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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission file number: 0-21683
GRAPHON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
400 Cochrane Circle
Morgan Hill, California 95037
(Address of principal executive offices)
Registrant's telephone number: (800) 472-7466
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2)
Yes [ ] No [X]
The aggregate market value of the common equity of registrant held
by non-affiliates of the registrant as of June 28, 2002 was
approximately $2,804,600.
Number of shares of Common Stock outstanding as of March 4, 2003:
16,629,387 shares of Common Stock.
GRAPHON CORPORATION
FORM 10-K
Table of Contents
Page
PART I.
Item 1. Business 2
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About
Market Risks 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 49
PART III.
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 52
Item 13. Certain Relationships and Related Transactions 54
Item 14. Controls and Procedures 54
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 55
SIGNATURES 56
FORWARD LOOKING INFORMATION
This report includes, in addition to historical information,
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. This Act provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward-looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical
fact we make in this report or in any document incorporated by reference
are forward-looking statements. In particular, the statements regarding
industry prospects and our future results of operations or financial
position are forward-looking statements. Such statements are based on
management's current expectations and are subject to a number of
uncertainties and risks that could cause actual results to differ
significantly from those described in the forward looking statements.
Factors that may cause such a difference include, but are not limited to,
those discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as well as those discussed elsewhere
in this report.
PART I
ITEM 1. BUSINESS
General
We are developers of business connectivity software, including server-based
software, with an immediate focus on web-enabling applications for use by
various parties, including independent software vendors (ISVs), application
service providers (ASPs), corporate enterprises, governmental and educational
institutions, and others. Server-based computing, sometimes referred to as
thin-client computing, is a computing model where traditional desktop software
applications are relocated to run entirely on a server, or host computer. This
centralized deployment and management of applications reduces the complexity
and total costs associated with enterprise computing. Our software architecture
provides application developers with the ability to relocate applications
traditionally run on the desktop to a server, or host computer, where they can
be run over a variety of connections from remote locations to a variety of
display devices. Our server-based technology works on today's most powerful
personal computer, or low-end network computer, without application rewrites or
changes to the corporate computing infrastructure.
With our software, applications can be web enabled, without any modification to
the original application software required, allowing the applications to be run
from browsers or portals. In addition, the ability to access such applications
over the Internet creates new operational models and sales channels. We provide
the technology to access applications over the Internet.
We entered both the Unix and Linux server-based computing and web enabling
markets as early as 1996. We expanded our product offerings by shipping
Windows web-enabling software in early 2000.
We are headquartered in Morgan Hill, California and have offices in
Concord, New Hampshire and Berkshire, England, United Kingdom.
Industry Background
History
In the 1970s, software applications were executed on central mainframes and
typically accessed by low-cost display terminals. Information technology
departments were responsible for deploying, managing and supporting the
applications to create a reliable environment for users. In the 1980s, the PC
became the desktop of choice: empowering the user with flexibility, a graphical
user interface, and a multitude of productive and inexpensive applications.
In the 1990s, the desktop provided access to mainframe applications and
databases, which run on large, server computers. Throughout the computing
evolution, the modern desktop has become increasingly complex and costly to
administer and maintain. This situation is further worsened as organizations
become more decentralized with remote employees, and as their desire increases
to become more closely connected with vendors and customers through the
Internet.
Lowering Total Cost of Ownership
PC software in general has grown dramatically in size and complexity in
recent years. As a result, the cost of supporting and maintaining PC
desktops has increased substantially. Industry analysts and enterprise
users alike have begun to recognize that the total cost of PC ownership,
taking into account the recurring cost of technical support,
administration and end-user down time, has become high, both in absolute
terms and relative to the initial hardware purchase price.
With increasing demands to control corporate computing costs, industry
leaders are developing technology to address total cost of ownership
issues. One approach, led by Sun Microsystems and IBM, utilizes
Java-based network computers, which operate by downloading small Java
programs to the desktop, which in turn are used for accessing server-based
applications. The other approach is Microsoft's Windows NT(TM), terminal
server edition, introduced in June 1998. It permits server-based Windows
applications to be accessed from Windows-based network computers. Both
initiatives are examples of server-based computing. They simplify the
desktop by moving the responsibility of running applications to a central
server, with the promise of lowering total cost of ownership.
Enterprise Cross-Platform Computing
Today's enterprises contain a diverse collection of desktop computers,
each with its particular operating system, processing power and connection
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type. Consequently, it is becoming increasingly difficult to provide
universal desktop access to business-critical applications across the
enterprise. As a result, organizations resort to desktop emulation
software, new hardware or costly application rewrites in order to provide
universal desktop access.
A common cross-platform problem for the enterprise is the need to access
Unix or Linux applications from a PC desktop. While Unix-based computers
dominate the enterprise applications market, Microsoft Windows-based PCs
dominate the enterprise desktop market. Since the early 1990s,
enterprises have been striving to connect desktop PCs to Unix applications
over all types of connections, including networks and standard phone
lines. This effort, however, is complex and costly. The primary solution
to date is known as PC X Server software. PC X Server software is a large
software program that requires substantial memory and processing resources
on the desktop. Typically, PC X Server software is difficult to install,
configure and maintain. Enterprises are looking for effective Unix
connectivity software for PCs and non-PC desktops that is easier and less
expensive to administer and maintain.
Application Service Providers (ASPs)
With the ubiquitous nature of the Internet, new operational models and
sales channels are emerging. Traditional high-end software packages that
were once too expensive for many companies are now available for rent over
the Internet. By servicing customers through a centralized operation,
rather than installing and maintaining applications at each customer's
site, ASPs play an important role in addressing an enterprise's computing
requirements. Today, ASPs are faced with the difficult task of creating,
or rewriting, applications to entertain the broader market. Though the
ASP industry is just beginning to emerge, we expect it to develop rapidly,
due to the ASPs and their vendors' desires to expand their markets.
Remote Computing
The cost and complexity of contemporary enterprise computing has been
further complicated by the growth in remote access requirements. As
business activities become physically distributed, computer users have
looked to portable computers with remote access capabilities to stay
connected in a highly dispersed work environment. One problem facing
remote computing over the Internet, or direct telephone connections, is
the slow speed of communication in contrast to the high speed of internal
corporate networks. Today, applications requiring remote access must be
tailored to the limited speed and lower reliability of remote connections,
further complicating the already significant challenge of connecting
desktop users to business-critical applications.
Our Approach
Our server-based software deploys, manages, supports and executes
applications entirely on the server computer and publishes their user
interface efficiently and instantaneously to desktop devices. The
introduction of the Windows-based version of our Bridges software, during
2000, enabled us to enter the Windows application market. This allowed
us to provide support for Windows applications to both enterprise
customers and to leverage independent software vendors (ISVs) as a
channel. During the fourth quarter of 2002 we introduced GO-Global for
Windows, a significant upgrade to our product offerings in the Windows
market. This new version has increased application compatibility, server
scalability and improved application performance over our previous version.
Our technology consists of three key components:
o The server component runs alongside the server-based application and is
responsible for intercepting user-specific information for display at
the desktop.
o The desktop component is responsible only for sending keystrokes and
mouse motion to the server. It also presents the application
interface to the desktop user. This keeps the desktop simple, or
thin, as well as independent of application requirements for
resources, processing power and operating systems.
o Our protocol enables efficient communication over fast networks or slow
dial-up connections and allows applications to be accessed from
remote locations with network-like performance and responsiveness.
We believe that the major benefits of our technology are as follows:
Lowers Total Cost of Ownership. Reducing information technology (IT)
costs is a primary goal of our products. Today, installing enterprise
applications is time-consuming, complex and expensive. It typically
3
requires administrators to manually install and support diverse desktop
configurations and interactions. Our server-based software simplifies
application management by enabling deployment, administration and support
from a central location. Installation and updates are made only on the
server, thereby avoiding desktop software and operating system conflicts
and minimizing at-the-desk support.
Web Enables Existing Applications. The Internet represents a fundamental
change in distributed computing. Organizations now benefit from
ubiquitous access to corporate resources by both local and remote users.
However, to fully exploit this opportunity, organizations need to find a
way to publish existing applications to Internet enabled devices. Our
technology is specifically targeted at solving this problem. With
GoGlobal, an organization can publish an existing application to an
Internet enabled device without the need to rewrite the application. This
reduces application development costs while preserving the rich user
interface so difficult to replicate in a native Web application.
Connects Diverse Computing Platforms. Today's computing infrastructures
are a mix of computing devices, network connections and operating
systems. Enterprise-wide application deployment is problematic due to
this heterogeneity, often requiring costly and complex emulation software
or application rewrites. For example, Windows PCs typically may not
access a company's Unix applications without installing complex PC X
Server software on each PC. Typical PC X Servers are large and require an
information technology professional to properly install and configure each
desktop. For Macintosh, the choices are even fewer, requiring the
addition of yet another vendor product. For the newer technologies, such
as tablet PCs or handheld devices, application access will be challenging.
To rewrite an application for each different display device (be that a
desktop PC or tablet PC) and their many diverse operating systems is often
a difficult and time-consuming task. In addition to the development
expense, issues of desktop performance, data compatibility and support
costs often make this option prohibitive. Our products provide
organizations the ability to access applications from virtually all
devices, utilizing their existing computing infrastructure, without
rewriting a single line of code or changing or reconfiguring hardware.
This means that enterprises can maximize their investment in existing
technology and allow users to work in their preferred environment.
Leverages Existing PCs and Deploys New Desktop Hardware. Our software
brings the benefits of server-based computing to users of existing PC
hardware, while simultaneously enabling enterprises to begin to take
advantage of and deploy many of the new, less complex network computers.
This assists organizations in maximizing their current investment in
hardware and software while, at the same time, facilitating a manageable
and cost effective transition to newer devices.
Efficient Protocol. Applications typically are designed for
network-connected desktops, which can put tremendous strain on congested
networks and may yield poor, sometimes unacceptable, performance over
remote connections. For ASPs, bandwidth typically is the top recurring
expense when web-enabling, or renting, access to applications over the
Internet. In the emerging wireless market, bandwidth constraints limit
application deployment. Our protocol sends only keystrokes, mouse clicks
and display updates over the network resulting in minimal impact on
bandwidth for application deployment, thus lowering cost on a per user
basis. Within the enterprise, our protocol can extend the reach of
business-critical applications to many areas, including branch offices,
telecommuters and remote users over the Internet, phone lines or wireless
connections. This concept may be extended further to include vendors and
customers for increased flexibility, time-to-market and customer
satisfaction.
Products
We are dedicated to creating business connectivity technology that brings
Windows, Unix, and Linux applications to the web without modification.
Our customers include ISVs, Value-Added Resellers (VARs) and Fortune 1000
enterprises. By employing our technology, customers benefit from a very
quick time to market, overall cost savings via centralized computing, a
client neutral cross-platform solution, and high performance remote access.
Our product offerings include GoGlobal for Windows, GoGlobal for Unix and
legacy products, such as Bridges for Windows, Bridges for Unix/Linux and
GO Joe.
GoGlobal for Windows allows access to Windows applications from remote
locations and a variety of connections, including the Internet and dial-up
connections. GoGlobal for Windows allows Windows applications to be run
via a browser from Windows or non-Windows devices, over many types of data
connections, regardless of the bandwidth or operating system. With
GoGlobal for Windows, web enabling is achieved without modifying the
underlying Windows applications' code or requiring costly add-ons.
GoGlobal for Unix web-enables Unix and Linux applications allowing them to
be run via a browser from many different display devices, over various
types of data connections, regardless of the bandwidth or operating
systems being used. GoGlobal for Unix web-enables individual Unix and
Linux applications, or entire desktops. When using GoGlobal for Unix,
Unix and Linux web enabling is achieved without modifying the underlying
applications' code or requiring costly add-ons.
4
Target Markets
The target market for our products comprises organizations that need to
access Windows, Unix and/or Linux applications from a wide variety of
devices, from remote locations, including over the Internet, dial-up
lines, and wireless connections. This includes organizations, such as
Fortune 1000 companies, governmental and educational institutions, ISVs,
VARs and ASPs. Our software is designed to allow these enterprises to
tailor the configuration of the end user device for a particular purpose,
rather than following a "one PC fits all," high total cost of ownership
model. Our opportunity within the marketplace is more specifically broken
down as follows:
o ISVs. By web-enabling their applications, software developers can
strengthen the value of their product offerings, opening up
additional revenue opportunities and securing greater satisfaction
and loyalty from their customers. We believe that ISVs who
effectively address the web computing needs of customers and the
emerging ASP market will have a competitive advantage in the
marketplace.
By combining our products with desktop versions of their software
applications, our ISV customers have been able to accelerate the time
to market for web-enabled versions of their software applications
without the risks and delays associated with rewriting applications
or using third party solutions. Our technology quickly integrates
with their existing software applications without sacrificing the
full-featured look and feel of their original software application,
thus providing ISVs with out-of-the-box web-enabled versions of their
software applications with their own branding for licensed, volume
distribution to their enterprise customers.
o Enterprises Employing a Mix of Unix and Windows. Most major
enterprises employ a mix of Unix computers and Windows PCs.
Companies that utilize a mixed computing environment require
cross-platform connectivity solutions, like GoGlobal for Unix that
will allow users to access Unix applications from desktop PCs. It
has been estimated that PCs represent over 90% of enterprise
desktops. We believe that our products are well positioned to
exploit this opportunity and that our server-based software products
will significantly reduce the cost and complexity of connecting PCs
to Unix applications.
o Enterprises With Remote Computer Users. Remote computer users comprise
one of the fastest growing market segments in the computing
industry. Efficient remote access to applications has become an
important part of many enterprises' computing strategies. Our
protocol is designed to enable highly efficient low-bandwidth
connections.
o ASPs. High-end software applications in the fields of human resources,
enterprise resource planning, enterprise relationship management and
others, historically have only been available to organizations able
to make large investments in capital and personnel. The Internet has
opened up global and mid-tier markets to vendors of this software who
may now offer it to a broader market on a rental basis. Our products
enable the vendors to provide Internet access to their applications
with minimal additional investment in development implementation.
o VARs. The VAR channel presents an additional sales force for our
products and services. In addition to creating broader awareness of
Go-Global, the VAR channel also provides integration and support
services for our current and potential customers. Our products allow
software resellers to offer a cost effective competitive alternative
for Server-Base Thin Client computing. In addition, reselling our
Go-Global software, creates new revenue streams for our VARs through
professional services and maintenance renewals.
o Extended Enterprise Software Market. Extended enterprises allow access
to their computing resources to customers, suppliers, distributors
and other partners, thereby gaining flexibility in manufacturing and
increasing speed-to-market and customer satisfaction. For example,
extended enterprises may maintain decreased inventory via
just-in-time, vendor-managed inventory and related techniques.
The early adoption of extended enterprise solutions may be driven in part
by enterprises' need to exchange information over a wide variety of
computing platforms. We believe that our server-based software products,
along with our low-impact protocol, are well positioned to provide
enabling solutions for extended enterprise computing.
Strategic Relationships
We believe it is important to maintain our current strategic alliances and
to seek suitable new alliances in order to enhance shareholder value,
improve our technology and/or enhance our ability to penetrate relevant
target markets. We also are focusing on strategic relationships that have
5
immediate revenue generating potential, strengthen our position in the
server-based software market, add complementary capabilities and/or raise
awareness of our products and us.
In July 1999, we entered into a five-year, non-exclusive agreement with
Alcatel Italia, the Italian Division of Alcatel, the telecommunications,
network systems and services company. Pursuant to this agreement, Alcatel
has licensed our GoGlobal thin client PC X server software for inclusion
with their Turn-key Solution software, an optical networking system.
Alcatel's customers are using our server-based solution to access
Alcatel's UNIX/X Network Management Systems applications from T-based
PCs. Alcatel has deployed GoGlobal internally to provide their employees
with high-speed network access to their own server-based software over
dial-up connections, local area networks (LANs) and wide area networks
(WANs).
In September 1999, we entered into a three-year, non-exclusive agreement
with Compuware, an international software and services company. Pursuant
to this agreement, we licensed our Bridges for Windows server-based
software for inclusion with Compuware's UNIFACE software, a powerful
development and deployment environment for enterprise customer-facing
applications. Compuware's customers are using our server-based solution
to provide enterprise-level UNIFACE applications over the Internet.
Compuware has private labeled and completely integrated Bridges for
Windows into its UNIFACE deployment architecture as UNIFACE Jti.
Negotiations are currently underway with Compuware on a renewal involving
our latest Windows-based product, GoGlobal for Windows.
In February 2002 we signed a three-year, non-exclusive agreement with
Agilent Technologies, an international provider of technologies, solutions
and services to the communications, electronics, life sciences and
chemical analysis industries. Pursuant to this agreement, we licensed our
Unix-based web-enabling products to Agilent for inclusion in their Agilent
OSS Web Center, an operations support system that provides access to
mission-critical applications remotely via a secure Internet browser.
In December 2002, we agreed to an eighteen-month extension of our
exclusive agreement with KitASP, a Japanese application service provider,
which was founded by companies within Japan's electronics and
infrastructure industries, including NTT DATA, Mitsubishi Electric, Omron,
RICS, Toyo Engineering and Hitachi. Pursuant to the original agreement,
KitASP was granted an exclusive right, within Japan, to distribute our
web-enabling technology, bundled with their ASP services, and to resell
our software. The original agreement provided for an optional second
year, which was exercisable at our discretion. As a result of the
extension, KitASP's one-year exclusivity period has been extended for an
additional 18 months in lieu of the optional second year that we had
formerly held.
In March 2003, we entered into a fourth consecutive one-year,
non-exclusive agreement with FrontRange, an international software and
services company. Pursuant to the original agreement, we licensed our
Bridges for Windows server-based software for integration with
FrontRange's HEAT software, which is a state-of-the-art help desk software
system. FrontRange has private labeled and completely integrated Bridges
for Windows into its HEAT help desk software as iHEAT. As part of the
2003 renewal, we have licensed our GoGlobal for Windows server-based
software for integration with both FrontRange's HEAT and its Client
Relationship Management software package Goldmine.
Sales, Marketing and Support
Our customers, to date, include Fortune 1000 enterprises, ISVs and large
governmental organizations. The following customers, listed
alphabetically, generated 10% or more of our revenues in either 2002 or
2001- Alcatel, Citrix, FrontRange and Verizon. We consider FrontRange to
be our most significant customer. Sales to FrontRange represented 26.9%
and 24.5% of revenues in 2002 and 2001, respectively.
Our sales and marketing efforts will be focused on increasing product
awareness and demand among ISVs, Fortune 1000 enterprises, and developing
formal distribution relationships with Unix and Windows oriented
resellers. Current marketing activities include a targeted advertising
campaign of insertions in online newsletters, tradeshows, production of
promotional materials, public relations and maintaining an Internet
presence for marketing and sales purposes.
Research and Development
Our research and development efforts currently are focused on developing
new products and further enhancing the functionality, performance and
reliability of existing products. We invested $2,831,300, $4,134,400, and
$4,060,000 in research and development in 2002, 2001, and 2000,
respectively. We expect expenditures in 2003 to approximate 2002 levels.
We have made significant investments in our protocol and in the
performance and development of our server-based software.
6
Competition
The server-based software market in which we participate is highly
competitive. We believe that we have significant advantages over our
competitors, both in product performance and market positioning. This
market ranges from remote access for a single PC user to server-based
software for large numbers of users over many different types of device
and network connections. Our competitors include manufacturers of
conventional PC X server software. Competition is expected from these and
other companies in the server-based software market. Competitive factors
in our market space include; price, product quality, functionality,
product differentiation and breadth.
We believe our principal competitors for our current products include
Citrix Systems, Inc., Hummingbird Communications, Ltd., Tarantella, WRQ,
Network Computing Devices and NetManage. Citrix is the established
leading vendor of server-based computing software. Hummingbird is the
established market leader in PC X Servers. WRQ, Network Computing
Devices, and NetManage also offer traditional PC X Server software.
Operations
Our current staffing levels provide us with adequate resources to perform
all purchasing, inventory, order processing and shipping of our products
and accounting functions related to our operations. Production of
software masters, development of documentation, packaging designs, quality
control and testing are also performed by us. CD-ROM and floppy disk
duplication, printing of documentation and packaging are accomplished
through outside vendors. We generally ship products immediately upon
receipt of order. As a result, we have relatively little backlog at any
given time, and do not consider backlog a significant indicator of future
performance.
Proprietary Technology
We rely primarily on trade secret protection, copyright law,
confidentiality and proprietary information agreements to protect our
proprietary technology and registered trademarks. The loss of any
material trade secret, trademark, trade name or copyright could have a
material adverse effect on our results of operations and financial
condition. There can be no assurance that our efforts to protect our
proprietary technology rights will be successful.
Despite our precautions, it may be possible for unauthorized third parties
to copy portions of our products, or to obtain information we regard as
proprietary. We do not believe our products infringe on the rights of any
third parties, but there can be no assurance that third parties will not
assert infringement claims against us in the future, or that any such
assertion will not result in costly litigation or require us to obtain a
license to proprietary technology rights of such parties.
In November 1999, we acquired a U.S. patent for the remote display of
Microsoft Windows applications on Unix and Linux desktops with X Windows.
As a result, we believe that we have acquired patent protection and
licensing rights for the deployment of all Windows applications remoted,
or displayed, over a network or any other type of connection to any X
Windows systems. This patent, which covers our Bridges for Windows
(formerly jBridge) technology, was originally developed by a team of
engineers formerly with Exodus Technology and hired by us in May 1998.
Employees
As of March 14, 2003, we had a total of 27 employees, including eight in
marketing, sales and support, 15 in research and development and four in
administration and finance. No employees are covered by a collective
bargaining agreement.
Proposed Acquisition.
On August 21, 2002, we announced that we had signed an agreement to
acquire three privately held, affiliated entities in the
telecommunications industry. We had expected that these businesses would
benefit from our software development expertise and experience, while
providing us with a revenue stream and platform for future growth and
profitability. As a consequence of our subsequent due diligence
investigations upon the financial statements and operations of these
entities, we concluded that the proposed acquisition transaction, as
initially structured, would not be in the best interests of our
shareholders. The August 21, 2002 agreement expired by its
terms on December 31, 2002. While our efforts to achieve a mutually agreeable
restructuring are ongoing, there can be no assurance that we will enter
into a new agreement with any or all of these affiliated entities.
7
ITEM 2. PROPERTIES
We currently occupy approximately 13,000 square feet of office space in
Morgan Hill, California. The office space is rented pursuant to a
five-year lease, which became effective in October 2000. We are currently
in negotiations with various third parties to sublet our lease and we plan
to move to a smaller facility once we successfully sublet our current
office space. The Morgan Hill lease contains provisions outlining our
rights and responsibilities in order to affect a sublease that will meet
with our landlord's approval. We are contractually obligated to continue
paying rent on the Morgan Hill space, whether the space is occupied or
not, while we negotiate a sublease. Rent on the Morgan Hill facility is
approximately $19,000 per month, which is inclusive of various taxes and
other fees proportioned to us under the terms of the lease agreement.
In May 2001, we began renting approximately 5,000 square feet of office
space in Bellevue, Washington pursuant to a five-year lease. During
September 2002 we ceased operations in this facility. We are actively
seeking a sublessee for this facility and have begun lease cancellation
negotiations with our landlord. Rent on the Bellevue facility is
approximately $13,000 per month.
We also occupy leased facilities in Concord, New Hampshire, Rolling Hills
Estates, California and Berkshire, England, United Kingdom. The New
Hampshire lease expires at the end of October 2003 and we anticipate that
we can renew the lease with terms favorable to current market conditions
at that time. Rent on the Concord facility is approximately $17,000 per
month. We currently sublet approximately half of the Concord facility to
a tenant whose lease term coincides with ours. We collect approximately
$8,400 in rent from our tenant on a monthly basis. The Rolling Hills
Estates and Berkshire offices are very small and each are leased on a
month-to-month basis. Together, the monthly rent on these two offices
approximates $3,500 and will fluctuate slightly depending on movement in
the exchange rate between the dollar and the British Pound.
The net aggregate amount of the annual lease payments made under all of
our leases in the years 2002, 2001 and 2000 was approximately $525,700,
$558,700 and $537,100, respectively. We believe our current facilities
will be adequate to accommodate our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are currently not party to any legal proceedings that we believe will
have a material negative impact on our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Our 2002 Annual Meeting of Stockholders was held on December 30, 2002. At
the meeting, one director was elected. The vote was as follows:
For Withheld
Gordon Watson 11,655,753 2,558,313
Also at the meeting, the shareholders ratified the reappointment of BDO
Seidman, LLP as our independent auditors for fiscal 2002. The vote was as
follows:
For 14,158,186
Against 38,175
Abstain -
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth, for the periods indicated, the high and
low reported sales price of our common stock. From August 9, 2000 to May
27, 2002, our common stock was quoted on the Nasdaq National Market System
and since May 28, 2002, our common stock has been quoted on the Nasdaq
SmallCap Market System under the symbol "GOJO".
Fiscal 2002 Fiscal 2001
-------------- --------------
Quarter High Low High Low
------- ------- --------- -------
1st $ 0.80 $ 0.24 $ 3.38 $ 1.00
2nd $ 0.37 $ 0.15 $ 4.05 $ 0.81
3rd $ 0.52 $ 0.08 $ 3.05 $ 1.00
4th $ 0.29 $ 0.12 $ 1.26 $ 0.50
On March 4, 2003, there were approximately 138 holders of record of our
common stock. On March 19, 2003, the last reported sales price was $0.194.
On March 19, 2003, we received a Nasdaq Staff Determination letter
indicating our non-compliance with the $1.00 minimum closing bid price
per share requirement for continued listing as set forth in Marketplace
Rule 4310(c)(4) and that our securities are, therefore, subject to
delisting from the Nasdaq SmallCap Market. We have requested a hearing
before a Nasdaq Listing Qualifications Panel to review the Staff
Determination. There can be no assurance that the Panel will grant our
request for continued listing on the Nasdaq SmallCap Market.
We have never declared or paid dividends on our common stock. We do not
anticipate paying any cash dividends for the foreseeable future. We
currently intend to retain future earnings, if any, to finance operations
and the expansion of our business. Any future determination to pay cash
dividends will be at the discretion of our Board of Directors and will be
dependent upon the earnings, financial condition, operating results,
capital requirements and other factors as deemed necessary by the Board of
Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis" and our historical
financial statements and the notes thereto included elsewhere herein. Our
selected historical financial data as of December 31, 2002, 2001, 2000,
1999 and 1998, and for the years ended December 31, 2002, 2001, 2000, 1999
and 1998 have been derived from our financial statements which have been
audited by BDO Seidman LLP, independent public accountants.
Statement of Operations Data:
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ---------- -----------
(Amounts in thousands, except share and per share data)
Revenues $ 3,535 $ 5,911 $ 7,567 $ 3,635 $ 2,124
Costs of revenues 1,680 2,613 1,044 2,800 344
---------- ----------- ----------- ---------- -----------
Gross profit 1,855 3,298 6,523 835 1,780
---------- ----------- ----------- ---------- -----------
Operating expenses:
Selling and marketing 2,235 5,989 5,750 3,279 1,440
General and administrative 2,801 4,561 4,653 2,265 1,119
Research and development 2,831 4,134 4,060 2,467 840
Asset impairment loss 914 4,501 - - -
Restructuring charge 1,943 - - - -
---------- ----------- ----------- ---------- -----------
Total operating expenses 10,724 19,185 14,463 8,011 3,399
---------- ----------- ----------- ---------- -----------
Loss from operations (8,869) (15,887) (7,940) (7,176) (1,619)
Other income (expense) net 77 410 (1,434) 144 (529)
---------- ----------- ----------- ---------- -----------
Loss before provision
for income taxes (8,792) (15,477) (9,374) (7,032) (2,148)
Provision for income taxes - 1 1 1 1
---------- ----------- ----------- ---------- -----------
Net loss $ (8,792)$ (15,478) $ (9,375) $ (7,033) $ (2,149)
========== =========== =========== ========== ===========
Basic and diluted loss per share $ (0.50)$ (0.97) $ (0.65) $ (0.71) $ (0.57)
========== =========== =========== ========== ===========
Weighted average common
shares outstanding 17,465,099 16,007,763 14,396,435 9,950,120 3,770,863
========== =========== =========== ========== ===========
Balance Sheet Data:
As of December 31,
2002 2001 2000 1999 1998
---------- ----------- ----------- ---------- -----------
(Amounts in thousands)
Working capital $ 668 $ 6,173 $ 12,879 $ 11,701 $ 1,193
Total assets 4,550 12,986 21,040 15,224 6,545
Total liabilities 1,820 1,660 1,983 842 1,203
Shareholders' equity 2,730 11,326 19,057 14,382 5,342
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements provided under Part II, ITEM 8 of this
Annual Report on Form 10-K.
Critical Accounting Policies. The preparation of financial statements and
related disclosures in conformity with accounting principles generally
accepted in the United States requires management to make judgments,
assumptions and estimates that effect the amounts reported in the
Consolidated Financial Statements and accompanying notes. The Summary of
Significant Accounting Policies appears in Part II, Item 8 - Financial
Statements and Supplementary Data, of this Form 10-K, which describes the
significant accounting polices and methods used in the preparation of the
Consolidated Financial Statements. Estimates are used for, but not
limited to, the accounting for the allowance for doubtful accounts, the
impairment of intangible assets, contingencies and other special charges
and taxes. Actual results could differ materially from these estimates.
The following critical accounting policies are impacted significantly by
judgments, assumptions and estimates used in the preparation of the
Consolidated Financial Statements.
The recognition of revenue is based on our assessment of the facts and
circumstances of the sales transaction. In general, software license
revenues are recognized when a non-cancelable license agreement has been
signed and the customer acknowledges an unconditional obligation to pay,
the software product has been delivered, there are no uncertainties
surrounding product acceptance, the fees are fixed or determinable and
collection is considered probable. Delivery is considered to have
occurred when title and risk of loss have been transferred to the
customer, which generally occurs when the media containing the licensed
programs is provided to a common carrier. In the case of electronic
delivery, delivery occurs when the customer is given access to the
licensed programs. If collectibility is not considered probable, revenue
is recognized when the fee is collected.
Under Statement of Position (SOP) 97-2, "Software Revenue Recognition,"
revenue earned on software arrangements involving multiple elements is
allocated to each element arrangement based on the relative fair values of
the elements. If there is no evidence of the fair value for all the
elements in a multiple element arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all elements
are delivered. In accordance with SOP 97-2, we recognize revenue from the
sale of software licenses when all the following conditions are met:
Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o Our price to the customer is fixed or determinable; and
o Collectibility is reasonably assured
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's credit
worthiness or actual defaults are higher than our historical experience,
our estimates of the recoverability of amounts due us could be adversely
affected.
10
We perform impairment tests on our intangible assets on an annual basis
and between annual tests in certain circumstances. In response to changes
in industry and market conditions, we may strategically realign our
resources and consider restructuring, disposing of, or otherwise exiting
businesses, which could result in an impairment of intangible assets.
During 2002 and 2001 we recorded significant write-downs to the value of
our intangible assets as a result of the impairment tests performed. A
significant consideration impacting the results of the impairment tests
was the substantial delay in getting our most recently released
Windows-based product upgrade, GoGlobal for Windows, into marketable
condition. The engineering delays we encountered resulted in a
substantial decrease in our revenue in both 2002 and 2001, which
ultimately caused us to consume almost all of our cash balances in our
day-to-day operations.
We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of the loss
or impairment of an asset or the incurrence of a liability as well as our
ability to reasonably estimate the amount of loss in determining loss
contingencies. An estimated loss contingency is accrued when it is
probable that a liability has been incurred or an asset has been impaired
and the amount of the loss can be reasonably estimated. We regularly
evaluate current information available to us to determine whether such
accruals should be adjusted.
Results of Operations
The first table that follows sets forth our income statement data for the
years ended December 31, 2002 and 2001, respectively, and calculates the
dollar change and percentage change from 2001 to 2002 in the respective
line items. The second table that follows presents the same information
for the years ended December 31, 2001 and 2000.
2002 2002
Year Ended Dollars Percentage
December 31, Over (Under) Over (Under)
---------------------- --------------------------
(Dollars in 000s) 2002 2001 2001 2001
- ----------------- ------- -------- ------- --------
Revenue $ 3,535 $ 5,911 $(2,376) (40.20%)
Cost of sales 1,680 2,613 (933) (35.71)
------- -------- ------- ---------
Gross Profit 1,855 3,298 (1,443) (43.75)
------- -------- ------- ---------
Operating expenses:
Selling & marketing 2,235 5,989 (3,754) (62.68)
General & administrative 2,801 4,561 (1,760) (38.59)
Research & development 2,831 4,134 (1,303) (31.52)
Fixed assets impairment 914 4,501 (3,587) (79.69)
Restructuring charge 1,943 - 1,943 n/a
------- -------- ------- --------
Total operating expenses 10,724 19,185 (8,461) (44.10)
------- -------- ------- --------
Loss from operations (8,869) (15,887) 7,018 44.17
------- -------- ------- --------
Other income (expense):
Interest & other income 153 516 (363) (70.35)
Interest & other expense (76) (65) (11) (16.92)
Loss on long-term investment-
China joint venture - (41) 41 100.00
------- ------- -------- --------
Total other income (expense) 77 410 (333) (81.22)
------- -------- -------- --------
Loss before tax (8,792) (15,477) 6,685 43.19
Tax provision - 1 (1) 100.00
------- -------- -------- --------
Net loss $(8,792) $(15,478) $ 6,686 43.20%
======= ========= ======= ========
11
2001 2001
Year Ended Dollars Percentage
December 31, Over (Under) Over (Under)
(Dollars in 000s) 2001 2000 2000 2000
- ----------------- -------- --------- ---------- ---------
Revenue $ 5,911 $ 5,067 $ 844 16.67%
Revenue - related party - 2,500 (2,500) (100.00)
-------- --------- ---------- ---------
Total revenue 5,911 7,567 (1,656) (21.88)
-------- --------- ---------- ---------
Cost of sales 2,613 946 1,667 176.22
Cost of sales - related party - 98 (98) (100.00)
-------- --------- ---------- ---------
Total cost of sales 2,613 1,044 1,569 150.29
-------- --------- ---------- ---------
Gross profit 3,298 6,523 (3,225) (49.44)
-------- --------- ---------- ---------
Operating expenses:
Selling & marketing 5,989 5,750 239 4.16
General & administrative 4,561 4,653 (92) (1.98)
Research & development 4,134 4,060 74 1.82
Fixed assets impairment 4,501 - 4,501 n/a
-------- --------- ---------- ---------
Total operating expenses 19,185 14,463 4,722 32.65
-------- --------- ---------- ---------
Loss from operations (15,887) (7,940) (7,947) (100.09)
-------- --------- ---------- ---------
Other income (expense)
Interest & other income 516 1,181 (665) (56.31)
Interest & other expense (65) (7) (58) (828.57)
Loss on long-term investment -
China joint venture (41) (2,608) 2,567 98.43
-------- --------- ---------- ---------
Total other income (expense) 410 (1,434) 1,844 (128.59)
-------- --------- ---------- ----------
Loss before tax (15,477) (9,374) (6,103) (65.11)
Tax provision 1 1 - -
-------- --------- --------- ---------
Net loss $(15,478) $ (9,375) $ (6,103) (65.11%)
========= ========= ========= ==========
Revenues. Our revenues are primarily derived from product and patent
technology licensing fees. Other sources of revenues include service fees
from maintenance contracts and training fees. The decrease in revenues in
2002 from 2001 was due primarily to a decrease in third party licensing
fees derived from licensing our patented technology. During 2002 we
recognized $0 in third party patent licensing revenue as compared to
approximately $2,200,000 during 2001. We believe that the market for
licensing our patented technology is very limited, accordingly, we wrote
the carrying value of our patent down to $0 as part of our year end 2001
asset impairment write off. We do not anticipate recognizing licensing
revenue from our patent in the future.
The decrease in revenues in 2001 from 2000 was primarily due to a decrease
in revenues - related party. During 2001 we recognized $0 in revenue from
our joint venture in China, as compared with $2,500,000 during 2000. The
joint venture began operations in 2000 and was dissolved during 2001. The
joint venture was not able to satisfactorily penetrate the Chinese market
on a timetable agreeable to our joint venture partner or us.
Consequently, through mutual agreement, it was dissolved during 2001. We
do not anticipate reactivating the joint venture in the near future as we
have formed alternative strategic relationships to penetrate the Chinese
as well as other Asian markets.
The decrease in revenues in 2001 from 2000 related to the decrease in
revenues - related party was offset by an increase in revenues from third
parties. The increase in revenues from third parties was due primarily to
an increase in third party licensing fees derived from licensing our
patented technology. We recognized approximately $2,200,000 in revenue
from licensing our patented technology in 2001 as compared with
approximately $1,500,000 in 2000.
We recognized approximately $1,629,500 of revenue from licensing fees for
our Windows-based products during 2002 as compared with approximately
$1,767,200 during 2001. The decrease was due to the overall decrease in
corporate spending pervasive throughout the economy as well as the delay
in releasing the latest upgraded version of our Windows product, GoGlobal
for Windows, until the fourth quarter of 2002. We expect 2003 revenue
from our Windows-based products to exceed 2001 levels. The amount of
revenue we recognized from our Windows-based products in 2001 decreased
from 2000, to approximately $1,767,200 as compared with $2,330,300,
respectively. Approximately 60% of the 2001 Windows-based revenue was
recognized in the first half of the year. The downward trend in revenue
that began during the second half of 2001 carried over into 2002 as the
overall economy continued to be weak.
We recognized approximately $1,457,200 of revenue from licensing our
Unix-based products during 2002 as compared with approximately $1,630,400
during 2001 and approximately $993,600 in 2000. The decrease in 2002 from
2001 was principally due to the continued weakness in the overall
economy. The increase in 2001 from 2000 was primarily due to the
12
competitiveness of Bridges for Unix/Linux, which was released in early
2000, and Go-Global:UX, which was released in early 2001. We expect 2003
Unix sales to approximate 2001 levels.
Our licensing fees have been realized from a limited number of customers.
As such, revenues from these products have varied from quarter to quarter
reflecting the aggregate demand of the individual customers. We expect
our quarterly licensing fees to continue to vary during 2003.
Revenues from our three largest customers for 2002 represented
approximately 26.9%, 23.4% and 12.5%, respectively, of total revenues.
These three customers' December 31, 2002 year-end accounts receivable
balances represented approximately 0.0%, 0.0%, and 15.1% of reported net
accounts receivable. By March 21, 2003, we had collected the substantial
majority of the only outstanding balance from December 31, 2002. Revenues
from our three largest customers in 2001 represented approximately 27.1%,
26.3% and 10.1%, respectively, of total revenues. These three customers'
December 31, 2001 year-end accounts receivable balances represented
approximately 0.0%, 43.5% and 0.0% of reported net accounts receivable.
All amounts outstanding from these three customers as of December 31, 2001
were collected during February 2002.
We anticipate that many of our customers will enter into, and periodically
renew, maintenance contracts to ensure continued product updates and
support. Service revenue was approximately $448,300, or 12.7% of revenue
in 2002, $313,100, or 4.8% of revenue in 2001, and $242,600, or 3.2% of
revenue in 2000. We expect service revenue in 2003 to approximate 2002
levels.
Cost of Revenues. Cost of revenues consists primarily of the amortization
of acquired technology and the amortization of capitalized technology
developed in-house. Research and development costs for new product
development, after technological feasibility is established, are recorded
as "capitalized software" on our balance sheet and subsequently amortized
as cost of revenues over the shorter of three years or the remaining
estimated life of the products.
The decrease in cost of revenues in 2002 from 2001 was due to the
write-downs of the estimated remaining carrying values of our intangible
assets that were recorded during the third quarter of 2002 as well as the
fourth quarter of 2001. The increase in cost of revenues in 2001 from
2000 was due to the significant acquisition of technology from Menta
Corporation, which we began amortizing during the third quarter of 2000,
and the capitalization of costs associated with technology developed
in-house during 2000. The costs of both the Menta technology and the
capitalized technology developed in-house were only amortized for a
portion of 2000 whereas each was amortized for a full year during 2001.
As more fully explained below under Asset Impairment Loss, during
September 2002 and December 2001, we wrote down the historical cost of
various components of our purchased technology assets as part of our
periodic assessments of asset impairment. The amortization of our
technology assets, as explained above, is recorded as a component of Cost
of Revenues. As a result of these write-downs, we expect that our cost of
revenues will be significantly lower in 2003 as compared with 2002. Cost
of revenues were approximately 47.5%, 44.2% and 20.6% of total revenues
for the years 2002, 2001 and 2000, respectively.
Sales and Marketing Expenses. Sales and marketing expenses primarily
consist of salaries, sales commissions, non-cash compensation, travel
expenses, trade show related activities and promotional costs.
The decrease in selling and marketing expense in 2002 from 2001 was due to
the cumulative impact of the workforce reductions we have undergone over
the last two years. We began 2002 with 24 employees in selling and
marketing. By the end of the first quarter we had reduced this number to
14 and by the end of the second quarter, we had reduced this number to
nine. These reductions were a direct result of our effort to reduce our
operating costs to a bare minimum, in order to preserve our cash balances,
while achieving our operating objectives.
The increase in selling and marketing expense in 2001 from 2000 was due an
increase in selling and marketing headcount over the first half of 2001,
which was partially offset be a decrease over the second half of 2001. We
began 2001 with 23 employees in selling and marketing. By the end of the
first quarter of 2001 we had increased this number to 27, by the end of
the second quarter we had increased this number to 31, and by the end of
the third quarter, we had reduced this number to 24. Headcount remained
at 24 through the remainder of 2001. We had increased headcount
throughout the first half of 2001 in anticipation of the release of
upgraded versions of our Windows product, GoGlobal: XP, as well as our
Unix product, GoGlobal:UX. The ultimate release of GoGlobal:XP was
delayed and when finally released, it was not received as warmly in the
marketplace as originally anticipated. The release of GoGlobal:UX was
accomplished in a timely manner and was well received, however; the Unix
market is estimated to be much smaller than the Windows market. As a
result, we began reducing the selling and marketing workforce to more
sustainable levels, while work continued on the next version of the
Windows product.
13
We expect that cumulative sales and marketing expenses in 2003 will be
significantly lower than those incurred during 2002. We expect to focus
our selling and marketing efforts in the Windows market during 2003. We
have based this decision on the positive feedback we received from
customers and others during the beta testing phase of our latest Windows
release, GoGlobal for Windows. Sales and marketing expenses were
approximately 63.2 %, 101.3% and 113.5% of total revenues for the years
2002, 2001 and 2000, respectively.
General and Administrative Expenses. General and administrative expenses
primarily consist of salaries, legal and professional services, non-cash
compensation and bad debts expense.
The decrease in general and administrative expense in 2002 from 2001, as
well as in 2001 from 2000 were primarily due to the cumulative impact of
the workforce reductions that we have undergone over the last two years.
We began 2002 with nine general and administrative employees. By the end
of the second quarter we had reduced this number to six and by the end of
the third quarter we had reduced this number to four. We began 2001 with
15 general and administrative employees. We reduced this number to 14 by
the end of the first quarter, to 13 by the end of the second quarter, to
nine by the end of the third quarter and maintained nine general and
administrative employees from the end of the third quarter until year end
2001. In addition to these workforce reductions, various general and
administrative employees began reduced workweek schedules. All of these
reductions were a direct result of our effort to reduce our operating
costs to a bare minimum, in order to preserve our cash balances, while
achieving our operating objectives.
Changes to our allowance for doubtful accounts are also charged to bad
debts expense within general and administrative expense. The ending
balance of our allowance for doubtful accounts as of December 31, 2002,
2001 and 2000, was $50,300, $350,000 and $100,000, respectively. Bad
debts expense is more fully explained at Schedule II - Valuation and
Qualifying Accounts.
We anticipate that cumulative general and administrative expense in 2003
will be significantly lower than those incurred during 2002. General and
administrative expenses were approximately 79.2%, 77.2% and 91.8% of 2002,
2001 and 2000 total revenues, respectively.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and benefits paid to software engineers,
payments to contract programmers, and facility expenses related to our
remotely located engineering offices.
The decrease in research and development expense in 2002 from 2001 was
primarily due to the cumulative impact of the workforce reductions that we
have undergone over the last two years. We began 2002 with 28 research
and development employees. At the end of the third quarter, we reduced
this number to 15. We began 2001 with approximately 35 employees in
research and development. This number increased slightly, to
approximately 40, immediately prior to the work force reduction in
September 2001, and then was reduced to 28 as a result of the workforce
reduction.
We believe that a significant level of investment for research and
development is required to remain competitive. Accordingly, during 2003
we will continue working towards our goal of full maturity for our
products through a combination of in-house and contracted research and
development efforts. Research and development expense was approximately
80.1%, 70.0% and 80.1% of total revenues for the years 2002, 2001 and
2000, respectively.
Asset Impairment Loss. During the third quarter of 2002 and the fourth
quarter of 2001, we recorded impairment charges of $914,000 and
$4,500,900, respectively, against several of our intangible assets,
primarily capitalized technology assets. We review our long-lived assets
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Examples of
events or changes in circumstances that indicate that the recoverability
of the carrying amount of an asset should be addressed, including the
following:
o A significant decrease in the market value of an asset;
o A significant change in the extent or manner in which an asset is used;
o A significant adverse change in the business climate that could affect
the value of an asset; and
o Current and historical operating or cash flow losses.
We believed that a review of our current carrying values to evaluate
whether the value of any of our long-lived technology assets had been
impaired was warranted, due to several factors, including:
o The challenges we faced in bringing our GoGlobal for Windows and
GoGlobal:XP products to maturity;
o The continued pervasive weakness in the world-wide economy;
14
o How we were incorporating and planning to incorporate each element of
the purchased technologies into our legacy technology;
o Our continued and historical operating and cash flow losses.
Based on studies of the various factors affecting asset impairment, as
outlined above, the following asset impairment charges were determined to
be necessary in order to reduce the carrying value of these assets to our
current estimate of the present value of the expected future cash flows to
be derived from these assets:
Net Book Value Impairment Net Book Value
Before Impairment Write Down After Impairment
------------------ ---------------- ----------------
2001 Impairment
Purchased Technology $ 7,283,300 $ 4,150,900 $ 3,132,400
Patent 350,000 350,000 -
------------------ ---------------- ----------------
Totals $ 7,633,300 $ 4,500,900 $ 3,132,400
================== ================ ================
2002 Impairment (1)
Purchased Technology $ 2,145,200 $ 775,100 $ 1,370,100
Capitalized Software 277,800 138,900 138,900
------------------ ---------------- ----------------
Totals $ 2,423,000 $ 914,000 $ 1,509,000
================== ================= ================
(1) The net book value after impairment for the 2002 impairment is shown
as of September 30, 2002. There was no impairment charge recorded in the
fourth quarter 2002.
The asset impairment charges were approximately 25.9%, 76.2% and 0.0% of
total revenues for the years 2002, 2001 and 2000, respectively.
Restructuring charge. During 2002 we closed our Morgan Hill, California
and Bellevue Washington office locations as part of our strategic
initiatives to reduce operating costs. In conjunction with these
closures, we reduced headcount in all of our operating departments and
wrote off the costs of leasehold improvements and other assets that were
abandoned. A summary of the restructuring charges recorded during 2002 is
as follows:
Ending Balance
Cash Non-cash Restructuring
Restructuring Payments Charges Charge Accrual
Category Charge During 2002 During 2002 December 31, 2002
- -------- ------------- -------------- ------------- -----------------
Quarter ended
March 31, 2002:
Employee severance $ 752,100 $ (752,100) $ - $ -
Fixed assets abandonment 558,100 - (558,100) -
Minimum lease payments 180,200 (122,300) - 57,900
------------- -------------- ------------- -----------------
Subtotal 1,490,400 (874,400) (558,100) 57,900
------------- -------------- ------------- -----------------
Quarter ended
September 30, 2002:
Employee severance 78,900 (78,900) - -
Fixed assets abandonment 99,700 - (99,700) -
Minimum lease payments 263,600 (39,300) - 224,300
Other 10,200 (10,200) - -
------------- -------------- ------------- -----------------
Subtotal 452,400 (128,400) (99,700) 224,300
------------- -------------- ------------- -----------------
Totals $ 1,942,800 $ (1,002,800) $ (657,800) $ 282,200
============= ============== ============= =================
Included in employee severance are the payments made to our co-founders,
which aggregated $500,000, upon their departure in January 2002. The
costs associated with fixed assets abandonment are comprised of the
estimated net book value of the assets, including furniture and fixtures,
equipment and leasehold improvements, which were written off upon the
closure of the two facilities, as the assets were deemed to not have any
future utility. No material disposal costs were incurred to dispose of
any of the assets. The minimum lease payments were an estimate of the
cash payments that we would need to disburse in order to fulfill our
obligations under each of the respective leases until we could find a
suitable sublessee.
15
As of March 21, 2003, we had not found a sublessee for our Bellevue,
Washington office and had entered into negotiations with out landlord on a
lease buyout. Additionally, approximately six employees are now
temporarily using our Morgan Hill facility until we can find a suitable
sublessee, or negotiate a lease buyout with our landlord, whichever occurs
first. The restructuring charge was approximately 55.0% of total revenues
for 2002. No restructuring charges were recorded in either 2001 or 2000.
Interest and Other Income. During 2002, 2001 and 2000, the primary
component of interest and other income was interest income derived on
excess cash. Our excess cash was held in relatively low-risk, highly
liquid investments, such as U.S. Government obligations, bank and/or
corporate obligations rated "A" or higher by independent rating agencies,
such as Standard and Poors, or interest bearing money market accounts with
minimum net assets greater than or equal to one billion U.S. dollars. The
decrease in interest income in 2002 over 2001, and 2001 over 2000, was due
to lower average cash and cash equivalents, and available-for-sale
securities balances in 2002 as compared with 2001, and 2001 as compared
with 2000. Additionally, the decreases were reflective of a decrease in
our portfolio's average yield rate, which reflected the market's response
to the continued cuts made in interest rates by the Federal Reserve.
The lower average cash and cash equivalents and available-for-sale
securities balances in 2002 as compared with 2001 is primarily due to the
outflow of approximately $4,606,000, resulting from our operations. The
lower average cash and cash equivalents and available-for-sale securities
balances in 2001 as compared with 2000 is primarily due to the outflow of
approximately $6,752,700, resulting from our operations. Interest and
other income was approximately 4.3%, 8.7% and 23.3% of total revenues for
the years 2002, 2001 and 2000, respectively.
Interest and Other Expense. Interest and other expense consists primarily
of the cost of accrued interest on bonds and other investments that we
purchased with our excess cash. The increase in 2002 from 2001, and in
2001 from 2000 was primarily due to faster rollovers of investments, as we
required more readily available cash to finance our operations. The
faster rollovers were reflective of the shorter time frame that we could
keep the excess cash invested. These increases were partially offset by
cumulative marked-to-market gains recorded on the value of the securities
held in our investment account.
Interest and other expense was approximately 2.2%, 1.1% and 0.1% of total
revenues for the years 2002, 2001 and 2000, respectively.
Provision for Income Taxes. At December 31, 2002, we had approximately
$36,625,000 in federal net operating loss carryforwards. The federal net
operating loss carryforwards will expire at various times from 2007
through 2020, if not utilized. In addition, the Tax Reform Act of 1986
contains provisions that may limit the net operating loss carryforwards
available for use in any given period upon the occurrence of various
events, including a significant change in ownership interests. In 1998,
we experienced a "change of ownership" as defined by the provisions of the
Tax Reform Act of 1986. As such, our utilization of our net operating
loss carryforwards through 1998 will be limited to approximately $400,000
per year until such carryforwards are fully utilized or expire.
Liquidity and Capital Resources
We have suffered recurring losses and have absorbed significant cash in
our operating activities. Further, we have limited alternative sources of
financing available to fund any additional cash required for our
operations or otherwise. These matters raise substantial doubt about our
ability to continue as a going concern. Our plan in regard to these
matters is described below. The consolidated financial statements
included in this report do not include any adjustments that might result
from the outcome of this uncertainty.
We are continuing to operate the business on a cash basis while looking at
ways to reduce cash expenses. We are simultaneously looking at ways to
improve or maintain our revenue stream. Additionally, we continue to
review potential merger opportunities as they present themselves to us and
at such time as a merger might make financial sense and add value for our
shareholders, we will pursue that merger opportunity.
In June 2001, we issued 2,500,000 shares of our common stock to Menta
Software in connection with the acquisition of software technology, which
was assigned a historical cost of $6,500,000 based on the then fair market
value of our common stock. In an extemporaneous transaction in June of
2001, we licensed our patented technology to Menta Software in a
transaction valued at $2,000,000, of which they paid us $600,000 in cash.
In December 2002, we accepted 933,333 shares of our common stock from
Menta Software in full settlement of the outstanding $1,400,000 due us
from them under the terms of the June 2001 patented technology licensing
agreement.
16
During 2002 we used $4,606,000 of cash from our operating activities that
related primarily to our net loss of $8,792,500, offset by non-cash items
including depreciation and amortization totaling $2,085,800, the non-cash
portion of the restructuring charge of $657,800, and the asset impairment
loss of $914,000. Operating cash inflow was generated by an aggregate
increase in cash flow from operating assets and liabilities of $828,200,
which was partially offset by a $299,700 decrease in our provision for
doubtful accounts.
Depreciation and amortization primarily relates to our purchased
technology, as outlined above in Costs of Revenues. Also included in
depreciation and amortization is the amortization of deferred compensation
expense related to non-cash compensation paid to various third parties,
primarily consultants, who provide us services. This amortization is
recorded as sales and marketing expense or general and administrative
expense, depending on the nature of the underlying services provided.
The cash inflow generated from aggregated operating assets and liabilities
was primarily due to the collection of a significant portion of our year
end 2001 accounts receivable balance during 2002, including accounts that
had previously been deemed uncollectible.
We are exploring all options available to aggressively reduce costs, to
increase revenues and to find alternative sources of financing our
operations. Such options will likely include further work force
reductions, exiting of facilities, or the disposition of certain
operations. If we were unsuccessful in obtaining any of these strategic
goals, we would face a severe constraint on our ability to sustain
operations in a manner that would create future growth and viability, and
we may need to cease operations entirely.
During 2002 we generated $2,628,200 of cash from our investing activities
that included $3,776,300 from the sale of investments, partially offset by
the purchase of investments, totaling $768,300, the capitalization of
software development costs, totaling $298,500 and other capital
expenditures totaling $82,900.
Throughout the year, we buy various high-grade securities for investment
purposes with our excess cash. The securities are usually held until
maturity, at which time any excess cash is used to reinvest in new
securities. We treat the investment as cash used in investing activities
and the maturity as cash provided by investing activities. The
capitalized software development costs were incurred in the development of
GoGlobal for Windows, our latest Windows-based product upgrade. Other
capital expenditures incurred during 2002 consisted primarily of computer
equipment for our research and development team.
During 2002, we used $20,200 of cash in our financing activities that were
primarily related to the repayment of the note payable that was
outstanding as of year end 2001, partially offset by the proceeds from the
issuance of stock through our employee stock purchase program.
As of December 31, 2002, cash and cash equivalents were approximately
$1,958,200. We anticipate that our cash and cash equivalents as of
December 31, 2002, together with anticipated revenue from operations, cost
savings from the 2002 restructuring and asset impairment charges, and
future potential cost reduction measures, 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. However, due to the inherent uncertainties associated with
predicting future operations, there can be no assurances that such
anticipated revenue and cumulative operational savings will ultimately be
realized during the next twelve months.
During 2002 we implemented several strategic initiatives intended to
control operating expenses and capital expenditures. These initiatives
have been successful in reducing our operating expenses. As explained
above, our 2002 operating expenses are significantly lower in every
category, as compared with 2001.
The following table discloses our contractual commitments for future
periods (See footnote 12):
Year ending
December 31,
2003 $ 548,900
2004 395,400
2005 328,100
2006 55,000
2007 -
----------
$1,327,400
17
New Accounting Pronouncements
In June 2001, the FASB finalized Statements No. 141, "Business
Combinations," (SFAS 141) and No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS
141 also requires that we recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS
141 applies to all business combinations initiated after June 30, 2001 and
for purchase business combinations completed on or after July 1, 2001. It
also requires, upon adoption of SFAS 142 that we reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS
141.
SFAS 142 requires, among other things, that we no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that we identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess
the useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS 142. SFAS 142 is
required to be applied in fiscal years beginning after December 15, 2001
to all goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized. SFAS 142
requires us to complete a transitional goodwill impairment test six months
from the date of adoption. We are also required to reassess the useful
lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.
Pursuant to SFAS 142, during 2002 we conducted periodic tests for asset
impairment and recorded an asset impairment charge accordingly (See Note 6
to the Consolidated Financial Statements). As of December 31, 2002 we do
not have any intangible assets with indefinite useful lives, nor do we have
any goodwill on our balance sheet. Our intangible assets are comprised of
acquired technology and technology developed in-house, both of which have
been incorporated into one or more of our products. As such, all of our
intangible assets are being amortized to cost of revenue over the estimated
useful lives of the underlying products, or three years, whichever is
shorter.
In June 2001, the FASB finalized Statements No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) which addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002. There was no material result on our results of operations
and financial position from the adoption of SFAS 143.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit Activities," (SFAS 146) which addresses financial
accounting and reporting for costs associated with exit activities and
supersedes Emerging Issues Task Force (EITF) statement 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only
when the liability is incurred. This differs from EITF 94-3, which
required that a liability for an exit cost be recognized at the date of an
entity's commitment to an exit plan. However, under SFAS 146, a liability
for one-time termination benefits is recognized when an entity has
committed to a plan of termination, provided certain other requirements
have been met. In addition, under SFAS 146, a liability for costs to
terminate a contract is not recognized until the contract has been
terminated, and a liability for costs that will continue to be incurred
under a contract's remaining term without economic benefit to the entity
is recognized when the entity ceases to use the right conveyed by the
contract. SFAS 146 is effective for exit or disposal activities initiated
after December 31, 2002. We will adopt the provisions of SFAS 146 for
restructuring activities initiated after December 31, 2002. It is
expected that the adoption of SFAS 146 will not have a material impact on
our consolidated results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others," which clarifies
disclosure and recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for financial
statements issued after December 31, 2002 and the recognition/measurement
requirements are effective on a prospective basis for guarantees issued or
modified after December 31, 2002. The application of the requirements of
FIN 45 did not have a material impact on our financial position or results
of operations.
In December 2002, the FASB issued Statement No. 148, " Accounting for
Stock-Based Compensation - Transition and Disclosure." (SFAS 148) This
Statement amends SFAS 123, "Stock-Based Compensation," (SFAS 123) to
provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. Additionally, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for financial statements for fiscal years
18
ended after December 31, 2002. In compliance with SFAS 148 we have
elected to continue to follow the intrinsic value method in accounting for
our stock-based employee compensation arrangement as defined by Accounting
Principles Board Opinion No. 25, (APB 25) "Accounting for Stock Issued to
Employee," (See Critical Accounting Policies, below.)
Risk Factors
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.
We Have A History Of Operating Losses And Expect These Losses To
Continue, At Least For The Near Future.
We have experienced significant losses since we began operations. We
expect to continue to incur losses for the foreseeable future. We
incurred net losses of approximately $8,792,500, $15,478,000 and
$9,374,700 for the years ended December 31, 2002, 2001 and 2000,
respectively. We expect our expenses to decrease as we have implemented
several substantial cost cutting measures, however, we cannot give
assurance that revenues will increase sufficiently to exceed costs. 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:
o The degree of success of our recently introduced products;
o Variations in the timing of and shipments of our products;
o Variations in the size of orders by our customers;
o Increased competition;
o The proportion of overall revenues derived from different sales
channels such as distributors, original equipment manufacturers
(OEMs) and others;
o Changes in our pricing policies or those of our competitors;
o The financial stability of major customers;
o New product introductions or enhancements by us or by competitors;
o Delays in the introduction of products or product enhancements by us or
by competitors;
o The degree of success of new products;
o Any changes in operating expenses; and
o 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 significant
portions 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 be affected.
We May Not Be Successful In Attracting And Retaining Key Management Or
Other Personnel.
Our success and business strategy is also dependent in large part on our
ability to attract and retain key management and other personnel. We
currently need to attract a permanent Chief Executive Officer and we
cannot assure you we will be able to attract or retain such a person. The
loss of the services of one or more members of our management group and
other key personnel, including our interim Chief Executive Officer, may
have a material adverse effect on our business.
19
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. 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 any third party and us 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 business infrastructure 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 business
infrastructure 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 business infrastructure software market, or if such market
does not grow as anticipated, our business, results of operations and
financial condition may be adversely affected.
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 OEMs, systems integrators, value-added resellers,
distributors and other vendors to encourage these parties to recommend or
distribute our products and to add resellers both domestically and
internationally. We currently invest, 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 Failure To Manage Expanding Operations Could Adversely Affect Us.
To exploit the emerging business infrastructure 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:
20
o Continue to implement and improve our operational, financial and
management information systems;
o Hire and train additional qualified personnel;
o Continue to expand and upgrade core technologies; and
o 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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are currently not exposed to any significant financial market risks
from changes in foreign currency exchange rates or changes in interest
rates and do not use derivative financial instruments. A substantial
majority of our revenue and capital spending is transacted in U.S.
dollars. However, in the future, we may enter into transactions in other
currencies. An adverse change in exchange rates would result in a decline
in income before taxes, assuming that each exchange rate would change in
the same direction relative to the U.S. dollar. In addition to the direct
effects of changes in exchange rates, such changes typically affect the
volume of sales or foreign currency sales price as competitors' products
become more or less attractive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants........................... 22
Consolidated Balance Sheets as of December 31, 2002 and
2001..........................................................................23
Consolidated Statements of Operations and Comprehensive Loss for
the Years Ended December 31, 2002, 2001, and 2000...........................24
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000............................................25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000............................................26
Summary of Significant Accounting Policies....................................27
Notes to Consolidated Financial Statements....................................30
Report of Independent Certified Public Accountants on
Supplemental Schedule.......................................................40
Supplemental Schedule II......................................................41
21
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of GraphOn Corporation
We have audited the accompanying consolidated balance sheets of GraphOn
Corporation and Subsidiary (the Company) as of December 31, 2002 and 2001
and the related consolidated statements of operations and comprehensive
loss, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
GraphOn Corporation and Subsidiary as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. As discussed
in Note 1 to the financial statements, the Company has suffered recurring
losses and has absorbed significant cash in its operating activities.
Further, the Company has limited alternative sources of financing
available to fund any additional cash required for its operations or
otherwise. These matters raise substantial doubt about the ability of the
Company to continue as a going concern. Management's plan in regard to
these matters is also described in Note 1. The accompanying financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO Seidman, LLP
San Jose, California
February 7, 2003
22
GraphOn Corporation
Consolidated Balance Sheets
December 31, 2002 2001
- ------------ ---------------- ----------------
CURRENT ASSETS
Cash and cash equivalents $ 1,958,200 $ 3,952,600
Available-for-sale securities - 3,008,000
Accounts receivable, net of allowance
for doubtful accounts of $50,300 and $350,000 337,900 620,400
Prepaid expenses and other current assets 192,000 251,300
---------------- ----------------
TOTAL CURRENT ASSETS 2,488,100 7,832,300
---------------- ----------------
Property and equipment, net 421,900 1,436,100
Purchased technology, net 1,163,100 3,132,400
Capitalized software, net 406,500 513,400
Other Assets 70,000 71,600
---------------- ----------------
TOTAL ASSETS $ 4,549,600 $ 12,985,800
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 228,700 $ 319,900
Accrued liabilities 795,100 735,500
Notes payable - 26,600
Deferred revenue 796,100 577,800
---------------- ----------------
TOTAL CURRENT LIABILITIES 1,819,900 1,659,800
---------------- ----------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $0.0001 par value, 45,000,000 shares
authorized, 16,580,719 and 17,288,332 shares
issued and outstanding 1,700 1,700
Additional paid-in capital 45,982,500 45,925,900
Deferred compensation - (193,800)
Notes receivable (50,300) -
Accumulated other comprehensive gain (2,400) 1,500
Accumulated deficit (43,201,800) (34,409,300)
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 2,729,700 11,326,000
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,549,600 $ 12,985,800
================ ================
See accompanying summary of significant accounting policies and notes to consolidated financial statements
23
GraphOn Corporation
Consolidated Statements of Operations and Comprehensive Loss
Years Ended December 31,
-------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Revenue $ 3,535,000 $ 5,910,700 $ 5,066,500
Revenue - related party - - 2,500,000
--------------- --------------- ---------------
Total Revenue 3,535,000 5,910,700 7,566,500
--------------- --------------- ---------------
Cost of revenue 1,679,900 2,612,600 945,900
Cost of revenue - related party - - 97,800
--------------- --------------- ---------------
Total Cost of Revenue 1,679,900 2,612,600 1,043,700
--------------- --------------- ---------------
Gross Profit 1,855,100 3,298,100 6,522,800
--------------- --------------- ---------------
Operating Expenses
Selling and marketing 2,235,100 5,989,400 5,749,900
General and administrative 2,801,000 4,560,800 4,653,300
Research and development 2,831,300 4,134,400 4,060,000
Asset impairment loss 914,000 4,500,900 -
Restructuring charges 1,942,800 - -
--------------- --------------- ---------------
Total Operating Expenses 10,724,200 19,185,500 14,463,200
--------------- --------------- ---------------
Loss From Operations (8,869,100) (15,887,400) (7,940,400)
--------------- --------------- ---------------
Other Income (Expense)
Interest and other income 152,500 516,100 1,181,400
Interest and other expense (75,900) (64,800) (6,800)
Loss on long-term investment -
China joint venture - (41,100) (2,608,100)
--------------- --------------- ---------------
Total Other Income (Expense) 76,600 410,200 (1,433,500)
--------------- --------------- ---------------
Loss Before Provision for Income Taxes (8,792,500) (15,477,200) (9,373,900)
Provision for Income Taxes - 800 800
--------------- --------------- ---------------
Net Loss (8,792,500) (15,478,000) (9,374,700)
Other Comprehensive Income (Loss), net of tax
Unrealized holding gain (loss)
on investment (7,500) 200 6,900
Foreign currency translation adjustment 3,600 (600) (600)
--------------- --------------- ---------------
Comprehensive Loss $ (8,796,400) $ (15,478,400) $ (9,368,400)
=============== =============== ===============
Basic and Diluted Loss per Common Share $ (0.50) $ (0.97) $ (0.65)
=============== =============== ===============
Weighted Average Common Share Outstanding 17,465,099 16,007,763 14,396,435
=============== =============== ===============
See accompanying summary of significant accounting policies and notes to consolidated financial statements
24
GraphOn Corporation
Consolidated Statements of Shareholders' Equity
Accumulated
Additional Other
Common Stock Paid-in Deferred Notes Comprehensive Accumulated
Shares Amount Capital Compensation Receivable Income(Loss) Deficit Totals
---------- ------- ------------ ------------ ---------- ----------- ------------ -----------
Balances, December 31, 1999 12,342,322 $ 1,200 $ 25,413,500 $ (1,472,100) $ - $ (4,400) $ (9,556,600)$14,381,600
Issuance of common stock due to the
exercise of warrants, options and
underwriter units, net of costs
of $177,800 2,328,853 300 12,262,700 - - - - 12,263,000
Deferred compensation related to
stock options - - 1,439,800 (1,439,800) - - - -
Amortization of deferred
compensation - - - 1,780,300 - - - 1,780,300
Change in market value of
available-for-sale securities - - - - - 6,900 - 6,900
Foreign currency translation
adjustment - - - - - (600) - (600)
Net Loss - - - - - - (9,374,700) (9,374,700)
---------- ------- ------------ ------------ ---------- ----------- ------------ -----------
Balances, December 31, 2000 14,671,175 1,500 39,116,000 (1,131,600) - 1,900 (18,931,300) 19,056,500
Issuance of common stock due to the
exercise of options 52,199 - 37,000 - - - - 37,000
Proceeds from employee stock
purchase 64,958 - 152,900 - - - - 152,900
Issuance of common stock to
acquire technology 2,500,000 200 6,499,800 - - - - 6,500,000
Deferred compensation related to
stock options and