SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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 Identification No.)
incorporation or organization)
150 HARRISON AVENUE, CAMPBELL, CALIFORNIA 95008
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 370-4080
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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),
Yes [X] No [ ]
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 11, 1999, there were 10,961,961 shares of the Registrant's Common
Stock outstanding, par value $0.0001.
GRAPHON CORPORATION
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION Number
--------------------- ------
Item 1 Financial Statements
Historical and Pro Forma Balance Sheets as of June 30, 1999 and
December 31, 1998 ......................................................... 4
Statements of Operations for the six months ended June 30, 1999 and
1998 and the three months ended June 30, 1999 and 1998 ..................... 5
Statements of Cash Flows for the six months ended June 30, 1999
and 1998 .................................................................. 6
Statement of Equity as of June 30, 1999..................................... 7
Notes to Financial Statements ............................................. 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk.................. 13
PART II. OTHER INFORMATION
-----------------
Item 1 Legal Proceedings ......................................................... 21
Item 4 Submission of Matters to a Vote of Security Holders ....................... 21
Item 5 Other Information ......................................................... 21
Item 6 Exhibits and Reports on Form 8-K .......................................... 22
Signatures ............................................................................ 23
2
On July 12, 1999, GraphOn Corporation, a California corporation
("GraphOn-CA"), merged with and into the Registrant (formerly, Unity First
Acquisition Corp., a Delaware corporation). Registrant, as the surviving
entity to the merger, then changed its name to GraphOn Corporation, and the
GraphOn-CA management team continued in their existing roles at GraphOn.
Pursuant to this merger, each outstanding share of GraphOn-CA common stock
was exchanged for 0.5576 shares of Registrant common stock and each
outstanding option and warrant to purchase shares of GraphOn-CA common stock
was exchanged for options or warrants to purchase 0.5576 shares of Registrant
common stock. As a result of the merger, the GraphOn-CA shareholders acquired
approximately 9,086,961 shares of Registrant common stock, or approximately
82.9% of the then outstanding Registrant common stock.
Unless otherwise indicated in this Quarterly Report on Form 10-Q, all
references to "us", "we", "our" and variations of these words refer to
GraphOn-CA when pertaining to historical events. All other such words and
references refer to both GraphOn-CA and GraphOn Corporation, the combined entity
and Registrant.
3
PART I - FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
GRAPHON CORPORATION
BALANCE SHEETS
JUNE 30, 1999
(UNAUDITED)
---------------------------------------------------
PRO FORMA AS December 31,
ACTUAL PRO FORMA ADJUSTED 1998
--------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 316,700 $ 5,425,000(1) $ 5,741,700 $ 1,798,400
Accounts receivable, net of allowance for
doubtful accounts of $25,000 and $25,000
1,153,900 - 1,153,900 564,700
Prepaid expenses and other assets 432,100 - 432,100 32,100
--------------------------------------------------------------------
Total Current Assets 1,902,700 5,425,000 7,327,700 2,395,200
Property and Equipment, net 507,700 - 507,700 423,300
Purchased Technology , net 2,082,700 - 2,082,700 3,645,400
Capitalized Software, net 55,400 - 55,400 74,200
Deferred Compensation Expense 482,500 - 482,500 566,000
Other Assets 6,400 - 6,400 6,400
--------------------------------------------------------------------
$ 5,037,400 $ 5,425,000 $ 10,462,400 $ 7,110,500
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible note payable $ - $ - $ - $ 475,000
Accounts payable 592,100 - 592,100 115,700
Accrued expenses 622,800 - 622,800 498,900
Deferred revenue 161,800 - 161,800 112,600
--------------------------------------------------------------------
Total Current Liabilities 1,376,700 - 1,376,700 1,202,200
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding - - - -
Common stock, no par value, 50,000,000 shares
authorized, 16,296,559 and 14,294,003 shares
issued and outstanding 10,231,600 5,425,000 (1) 15,656,600 8,431,500
Accumulated other comprehensive income - - - -
Accumulated deficit (6,570,900) - (6,570,900) (2,523,200)
--------------------------------------------------------------------
Stockholders' Equity 3,660,700 5,425,000 9,085,700 5,908,300
$ 5,037,400 $ 5,425,000 $ 10,462,400 $ 7,110,500
- -------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
(1) (1) Reflects $5,425,000 in contributed cash as a result of the merger on
July 12, 1999 of GraphOn Corporation and Unity First Acquisition Corp. and its
resulting recapitalization.
4
GRAPHON CORPORATION
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, Three Months Ended June 30,
(Unaudited) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
REVENUES
Product sales $ 376,900 $ 240,300 $ 181,600 $ 119,100
Maintenance 95,000 47,900 50,800 25,000
OEM license 875,000 864,600 475,000 555,200
Training - 10,400 - 10,400
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,346,900 1,163,200 707,400 709,700
COST OF REVENUES
Product sales 6,800 15,800 3,200 7,600
Maintenance 18,800 10,000 9,400 5,000
OEM license 172,600 155,500 96,300 88,900
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL COST OF REVENUES 198,200 181,300 108,900 101,500
GROSS PROFIT 1,148,700 981,900 598,500 608,200
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling and marketing 1,575,400 524,400 819,800 302,400
General and administrative 2,385,000 341,100 1,131,900 234,100
Research and development 1,254,800 334,900 681,800 215,900
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,215,200 1,200,400 2,633,500 752,400
- ---------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS
(4,066,500) (218,500) (2,035,000) (144,200)
OTHER INCOME (EXPENSE):
Interest and other income 27,000 7,100 12,100 4,600
Interest expense (7,400) (201,400) (800) (181,400)
- ---------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE PROVISION FOR INCOME TAXES (4,046,900) (412,800) - -
PROVISION FOR INCOME TAXES 800 800 - -
- ---------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (4,047,700) $ (413,600) $ (2,023,700) $ (321,000)
- ---------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.25) $ (0.07) $ (0.12) $ (0.05)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 16,057,940 6,283,333 16,336,681 6,500,000
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
GRAPHON CORPORATION
STATEMENTS OF CASH FLOWS
SIX MONTHS Six Months
ENDED JUNE 30, Ended June 30,
(Unaudited) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (4,047,700) $ (413,600)
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,646,900 24,100
Loss on available-for-sale securities - 16,500
Compensation expense 83,500 23,000
Interest expense - 171,200
Changes in operating assets and liabilities:
Accounts receivable (589,200) 100,800
Prepaid expenses and other assets (400,000) (41,700)
Accounts payable 476,400 44,400
Accrued expenses 123,900 81,700
Deferred revenue 49,200 (244,600)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (2,657,000) (238,200)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets - (8,400)
Capital expenditures (149,800) (84,800)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (149,800) (93,200)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable - 475,000
Repayment of convertible notes payable (475,000) -
Net proceeds from issuance of common stock 1,805,800 25,000
Purchase and retirement of common stock (5,700) -
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,325,100 500,000
- ---------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,481,700) 168,600
CASH AND CASH EQUIVALENTS, beginning of period 1,798,400 302,800
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 316,700 $ 471,400
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
GRAPHON CORPORATION
STATEMENT OF EQUITY
Common Stock
------------------------------ Accumulated
Shares Amount Deficit Total
- ---------------------------------------------------------------------------------------------------------
BALANCES, December 31, 1998 14,294,003 $8,431,500 $(2,523,200) $5,908,300
Proceeds from sale of common stock
112,132 97,200 - 97,200
Purchase and retirement of common
stock (73,444) (5,700) - (5,700)
Proceeds from sale of common stock,
net of offering costs of $255,303 1,963,868 1,708,600 - 1,708,600
Net loss - - (4,047,700) (4,047,700)
- ---------------------------------------------------------------------------------------------------------
BALANCES, June 30, 1999 (unaudited) 16,296,559 $10,231,600 $(6,570,900) $3,660,700
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
GRAPHON CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Subsequent Event, Unaudited Pro Forma Combined Balance Sheet and
Basis of Presentation
On July 12, 1999, GraphOn Corporation, a California corporation
("GraphOn-CA"), merged with and into Unity First Acquisition Corp., a
Delaware corporation ("Unity"). Unity, as the surviving entity to the merger
and the Registrant, then changed its name to GraphOn Corporation ("GraphOn"),
and the GraphOn-CA management team continued in their existing roles at
GraphOn. Pursuant to the merger, each outstanding share of GraphOn-CA common
stock was exchanged for 0.5576 shares of Unity common stock and each
outstanding option and warrant to purchase shares of GraphOn-CA common stock
was exchanged for 0.5576 options or warrants to purchase shares of Unity
common stock. Additionally, GraphOn received $5,425,000 in cash which was
placed into trust upon Unity's initial public offering in November 1996 and
released from trust upon consummation of the merger. As of June 30, 1999,
GraphOn-CA had outstanding 16,296,559 shares of common stock. As a result of
the merger, the GraphOn-CA shareholders acquired approximately 9,086,961
shares of Unity common stock, or approximately 82.9% of the then outstanding
Unity common stock. The merger was accounted for as a capital transaction
which is equivalent to the issuance of stock by GraphOn-CA for Unity's net
monetary assets of approximately $5,425,000, accompanied by a
recapitalization of GraphOn-CA.
The accompanying unaudited pro forma balance sheet presents the financial
position of GraphOn, the combined entity, as of June 30, 1999, assuming the
merger had been completed as of the balance sheet date.
The unaudited historical financial statements of GraphOn-CA 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 GraphOn-CA's results of operations, financial
position and cash flows. We filed audited financial statements that included
all information and footnotes necessary for a complete presentation for each
of the years in the two-year period ended December 31, 1998 in the Unity
Registration Statement on Form S-4 filed on June 15, 1999.
The unaudited financial statements included herein reflect all adjustments
(which include only normal, recurring adjustments) which are, in the opinion of
management, necessary to state fairly the results for the three and six months
ended June 30, 1999. The results for the three and six months ended June 30,
1999 are not necessarily indicative of the results expected for the full fiscal
year.
2. Earnings Per Share
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period. Dilutive earnings per share is computed on
the basis of the weighted average number of common shares outstanding 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
In January 1999, GraphOn-CA completed the third and final closing of a
private placement offering, in which it sold 1,963,868 shares of its common
stock at $1.00 per share (representing approximately 1,095,052 shares of the
combined entity at $1.79 per share) and granted warrants to purchase an
additional 392,774 shares of common stock (representing approximately 219,010
shares of the combined entity) for net proceeds of $1,708,600.
In January 1999, a convertible note payable for $475,000 to Spencer Trask
Investors, an affiliate of GraphOn-CA, was retired from proceeds from the
third closing of the private placement offering.
In February 1999, GraphOn-CA sold 112,132 shares of its common stock
(representing approximately 62,524 shares of common stock of the combined
entity) and warrants to purchase an additional 1,213 shares (representing 676
shares of the combined entity) for gross proceeds of $97,200.
8
4. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" and in
June 1998, issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Readers are referred to the "Recent Accounting
Pronouncements" section of the Company's 1998 Report for further discussion.
The Company adopted Statement of Position (SOP) No. 97-2, "Software Revenue
Recognition" in the first quarter of fiscal year 1999 and its adoption had no
material impact on the Company's results from operations or financial position.
9
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 GraphOn Corporation 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. Our 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" and elsewhere in this Quarterly Report and in
other documents filed by the Company with the Securities and Exchange
Commission.
OVERVIEW
We develop, market, sell and support server-based software that is
designed to enable a diverse range of desktop computers to access server-based
Windows and UNIX applications from any location, over fast or slow Internet
connections. We were incorporated in May 1982 and engaged in the development and
manufacture of hardware computer terminals. In 1995, we started to transition
from a hardware to a software manufacturer by working with three independent
software developers, with whom we entered into exclusive license agreements
calling for royalties aggregating 16.4%, 9.7%, 4.8% and 2.9% of net revenues
from sales of software products which contain the licensed technology for the
years 1997, 1998, 1999 and 2000, respectively. After December 31, 2000, we have
the option, under particular circumstances, to purchase the licensed technology
or exclusive rights to it. We purchased a portion of the licensed technology
from one of the software developers for a purchase price of $162,000 in July
1999.
Before October 1996, while we were developing our server-based software
products, our revenue was derived principally from the sale and repair of
hardware computer terminals. We discontinued selling hardware products in 1996
and now provide only return-to-factory repair for the installed customer base.
Software revenue consists of licensing fees for products sold and revenues from
OEM license agreements relating to our software products called GO-Global-TM-,
GO-Joe-TM- and GO-Between-TM- in addition to fees for training and software
maintenance.
In May 1998, we hired eight software engineers based in Bellevue,
Washington and in December 1998 added eight engineers in Concord, New
Hampshire in connection with the acquisition of Corel Corporation's
jBridge-TM-technology. In February 1999, we hired a Chief Financial Officer.
We have more than doubled our headcount from 24 at June 30, 1998 to 49 at
June 30, 1999.
Product license revenues are recognized upon shipment only if no
significant GraphOn obligations remain and collection of the resulting
receivable is deemed probable. When product licenses require product engineering
development by us, recognition of revenue is after delivery and customer
acceptance of contract milestones. Revenues for training are recognized when the
services are performed. Revenue from customer yearly maintenance fees, for
ongoing customer support and product updates are recognized equally over the
term of the contract, which typically is 12 months.
Our limited operating history as a software developer and manufacturer
makes the prediction of future operating results difficult and unreliable.
Future operating results may fluctuate due to many factors, including our
ability to attract and retain strategic partners, the degree and rate of growth
of the markets in which we compete and accompanying demand for our products, the
level of product and price competition, and our ability to establish and build
our software product reseller channels.
10
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30,
1999 VERSUS THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998
REVENUES. Software revenues have been derived primarily from two
sources: GO-Global product sales and OEM licensing revenues for GO-Joe,
GO-Global and GraphOn's server software. Total revenues for the six-month period
ended June 30, 1999 increased by $183,700, or 15.8%, to $1,346,900 from
$1,163,200 for the same period in 1998. The most important contributing factor
was an increase in product sales to $376,900 in 1999 as compared to $240,300 in
1998. Total revenues for the three-month period ended June 30, 1999 remained
basically unchanged at $707,400 from $709,700 for the same period in 1998.
SALES AND MARKETING EXPENSES. Sales and marketing expenses primarily
consist of salaries, sales commissions, travel expenses, trade show related
activities and promotional costs. Sales and marketing expenses increased
$1,051,000, or 200.4%, to $1,575,400, or 117.0% of revenue, for the six months
ended June 30, 1999 from $524,400, or 45.1% of revenue, for the same period in
1998. Sales and marketing expenses increased $517,400, or 171.1%, to $819,800,
or 115.9% of revenue, for the three months ended June 30, 1999 from $302,400, or
42.6% of revenue, for the same period in 1998. These increases primarily are
attributable to the addition of sales and marketing personnel and a substantial
increase in trade show, promotional and public relations activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
primarily consist of salaries and legal and professional services. In addition,
our corporate rent, utilities and administrative employee benefits are included
in general and administrative expenses. General and administrative expenses
increased $2,043,900, or 599.2%, to $2,385,000, or 177.1% of revenue, for the
six months ended June 30, 1999 from $341,100, or 29.3% of revenue, for the same
period in 1998. General and administrative expenses increased $897,800, or
383.5%, to $1,131,900, or 161.0% of revenue, for the three months ended June 30,
1999 from $234,100, or 33.0% of revenue, for the same period in 1998. This
increase is primarily due to:
- amortization and depreciation expense recorded in connection with
the acquisition of technology and assets from Corel Corporation in
the approximate amount of $1,600,000 and $800,000 for the six and
three months ended June 30, 1999, respectively;
- an increase in legal services;
- hiring additional administrative personnel; and
- increased utilities expenses necessary to support expanding
operations.
In addition, we recognized non-cash compensation charges in 1999 due to the
recognition of deferred compensation charges in the latter part of 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits to software engineers, supplies and payments
to contract programmers and rent on facilities. Research and development
expenses increased by $919,900, or 274.7%, to $1,254,800, or 93.2% of revenue,
for the six months ended June 30, 1999 from $334,900, or 28.8% of revenue, for
the same period in 1998. Research and development expenses increased by
$465,900, or 215.8%, to $681,800, or 96.4% of revenue, for the three months
ended June 30, 1999 from $215,900, or 30.4% of revenue, for the same period in
1998. The increase was primarily due to the addition of software engineers and
the rent on new facility locations. As of June 30, 1999, we had 26 software
engineers compared to 12 as of June 30, 1998.
INTEREST EXPENSE. Interest expense decreased in 1999 as compared to
1998 due to the repayment of a convertible note payable in January 1999.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1998, we funded our operations, working capital needs and
capital expenditures primarily through cash flow from operations.
In January 1999, a convertible note in the amount of $475,000 was
repaid from the net proceeds of the final closing of our private placement of
securities whereby we received additional net proceeds of $1,708,600 in
consideration of 1,963,868 shares of our common stock and warrants to purchase
an additional 392,774 shares of
11
our common stock (representing approximately 1,095,052 and 219,010 shares of
the combined entity, respectively). In February 1999, we sold 112,132 shares
of our common stock and warrants to purchase an additional 1,213 shares of
our common stock (representing approximately 62,524 and 676 shares of the
combined entity), for gross proceeds of $97,200. As of June 30, 1999, we had
cash and cash equivalents of $316,700 ($5,741,700 pro forma combined) as
compared to total liabilities of $1,214,900, exclusive of deferred revenue of
$161,800.
On July 12, 1999, we completed a merger with Unity First Acquisition
Corp. pursuant to which each share of our common stock was exchanged for
0.5576 shares of Unity common stock and each outstanding option and warrant
to purchase our common stock was exchanged for options or warrants to
purchase 0.5576 shares of Unity common stock. The transaction was a forward
merger with Unity surviving the merger and changing its name to GraphOn
Corporation and with GraphOn's management team continuing in their existing
roles. The merger provided us with $5,425,000 in net cash proceeds which was
previously held in trust for Unity until it consummated a merger with an
operating business.
We anticipate that cash balances as of June 30, 1999, as well as
anticipated revenue from operations, will be sufficient to meet our working
capital and capital expenditure needs through the next twelve months. We have
no material capital expenditure commitments for the next twelve months.
YEAR 2000 COMPLIANCE
We are aware of problems associated with computer systems as the year
2000 approaches. Many existing computer systems and applications and other
control devices use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Others do
not correctly process "leap year" dates. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can correctly process data related to the year 2000 and beyond. These
problems are expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the "year 2000 problem."
We are continuing to assess the impact that the year 2000 problem may
have on our operations and have identified the following three key areas of its
business that may be affected:
- PRODUCTS. We have evaluated each of our most current products and
older versions and believe that each is substantially year 2000
compliant. However, we believe that it is not possible to
determine whether all of our customers' products into which our
products are incorporated or connected will be year 2000 compliant
because we have little or no control over the design, production
and testing of our customers' products.
- INTERNAL INFRASTRUCTURE. The year 2000 problem could affect the
systems, transaction processing computer applications and devices
used by us to operate and monitor all major aspects of our
business, including financial systems, customer services,
infrastructure, materials requirement planning, master production
scheduling, networks and telecommunications systems. We believe
that we have identified substantially all of the major systems,
software applications and related equipment used in connection
with our internal operations that must be modified or upgraded in
order to minimize the possibility of a material disruption to our
business. We have modified and upgraded all affected systems.
Because most of the software applications used by us are recent
versions of vendor supported, commercially available products, we
have not incurred, and do not expect in the future to incur,
significant costs to upgrade these applications as year 2000
compliant versions are released by the respective vendors.
- FACILITY SYSTEMS. Systems such as heating, sprinklers, test
equipment and security systems at our facilities also may be
affected by the year 2000 problem. We currently are assessing the
potential effect of and costs of remediating the year 2000
problem on our facility systems. We estimate that the total cost
to the company of completing any required modifications, upgrades
or replacements of these systems will not have a material adverse
effect on our business or results of operations.
We presently estimate that the total cost of addressing our year 2000
issues will be less than approximately $10,000. This estimate was derived
utilizing numerous assumptions, including the assumption that we already have
12
identified our most significant year 2000 issues. However, there can be
no guarantee that these assumptions are accurate, and actual results could
differ materially from those anticipated.
We currently are developing contingency plans to address the year 2000
issues that may pose a significant risk to our on-going operations. Such plans
could include accelerated replacement of affected equipment or software,
temporary use of back-up equipment or software or the implementation of manual
procedures to compensate for system deficiencies. However, there can be no
assurance that any contingency plans we implement would be adequate to meet our
needs without materially impacting our operations, that any such plan would be
successful or that our results of operations would not be materially and
adversely affected by the delays and inefficiencies inherent in conducting
operations in an alternative manner.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 132, "EMPLOYER'S
DISCLOSURE ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS," which standardizes
the disclosure requirements for pension and other post-retirement benefits. The
adoption of SFAS No. 132 did not impact our disclosures.
RECENTLY ISSUED ACCOUNTING STANDARDS AND PRONOUNCEMENTS NOT YET ADOPTED
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Under the provisions
of this standard, software development is divided into three phases: the
preliminary project state, which includes conceptual formulation and selection
of alternatives; the application development stage, which includes design of
chosen path, coding, installation of hardware and testing; and the
post-implementation/operation stage, which includes training and application
maintenance. Generally, only internal and external costs incurred during the
second phase, the application development stage, are capitalizable, with the
exception of data conversion and training costs, which are to be expensed when
incurred during this phase. This standard is not effective for GraphOn's 1998
financial statements. Management does not expect this standard to have a
significant impact on GraphOn's financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities." This standard requires the cost of
start-up activities, including organizational costs, be expensed as incurred and
is not effective for GraphOn's fiscal 1998 financial statements. Management does
not expect this standard to have a significant impact on GraphOn's financial
statements.
In June 1998, FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
standard requires that every derivative instrument, including derivative
instruments embedded in other contracts, be recorded on the balance sheet as
either an asset or liability measured at its fair value. The standard is
effective for all fiscal years beginning after June 15, 2000. As GraphOn
currently is not a party to any derivative financial instruments and does not
anticipate becoming a party to any derivative instruments, management does not
expect this standard to have a significant impact on the GraphOn financial
statements.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not exposed to 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.
13
RISK FACTORS
You should carefully review the following factors before making an
investment decision in our company. The risks and uncertainties described below
are not the only ones facing our company. Additional risks and uncertainties not
presently known to us or risks that we do not consider significant may also
impair our business. This document also contains forward-looking statements that
involve risks and uncertainties, and actual results may differ materially from
the results we discuss in the forward-looking statements. If any of the
following risks actually occur, they could have a severe negative impact on our
financial results and stock price and, in such case, you could lose all or part
of your investment.
WE RECENTLY CHANGED OUR CORPORATE STRATEGY AND HAVE A LIMITED HISTORY OPERATING
UNDER OUR CURRENT BUSINESS MODEL.
Our operations are based entirely on the operations of GraphOn-CA.
Although GraphOn-CA was founded in 1982, we have a relatively brief operating
history as a provider of server-based software. We changed our strategic
focus in early 1996 from manufacturing and selling computer terminal hardware
to developing server-based software. This change in strategic focus required
us to make changes to our business processes and to make a number of
significant personnel changes, including changes and additions to our
engineering and management teams. As a result of our relatively brief
operating history as a provider of server-based software, you must consider
the risks and difficulties frequently encountered by early stage companies in
new and rapidly evolving markets. These risks include our:
- substantial dependence on products with only limited market
acceptance;
- need to expand our sales and support organizations;
- competition with established and emerging companies;
- need to manage changing operations;
- reliance upon strategic relationships; and
- dependence upon key personnel.
We also depend to a significant degree on the continued growing use of the
Internet for commerce and communication. We cannot be certain that our business
strategy will be successful or that we will successfully address these risks.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT THESE LOSSES TO CONTINUE AND
INCREASE, AT LEAST FOR THE NEAR FUTURE.
We have experienced significant losses since we began operations. We
expect to continue to incur significant losses for the foreseeable future. We
incurred net losses of approximately $2,148,500 for the year ended December
31, 1998 and $4,047,700 for the six months ended June 30, 1999. We expect our
expenses to increase as we expand our business but cannot assure you that our
revenues will increase as a result of increased spending. If revenues grow
more slowly than anticipated, or if operating expenses exceed expectations,
we may not become profitable. Even if we become profitable, we may be unable
to sustain profitability.
OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO FLUCTUATE
SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES
ANALYSTS OR INVESTORS.
Our operating results are likely to fluctuate significantly in the
future on a quarterly and on an annual basis due to a number of factors, many of
which are outside our control. Factors that could cause our revenues to
fluctuate include the following:
- the degree of success of our recently introduced products;
- variations in the timing of and shipments of our products;
- variations in the size of orders by our customers;
- increased competition;
- the proportion of overall revenues derived from different sales
channels such as distributors, OEMs
14
and others;
- changes in our pricing policies or those of our competitors;
- the financial stability of major customers;
- new product introductions or enhancements by us or by competitors;
- delays in the introduction of products or product enhancements by us
or by competitors;
- the degree of success of new products;
- any changes in operating expenses; and
- general economic conditions and economic conditions specific to the
software industry.
In addition, our royalty and license revenues are impacted by
fluctuations in OEM licensing activity from quarter to quarter which may involve
one-time royalty payments and license fees. Our expense levels are based, in
part, on expected future orders and sales. Therefore, if orders and sales levels
are below expectations, our operating results are likely to be materially
adversely affected. Additionally, because a significant portion of our expenses
are fixed, a reduction in sales levels may disproportionately affect our net
income. Also, we may reduce prices or increase spending in response to
competition or to pursue new market opportunities. Because of these factors, our
operating results in one or more future periods may fail to meet or exceed the
expectations of securities analysts or investors. In that event, the trading
price of our common stock would likely decline.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT
US.
Our commercial success is dependent, in large part, upon our ability to
protect our proprietary rights. We rely on a combination of patent, copyright
and trademark laws, and on trade secrets and confidentiality provisions and
other contractual provisions to protect our proprietary rights. These measures
afford only limited protection. We cannot assure you that measures we have taken
will be adequate to protect us from misappropriation or infringement of our
intellectual property. We license essential components of our core technology
from two different parties to whom we pay royalties, although we hold an option,
which is exercisable in the year 2001, to purchase the technology under such
licenses. These licenses may be terminated upon material breach of the
agreements, and if they are terminated our business will be harmed. Despite our
efforts to protect proprietary rights, it may be possible for unauthorized third
parties to copy aspects of our products or obtain and use information that we
regard as proprietary. In addition, the laws of some foreign countries do not
protect our intellectual property rights as fully as do the laws of the United
States. Furthermore, we cannot assure you that the existence of any proprietary
rights will prevent the development of competitive products. The infringement
upon or loss of any proprietary rights, or the development of competitive
products despite such proprietary rights, could have a material adverse effect
on our business.
WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY
INFRINGEMENT THAT COULD ADVERSELY AFFECT OUR BUSINESS.
At any time, we may receive communications from third parties
asserting that features or content of our products may infringe upon their
intellectual property rights. Any such claims, with or without merit, and
regardless of their outcome, may be time consuming and costly to defend. We
may not have sufficient resources to defend such claims and they could divert
management's attention and resources, cause product shipment delays or
require us to enter into new royalty or licensing agreements. New royalty or
licensing agreements may not be available on beneficial terms, and may not be
available at all. If a successful infringement claim is brought against us
and we fail to license the infringed or similar technology, our business
could be materially adversely affected.
OUR BUSINESS SIGNIFICANTLY BENEFITS FROM STRATEGIC RELATIONSHIPS AND THERE CAN
BE NO ASSURANCE THAT SUCH RELATIONSHIPS WILL CONTINUE IN THE FUTURE.
Our business and strategy relies to a significant extent on our
strategic relationships with other companies. There is no assurance that we will
be able to maintain or develop any of these relationships or to replace them in
the event any of these relationships are terminated. In addition, any failure to
renew or extend any licenses between us and any third party may adversely affect
our business.
15
BECAUSE OUR MARKET IS NEW AND EMERGING, WE CANNOT ACCURATELY PREDICT ITS FUTURE
GROWTH RATE OR ITS ULTIMATE SIZE, AND WIDESPREAD ACCEPTANCE OF OUR PRODUCTS IS
UNCERTAIN.
The market for server-based software, which enables programs to be
accessed and run with minimal memory resident on a desktop computer or remote
user device, still is emerging, and we cannot assure you that our products will
receive broad-based market acceptance or that this market will continue to grow.
Additionally, we cannot accurately predict our market's future growth rate or
its ultimate size. Even if server-based software products achieve market
acceptance and the market for these products grows, we cannot assure you that we
will have a significant share of that market. If we fail to achieve a
significant share of the server-based software market or if such market does not
grow as anticipated, our business, results of operations and financial condition
may be adversely affected.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND MAY NOT BE ABLE TO SECURE
ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US.
In the future, we may need to raise additional funds to meet our
obligations, cover operating expenses, pursue business strategies, respond to
financial, technological or marketing hurdles or take advantage of new
opportunities. However, we cannot assure you that any additional funds required
will be available at the time or times needed, or available on terms acceptable
to us. If adequate funds are not available, or are not available on acceptable
terms, we may not be able to meet our obligations, pursue business strategies,
take advantage of market opportunities, develop new products or otherwise
respond to competitive pressures. Such inability could have a material adverse
effect on our business, financial condition and results of operations.
WE RELY ON INDIRECT DISTRIBUTION CHANNELS FOR OUR PRODUCTS AND MAY NOT BE ABLE
TO RETAIN EXISTING RESELLER RELATIONSHIPS OR TO DEVELOP NEW RESELLER
RELATIONSHIPS.
Our products primarily are sold through several distribution channels.
An integral part of our strategy is to strengthen our relationships with
resellers such as value-added resellers, distributors, OEMs, systems integrators
and other vendors to encourage these parties to recommend or distribute our
products and to add resellers both domestically and internationally. We
currently invest in and intend to continue to invest significant resources to
expand our sales and marketing capabilities. We cannot assure you that we will
be able to attract and/or retain resellers to market our products effectively.
Our inability to attract resellers and the loss of any current reseller
relationships could have a material adverse effect on our business, results of
operations and financial condition. Additionally, we cannot assure you that
resellers will devote enough resources to provide effective sales and marketing
support to our products.
OUR FUTURE SUCCESS WILL DEPEND IN PART UPON OUR ABILITY TO ENHANCE OUR EXISTING
PRODUCTS AND TO DEVELOP AND INTRODUCE, ON A TIMELY BASIS, NEW PRODUCTS AND
FEATURES THAT MEET CHANGING CUSTOMER REQUIREMENTS AND EMERGING INDUSTRY
STANDARDS.
The server-based software market still is emerging and characterized by
rapid technological change, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements. The
introduction of new technological products and the emergence of new industry
standards could render our products obsolete and unmarketable. From time to
time, we may develop new products, capabilities or technologies that have the
potential to replace or shorten the life cycle of our existing products.
Additionally, we cannot assure you that announcements of currently planned or
newly introduced product offerings will not cause customers to defer purchasing
our existing products. In addition, we cannot assure you that we will be able to
develop products that keep pace with new technology, or that new technology will
not obviate the need for our products. If any new or enhanced technology gains
widespread acceptance and we fail to develop and provide compatible products on
a timely basis, our competitive position, business, results of operations and
financial condition could be adversely affected. Our future success depends in
large part upon:
16
- our ability to enhance our current products;
- our ability to develop and successfully introduce new products
that keep pace with technological developments; and
- our ability to respond to evolving end-user requirements.
We cannot assure you that we will successfully develop and market new
products or product enhancements on a timely basis, or that new products or
product enhancements we develop will achieve market acceptance.
WE FILED FOR BANKRUPTCY ON NOVEMBER 15, 1991 AND MAY BE REQUIRED TO PAY UP TO
$2.23 MILLION AND INTEREST, IF ANY, TO CREDITORS.
On November 15, 1991, GraphOn-CA filed for reorganization under
Chapter 11 of the United States Bankruptcy Code and, later, submitted a Debtor's
Proposed Amended Plan of Reorganization. The plan was confirmed by order of the
bankruptcy court on July 11, 1994 and the court established a plan of payment
for the benefit of our creditors. Under the bankruptcy court order, we
established a disbursement account into which 50% of the ongoing terminal
royalties we receive from OEMs with whom we had a current relationship must be
deposited to pay named creditors. For all but one unsecured creditor, payments
from the disbursement account were ordered to continue up to the earlier of:
- the limit of our liability to each unsecured creditor; or
- through the year 2000.
However, the largest unsecured creditor's claim, which currently totals
approximately $964,000, must be paid from available funds, if any, in the
disbursement account until such amount is fully paid. Our total remaining
liability under the bankruptcy, as of June 30, 1999, is limited to the lesser
of:
- approximately $2,230,000; or
- 50% of future ongoing terminal royalties we receive from the OEMs.
To date, only royalties received pursuant to some of our license agreements
existing at the time of the bankruptcy have been deposited into the disbursement
account, and we have not deposited into such account or paid creditors out of
royalties received or currently received on our subsequently developed and
licensed server-based technology. We believe that our royalty payment
obligations under the bankruptcy court order relate only to licenses in place as
of July 11, 1994, and no payments to creditors have been made since November 14,
1997. We cannot assure you that a court will not interpret our obligation to
include payments to the disbursement account from royalties earned from
subsequent licenses of the server-based technology or licenses that we secure in
the future, or that our current technology will not be deemed derivative of our
technology existing at July 11, 1994. Consequently, we cannot assure you that we
will not be required to repay creditors referenced in the bankruptcy proceedings
the full amount of our liability, which is approximately $2,230,000, and
interest on any payments that a court deems to be owed based upon a ruling that
our interpretation is wrong. In addition, we cannot guarantee you that a
creditor will not assert a claim for payment out of the royalties from
subsequent licenses of the server-based technology. Such claims could be costly
and time-consuming for us. If any of these events takes place, it could have a
material adverse effect on our business, financial condition and results of
operations.
OUR FAILURE TO MANAGE EXPANDING OPERATIONS COULD ADVERSELY AFFECT US.
To exploit the emerging server-based software market, we must rapidly
execute our business strategy and further develop products while managing our
anticipated growth in operations. To manage our growth, we must:
17
- continue to implement and improve our operational, financial and
management information systems;
- hire and train additional qualified personnel;
- continue to expand and upgrade core technologies; and
- effectively manage multiple relationships with various licensees,
consultants, strategic and technological partners and other third
parties.
We cannot assure you that our systems, procedures, personnel or controls will be
adequate to support our operations or that management will be able to execute
strategies rapidly enough to exploit the market for our products and services.
Our failure to manage growth effectively or execute strategies rapidly could
have a material adverse effect on our business, financial condition and results
of operations.
COMPETITION FOR KEY MANAGEMENT AND OTHER PERSONNEL IN OUR INDUSTRY IS INTENSE,
AND WE MAY NOT BE SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL.
Our success and business strategy is dependent in large part on our
ability to attract and retain key management and other personnel. Such
individuals are in high demand and often have competing employment offers. In
particular, our success depends on our ability to retain the services of Mr.
Walter Keller, our President and Chairman of the Board and Ms. Robin Ford, our
Executive Vice President of Marketing and Sales. We have entered into employment
agreements with these individuals that each contain non-competition and
confidentiality covenants. We currently anticipate the need to attract
additional sales, marketing, financial and software engineer personnel in the
near future. Competition for such personnel in the computer software and
services industry is intense, and therefore, we cannot assure you we will be
able to attract or retain such personnel. The loss of the services of one or
more members of our management group or the inability to retain or hire
additional personnel as needed may have a material adverse effect on our
business.
OUR PLANNED EXPANSION INTO INTERNATIONAL MARKETS MAKES US SUSCEPTIBLE TO RISKS
FROM INTERNATIONAL OPERATIONS.
As part of our long term strategy we intend to address the global needs
of our customers and expand our business to commit resources to international
market expansion. In order to execute this strategy, we will need to hire and
train additional personnel and recruit additional international resellers to
successfully expand our international sales. We cannot assure you that we will
be able to increase or maintain international sales of our products or that
international reseller channels will be willing or able to adequately service
and support our products. Our international operations will be subject to a
number of risks including:
- difficulties in staffing and managing foreign operations;
- variability of foreign economic conditions and changing restrictions
imposed by United States export laws;
- unexpected changes in regulatory requirements;
- tariffs and other trade barriers;
- lack of acceptance of products in foreign countries;
- the burdens of complying with a wide variety of foreign laws; and
- foreign restrictions on the transfer of currency and variability of
foreign currency exchange rates.
We cannot assure you that such factors will not have a material adverse effect
on our future international sales and, consequently, our business, results of
operations and financial condition.
THE MARKET IN WHICH WE PARTICIPATE IS HIGHLY COMPETITIVE AND HAS MORE
ESTABLISHED COMPETITORS.
The market we participate in is intensely competitive, rapidly evolving
and subject to technological changes. We expect competition to increase as other
companies introduce additional competitive products. In order to compete
effectively, we must continually develop and market new and enhanced products
and market those products at competitive prices. As markets for our products
continue to develop, additional companies, including companies in the computer
hardware, software and networking industries with significant market presence,
may
18
enter the markets in which we compete and further intensify competition. A
number of our current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
sales, technical, marketing and other resources than we do. We cannot assure
you that our competitors will not develop and market competitive products
that will offer superior price or performance features or that new
competitors will not enter our markets and offer such products. We believe
that we will need to invest increasing financial resources in research and
development to remain competitive in the future. Such financial resources may
not be available to us at the time or times that we need them or upon terms
acceptable to us. We cannot assure you that we will be able to establish and
maintain a significant market position in the face of our competition and our
failure to do so would adversely affect our business.
WE ARE SUBJECT TO RISK OF UNDETECTED ERRORS WHICH COULD SUBSTANTIALLY REDUCE THE
EFFECTIVENESS OF OUR PRODUCTS AND ADVERSELY AFFECT US.
Our complex software products may contain undetected errors or failures
when first introduced or as new versions are released. We cannot assure you that
errors will not be found in our products after commencement of commercial
shipments. In addition, third-party products that our products depend upon,
including current and future versions of operating systems and application
programs provided by companies such as Sun Microsystems, Inc., IBM Corporation
and Microsoft Corporation, may contain defects which could reduce the
performance of our products or render them useless. Because we do not develop
our own application programs and depend upon third party applications, errors in
any application utilized by our customers could adversely impact the
marketability of our products. Similarly, we cannot assure you that errors or
defects in our products will not be discovered, causing delays in product
introductions and shipments or requiring design modifications that could
adversely affect our reputation, competitive position, business, results of
operations and financial condition.
OUR MANAGEMENT WILL BE ABLE TO EXERT SIGNIFICANT CONTROL OVER US.
Our executive officers, directors and their affiliates own or have
voting control over approximately 45.8% of the outstanding shares of our common
stock. As a result, if they act as a group, the executive officers and directors
may exercise significant influence over such matters as amendments to our
charter and fundamental corporate transactions such as mergers, asset sales and
the sale of our company. In addition, they will be able to influence the
direction of our business and the election of members to the board of directors.
WE HAVE AGREED TO CONTRACTUAL PROVISIONS THAT COULD DISCOURAGE ACQUISITION BIDS.
A number of our agreements contain express provisions that do not allow
us to assign them without written consent. These provisions could deter third
parties from making bids to acquire us. These provisions could also limit the
price future investors are willing to pay for shares of our common stock.
OUR FAILURE TO BE YEAR 2000 COMPLIANT WOULD NEGATIVELY IMPACT OUR BUSINESS.
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field and therefore are
not designed to handle any dates beyond the year 1999. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in a relatively short time, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "year 2000" requirements to remain functional. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance. Although we currently offer software products that are designed
and, in certain circumstances, are warranted to be year 2000 compliant, there
can be no assurance that our software products contain all necessary date code
changes. In addition, there may be a significant amount of litigation arising
out of year 2000 compliance issues. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent we may be affected by it.
We believe that the purchasing patterns of customers and potential customers may
be affected by year 2000 issues in a variety of ways. Many companies are
expending significant resources to purchase new software or correct their
current software systems for year 2000 compliance. These expenditures may result
in reduced funds available to purchase our products. In addition, many potential
customers may choose to defer purchasing year 2000 compliant products until they
believe it is absolutely necessary, thus resulting in potentially stalled market
sales within the server-based software industry. Conversely, year 2000 issues
may cause other companies to accelerate purchases, causing an increase in
short-term demand and
19
a consequent decrease in long-term demand for our year 2000 compliant
products. There can be no assurance that year 2000 issues will not affect us
in one or more of a number of possible ways and will not result in a
material adverse effect on our business, operating results and financial
condition.
THE PRICE OF OUR SECURITIES MAY FLUCTUATE.
The market price of our securities is likely to be highly volatile as
the stock market in general, and the market for technology companies in
particular, has been highly volatile. Our stockholders may have difficulty
selling their common stock following periods of volatility because of the
market's adverse reaction to such volatility. Factors which could cause such
volatility may include, among others:
- conditions or trends in the computer software industry;
- changes in the market valuations of other computer software
companies;
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- capital commitments and expenditures;
- departures of key employees; and
- announcements by us or our competitors of strategic alliances,
joint ventures and significant acquisitions.
Many of these factors are beyond our control and may materially adversely affect
the market price of our common stock, regardless of future operating results.
The trading prices of many technology companies' stocks have reached historical
highs within the last 12 months and have reflected valuations substantially
above historical levels. During the same period, such companies' stocks have
also been highly volatile and have recorded lows well below such historical
highs. We cannot assure you that our securities will trade at the same levels of
other technology companies or that technology stocks in general will sustain
their current levels.
SOME OF OUR WARRANTS MAY NOT BE EXERCISED IF A CURRENT PROSPECTUS COVERING THE
UNDERLYING SHARES IS NOT AVAILABLE.
Holders of warrants issued by us when we were known as Unity First
Acquisition Corp. in our initial public offering cannot exercise such warrants
and then sell the underlying shares of common stock in the absence of an
effective registration statement. The warrants are not exercisable unless, at
the time of exercise, we have a current prospectus covering the shares of common
stock issuable upon exercise of the warrants, and the shares have been
registered, qualified or are deemed to be exempt from registration under the
securities laws of the state of residency of the warrant holder. Although we
have agreed with the underwriter of our initial public offering to use our best
efforts to keep a registration statement covering the shares underlying such
warrants effective for the life of the warrants, if we fail to do so, the
warrants may be deprived of their value. Maintaining such a registration
statement may be very costly over the life of the warrants.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS COULD MAKE IT DIFFICULT FOR A THIRD
PARTY TO ACQUIRE US.
Our amended and restated certificate of incorporation and bylaws could
have the effect of delaying, deferring or preventing an acquisition of us. For
example, our board may issue preferred stock without stockholder approval.
Additionally, such certificate of incorporation provides for a classified board,
with each member having a staggered three year term. Our certificate of
incorporation also will prohibit the stockholders from taking action by written
consent and limit their ability to call special meetings and make proposals at
such meetings. These provisions could make it more difficult for a third party
to remove or replace our management or to acquire us.
OUR COMMON STOCK MAY NOT HAVE AN ACTIVE TRADING MARKET, WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU WANT.
There has been a sporadic and, at times, relatively illiquid public
market for our securities. We cannot predict the extent to which a trading
market will develop or how liquid that market will be.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In late 1996, we disclosed aspects of our proprietary technology on a
confidential basis to Insignia Solutions, Inc. and Insignia Solutions plc, some
of whose assets were later acquired by Citrix Systems. We made inquiry of Citrix
and Insignia regarding its potential misuse of our technology. Citrix instituted
litigation in the United States District Court for the Southern District of
Florida seeking a judicial declaration that neither Citrix nor Insignia had
misappropriated or infringed upon our technology or breached a binding
agreement. We responded by filing a motion to dismiss the action. On May 14,
1999, the court granted our motion to dismiss the action. Citrix subsequently
filed notice to appeal this decision and the court issued a Readiness of Appeal
Notice on July 28, 1999. Additionally, on July 14, 1999, we filed a motion for
reimbursement of our attorneys' fees and costs resulting from the litigation.
ITEM 2.
In connection with the merger, our Certificate of Incorporation and
bylaws were amended to prohibit the stockholders from taking action by
written consent and limit their ability to call special meetings and make
proposals at such meetings. These are described more fully in our
Registration Statement on Form S-4, as amended, filed with the Securities and
Exchange Commission on June 15, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of the stockholders was held on July 12, 1999 for
each of GraphOn and Unity First Acquisition Corp. ("Unity"). At such meeting,
the stockholders of GraphOn and Unity voted to approve the merger between
GraphOn and Unity, including the amendment of our Certificate of
Incorporation and the voting for the following directors: Walter Keller,
Thomas A. Bevilacqua, Michael O'Reilly, Robert Dilworth, Eric Kim, August
Klein and Lawrence Burstein. Each of such actions is further described in the
Registration Statement on Form S-4, as amended, filed with the Securities and
Exchange Commission on June 15, 1999 and the Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 15, 1999 and July 27,
1999, respectively, incorporated herein by reference.
The results of such vote were as tabulated below:
GraphOn Unity
- ------------------- ----------------- ---------------- --------------- ----------------- ---------------
For Against Abstain For Against Abstain
--- ------- ------- --- ------- -------
12,628,707 0 392,500 1,152,375 0 0
ITEM 5. OTHER INFORMATION.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On August 4, 1999, the board of directors of the Registrant dismissed
Arthur Andersen LLP (the "Former Certifying Accountant") and hired BDO Seidman
LLP as the certifying accountant to audit the Registrant's financial statements.
BDO Seidman LLP acted as the principal accountant to audit the financial
statements of GraphOn-CA prior to its merger with Unity.
The Former Certifying Accountant's report on the financial statements
of the Registrant during the two most recent fiscal years and the subsequent
interim periods preceding the date hereof contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. During the two most recent fiscal years and the
subsequent interim periods preceding the date hereof, there were no
disagreements with the Former Certifying Accountant on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which disagreement, if not resolved to the satisfaction of the Former
Certifying Accountant, would have caused it to make reference to the subject
matter of the disagreement in connection with its report.
None of the "reportable events" described in Item 301 (a) (i) (ii)
occurred with respect to the Registrant within the last two fiscal years and the
subsequent interim periods preceding the date hereof.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
*2.1 Agreement and Plan of Merger and Reorganization dated as of February 1, 1999, between
Unity First Acquisition Corp. and GraphOn Corporation,
*3.5 Amended and Restated Certificate of Incorporation
*3.6 Amended and Restated Bylaws
+4.2 Form of certificate evidencing Class A Redeemable Warrants
+4.3 Form of certificate evidencing Class B Redeemable Warrants
*4.4 Form of certificate evidencing shares of common stock
+4.5 Warrant Agreement dated November 12, 1996 between Registrant and GKN Securities Corp.
and Gaines, Berland, Inc.
+4.6 Redeemable Warrant Agreement dated November 12, 1996 between Registrant and American
Stock Transfer & Trust Company
*4.7 Registration Rights Agreement dated October 28, 1998 between Registrant, Spencer Trask
Investors, Walter Keller and the investors purchasing units in Registrant's private placement
*4.8 Amendment to Registration Rights Agreement
+10.1 1996 Stock Option Plan of Registrant
*10.2 1998 Stock Option/Stock Issuance Plan of Registrant
*10.3 Placement Agency Agreement by and between GraphOn and Spencer Trask Securities, Inc.,
dated as of September 2, 1998
*10.4 Asset Purchase Agreement by and among GraphOn, Corel Corporation, Corel Corporation
Limited and Corel, Inc. (collectively, "Corel"), dated as of December 18, 1998
*10.5 Securities Purchase Agreement by and among GraphOn and Corel, dated as of December 18,
1998
*10.6 Standard Industrial Lease between GraphOn and Mildred K. Dibona, dated April 14, 1995,
as amended on October 2, 1998
*10.7 Hidden Valley Office Park Lease Agreement between GraphOn and ASA Properties, Inc.,
dated June 5, 1998
*10.8 Lease Agreement between Corel Inc. and CML Realty Corp., dated September, 1998 and
assumed by GraphOn on December 31, 1998
16.1 Letter from Arthur Andersen LLP regarding change in certifying accountant,
dated .
27.1 Financial Data Schedule.
* Incorporated by reference to Form S-4 (File No. 333-76333) filed with
the SEC on June 15, 1999.
+ Incorporated by reference to Form S-1 (File No. 333-11165), filed with
the SEC on August 30, 1996.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the
six months ended June 30, 1999.
22
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 13, 1999 By: /s/ Walter Keller
-----------------------------
Walter Keller,
Chief Executive Officer and President
Date: August 13, 1999 By: /s/ Edmund Becmer
------------------------------
Edmund Becmer,
Chief Financial Officer
23
EXHIBIT INDEX
Exhibit No.
-----------
*2.1 Agreement and Plan of Merger and Reorganization dated as of February 1, 1999, between
Unity First Acquisition Corp. and GraphOn Corporation,
*3.5 Amended and Restated Certificate of Incorporation
*3.6 Amended and Restated Bylaws
+4.2 Form of certificate evidencing Class A Redeemable Warrants
+4.3 Form of certificate evidencing Class B Redeemable Warrants
*4.4 Form of certificate evidencing shares of common stock
+4.5 Warrant Agreement dated November 12, 1996 between Registrant and GKN Securities Corp.
and Gaines, Berland, Inc.
+4.6 Redeemable Warrant Agreement dated November 12, 1996 between Registrant and American
Stock Transfer & Trust Company
*4.7 Registration Rights Agreement dated October 28, 1998 between Registrant, Spencer Trask Investors,
Walter Keller and the investors purchasing units in Registrant's private placement
*4.8 Amendment to Registration Rights Agreement
+10.1 1996 Stock Option Plan of Registrant
*10.2 1998 Stock Option/Stock Issuance Plan of Registrant
*10.3 Placement Agency Agreement by and between GraphOn and Spencer Trask Securities, Inc.,
dated as of September 2, 1998
*10.4 Asset Purchase Agreement by and among GraphOn, Corel Corporation, Corel Corporation
Limited and Corel, Inc. (collectively, "Corel"), dated as of December 18, 1998
*10.5 Securities Purchase Agreement by and among GraphOn and Corel, dated as of December 18,
1998
*10.6 Standard Industrial Lease between GraphOn and Mildred K. Dibona, dated April 14, 1995,
as amended on October 2, 1998
*10.7 Hidden Valley Office Park Lease Agreement between GraphOn and ASA Properties, Inc.,
dated June 5, 1998
*10.8 Lease Agreement between Corel Inc. and CML Realty Corp., dated September, 1998 and
assumed by GraphOn on December 31, 1998
16.1 Letter from Arthur Andersen LLP regarding change in certifying accountant,
dated .
27.1 Financial Data Schedule.
* Incorporated by reference to Form S-4 (File No. 333-76333) filed with the
SEC on June 15, 1999.
+ Incorporated by reference to Form S-1 (File No. 333-11165), filed with the
SEC on August 30, 1996.