<PAGE>
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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 September 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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<TABLE>
<S> <C>
Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
150 Harrison Avenue, Campbell, California 95008
(Address of principal executive offices) (zip code)
</TABLE>
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 November 12, 1999, there were 10,969,471 shares of the Registrant's
Common Stock outstanding, par value $0.0001.
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<PAGE>
PART I--FINANCIAL INFORMATION
ITEM I Financial Statements
GRAPHON CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents....................... $ 2,795,200 $ 1,798,400
Accounts receivable, net of allowance for
doubtful accounts of $25,000 and $25,000....... 1,322,800 564,700
Available for sale securities................... 999,000 --
Prepaid expenses and other assets............... 554,100 32,100
----------- -----------
Total Current Assets........................ 5,671,100 2,395,200
----------- -----------
Property and Equipment, net....................... 548,200 423,300
Purchased Technology , net........................ 1,301,400 3,645,400
Capitalized Software, net......................... 231,500 74,200
Deferred Compensation Expense..................... 440,800 566,000
Other Assets...................................... 6,400 6,400
----------- -----------
$ 8,199,400 $ 7,110,500
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Convertible note payable........................ $ -- $ 475,000
Accounts payable................................ 382,000 115,700
Accrued expenses................................ 494,500 498,900
Deferred revenue................................ 75,400 112,600
----------- -----------
Total Current Liabilities................... 951,900 1,202,200
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $0.01 par value, 5,000 shares
authorized, no shares issued and outstanding... -- --
Common stock, $0.0001 par value, 20,000,000
shares authorized, 10,969,471 and 7,970,336
shares issued and outstanding.................. 1,100 800
Additional paid in capital...................... 15,399,800 8,430,700
Accumulated other comprehensive income........ 300 --
Accumulated deficit........................... (8,153,700) (2,523,200)
----------- -----------
Stockholders' Equity........................ 7,247,500 5,908,300
----------- -----------
$ 8,199,400 $ 7,110,500
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
2
<PAGE>
GRAPHON CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ -----------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues
Product sales.............. $ 602,600 $ 447,700 $ 225,700 $ 207,400
Maintenance................ 131,900 76,300 36,900 28,400
OEM license................ 1,115,000 964,600 240,000 100,000
OEM license--related
party..................... 600,000 -- 600,000 --
Training................... -- 10,400 -- --
----------- ----------- ----------- ----------
Total Revenues......... 2,449,500 1,499,000 1,102,600 335,800
Cost of Revenues
Product sales.............. 10,400 20,900 3,600 5,100
Maintenance................ 28,200 15,000 9,400 5,000
OEM license................ 251,900 215,500 79,300 60,000
----------- ----------- ----------- ----------
Total Cost of
Revenues.............. 290,500 251,400 92,300 70,100
Gross Profit........... 2,159,000 1,247,600 1,010,300 265,700
----------- ----------- ----------- ----------
Operating Expenses:
Selling and marketing...... 2,359,200 860,000 783,800 335,600
General and
administrative............ 3,725,500 782,800 1,340,500 441,700
Research and development... 1,771,800 634,400 517,000 299,500
----------- ----------- ----------- ----------
Total Operating
Expenses.............. 7,856,500 2,277,200 2,641,300 1,076,800
----------- ----------- ----------- ----------
Loss From Operations....... (5,697,500) (1,029,600) (1,631,000) (811,100)
Other Income (Expense):
Interest and other
income.................. 76,900 8,800 49,900 1,700
Interest expense......... (9,100) (368,000) (1,700) (166,600)
----------- ----------- ----------- ----------
Loss Before Provision for
Income Taxes.............. (5,629,700) (1,388,800) (1,582,800) (976,000)
Provision for Income
Taxes..................... 800 800 -- --
----------- ----------- ----------- ----------
Net Loss................... $(5,630,500) $(1,389,600) $(1,582,800) $ (976,000)
----------- ----------- ----------- ----------
Basic and Diluted Loss per
Common Share.............. $ (0.59) $ (0.39) $ (0.15) $ (0.26)
=========== =========== =========== ==========
Weighted Average Common
Shares Outstanding........ 9,540,148 3,583,798 10,712,629 3,750,418
=========== =========== =========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
3
<PAGE>
GRAPHON CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income....................... $(5,630,500) $(1,389,600)
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization......... 2,473,900 41,700
Loss on available-for-sale
securities........................... -- 16,500
Compensation expense.................. 125,200 59,900
Interest expense...................... -- 323,100
Changes in operating assets and
liabilities:
Accounts receivable................. (758,100) 149,900
Available for sale securities....... (998,700) --
Prepaid expenses and other assets... (522,000) (31,600)
Accounts payable.................... 266,300 204,000
Accrued expenses.................... (4,400) 202,100
Deferred revenue.................... (37,200) (398,100)
----------- -----------
Net Cash Used In Operating
Activities....................... (5,085,500) (822,100)
----------- -----------
Cash Flows From Investing Activities:
Other assets............................ -- (4,500)
Capital expenditures.................... (412,100) (158,600)
----------- -----------
Net Cash Used In Investing
Activities....................... (412,100) (163,100)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from convertible notes
payable................................ -- 775,000
Repayment of convertible notes payable.. (475,000) --
Net proceeds from issuance of common
stock.................................. 6,975,100 63,100
Purchase and retirement of common
stock.................................. (5,700) --
----------- -----------
Net Cash Provided By Financing
Activities....................... 6,494,400 838,100
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 996,800 (147,100)
Cash and Cash Equivalents, beginning of
period................................. 1,798,400 302,800
----------- -----------
Cash and Cash Equivalents, end of
period................................. $ 2,795,200 $ 155,700
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
4
<PAGE>
GRAPHON CORPORATION
STATEMENT OF EQUITY
<TABLE>
<CAPTION>
Common Stock Unrealized
------------------ Additional Paid Gain on Accumulated
Shares Amount in Capital Securities Deficit Total
---------- ------ --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1998................... 7,970,336 $ 800 $ 8,430,700 $ -- $(2,523,200) $ 5,908,300
Balance of information
is unaudited through
September 30,1999:
Proceeds from sale of
common stock.......... 62,525 -- 97,200 -- -- 97,200
Net proceeds from sale
of common stock, net
of offering costs of
$255,300.............. 1,095,053 100 1,708,500 -- -- 1,708,600
Repurchase and
retirement of common
stock................. (40,952) -- (5,700) -- -- (5,700)
Recapitalization of
company through
merger, net of merger
costs of $255,700..... 1,875,000 200 5,169,100 -- -- 5,169,300
Unrealized gain on
available for sale
securities............ -- -- -- 300 -- 300
Issuance of common
stock due to the
exercise of warrants.. 7,509 -- -- -- -- --
Net loss............... -- -- -- -- (5,630,500) (5,630,500)
---------- ------ ----------- ----- ----------- -----------
Balances, September 30
,1999.................. 10,969,471 $1,100 $15,399,800 $ 300 $(8,153,700) $ 7,247,500
========== ====== =========== ===== =========== ===========
</TABLE>
5
<PAGE>
GRAPHON CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Merger with Unity First Acquisition Corp. 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 July 12, 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 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 nine months
ended September 30, 1999. The results for the three and nine months ended
September 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.
As noted above, in July 1999, GraphOn-CA merged with and into Unity. All
references to share and per-share data for all periods presented have been
adjusted to give effect to the .5576 exchange of GraphOn-CA stock (See Note 3).
3. Stockholders' Equity
In January 1999, GraphOn-CA completed the third and final closing of a
private placement offering, in which it sold 1,095,053 shares of its common
stock at $1.79 per share and granted warrants to purchase an additional 219,010
shares of common stock 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 62,525 shares of its common stock and
warrants to purchase an additional 676 shares for gross proceeds of $97,200.
6
<PAGE>
GRAPHON CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In July 1999, GraphOn-CA merged with and into Unity. As discussed above,
each share of GraphOn-CA common stock was exchanged for .5576 shares of Unity
common stock and each outstanding GraphOn-CA option and warrant was exchanged
for .5576 options and warrants of Unity. Additionally, GraphOn received
$5,425,000 in cash and the merger was accounted for as a capital transaction
giving effect to the 1,875,000 shares of Unity. All references to share and
per-share data for all periods presented have been adjusted to give effect to
this .5576 exchange of GraphOn-CA stock.
4. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged assets
or liability that are attributable to the hedged risk or (ii) the earnings
effect of the hedged forecasted transaction. For a derivative not designated as
a hedging instrument, the gain and loss is recognized in income in the period
of change. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative instruments and Hedging Activities--Deferring the Effective Date of
FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to have a material impact on the
Company's results of operations, financial position or cash flows.
5. Litigation
On October 4, 1999, Insignia Solutions plc, a British company with a
California subsidiary, filed a complaint against GraphOn Corporation in the
Superior Court of the State of California, Santa Clara County, alleging the
GraphOn intentionally disrupted Insignia's sale to Citrix Systems, Inc., on
February 5, 1998, of assets related to Insignia's NTRIGUE software product
line. The complaint alleges that, as a result of GraphOn's conduct in
connection with that sale of assets, Insignia was required by Citrix to place
$8.75 million in escrow to enable Citrix to deal with potential claims by
GraphOn of proprietary rights in the assets being sold. The complaint seeks
unspecified damages from GraphOn.
The complaint also names Citrix and its subsidiary in the United Kingdom
("Citrix UK") as defendants, alleging that these companies breached the
February 5, 1998 contract with Insignia. The complaint seeks compensatory
damages from Citrix related to that company's refusal to release purchase money
from escrow for payment to Insignia.
Insignia's California state court complaint makes reference to a declaratory
judgment lawsuit that Citrix filed against GraphOn, on November 23, 1998, in
the United States District Court for the Southern District of Florida, seeking
a declaration of Citrix's right to use software purchased from Insignia, free
and clear of any claim by GraphOn that such software may incorporate
proprietary information owned by GraphOn. On May 14, 1999, Citrix's Florida-
based lawsuit against GraphOn was dismissed for lack of subject matter
jurisdiction. Essentially, the Florida court held that GraphOn has not
threatened Citrix with litigation, and there is no existing dispute between
GraphOn and Citrix. Citrix has filed an appeal from this ruling, which is
presently pending.
At the request of Citrix and Insignia, GraphOn has agreed to participate in
mediation aimed at resolving the dispute. In light of that effort, the parties
to the California state court case have agreed to extend GraphOn's time to
respond to the complaint until early December. GraphOn has not yet filed an
answer or other responsive pleading in the California state court action, but
GraphOn presently intends to deny the principal allegations made by Insignia in
the complaint. GraphOn views the matter as a dispute between Citrix and
Insignia, in which GraphOn is not directly involved.
7
<PAGE>
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 most of the licensed
technology from two of the software developers for a purchase price of $378,000
in the third quarter of 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-GlobalTM-,
GO-JoeTM- and GO-BetweenTM 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 jBridgeTM technology. In
February 1999, we hired a Chief Financial Officer.
We have increased our headcount from 29 at September 30, 1998 to 49 at
September 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.
8
<PAGE>
Results of Operations for the Three and Nine Month Periods Ended September 30,
1999 Versus Three and Nine Month Periods Ended September 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 nine-month period ended September 30,
1999 increased by $950,500, or 63.4%, to $2,449,500 from $1,499,000 for the
same period in 1998. Total revenues for the three-month period ended September
30, 1999 increased by $766,800, or 228.4%, to $1,102,600 from $335,800 for the
same period in 1998. The most important contributing factor was an increase in
OEM license sales in 1999 as compared to 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 by $1,499,200, or 174.3%, to
$2,359,200, or 96.3% of revenue, for the nine months ended September 30, 1999
from $860,000, or 57.4% of revenue, for the same period in 1998. Sales and
marketing expenses increased by $448,200, or 133.6%, to $783,800, or 71.1% of
revenue, for the three months ended September 30, 1999 from $335,600, or 99.9%
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 by $2,942,700, or
375.9%, to $3,725,500, or 152.1% of revenue, for the nine months ended
September 30, 1999 from $782,800, or 52.2% of revenue, for the same period in
1998. General and administrative expenses increased by $898,800, or 203.5%, to
$1,340,500, or 121.6% of revenue, for the three months ended September 30, 1999
from $441,700, or 131.5% 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 $2,400,000 and $800,000 for the nine and three
months ended September 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 $1,137,400, or
179.3%, to $1,771,800, or 72.3% of revenue, for the nine months ended
September 30, 1999 from $634,400, or 42.3% of revenue, for the same period in
1998. Research and development expenses increased by $217,500, or 72.6%, to
$517,000, or 46.9% of revenue, for the three months ended September 30, 1999
from $299,500, or 89.2% 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 September 30, 1999, we had 28 software engineers
compared to 13 as of September 30, 1998.
9
<PAGE>
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 1,095,053 shares of our common stock and warrants to purchase
an additional 219,010 shares of our common stock.
In February 1999, we sold 62,525 shares of our common stock and warrants to
purchase an additional 676 shares of our common stock, for gross proceeds of
$97,200.
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.
As of September 30, 1999, we had cash and cash equivalents of $2,795,200 as
well as $999,000 in available-for-sale securities compared to total liabilities
of $876,500, exclusive of deferred revenue of $75,400.
We anticipate that cash balances as of September 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.
10
<PAGE>
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 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 1999
financial statements. Management does not expect this standard to have a
significant impact on GraphOn's financial statements.
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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 1999 financial statements. Management does not
expect this standard to have a significant impact on GraphOn's financial
statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged assets
or liability that are attributable to the hedged risk or (ii) the earnings
effect of the hedged forecasted transaction. For a derivative not designated as
a hedging instrument, the gain and loss is recognized in income in the period
of change. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative instruments and Hedging Activities--Deferring the Effective Date of
FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. As GraphOn
is 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.
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;
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. 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 $5,630,500 for the nine months ended September 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 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
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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.
A Complaint Has Been Filed Against Us, and if Such Claim Were Successful, Our
Business May Be Materially Adversely Affected.
On October 4, 1999, Insignia Solutions plc, a British company with a
California subsidiary, filed a complaint against us in the Superior Court of
the State of California, Santa Clara County, alleging that we intentionally
disrupted Insignia's sale to Citrix Systems, Inc., on February 5, 1998, of
assets related to Insignia's NTRIGUE software product line. The complaint
alleges that, as a result of our conduct in connection with that sale of
assets, Insignia was required by Citrix to place $8.75 million in escrow to
enable Citrix to deal with potential claims by us of proprietary rights in the
assets being sold. The complaint seeks unspecified damages from us.
In addition, Citrix had filed a declaratory judgement lawsuit against us, on
November 23, 1998, in the United States District Court for the Southern
District of Florida, seeking a declaration of Citrix's right to use software
purchased from Insignia, free and clear of any claim by us that such software
may incorporate our proprietary information. On May 14, 1999, Citrix's Florida-
based lawsuit against us was dismissed for lack of subject matter jurisdiction.
At the request of Citrix and Insignia, we have agreed to participate in
mediation aimed at resolving the dispute. In light of that effort, the parties
to the California state court case have agreed to extend our time to respond to
the complaint until early December. We have not yet filed an answer or other
responsive pleading in the California state court action, but we presently
intend to deny the principal allegations made by Insignia in the complaint.
Mediation may fail to resolve this dispute. If mediation were unsuccessful,
then we may face litigation from either or both Citrix and Insignia. Any
litigation, regardless of outcome, may divert management's attention and
resources and be costly to defend. If Insignia prevailed against us in its
claim for damages or Citrix wins its appeal, it could adversely affect our
business and financial condition.
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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.
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.
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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:
. 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
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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:
. 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
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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 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.
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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 48.4% 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 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.
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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.
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PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings.
On October 4, 1999, Insignia Solutions plc, a British company with a
California subsidiary, filed a complaint against GraphOn Corporation in the
Superior Court of the State of California, Santa Clara County, alleging that
GraphOn intentionally disrupted Insignia's sale to Citrix Systems, Inc., on
February 5, 1998, of assets related to Insignia's NTRIGUE software product
line. The complaint alleges that, as a result of GraphOn's conduct in
connection with that sale of assets, Insignia was required by Citrix to place
$8.75 million in escrow to enable Citrix to deal with potential claims by
GraphOn of proprietary rights in the assets being sold. The complaint seeks
unspecified damages from GraphOn.
The complaint also names Citrix and its subsidiary in the United Kingdom
("Citrix UK") as defendants, alleging that these companies breached the
February 5, 1998 contract with Insignia. The complaint seeks compensatory
damages from Citrix related to that company's refusal to release purchase money
from escrow for payment to Insignia.
Insignia's California state court complaint makes reference to a declaratory
judgment lawsuit that Citrix filed against GraphOn, on November 23, 1998, in
the United States District Court for the Southern District of Florida, seeking
a declaration of Citrix's right to use software purchased from Insignia, free
and clear of any claim by GraphOn that such software may incorporate
proprietary information owned by GraphOn. On May 14, 1999, Citrix's Florida-
based lawsuit against GraphOn was dismissed for lack of subject matter
jurisdiction. Essentially, the Florida court held that GraphOn has not
threatened Citrix with litigation, and there is no existing dispute between
GraphOn and Citrix. Citrix has filed an appeal from this ruling, which is
presently pending.
At the request of Citrix and Insignia, GraphOn has agreed to participate in
mediation aimed at resolving the dispute. In light of that effort, the parties
to the California state court case have agreed to extend GraphOn's time to
respond to the complaint until early December. GraphOn has not yet filed an
answer or other responsive pleading in the California state court action, but
GraphOn presently intends to deny the principal allegations made by Insignia in
the complaint. GraphOn views the matter as a dispute between Citrix and
Insignia, in which GraphOn is not directly involved.
ITEM 2. Changes in Securities and Use of Proceeds.
Not Applicable.
ITEM 3. Defaults Upon Senior Securities.
Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
ITEM 5. Other Information.
None.
21
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*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 August 10, 1999.
27.1 Financial Data Schedule.
</TABLE>
- --------
* 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.
++ Previously filed as an exhibit to the Quarterly Report on Form 10-Q, filed
with the SEC on August 13, 1999.
(b) Reports on Form 8-K.
On July 27, 1999, the Company filed a Current Report on Form 8-K, which
related to an acquisition agreement with GraphOn Corporation, a California
corporation ("GraphOn-CA") pursuant to which GraphOn-CA was merged with and
into Unity First Acquisition Corp. and renamed GraphOn Corporation, a
Delaware corporation. The Form 8-K included Item 5, Other Events,
specifically, changes to the symbols under which the Company's securities
are traded on the OTC Bulletin Board, Item 7(a), the Financial Statement of
Business Acquired, Item 7(b), the Pro Forma Financial Information and Item
8, Change in Fiscal Year.
22
<PAGE>
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: November 12, 1999 /s/ Walter Keller
By: _________________________________
Walter Keller,
Chief Executive Officer and
President
(Principal Executive Officer)
Date: November 12, 1999 /s/ Edmund Becmer
By: _________________________________
Edmund Becmer,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*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 August 10, 1999.
27.1 Financial Data Schedule.
</TABLE>
- --------
* 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.
++ Previously filed as an exhibit to the Quarterly Report on Form 10-Q, filed
with the SEC on August 13, 1999.
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,795,200
<SECURITIES> 999,000
<RECEIVABLES> 1,347,800
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,671,100
<PP&E> 708,500
<DEPRECIATION> 160,300
<TOTAL-ASSETS> 8,199,400
<CURRENT-LIABILITIES> 951,900
<BONDS> 0
0
0
<COMMON> 1,100
<OTHER-SE> 7,246,400
<TOTAL-LIABILITY-AND-EQUITY> 8,199,400
<SALES> 2,449,500
<TOTAL-REVENUES> 2,449,500
<CGS> 290,500
<TOTAL-COSTS> 290,500
<OTHER-EXPENSES> 7,856,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,100
<INCOME-PRETAX> (5,629,700)
<INCOME-TAX> 800
<INCOME-CONTINUING> (5,630,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,630,500)
<EPS-BASIC> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
