directors of stock options granted under the
1998 Stock Option/Stock Issuance Plan. Each of the two directors exercising the
options issued a $25,000 promissory note to the Company to pay for the options.
The notes are for a term of three years, are due on or before March 5, 2005 and
bear semi-annual interest at 2.67% per annum, which is equal to the applicable
federal short-term interest rate in effect at the time the promissory notes were
signed.
During the three months ended June 30, 2002, the Company did not enter into
any transactions affecting stockholders equity.
4. Litigation
The Company is currently not involved in any litigation that it believes
would have a materially adverse affect upon its financial results.
5. Restructuring Charge
Effective March 31, 2002, the Company closed its Morgan Hill, California
corporate office facilities and relocated them to its pre-existing engineering
6
facility in Bellevue, Washington. In conjunction with the relocation, the
Company reduced administrative, sales and marketing headcount, and wrote off the
costs of leasehold improvements that had been previously made to the Morgan Hill
facility. A summary of the restructuring charges recognized during the quarter
ended March 31, 2002 is as follows:
Category Charge
Fixed assets abandonment $ 559,800
Minimum lease payments 180,100
Employee severance 750,500
-----------
$ 1,490,400
Included in employee severance are the payments made to the Company's
co-founders, which aggregated $500,000, upon their departure in January 2002.
The costs associated with fixed assets disposals are comprised of the estimated
net book value of the assets, including furniture and fixtures, equipment and
leasehold improvements, which were written off upon the closure of the Morgan
Hill corporate office, as these assets will have no future utility. The Company
does not anticipate any material cash disposal costs to be incurred to dispose
of the fixed assets. The minimum lease payments are an estimate of the cash the
Company may need to disburse in order to fulfill its obligations under the
current Morgan Hill office lease and are equal to one year's worth of aggregated
monthly lease payments. Given current market conditions in the corporate real
estate rental market in Morgan Hill, the Company anticipates that its search for
a suitable sublessee should take approximately one year.
6. Acquisition
On May 15, 2002, the Company announced that it had entered into a letter of
intent to acquire three privately held, affiliated entities in the
telecommunications industry. The Company expects that these businesses will
benefit from its software development expertise and experience, while providing
the Company with a revenue stream and platform for potential future growth and
profitability. The Company anticipates that this acquisition, if completed, will
result in the shareholders of these entities acquiring approximately a 70%
equity interest in the Company.
Consummation of the proposed acquisition is subject to a number of conditions
including the negotiation and execution of a definitive acquisition agreement,
the performance of customary due diligence investigations, the Company's receipt
of a fairness opinion, filing and clearance of proxy solicitation materials and
receipt of shareholder approval, among others.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
The following discussion of the financial condition and results of operations
of the Company contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual results and the timing of certain events could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, but not limited to, those set forth under "Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 2001 and in other documents filed by the Company with the Securities and
Exchange Commission.
Overview
We are developers of business connectivity software, including server-based
software, with an immediate focus on web-enabling applications for use by
various parties, including independent software vendors (ISVs), application
service providers (ASPs), corporate enterprises, governmental and educational
institutions, and others. Server-based computing, sometimes referred to as
thin-client computing, is a computing model where traditional desktop software
applications are relocated to run entirely on a server, or host computer. This
centralized deployment and management of applications is intended to reduce the
complexity and total costs associated with enterprise computing. Our software
architecture provides application developers with the ability to relocate
applications traditionally run on the desktop to a server, or host computer,
where they can be run over a variety of connections from remote locations to the
desktop. Our server-based technology works on today's most powerful personal
computer, or low-end network computer, without application rewrites or changes
to the corporate computing infrastructure.
With our software, applications can be web enabled, without any modification
to the original application software required, allowing the applications to be
run from browsers or portals. In addition, the ability to access such
applications over the Internet creates new operational models and sales
channels. We provide the technology to access applications over the Internet.
We entered both the UNIX and Linux server-based computing and web enabling
markets as early as 1996. We expanded our product offerings by shipping Windows
web-enabling software in early 2000.
Effective April 1, 2002, we are headquartered in Bellevue, Washington, with
offices in Concord, New Hampshire and Reading, United Kingdom.
On May 15, 2002, we announced that we had entered into a letter of intent to
acquire three privately held, affiliated entities in the telecommunications
industry. We expect that these businesses will benefit from our software
development expertise and experience, while providing us with a revenue stream
and platform for potential future growth and profitability. We anticipate that
this acquisition, if completed, will result in the shareholders of these
entities acquiring approximately a 70% equity interest in GraphOn.
8
In order to ensure that we will be able to realize our assets and settle our
liabilities within the normal course of our business operations, we must
consider several aggressive strategic initiatives including future work force
reductions, the exiting of further facilities or the disposition of certain
operations.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us
to make judgments, assumptions and estimates that effect the amounts reported in
the Condensed Financial Statements and accompanying notes. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts,
the impairment of intangible assets, contingencies and other special charges and
taxes. Actual results could differ materially from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the Condensed Financial
Statements.
The recognition of revenue is based on our assessment of the facts and
circumstances of the sales transaction. We will recognize revenue only when all
four of the following conditions have been met:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o Our price to the customer is fixed or determinable; and
o Collectibility is reasonably assured
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts due us could be adversely affected.
We have experienced very little market volatility in the market prices of our
available-for-sale securities. These securities are recorded on the balance
sheet at fair value and we would recognize an impairment charge if a decline in
fair value below the cost basis were judged to be other than temporary. We
consider various factors in determining whether we should recognize an
impairment charge including, but not limited to the financial condition and the
near-term prospects of the issuer and our intent and ability to hold the
security until maturity. The ultimate market value realized on these securities
is subject to market volatility until they are sold.
We will perform impairment tests on our intangible assets on an annual basis
and between annual tests in certain circumstances. In response to changes in
industry and market conditions, we may strategically realign our resources and
consider restructuring, disposing of, or otherwise exiting businesses, which
could result in an impairment of intangible assets.
We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of the loss or
impairment of an asset or the incurrence of a liability as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies. An
9
estimated loss contingency is accrued it is probable that a liability has been
incurred or an asset has been impaired and the amount of the loss can be
reasonably estimated. We regularly evaluate current information available to us
to determine whether such accruals should be adjusted.
Results of Operations for the Three and Six-Month Periods Ended June 30, 2002
Versus the Three and Six-Month Periods Ended June 30, 2001.
Revenue
Our revenues are primarily derived from product and patent technology
licensing fees. Other sources of revenue include service fees from maintenance
contracts and training fees. Total revenue for the three-month period ended June
30, 2002 decreased by $1,410,200, or 72.9%, to $525,400 from $1,935,600 for the
same period in 2001. Revenue derived from our Windows-based products during the
three-month period ended June 30, 2002 decreased by $682,100, or 73.9%, to
$241,400 from $923,500 for the same period in the prior year. The decrease was
primarily due to product licensing fees, which were recorded during the three
months ended June 30, 2001, that resulted from one-time transactions entered
into with a limited number of customers. Revenue derived from our UNIX-based
products during the three-month period ended June 30, 2002 decreased by
$127,500, or 31.0%, to $284,000 from $411,500 for the same period in the prior
year. The decrease was primarily attributable to product licensing fees made
during the three-month period ended June 30, 2001, that resulted from one-time
transactions entered into with a limited number of customers. Also during the
three-month period ended June 30, 2002, revenue derived from licensing our
patented technology decreased by $600,000, or 100%, to $0 from $600,000 for the
same period in the prior year. The market for licensing our patented technology
is very limited. We do not anticipate licensing our patented technology during
the remainder of 2002.
Total revenue for the six-month period ended June 30, 2002 decreased by
$3,145,100, or 73.9%, to $1,111,100 from $4,256,200 for the same period in 2001.
Revenue derived from our Windows-based products during the six-month period
ended June 30, 2002 decreased by $662,600, or 52.4% to $602,900 from $1,265,500
for the same period in the prior year. The decrease was primarily due to product
licensing fees, which were recorded during the six months ended June 30, 2001,
that resulted from one-time transactions entered into with a limited number of
customers. Revenue derived from our UNIX-based products during the six-month
period ended June 30, 2002 decreased by $281,700, or 35.7%, to $508,200 from
$789,900 for the same period in the prior year. The decrease was primarily
attributable to product licensing fees made during the six-month period ended
June 30, 2001, that resulted from one-time transactions entered into with a
limited number of customers.
Also during the six-month period ended June 30, 2002, revenue derived from
our patented technology decreased by $2,200,000, or 100%, to $0 from $2,200,000
for the same period in the prior year. The market for licensing our patented
technology is very limited. We do not anticipate licensing our patented
technology during the remainder of 2002.
Currently, a significant portion of licensing fees is derived from a limited
number of customers, which vary, sometimes significantly, from quarter to
quarter. We expect this trend to continue throughout 2002.
10
Cost of Revenue
Cost of revenue consists primarily of the amortization of acquired technology
or capitalized technology developed in-house. Under accounting principles
generally accepted in the United States, research and development costs for new
product development, after technological feasibility is established, are
recorded as "capitalized software" on our balance sheet and are subsequently
amortized as cost of revenue over the shorter of three years or the remaining
estimated life of the products. Other items included in cost of revenue are
customer service costs and shipping and packaging materials.
Cost of revenue for the three-month period ended June 30, 2002 increased by
$94,000, or 25.5%, to $461,900 from $367,900 for the same period in 2001. Cost
of revenue for the six-month period ended June 30, 2002 increased by $166,600,
or 22.2%, to $916,500 from $749,900 for the same period in 2001. The increases
for the three-month and six-month periods ended June 30, 2002 are substantially
comprised of amortization resulting from the Menta technology acquisition made
at the end of the second quarter of 2001, partially offset by the asset
impairment charge we recorded as of December 31, 2001 against various components
of our purchased technology.
We expect cost of revenue to approximate first and second quarter 2002 levels
for the next several quarterly reporting periods.
Selling and Marketing Expenses
Selling and marketing expenses primarily consist of salaries, sales
commissions, travel expenses, trade show related activities, promotional, and
advertising costs and the allocation of corporate overhead charges. Also
included in selling and marketing expenses is amortization of non-cash
compensation resulting from the issuance of stock options and warrants to
various outside sales and marketing consultants. Selling and marketing expenses
for the three-month period ended June 30, 2002 decreased by $1,026,300, or
66.5%, to $516,700 from $1,543,000 for the same period in 2001.
The decrease for the three-month period ended June 30, 2002, as compared to
the same time period in the prior year, is primarily due to a decrease in
headcount, resulting from our September 2001 workforce reduction as well as our
March 31, 2002 restructuring, which lead to decreases in human resources costs,
including salaries, fringe benefits and commissions, travel expenses, and the
allocation of corporate overhead charges. Our average headcount in sales and
marketing decreased by 17, or 58.6%, to 12 in the three-month period ended June
30, 2002, from 29, for the same period in the prior year. As a result of the
decreased headcount, human resources costs decreased by $655,100, or 64.1%, to
$367,600, for the three-month period ended June 30, 2002, from $1,022,700, for
the same period in the prior year. Also as a result of the decreased headcount,
travel expenses decreased by $65,500, or 66.6%, to $32,800 for the three-month
period ended June 30, 2002, from $98,300, for the same period in the prior year.
Additionally as a result of the decreased headcount, allocation of corporate
overhead charges decreased by $142,000, or 94.3%, to $8,600 for the three-month
period ended June 30, 2002, from $150,600, for the same period in the prior
year.
Selling and marketing expenses for the six-month period ended June 30, 2002
decreased by $1,643,000, or 55.3%, to $1,325,500 from $2,968,500 for the same
period in 2001. The decrease for the six-month period ended June 30, 2002 was
11
primarily due to a decrease in headcount, resulting from our September 2001
workforce reduction and our March 2002 restructuring, which lead to decreases in
human resources costs, including salaries, fringe benefits and commissions,
travel expenses, and the allocation of corporate overhead charges. Our average
headcount in sales and marketing decreased by 11, or 40.7%, to 16 in the
six-month period ended June 30, 2002, from 27, for the same period in the prior
year. As a result of the decreased headcount, human resources costs decreased by
$928,500, or 51.2%, to $884,600, for the six-month period ended June 30, 2002,
from $1,813,100, for the same period in the prior year. Also as a result of the
decreased headcount, travel expenses decreased by $171,200, or 67.4%, to $82,900
for the six-month period ended June 30, 2002, from $254,100, for the same period
in the prior year. Additionally, as a result of the decreased headcount,
allocation of corporate overhead charges decreased by $136,500, or 52.2%, to
$124,800 for the six-month period ended June 30, 2002, from $261,300, for the
same period in the prior year.
We determined during February 2002 that we would temporarily shift our sales
and marketing concentration for the balance of 2002 towards our UNIX products
and away from our Windows products. The purpose of this shift was two-fold.
First, this would free up our Windows-based engineers' time to allow them to
continue their efforts to refine our Windows-based product line, particularly
our Windows enterprise edition, GG:XP, so that those products could compete more
effectively in the market place. Second, since our UNIX products are already
competitive in the market place, they would be able to support an increased
sales and marketing concentration, and potentially generate more revenue for us
than they have done in the past. We do not expect this shift in sales to have a
material negative impact on our Windows-based revenue, as we will continue to
service and support our established Windows-based customers.
We anticipate that selling and marketing expenses in future periods will be
lower than those incurred in the three-month period ended June 30, 2002 as we
continue to aggressively reduce our operating costs. Sales and marketing
expenses were approximately 98.3% and 79.7% of revenue for the three-month
periods ended June 30, 2002 and 2001, respectively. Sales and marketing expense
were approximately 119.3% and 69.7% of revenue for the six-month periods ended
June 30, 2002 and 2001, respectively.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries and
associated benefits, legal and professional services, amortization of non-cash
compensation resulting from the issuance of stock options and warrants to
various financial consultants and bad debts expense and the allocation of
corporate overhead charges. General and administrative expenses for the
three-month period ended June 30, 2002 decreased by $512,400, or 38.0%, to
$835,800 from $1,348,200 for the same period in 2001.
Factors contributing to the decreased general and administrative expenses for
the three-month period ended June 30, 2002 as compared with the same period in
the prior year, were primarily due to a decrease in headcount, resulting from
our September 2001 workforce reduction and our March 31, 2002 restructuring, and
included decreased employee related expenses, decreased corporate overhead
allocations and a decrease in non-cash compensation expense, which were offset
by an increase in consulting fees.
We reduced our average general and administrative headcount by six, or 42.9%,
to eight, for the three-month period ended June 30, 2002, from 14, for the same
12
period in the prior year. As a result of the headcount decrease, human resources
costs for the three-month period ended June 30, 2002 decreased by $284,100, or
66.3%, to $144,400, from $428,500 for the same period in the prior year.
Additionally as a result of the decrease in headcount, the amount of corporate
overhead charges allocated to general and administrative expense for the
three-month period ended June 30, 2002 decreased by $63,900, or 78.8%, to
$17,200, from $81,100 for the same period in the prior year.
General and administrative deferred compensation expense decreased by
$289,600, or 86.4%, to $45,700 for the three-month period ended June 30, 2002,
from $335,300, for the same period in the prior year. The decrease was due to
the expiration of certain third party consulting contracts, over whose lifetime
deferred compensation expense was being amortized. Under the terms of these
contracts, the consultants had been issued stock options, in lieu of cash, for
the performance of their respective services to us. Using the Black-Scholes
pricing model, a cost was calculated and assigned to each of these contracts,
and capitalized as a component of equity on our balance sheet in accordance with
accounting principles generally accepted in the United States. The total costs
of such contracts are amortized over the respective contract's service period.
Offsetting these decreases was an increase of $225,100, or 654.4%, in
consulting fees for the three-months ended June 30, 2002, to $259,500, from
$34,400 for the same period in the prior year. The primary reason for the
increase was the hiring of investment bankers to provide services related to our
proposed acquisition of three privately held, affiliated entities in the
telecommunications industry, including the issuance of a fairness opinion.
Should the acquisition be successful, it is anticipated that the investment
bankers' fee for the acquisition would approximate an aggregate $450,000.
General and administrative expenses for the six-month period ended June 30,
2002 decreased by $1,376,000, or 48.2%, to $1,479,400, from $2,855,400 for the
same period in the prior year. Factors contributing to the decreased general and
administrative expenses for the six-month period ended June 30, 2002 as compared
with the same period in the prior year, were primarily due to a decrease in
headcount, resulting from our September 2001 workforce reduction and our March
2002 restructuring, and included decreased employee related expenses, decreased
corporate overhead allocations, decreased legal fees, and a decrease in non-cash
compensation expense, which were offset by an increase in consulting fees.
We reduced our average general and administrative headcount by six, or 42.9%,
to eight, for the six-month period ended June 30, 2002, from 14, for the same
period in the prior year. As a result of the headcount decrease, human resources
costs for the six-month period ended June 30, 2002 decreased by $550,300, or
62.2%, to $335,100, from $885,400 for the same period in the prior year.
Additionally as a result of the decrease in headcount, the amount of corporate
overhead charges allocated to general and administrative expense for the
six-month period ended June 30, 2002 decreased by $61,000, or 43.4%, to $79,700,
from $140,700 for the same period in the prior year. Also, as part of our
workforce reduction in September 2001, several of our general and administrative
employees began working reduced workweek schedules, which continued through the
three-month period ended March 31, 2002.
General and administrative legal fees decreased by $388,900, or 72.1%, to
$150,400 for the six-month period ended June 30, 2002 from $539,300 for the same
13
period in the prior year. The primary reason for the decrease was the cessation
of our lawsuit with Citrix Systems, Inc. during the three-month period ended
March 31, 2001.
General and administrative deferred compensation expense decreased by
$527,700, or 79.6%, to $135,000 for the six-month period ended June 30, 2002,
from $662,700, for the same period in the prior year. The decrease was due to
the expiration of certain third party consulting contracts, over whose lifetime
the deferred compensation was being amortized. Under the terms of these
contracts, the consultants had been issued stock options, in lieu of cash, for
the performance of their respective services to us. Using the Black-Scholes
pricing model, a cost was calculated and assigned to each of these contracts,
and capitalized as a component of equity on our balance sheet in accordance with
accounting principles generally accepted in the United States. The total costs
of such contracts are amortized over the respective contract's service period.
Offsetting these decreases was an increase of $324,500, or 613.4%, in
consulting fees for the six-month period ended June 30, 2002, to $377,400, from
$52,900 for the same period in the prior year. The primary reason for the
increase was the hiring of investment bankers to provide services related to our
proposed acquisition of three privately held, affiliated entities in the
telecommunications industry, including the issuance of a fairness opinion.
Should the acquisition be successful, it is anticipated that the investment
bankers' fee for the acquisition would approximate an aggregate $450,000.
Additionally, we reduced our bad debts reserve by $100,000 during the
three-month period ended June 30, 2002, and by a total of $200,000 during the
six-month period ended June 30, 2002. No change was made to our bad debts
reserve during the similar periods in the prior year. We reduced our bad debts
reserve due to the collection of some large aged outstanding receivables. We
believe our current level of bad debts reserve is adequate in order to properly
state our accounts receivable to amounts that we believe we will collect in the
future.
We anticipate that general and administrative expense in future periods will
be lower than those incurred during the three-month period ended June 30, 2002
as we continue to aggressively reduce our operating costs. General and
administrative expenses were approximately 159.1% and 133.1% of revenues for the
three and six-month periods ended June 30, 2002 as compared with 69.7% and 67.1%
for the same periods in the prior year, respectively.
Research and Development Expenses
Research and development expenses consist primarily of salaries and benefits
to software engineers, payments to contract programmers, allocation of corporate
overhead charges, depreciation and computer related supplies. Research and
development expenses for the three-month period ended June 30, 2002 decreased by
$231,500, or 20.7%, to $884,600 from $1,116,100 for the same period in 2001.
The decrease in research and development expenses for the three-month period
ended June 30, 2002, as compared with the same period in the prior year, is
primarily due to a decrease in headcount, resulting from our September 2001
workforce reduction and our March 31, 2002 restructuring, which lead to
decreased human resources expenses, and decreased engineering consulting fees.
We decreased our research and development average headcount by eight, or 22.2%,
to 28, for the three-month period ended June 30, 2002, from 36, for the same
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period in the prior year. The decrease in headcount lead to a decrease in human
resources expenses of $103,000, or 15.5%, to $561,900, for the three-month
period ended June 30, 2002, from $664,900 for the same period in the prior year.
We believe that a significant level of investment for research and
development is required to remain competitive and as we continue working towards
our goal of full maturity for our products during 2002, we will closely monitor
our expenditures as we strive to reduce our expenses to levels sustainable by
our current and anticipated revenue levels. Accordingly, during the three-month
period ended June 30, 2002, we decreased our engineering consulting expense by
$203,700, or 86.6%, to $31,500, from $235,200 for the same period in the prior
year.
Research and development expenses for the six-month period ended June 30,
2002 decreased by $771,900, or 31.3%, to $1,697,400 from $2,469,300 for the same
period in the prior year. The decrease was primarily due to a decrease in
headcount, resulting from our September 2001 workforce reduction and our March
31, 2002 restructuring, which lead to decreased human resources expenses, and
reduced engineering consulting fees. We reduced our research and development
average headcount by eight, or 22.2%, to 28, for the six-month period ended June
30, 2002, from 36, for the same period in the prior year. The reduced headcount
lead to a decrease in human resources expenses of $377,300, or 25.2%, to
$1,117,500 for the six-month period ended June 30, 2002, from $1,494,800 for the
same period in the prior year.
Also contributing to the decrease in research and development expenses for
the six-month period ended June 30, 2002 was a decrease in engineering
consulting services of $420,200, or 81.2%, to $97,300 from $517,500 for the same
period in the prior year.
Under accounting principles generally accepted in the United States, all
costs of product development incurred once technological feasibility has been
established, but prior to general release of the product, are to be capitalized
and amortized to expense over the estimated life of the underlying product,
rather than being charged to expense in the period incurred. No product
development amounts were capitalized during the three-month period ended June
30, 2002. Approximately $132,500 of product development costs were capitalized
during the three-month period ended June 30, 2001 that related to the
development of our Bridges for Unix, version 2.0, product. These were the only
costs capitalized during the six-month periods ended June 30, 2002 and 2001,
respectively.
We anticipate that research and development expense in future periods will be
lower than those incurred during the three-month period ended June 30, 2002 as
we continue to aggressively reduce our operating costs. Research and development
expenses were approximately 168.4% and 57.7% of revenues for the three-month
periods ended June 30, 2002 and 2001, respectively, and approximately 152.8% and
58.0% of revenues for the six-month periods ended June 30, 2002 and 2001,
respectively.
Restructuring Charge
During the six month period ended June 30, 2002, effective March 31, 2002, we
relocated our corporate offices from our Morgan Hill, California location to our
Bellevue, Washington location in an effort to consolidate operations, maximize
underutilized space and reduce costs. In addition to the relocation we also
reduced our headcount in the general and administrative and sales and marketing
areas.
15
A summary of the restructuring charge is as follows:
Category Charge
Fixed assets abandonment $ 559,800
Minimum lease payments 180,100
Employee severance 750,500
-----------
$ 1,490,400
No such restructuring charge was recorded during the three or six-month
periods ended June 30, 2001.
Included in employee severance are the payments made to our co-founders,
which aggregated $500,000, upon their departure, in January 2002. The costs
associated with fixed assets disposals are comprised of the estimated net book
value of the assets, including furniture and fixtures, equipment and leasehold
improvements, which were written off upon the closure of the Morgan Hill
corporate office, as these assets will have no future utility. We do not
anticipate any material cash disposal costs to be incurred to dispose of the
fixed assets. The minimum lease payments are an estimate of the cash we may need
to disburse in order to fulfill our obligations under the current Morgan Hill
office lease and are equal to one year's worth of aggregated monthly lease
payments. Given current market conditions in the corporate real estate rental
market in Morgan Hill, we anticipate that our search for a suitable sub lessee
might take approximately one year.
We estimate that these restructurings and the restructurings that occurred
during September 2001 will generate cumulative operational savings, primarily
human resources costs, of approximately $3,000,000 to $4,000,000 during 2002.
However, due to the inherent uncertainties associated with predicting future
operations, there can be no assurances that such cumulative operational savings
will ultimately be realized.
Other Income (Expense)
Other income (expense) consists primarily of interest income on excess cash,
interest income on available-for-sale securities and interest expense on
short-term notes payable. Our excess cash is held in relatively low-risk, highly
liquid investments, such as U.S. Government obligations, bank and/or corporate
obligations rated "A" or higher by independent rating agencies, such as Standard
and Poors, or interest bearing money market accounts with minimum net assets
greater than or equal to one billion U.S. dollars.
Other income (expense) for the three-month period ended June 30, 2002
decreased by $113,900, or 81.6%, to $25,600 from $139,500 for the same period in
the prior year. Other income (expense) for the six-month period ended June 30,
2002 decreased by $269,900, or 81.9%, to $59,700 from $329,600 for the same
period in the prior year. The decreases for the three and six-month periods
ended June 30, 2002 were due to lower amounts of excess cash and
available-for-sale securities on-hand as compared with the respective periods in
2001. Also responsible for the decrease for the three and six-month periods
ended June 30, 2002 was the decrease in interest rates being paid by our
investments as compared with the interest rates from the respective periods in
the prior year.
We expect other income (expense) to be lower throughout the remainder of 2002
as we expect our cash balances to be lower as compared with the respective
16
periods of the prior year, and we expect the Federal Reserve Bank to keep
interest rates low for the next several months.
Net Loss
As a result of the foregoing items, net loss for the three-month period ended
June 30, 2002 was $2,148,000, a decrease of $179,200 or 7.8%, from a net loss of
$2,327,200 for the same period during 2001. Additionally, net loss for the
six-month period ended June 30, 2002 was $5,738,400, an increase of $1,240,400,
or 27.6%, from a net loss of $4,498,000 for the same period during 2001. In
response to our continued operating loss we intend to continue to aggressively
reduce our operating costs during 2002.
Liquidity and Capital Resources
As of June 30, 2002, cash and cash equivalents and available-for-sale
securities totaled $3,329,300, a decrease of $3,631,300, or 52.2%, from
$6,960,600 as of December 31, 2001.
The decrease in cash and cash equivalents was primarily attributable to net
cash used in operating activities, which was substantially comprised of our net
loss of $5,738,400. Operating activities that increased cash flow included: a
decrease in accounts receivable, $433,500; a decrease in prepaid expense and
other current assets totaling $147,100, and an increase in accounts payable,
$137,500. Offsetting these amounts were decreases in the provision for doubtful
accounts, $200,000; accrued expenses $6,200; and deferred revenue $74,500.
Our financial statements have been presented on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. We have suffered from recurring losses and have
absorbed significant cash in our operating activities. Further, our revenues
have declined significantly during the six-month period ended June 30, 2002
compared to the comparable period of 2001. These trends are expected to continue
in the near-term. As a result, based on our current amount of cash on hand and
level of operations, we expect to absorb our remaining cash within the next six
to twelve months. These matters raise substantial doubt about our ability to
continue in existence as a going concern. The condensed financial statements do
not include any adjustments relating to the recoverability and classification of
assets or the amount and classification of liabilities that might result should
we be unable to continue as a going concern. In order to realize assets and
settle liabilities within the normal course of business, we must continue to
aggressively adjust our current level of operations in order to match our
currently available resources. Such adjustments will likely include further work
force reductions, exiting of facilities or the disposition of certain
operations.
We have announced our intention to acquire three privately held, affiliated
entities in the telecommunications industry in a stock transaction. Currently,
the acquisition is on target for shareholder vote during the fourth quarter of
the current year. Should the shareholders approve the acquisition, we believe
that the newly acquired entities would have the financial resources to provide
sufficient liquidity to our operations for the next 12 months. We will continue,
however, to aggressively adjust our current level of operations in order to
match our currently available resources, as there can be no assurance that the
17
shareholders will approve the proposed acquisition. Such adjustments will likely
include further work force reductions, exiting of facilities, or the disposition
of certain operations. If we were unsuccessful in obtaining any of these
strategic goals, we would face a severe constraint on our ability to sustain
operations in a manner that would create future growth and viability.
We have used approximately $3,523,800 net cash in operating activities for
the six-month period ended June 30, 2002, including cash payments aggregating
approximately $750,500 that were related to our nonrecurring first quarter
restructuring. Our recurring operations' net cash requirements for the six-month
period ended June 30, 2002 averaged approximately $462,200 per month. At our
current level of operations and revenues, we have approximately seven months'
cash and cash equivalents and available-for-sale securities remaining.
The net cash provided by investing activities of $404,800 increased cash and
cash equivalents. Significant investing activities included: purchases of
available-for-sale securities, $768,300, which were offset by sales of
available-for-sale securities, $1,256,000; and the purchase of capital assets
including equipment, totaling $82,900. We purchase available-for-sale
securities, typically very highly rated corporate bonds or similar investments,
primarily when we have cash in excess of our short-term needs for operating
expenditures. Sales of available-for-sale securities represent the maturing of
investments previously made. Upon maturity, funds from the maturing investments
are deposited in our investment account awaiting our instructions to reinvest or
transfer to our operating accounts. Our purchasing of capital assets has been
curtailed to a minimum amount in order to preserve our cash balances as long as
possible.
Accounts receivable as of June 30, 2002 decreased, net of the allowance for
doubtful accounts, by $433,500, or 44.7%, to $536,900, from $970,400 as of
December 31, 2001. The primary reason for the decrease was the collection of a
few large older receivables that had been outstanding as of December 31, 2001 as
well as the charge off of amounts that have been deemed uncollectible, which had
been previously reserved for in prior reporting periods. Because these older
receivables had been outstanding as of December 31, 2001 and were collected
during the six-month period ended June 30, 2002, we were able to reduce our
provision for doubtful accounts while maintaining adequate reserves against our
current receivables.
As of June 30, 2002, gross purchased technology was approximately $8,690,800,
which was unchanged from December 31, 2001. Purchased technology is comprised of
various acquired technologies that have been incorporated into one or more of
our products. These amounts are amortized to cost of revenue, generally over a
three-year period. Purchased technology amortization expense for the six-month
period ended June 30, 2002 increased by $48,600, or 8.0%, to $658,100 from
$609,500 for the same period in the prior year. The increase was due primarily
to the acquisition of the Menta technology during 2001, which was partially
offset by the asset impairment charge we recorded as of December 31, 2001
against various components of our purchased technology. We did not begin
amortizing the technology we acquired from Menta until we placed it in service
during the third quarter of the prior year. Amortization of our purchased
technology is recorded as a component of cost of revenue on our income
statement.
Accounts payable as of June 30, 2002 increased by $137,500, or 43.0%, to
$457,400 from $319,900 as of December 31, 2001. Accounts payable are comprised
of our various operating expenses and increased due to the timing of the payment
of various invoices.
18
Other current liabilities as of June 30, 2002 decreased by $32,800, or 4.3%,
to $729,300 from $762,100 as of December 31, 2001. Other current liabilities are
comprised of accrued expenses and notes payable. The decrease in other current
liabilities was primarily due to the repayment of the $26,600 remaining balance
in notes payable that was outstanding at December 31, 2001. Accrued expenses are
charges for services rendered for which an invoice has not yet been received
such as consulting fees, legal and accounting fees, and utilities. Also included
in accrued expenses as of June 30, 2002 is approximately $165,000, representing
the amount of remaining rent we believe that we may ultimately have to pay for
the Morgan Hill office we closed at March 31, 2002.
Deferred revenue as of June 30, 2002 decreased by $74,500, or 12.9%, to
$503,300 from $577,800 as of December 31, 2001. The decrease is due to the terms
of the various licensing agreements and maintenance contracts we had entered
into during the six-month period ended March 31, 2002, which were offset by
previously deferred items being recognized as revenue. Increases in deferred
revenue reflect the application of generally accepted accounting principles in
the United States, which set forth certain criteria for the current recognition
of revenue in the financial statements. Revenues which do not currently meet the
criteria are charged to deferred revenue and are recognized either ratably over
the time period during which purchased services are provided to the customer,
such as maintenance contracts, or at such time that all revenue recognition
criteria have been met.
As of June 30, 2002, we had cash and cash equivalents of $811,800 as well as
$2,517,500 in available-for-sale securities compared to total liabilities of
$1,021,700, exclusive of deferred revenue of $503,300 and the accrued estimated
minimum lease payments that we might have to make until we are able to identify
a sub lessee for our abandoned Morgan Hill office facility, resulting from our
March 31, 2001 restructuring, of $165,000.
Throughout the six-month period ended June 30, 2002, we have undertaken
several strategic initiatives intended to control operating expenses and capital
expenditures. We have redirected our sales and marketing focus to our UNIX-based
products in attempt to increase revenues while we continue to focus our
engineering efforts on our windows enterprise edition product. These initiatives
have been successful in reducing our operating expenses. As explained above, our
expenses for the three and six-month periods ended June 30, 2002 are
significantly lower in virtually every expense category as compared with the
same periods in the prior year.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that we recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142 that we reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that we no longer amortize goodwill,
but instead test goodwill for impairment at least annually. In addition, SFAS
19
142 requires that we identify reporting units for the purposes of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life. An intangible asset with an indefinite
useful life should be tested for impairment in accordance with the guidance in
SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date, regardless of when those assets were initially recognized. SFAS 142
requires us to complete a transitional goodwill impairment test six months from
the date of adoption. We also are required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS 142.
Pursuant to FAS 142, we have completed our test for intangible asset
impairment during second quarter 2002. As of June 30, 2002 we do not have any
intangible assets with indefinite useful lives, nor do we have any good will on
our balance sheet. Our intangible assets are comprised of acquired technology
and technology developed in-house, both of which have been incorporated into one
or more of our products. As such, all of our intangible assets are being
amortized to cost of revenue over their estimated useful lives, or three years,
whichever is shorter.
Statement of Financial Accounting Standards No. 143. Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
("SFAS 143"), addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. It is anticipated that the
financial impact of SFAS 143 will not have a material effect on the Company.
Statement of Financial Accounting Standards No. 144. Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a business segment. SFAS
144 also eliminates the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. The provisions of SFAS 144
generally are to be applied prospectively. It is anticipated that the financial
impact of SFAS 144 will not have a material effect on the Company.
Statement of Financial Accounting Standards No. 145. Statement of Financial
Accounting Standards No. 145, "Rescission of SFAS Statements No. 4, 44, and 64,
Amendment of SFAS Statement No. 13, and Technical Corrections" ("SFAS 145"),
updates, clarifies and simplifies existing accounting pronouncements. SFAS 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt."
SFAS 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The provisions of SFAS
145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years
20
beginning and transactions occurring after May 15, 2002, respectively. It is
anticipated that the financial impact of SFAS 145 will not have a material
effect on the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit Activities", which addresses financial accounting and reporting for
costs associated with exit activities and supersedes EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. This differs from EITF 94-3, which required that a
liability for an exit cost be recognized at the date of an entity's commitment
to an exit plan. However, under SFAS No. 146, a liability for one-time
termination benefits is recognized when an entity has committed to a plan of
termination, provided certain other requirements have been met. In addition,
under SFAS No. 146, a liability for costs to terminate a contract is not
recognized until the contract has been terminated, and a liability for costs
that will continue to be incurred under a contract's remaining term without
economic benefit to the entity is recognized when the entity ceases to use the
right conveyed by the contract. Statement 146 is effective for exit or disposal
activities initiated after December 31, 2002. The Company will adopt the
provisions of SFAS No. 146 for restructuring activities initiated after December
31, 2002. The Company does not expect the adoption of Statement 146 will have a
material impact on its consolidated results of operations or financial position.
21
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are currently not exposed to any significant financial market risks from
changes in foreign currency exchange rates or changes in interest rates and do
not use derivative financial instruments. A substantial majority of our revenue
and capital spending is transacted in U.S. dollars. However, in the future, we
may enter into transactions in other currencies. An adverse change in exchange
rates would result in a decline in income before taxes, assuming that each
exchange rate would change in the same direction relative to the U.S. dollar. In
addition to the direct effects of changes in exchange rates, such changes
typically affect the volume of sales or foreign currency sales price as
competitors' products become more or less attractive.
22
PART II--OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports of Form 8-K
On May 23, 2002 we filed a report on Form 8-K dated May 15, 2002 with the
Commission. We disclosed, under Item 5 (Other Events) of the Form 8-K that we
had entered into a Letter of Intent to acquire three privately held affiliated
entities in the telecommunications industry.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GraphOn Corporation
(Registrant)
Date: August 14, 2002
By: /s/ Robert Dilworth
---------------------------------
Robert Dilworth,
Chief Executive Officer (Interim) and
Chairman of the Board
(Principal Executive Officer)
Date: August 14, 2002
By: /s/ William Swain
---------------------------------
William Swain,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
24