-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I1bg4BUxPGVwHQp1a7dR5DtyE8VFDnQDFliGI7MaKLAceSYXrN3onQi6gCifPUah P/RQF3mEuC4r+6G5do0/Nw== 0001021435-02-000014.txt : 20020814 0001021435-02-000014.hdr.sgml : 20020814 20020814133139 ACCESSION NUMBER: 0001021435-02-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAPHON CORP/DE CENTRAL INDEX KEY: 0001021435 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133899021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21683 FILM NUMBER: 02733935 BUSINESS ADDRESS: STREET 1: 400 COCHRANE CIRCLE CITY: MORGAN HILL STATE: CA ZIP: 95037 BUSINESS PHONE: 4087763232 MAIL ADDRESS: STREET 1: 40O COCHRANE CIRCLE CITY: MORGAN HILL STATE: CA ZIP: 95037 FORMER COMPANY: FORMER CONFORMED NAME: UNITY FIRST ACQUISITION CORP DATE OF NAME CHANGE: 19960823 10-Q 1 gojo10q.txt GRAPHON 10Q 2Q02 ================================================================================ 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 ---------------------- GraphOn Corporation (Exact name of Registrant as specified in its charter) ---------------------- 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 ---------------------- 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. ================================================================================ 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.
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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.
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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 14 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 -----END PRIVACY-ENHANCED MESSAGE-----