-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VADSGmk2dGSfZjkOFtVAisyv7FvkP1bFmry6cnk6u0eEXPYvU4Mg+ecy4K2iJoNC ojMC+ZYZMQ9SyOVZN6uecA== 0001012870-00-001758.txt : 20000331 0001012870-00-001758.hdr.sgml : 20000331 ACCESSION NUMBER: 0001012870-00-001758 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAPHON CORP/DE CENTRAL INDEX KEY: 0001021435 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133899021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21683 FILM NUMBER: 587254 BUSINESS ADDRESS: STREET 1: 150 HARRISON AVENUE CITY: CAMPBELL STATE: CA ZIP: 94103- BUSINESS PHONE: 4083704080 MAIL ADDRESS: STREET 1: 245 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10016 FORMER COMPANY: FORMER CONFORMED NAME: UNITY FIRST ACQUISITION CORP DATE OF NAME CHANGE: 19960823 10-K405 1 FORM 10-K405 FOR THE YEAR ENDED 12/31/1999 ================================================================================ 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, 1999 Commission file number: 0-21683 GRAPHON CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3899021 (State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.) 225 Cochrane Circle 95037 Morgan Hill, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (408) 776-3232
--------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A 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) The aggregate market value of the voting stock of registrant held by non- affiliates of the registrant as of March 10, 2000 was approximately $219,054,000. --------------------- Number of shares of Common Stock outstanding as of March 10, 2000: 14,323,922 shares of Common Stock. --------------------- DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-K Document in which incorporated -------- --------------------- Portions of the Proxy Statement with Part III respect to the 2000 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the close of the Registrant's fiscal year GRAPHON CORPORATION FORM 10-K Table of Contents
PART I Page ---- Item 1. Business.................................................................................................... 3 Item 2. Properties.................................................................................................. 11 Item 3. Legal Proceedings........................................................................................... 11 Item 4. Submission of Matters to a Vote of Security Holders......................................................... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 14 Item 6. Selected Financial Data..................................................................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................................... 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risks of Operations........................................................................................ 19 Item 8. Financial Statements and Supplementary Data................................................................. 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................................. 54 PART III Item 10. Directors and Executive Officers of the Registrant.......................................................... 54 Item 11. Executive Compensation...................................................................................... 54 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. 54 Item 13. Certain Relationships and Related Transactions.............................................................. 54 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................ 55 SIGNATURES .................................................................................................... 57
2 FORWARD LOOKING INFORMATION This report includes, in addition to historical information, "forward- looking statements" within the meaning of Section 27A of the Securities Act of 1933. This section provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statement 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," "Risk Factors" as well as those discussed elsewhere in this Report. PART I ITEM 1. BUSINESS General We develop, market, sell and support server-based software for the enterprise computing environment. 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. Our technology uses a small software program at each desktop, which allows the user to interface with an application as if it where running on the user's desktop computer. This centralized deployment and management of applications reduces the complexity and total costs associated with enterprise computing. 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. 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. We have established strategic alliances with technology leaders such as Sun Microsystems, Alcatel and Corel, who have licensed our technology. Using our technology, Sun Microsystems and Alcatel provide their network computers access to UNIX applications. Corel plans to use our technology to provide Internet access to its applications, such as WordPerfect, over the Internet. We are headquartered in Morgan Hill, California with offices in Bellevue, Washington; Concord, New Hampshire and Reading, United Kingdom. Recent Event On March 8, 2000, we announced the formation of a joint venture with Tianjin Development Holdings Ltd., a Hong Kong-based, state-owned publicly- traded conglomerate, to sell our products to China's business-to-business software market. Each joint venturer will own 50% of the joint venture and each has agreed to initially contribute $3.5 million to the joint venture. The joint venture intends to begin immediately targeting industrial, governmental, and educational markets in China. Industry Background History In the 1970's, 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 1980's, 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 1990's, the desktop was provided access to mainframe applications and databases, 3 which run on large server computers. Throughout this computing evolution, the modern desktop has become increasingly complex and costly to administer and maintain. This is further exacerbated as organizations become more dispersed with remote employees, and the 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. A leading research firm estimates the annual cost of operating a corporate PC was as much as $9,382 in 1997 and will increase to as much as $13,485 by 2001. Industry analysts and enterprise users alike have begun to recognize that the total cost of ownership of a PC, 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 better 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, which permits server-based Windows applications to be accessed from the new Windows-based network computers. Both initiatives are examples of server-based computing, which simplifies the desktop by moving the responsibility of running applications to a central server, with the promise of lowering total cost of ownership. Cross-Platform Computing Today's enterprises contain a diverse collection of desktop computers, each with its particular operating system, processing power and connection 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. A common cross-platform problem 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 are used on the majority of enterprise desktops. Since the early 1990's, organizations 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, large software programs that require substantial memory and processing resources on the desktop. Typically, PC X Server software is difficult to install, configure and maintain. Enterprises are looking for an effective UNIX connectivity software for PCs and non-PC desktops that is easier and less expensive to administer and maintain. Application Service Providers 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 site, we expect that application service providers quickly will play an important role in addressing an enterprise's computing requirements. Today, application service providers are faced with the difficult task of creating or rewriting applications to entertain the broader market. Though the application service provider industry is just beginning to emerge, we expect it to develop rapidly, due to application vendors' desire 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 4 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. The GraphOn Approach Our server-based software deploys, manages, supports and executes applications entirely on the server computer and distributes them efficiently and instantaneously to virtually any desktop device. Our technology consists of three key components: . The server component runs alongside the server-based application and is responsible for intercepting user-specific information for display at the desktop. . The desktop component is responsible only for sending keystrokes and mouse motion to the server, as well as presenting 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. . Our protocol enables efficient communication over fast networks or slow dial-up connections and allows applications to be accessed from virtually any location with network-like performance and responsiveness. The major benefits of our approach are as follows: . Lowers Total Cost of Ownership. Shrinking recurring costs is a primary goal of our products. Today, installing enterprise applications typically is time-consuming, complex and expensive, requiring 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 at the server, avoiding desktop software and operating system conflicts and minimizing at-the-desk support. According to a leading research firm, server-based computing strategies, such as those offered by us, may achieve as much as a 30% savings by, among other things, simplifying the desktop and moving application processing and management from individual desktops to a centralized server-based infrastructure. For example, in a 2,500-PC computing environment, a leading research firm has calculated that a server-based approach would have saved approximately $4.5 million in 1997 and, as computing complexity continues to grow, could save approximately $16 million in 2001. . Connects Diverse Computing Platforms. Today's computing infrastructures are a mix of desktop devices, network connections and operating systems. Enterprise-wide communication often requires 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 desktop technologies, such as Sun Microsystems' and IBM's network computers, access to UNIX is impractical without server-based products. To rewrite an application for each different desktop 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 desktops, utilizing their existing computing infrastructure, without rewriting a single line of code or changing or reconfiguring desktop hardware. This means that enterprises can maximize their investment in existing technology and allow users to work in their preferred desktop environment. 5 . Application Service Providers. Many large enterprises have made significant investments in developing, marketing and selling enterprise-wide software solutions. Our server-based technology is designed to allow Windows, Linux and UNIX access from any desktop connected to the Internet. Today's packaged applications can be accessed quickly, easily and without modification. . 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 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 desktop 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 application service providers, bandwidth typically is the top recurring expense when web-enabling or renting access to applications over the Internet. Our highly efficient 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 all 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 manufacturing flexibility, time-to-market and customer satisfaction. Products Our products are designed to allow enterprises to access Windows, UNIX and Linux applications from centrally managed servers without modification. Currently, our products provide the UNIX and Linux server-based software. With the integration of the Bridges for Windows (formerly known as jBridge) technology in early 2000, the current product line will be extended to access Windows applications from centrally managed servers, widening our product offering and opportunities. . GO-Global is a server-based software product for high performance access to UNIX and Linux applications from any Windows PC located virtually anywhere on an organization's network, the Internet or even over a phone line. We began selling GO-Global in March 1997. . GO-Joe is a server-based software product for accessing Unix and Linux applications, from virtually any Java-enabled desktop or device, including the Sun Microsystems and IBM network computers, desktops and hand-held devices with web browsers such as Microsoft Internet Explorer(TM) or Netscape Navigator(TM). We began selling GO-Joe in July 1998. Sun Microsystems began shipping GO-Joe for distribution with its network computers in July 1998. . GO-Between is a server-based software product for accessing UNIX and Linux applications from Microsoft's Windows NT, terminal server edition. GO- Between minimizes the impact on server resources over traditional emulator solutions for accessing UNIX and Linux applications from Microsoft's terminal server edition products. This increases the number of simultaneous users that may access UNIX from any one terminal server edition server. Microsoft has released a technical whitepaper describing the UNIX access benefits of GO-Between for terminal server edition users. We began shipping GO-Between in October 1998. . Bridges for Windows is a technology we acquired from Corel in December 1998. It will enable GO-Global, GO-Between and GO-Joe to access server- based Windows applications. 6 With the anticipated integration of the Bridges for Windows technology in early 2000, we will offer complete cross platform access to Windows applications from virtually any desktop. Since the applications are not running on the desktop, even a non-Windows desktop will be able to access Windows applications. Windows applications can be accessed from desktop computers using various operating systems such as Macintosh, UNIX, Linux and OS/2, which will appear and function as if they were running locally on the desktop. Target Markets The market for our products comprises all organizations that need to access Windows, UNIX and/or Linux applications from a wide variety of desktops from any location, including over the Internet and dial-up lines. This includes large organizations, such as Fortune 1000 companies, government and educational institutions. Our software is designed to allow these enterprises to use the best desktop 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: . 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 GO-Global 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. . Enterprises That Employ Microsoft's Terminal Server Edition. A leading research firm estimates that the Microsoft terminal server market will start to accelerate rapidly, with more than 390,000 host servers installed by the end of 2000. Each terminal server edition server supports a minimum of 10 users, such that the estimated user base for terminal server editions will be at least 3.9 million in 2000. A leading research firm reports that 38% of surveyed terminal server edition users will require access to UNIX applications. Our management believes the terminal server edition market to be a significant opportunity for GO-Between. . 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 enterprise computing strategies. A leading research firm projects that approximately 25 million business users access computing resources remotely in 1998 and that this number will grow to approximately 137 million worldwide in 2003, with 60% of these users still connecting via low- bandwidth modems. Our protocol is designed to enable highly efficient low- bandwidth connections. . Application Service Providers. High-end software applications in the fields of human resources, enterprise resource planning, enterprise relationship management and others historically only have 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. . Extended Enterprise Software Market. Extended enterprises allow access to their computing resources to their customers, suppliers, distributors and other partners, 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 Internet has facilitated this development and a leading research firm has predicted the extended enterprise software market will grow to an estimated $5.76 billion in 2002. 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. 7 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 intend to seek suitable new alliances in order to improve our technology and/or enhance our ability to penetrate relevant target markets. The alliances that we currently are focusing on are those that have immediate revenue generating potential, strengthen our position in the server-based software market, add complementary capabilities and/or raise awareness of our products. Sun MicroSystems. In October 1996, Sun MicroSystems licensed our GO-Joe for distribution within its network computers and our server component for distribution with its UNIX computers and operating system. Pursuant to the Sun Microsystems agreement, Sun has a perpetual, non-exclusive, world-wide and fully paid up license to, among other things, distribute and sell GO-Joe with its network computers and to distribute our server component with its UNIX computers and operating systems. The license to Sun also allows Sun employees to use GO- Global internally and remotely. In addition to what is provided for in the Sun agreement, Sun's network computers currently display the GO-Joe logo, our name and our website address each time GO-Joe is started, further increasing company and product awareness. We plan to work with Sun's sales force and resellers to sell and promote GO-Global and GO-Between as UNIX access solutions for users of PCs and multi-user NT. As of December 31, 1999, Sun paid us a $2,500,000 one- time royalty payment for completion of product delivery requirements and for a site license for GO-Global. The Sun agreement is expected to terminate in December 2000, although Sun will continue to have rights to our products licensed pursuant to the agreement after its termination. Compuware. 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 will license 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 customers will use GraphOn's server-based solution to provide enterprise-level UNIFACE applications over the Internet. Compuware will private label and completely integrate Bridges for Windows into its UNIFACE deployment architecture as UNIFACE Jti. Corel Corporation. In December 1998, we acquired Corel's jBridge (now known as Bridges for Windows) technology and its jBridge development team, in exchange for our securities. Bridges for Windows is designed to allow any device running Java to access 32-bit Windows applications remotely and unmodified. When combined with our UNIX products, we believe that Bridges for Windows will provide our customers with a complete enterprise solution, linking any of such platforms to virtually any desktop over virtually any connection. In addition, we entered into a strategic alliance with Corel. We intend through this alliance to promote our products to Corel's Windows, UNIX and Linux customers. The alliance has a one year term ending in July 2000 which is renewable by mutual consent for successive one year periods, and is terminable at will by either party. In October 1999, we entered into an agreement with Corel pursuant to which we licensed to Corel the right to include our Bridges for Windows technology with any of Corel's applications. Under this non-exclusive perpetual license, Corel will bundle our Bridges for Windows software with certain of its applications, beginning with its WordPerfect Office 2000 suite and, in the future, will fully integrate our software into these applications. We are to receive $1,500,000 for this license, of which $1,455,000 has been recognized to date. Alcatel Italia. 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 will license our GO-Global thin client PC X server software for inclusion with Alcatel's Turn-key Solution software, an optical networking system. Alcatel customers are expected to use GraphOn's server-based solution to access Alcatel's UNIX/X Network Management Systems applications from T-based PCs. In addition, Alcatel will deploy GO-Global internally to provide Alcatel employees with high-speed network access to Alcatel's own server-based software over dial-up, LANs and WANs. 8 Sales, Marketing and Support Our customers, to date, are primarily Fortune 1000 companies and large government organizations. Among our current customers are the following: Ameritech Corporation Johnson & Johnson Amoco Corporation Lucent Technologies, Inc. AT&T Corporation Motorola, Inc. Canadian Meteorological Centre Nortel Technology Cisco Systems, Inc, National Semiconductor Corp. Compuware Pfizer Inc. Corel Corporation Shell Oil Company Ericsson Telecommunicatie B.V. Sun Microsystems, Inc. Hewlett-Packard Company United States Geological Survey IBM
While previously most of our revenues were from direct sales and OEM agreements, we currently are developing and expanding relationships with a select number of resellers. We expect to benefit from these relationships by availing itself of their established customer-base, co-marketing programs and marketing and sales capabilities. Such resellers include value-added resellers, system integrators and OEM licensees. Our sales and marketing efforts will be focused on increasing product awareness and demand among large enterprises and developing formal distribution relationships with UNIX and Windows-oriented resellers. Current marketing activities include a targeted direct mail campaign, tradeshows, production of promotional materials, public relations and maintaining an Internet presence for marketing and sales purposes. Due to the nature of our products, remote access via telephone lines or the Internet can be used to troubleshoot and diagnose problems. We provide technical support and training to OEMs and resellers that function as the first line of support for their own customers. We provide 90-day online Internet, e- mail, fax and telephone-based services for technical support and software upgrades at no charge. Additionally, purchasers of our products can choose to purchase an annual extended maintenance program. 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 $840,200 and $2,466,200 in research and development in 1998 and 1999, respectively. We expect increased expenditures in 2000. We have made significant investments in our protocol and in the performance and development of our server-based software. In May 1998, we hired a group of eight software engineers located in Bellevue, Washington. They have experience in Java, protocol technology and various Microsoft Windows operating systems. They are working to enhance our existing software products as well as beginning to conceptualize and architect future products. In December 1998, we hired nine additional software engineers located in Concord, New Hampshire in connection with the acquisition of the Bridges for Windows technology from Corel. This group has substantial Windows and Java experience. We plan to continue to add software engineers in order to expand our research and development capabilities, although there can be no assurances that qualified personnel will be available to us as needed. Operations We control 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 also are performed by us. CD-ROM and floppy disk duplication, printing of documentation and packaging are accomplished through outside vendors. We generally ship products 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. 9 Competition The server-based software market in which we participate is highly- competitive, although we believe 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 desktop hardware and connections. Our competitors include manufacturers of conventional PC X Server software and competition is expected from these and other companies in the server-based software market. Competitive factors in the market in which we compete 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., SCO, 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, believed to have over 50% of that market. WRQ, Network Computing Devices and NetManage also offer traditional PC X Server software and have minority positions within that market. SCO introduced Tarantella, a server-based Java-to-Unix connectivity product which competes with GO-Joe. However, SCO's principal product is a UNIX operating system that competes with UNIX vendors like Sun Microsystems and IBM. We believe that SCO, as a competitor to the other UNIX vendors, will have difficulty in penetrating enterprises who utilize other vendors' UNIX operating systems, such as Sun Microsystems and IBM. Proprietary Technology We licensed key components of our server-based technology from three software developers to whom we paid royalties pursuant to exclusive license agreements. Such royalty payments were based on a percentage of net revenues received by us for sales of our products that contain the licensed technology. The royalty rate under all of these agreements was an aggregate of 4.8% and 2.9% for 1999 and 2000. We purchased this licensed technology for an aggregate purchase price of $378,000 in the third quarter of 1999. The remaining portion of such purchase price is $170,000, which amount was paid in the first quarter of 2000. 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. See "Legal Proceedings." 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 Window 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 10, 2000, we had a total of 56 employees, including 14 in marketing, sales and support, 32 in research and development and 10 in administration and finance. No employees are covered by a collective bargaining agreement. 10 ITEM 2. PROPERTIES We currently occupy approximately 7,000 square feet of temporary office space in Morgan Hill, California pursuant to a lease which expires when we move into our new permanent headquarters. We have entered into a five year lease for approximately 13,000 square feet in Morgan Hill, California. Such space will be available to us in July or August 2000. We were required by the City of Campbell, California to vacate our prior headquarters due to the acquisition by Campbell of the office building where such headquarters were located. The City of Campbell has agreed to pay us $85,000 to facilitate our relocation. We also occupy leased facilities in Bellevue, Washington, Concord, New Hampshire, and Reading, United Kingdom pursuant to leases expiring at varying dates through 2003. The aggregate amount of the annual lease payments under all of our current leases (including our new permanent headquarters) is approximately $500,000. We believe our current facilities will be adequate to accommodate our needs until the end of 2000. ITEM 3. LEGAL PROCEEDINGS In late 1996, we disclosed numerous aspects of our proprietary technology on a confidential basis to Insignia Solutions plc, some of whose assets were later acquired by Citrix Systems, Inc. When we learned of that acquisition in January 1998, we made inquiry of Citrix and Insignia seeking assurances that there had been no potential misuse of our confidential information. On November 23, 1998, Citrix instituted litigation in the United States District Court for the Southern District of Florida seeking a judicial declaration that neither Citrix nor Insignia had misappropriated or infringed upon our proprietary technology or breached the non-disclosure agreement. We responded by filing a motion to dismiss the action for lack of jurisdiction. On May 14, 1999, the court granted our motion and dismissed the case. Essentially, the Florida court held there was no existing dispute between us and Citrix. Citrix has appealed the dismissal of its case to the United States Court of Appeals for the Eleventh Circuit, where the matter is awaiting oral argument. On October 4, 1999, Insignia filed a complaint against us in the Superior Court of the State of California, Santa Clara County, alleging that we had attempted to disrupt Insignia's sale to Citrix, on February 5, 1998, of assets related to Insignia's NTRIGUE software product line. The complaint alleges that, as a result of such efforts, Insignia was required by Citrix to place $8.75 million in escrow to enable Citrix to deal with potential claims by us of proprietary rights in the assets being sold. The complaint seeks unspecified general and punitive damages. On December 13, 1999 we filed an answer denying the material allegations in Insignia's complaint. Insignia's complaint also names Citrix and its UK subsidiary as defendants, alleging that these companies have breached their February 5, 1998 contract with Insignia by refusing to release money from the escrow. The complaint seeks compensatory damages from Citrix related to that company's refusal to release purchase money from escrow for payment to Insignia and other unspecified damages. On March 14, 2000, we filed a lawsuit against Citrix Systems, Inc. and Insignia Solutions in California state court. The complaint asserts these claims against Citrix and Insignia: (1) trade secret misappropriation; (2) breach of contract; and (3) unfair competition. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. No matters were submitted to a vote of stockholders of the Registrant during the fourth quarter of the fiscal year ended December 31, 1999. 11 Executive Officers of the Registrant The executive officers of the Company are as follows:
Name Age Position ---- --- -------- Robert Dilworth 58 Chairman of the Board of Directors Walter Keller 49 President, Chief Executive Officer and Director Robin Ford 49 Executive Vice President, Marketing and Sales and Director Eric Lefebvre 33 Vice President, Business Development William Swain 59 Chief Financial Officer and Secretary
Robert Dilworth was appointed our Chairman in December 1999. He previously served as one of our directors since July 1999 and of GraphOn-CA between July 1998 and July 1999. Mr. Dilworth served as Chairman of the Board of Metricom, Inc. from 1996 until February 2000, and has served as a director of Metricom, Inc. since 1987. He served as Metricom's CEO from 1987 to 1998. Metricom is a leading provider of wireless data communication and network solutions. Prior to joining Metricom, from 1985 to 1987, Mr. Dilworth served as President of Zenith Data Systems Corporation, a microcomputer manufacturer. Earlier positions include CEO at Morrow Designs, CEO at Ultramagnetics, Division Manager at Varian Associates, Director of Minicomputer Systems at Sperry Univac and Vice President of Finance and Administration at Varian Data Machines. Mr. Dilworth is also a director of eOn Communications, Mobility Electronics and Transcept Corporation. Walter Keller has served as our President since July 1999 and of GraphOn-CA between 1982 and July 1999. Mr. Keller, who previously served as our Chairman since July 1999 until succeeded by Mr. Dilworth in December 1999 and as Chairman of GraphOn-CA between 1982 and July 1999, was Chief Financial Officer of GraphOn-CA from 1991 until February 8, 1999. Prior to the founding of GraphOn-CA in 1992, Mr. Keller's experience included executive staff and senior level management, sales and engineering positions at United Technologies Corporation and Honeywell Inc. Mr. Keller is a member of the Society of Professional Engineers and holds a B.S. in Mechanical Engineering and a M.S. in Electrical Engineering from Santa Clara University in Santa Clara, CA. Mr. Keller is the husband of Ms. Ford. Robin Ford has served as one of our directors since November 1999 and as our Executive Vice President, Marketing and Sales since July 1999 and of GraphOn-CA between 1996 and July 1999. Ms Ford was Vice President, Marketing and Sales of GraphOn-CA from 1991 to 1996 and held various positions in sales and marketing at GraphOn-CA from 1983 to 1991. Ms. Ford was a director of GraphOn-CA from October 1991 to June 1998. Prior to joining GraphOn-CA, Ms. Ford held various sales management and technical positions at Intel Corporation, National Semiconductor Corporation and Grid Systems Corporation. Ms. Ford's responsibilities with GraphOn and GraphOn-CA have included building and maintaining GraphOn's and GraphOn-CA's sales and marketing operations and obtaining major government and OEM contracts. Ms. Ford is the wife of Mr. Keller. Eric Lefebvre has served as our Vice President, Business Development since July 1999 and of GraphOn-CA between June 1999 and July 1999. From April 1997 through June 1999, he served as Director of Strategic Business and Alliances at Corel Corporation where he was responsible for developing strategic alliances and seeking new areas of business. From April 1996 to May 1997, Mr. Lefebvre served as International Corporate Communications Manager at Corel. From November 1991 to April 1996, he served at Corel as Communication and Market Development Manager and Marketing Manager (Europe). Mr. Lefebvre holds a Masters of International Affairs from Carleton University and an Honours B.Sc. in Government and Politics and Business Management from the University of Maryland. 12 William Swain has served as our Chief Financial Officer and Secretary since March 2000. Mr. Swain was a consultant from August 1998 until February 2000, working with entrepreneurs in the technology industry in connection with the start-up and financing of new business opportunities. Mr. Swain was CFO and Secretary of Metricom Incorporated, a publicly traded, wireless data communications service provider, from January 1988 until June 1997, during which time he was instrumental in both private financings as well as Metricom's initial public offering and subsequent public financing activities. He continued as Senior Vice President of Administration with Metricom from June 1997 until July 1998. Prior to joining Metricom, Mr. Swain held top financial positions with leading companies in the computer industry, including Morrow Designs, Varian Associates and Univac. Mr. Swain holds a Bachelors degree in Business Administration from California State University of Los Angeles and is a Certified Public Accountant in the State of California. All executive officers serve at the discretion of the Board of Directors. 13 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since August 26, 1999, our common stock, Class A redeemable warrants and Class B redeemable warrants have been quoted on The Nasdaq SmallCap Market under the symbols GOJO, GOJOW and GOJOZ, respectively. Prior to such date, such securities were quoted on the OTC Bulletin Board. The following table sets forth the range of the high and low bid quotations of such securities on The Nasdaq SmallCap Market and the OTC Bulletin Board for the periods indicated:
Class A Redeemable Class B Common Stock Warrants Redeemable Warrants -------------------------------- ------------------------------------ ------------------------------ Quarter Ende High Low High Low High Low - ----------------- ------------- ------------- --------------- ------------- ---------- ---------- March 31, 1998 5-1/2 4-3/4 1-1/4 7/16 3/4 1/4 June 30, 1998 5-5/16 4-3/4 1-1/4 3/8 1/2 3/16 September 30, 1998 5-3/8 4-3/4 1-3/8 1/32 1/2 1/4 December 31, 1998 5-7/16 4-11/16 15/16 11/16 5/8 1/16 March 31, 1999 5-3/8 5 1-7/32 1-1/16 1 7/16 June 30, 1999 7-5/16 5-1/8 2-3/16 1-1/16 1-3/4 11/16 September 30, 1999 9-1/2 3 4-5/16 1-1/8 3-9/16 3/4 December 31, 1999 23-7/16 6-1/8 14-11/16 3-1/8 12-13/16 2-1/6
The above quotations represent prices between dealers and do not include retail markup, markdown or commission. They do not necessarily represent actual transactions. On March 23, 2000, the last reported closing price of our common stock was $22.00. On that date, there were 131 recordholders of our common stock, although we believe that there are other persons who are beneficial owners of shares of our common stock held in street name. We have never declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends in 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 the Board of Directors and will be dependent upon our financial condition, operating results, capital requirements and such other factors as the Board of Directors deems relevant. 14 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, 1999, 1998, 1997 and 1996 and for the years ended December 31, 1999, 1998, 1997 and 1996 have been derived from our financial statements which have been audited by BDO Seidman LLP, independent public accountants. The data for the year ended December 31, 1995 has been derived from our unaudited condensed financial statements which, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the information set forth in such financial statements. (Amounts in thousands, except share and per share data) Statement of Operations Data:
Year Ended December 31, -------------------------------------------------------------------------------------- 1999 1998 1997 1996 (1) 1995 (1) ---- ---- ---- -------- -------- Revenues......................... $ 3,635 $ 2,124 $ 1,926 $ 595 $ 588 ------------ ---------- ---------- ---------- ---------- Costs of revenues................ 2,800 344 463 336 213 ------------ ---------- ---------- ---------- ---------- Gross profit..................... 835 1,780 1,463 259 375 Operating expenses: Selling and Marketing.......... 3,279 1,440 827 193 -- General and Administrative..... 2,265 1,119 325 218 389 Research and Development....... 2,467 840 191 42 59 ---------- ---------- ---------- --------- ---------- Total operating Expenses..... 8,011 3,399 1,343 453 448 ---------- ---------- ---------- ---------- ---------- (Loss) income from operations.... (7,176) (1,619) 120 (194) (73) Other income (expense), net...... 144 (529) 5 6 -- ---------- ---------- ---------- ---------- ---------- (Loss) income before provision for income taxes................ (7,032) (2,148) 125 (188) (73) Provision for income taxes....... 1 1 1 1 --- ---------- ---------- ---------- ---------- ---------- Net (loss) income................ $ (7,033) $ (2,149) $ 124 $ (189) $ (73) =========== =========== ========== ========== ========== Basic and diluted (loss income per share....................... $(0.71) $(0.57) $0.04 $(0.06) $ -- =========== ========== ========== ========== ========== Weighted average common shares outstanding..................... 9,950,120 3,770,863 3,345,600 3,345,600 3,345,600 ========== ========== ========== ========== ==========
Balance Sheet Data:
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1999 ----------------- ----------------- ----------------- ----------------- ----------------- Working capital.................. $11,941 $1,193 $ 23 $ 61 $183 Total assets..................... 15,224 6,544 733 825 225 Total liabilities................ 843 1,202 615 823 42 Stockholders' equity............. 14,381 5,342 118 2 183
___________ (1) During the years ended December 31, 1996 and 1995, we were engaged in the business of manufacturing, marketing and selling computer terminal hardware in an industry significantly different from that in which we presently do business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements The following discussion of the financial condition and results of operations of GraphOn Corporation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Annual Report and in other documents filed by the Company with the Securities and Exchange Commission. The following discussion should be read together with the financial statements and the related notes included in Item 8 of this Report and which are deemed to be incorporated into this section. Results of Operations Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Revenues. Software revenues have been derived primarily from two sources: GO-Global product sales and OEM licensing revenues for Bridges for Windows, GO- Joe, GO-Global and GraphOn's server software. Total revenues for the twelve- month period ended December 31, 1999 increased by $1,510,300, or 71.1%, to $3,634,500 from $2,124,200 for the same period in 1998. The most important contributing factor was an increase in OEM license sales in 1999 as compared to 1998. Revenues from OEM licensing agreements from Corel Corporation, IBM and Sun Microsystems represented 40.0%, 13.3% and 10.3%, respectively, of total revenues in 1999. Revenues from OEM license agreements with Sun Microsystems, IBM and Corel, collectively, represented 67.0% of revenues in 1998. Revenues also include service fees from maintenance contracts and training services. We anticipate that many of our customers will enter into and periodically review maintenance contracts to assure continued product updates and support. Service revenue was $178,100 or 4.9% of revenue in 1999 and $330,700, or 15.6% of revenue in 1998. Cost of Revenues. Cost of revenues consists primarily of royalty payments, materials such as manuals, media and packaging, expenses associated with product maintenance and enhancements such as software corrections and updates, and amortization of capitalized research and development expenses. In addition, cost of revenues includes the amortization expense recorded in connection with the acquisition of technology from Corel Corporation. Research and development costs for new product development, after technological feasibility is established, are treated as "capitalized software" on our balance sheet and subsequently expensed as cost of revenues over the shorter of three years or the remaining estimated life of the products, whichever produces the higher expense for the period. Cost of revenues - Amortization of Purchased Technology for the year ended December 31, 1999 increased by $2,430,600, or 100%, to $2,430,600 from $0 for the same period in the prior year due to amortization expense recorded in connection with the acquisition of technology from Corel Corporation. Sales and Marketing Expenses. Sales and marketing expenses primarily consist of salaries, sales commissions, travel expenses, trade show related activities and promotional costs. Sales and marketing expenses increased by $1,838,800, or 127.7%, to $3,279,100, or 90.2% of revenue, for the twelve months ended December 31, 1999 from $1,440,300, or 67.8% of revenue, for the same period in 1998. These increases primarily are attributable to the addition of sales and marketing personnel, a substantial increase in trade show, promotional and public relations activities, and amortization of deferred compensation for options issued to consultants. We expect that sales and marketing expenses will continue to increase in dollar amounts, but decline as a percentage of total revenues, as we continue to hire additional sales and marketing personnel, establish reseller channels and expand promotional activities. 16 General and Administrative Expenses. General and administrative expenses primarily consist of salaries and legal and professional services. In addition, our corporate rent, utilities and administrative employee benefits are included in general and administrative expenses. General and administrative expenses increased by $1,146,600, or 102.5%, to $2,265,200, or 62.3% of revenue, for the twelve months ended December 31, 1999 from $1,118,600, or 52.7% of revenue, for the same period in 1998. This increase is primarily due to: . an increase in legal services; . hiring additional administrative personnel; . we recognized non-cash compensation charges in 1999 due to the recognition of deferred compensation charges in the latter part of 1998. Research and Development Expenses. Research and development expenses consist primarily of salaries and benefits to software engineers, supplies and payments to contract programmers and rent on facilities. Research and development expenses increased by $1,626,000, or 193.5%, to $2,466,200, or 67.9% of revenue, for the twelve months ended December 31, 1999 from $840,200, or 39.6% of revenue, for the same period in 1998. The increase was primarily due to the addition of software engineers and the rent on new facility locations. As of December 31, 1999, we had 30 software engineers compared to 15 as of December 31, 1998. We believe that a significant level of investment for research and development is required to remain competitive and that such expenses are expected to continue to increase over the foreseeable future. Interest Expense. Interest expense decreased in 1999 as compared to 1998 due to the repayment of a convertible note payable in January 1999. Provision for Income Taxes. At December 31, 1999, we had approximately $7.2 million in federal net operating loss carryforwards. The federal net operating loss carryforwards will expire through 2019, 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 in the amount of $2.8 million will be limited to approximately $400,000 per year until such carryforwards are fully utilized. To date, we have utilized a portion of our net operating loss carryforwards to reduce our overall income tax liability. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues. Total revenues for the year ended December 31, 1998 were $2,124,200, an increase of 10.3% over the same period in 1997. The most important contributing factor was a 10.4% increase in software-related revenues to $1,971,000 in 1998 as compared to $1,785,000 in 1997. Our software revenues have been derived primarily from two sources: GO-Global product sales and OEM licensing revenues for GO-Joe, GO-Global and our server software. Revenues from the Sun Microsystems OEM licensing agreement represented 70.0% of total revenue in 1997 and from OEM license agreements with Sun Microsystems, IBM and Corel, collectively, represented 67.0% of revenues in 1998. Cost of Revenues. Cost of revenues was reduced to 16.2% of revenue in 1998, as compared to 24.1% in 1997. This primarily is attributed to the reduction in the royalty rate paid to outside software developers under our exclusive licensing agreements. Sales and Marketing Expenses. Sales and marketing expenses primarily consist of salaries, sales commissions, travel expenses, trade show related activities and promotional costs. Sales and marketing expenses increased 74.1% to $1,440,300, or 67.8% of revenue, in 1998 from $827,300, or 43.0% of revenue, in 1997. This increase primarily is attributable to the addition of sales and marketing personnel and a substantial increase in trade show, promotional and public relations activities. General and Administrative. General and administrative expenses primarily consist of salaries and legal and professional services. In addition, our rent, utilities and administrative employee benefits are included in general and administrative expenses. General and administrative expenses increased 244.5% to $1,118,600, or 52.7% of 17 revenue, in 1998, from $324,700, or 16.9% of revenue, in 1997. This increase primarily is attributed to legal services, hiring additional administrative personnel and increased rent, utilities and benefit expenses necessary to support expanding operations. Research and Development. Research and development expenses consist primarily of salaries and benefits to software engineers, supplies and payments to contract programmers. Research and development expenses increased by 341.1% to $840,200, or 39.6% of revenue, in 1998, from $190,500, or 9.9% of revenue, in 1997. Interest Expense. Interest expense increased in the amount of $519,800 in 1998 primarily due to the recording of interest expense in the amount of $475,000 on the convertible note payable as a result of the issuance of 278,800 shares of common stock at $.09 per share in connection with such note. Liquidity and Capital Resources In September 1998, we commenced a private placement of shares of our common stock and warrants which, when completed in January 1999 resulted in aggregate proceeds of $5,162,900 from our sale in this placement of 2,878,815 shares of our common stock and warrants to purchase an additional 575,763 shares of our common stock. In February 1999, we sold 62,525 shares of our common stock and warrants to purchase an additional 676 shares of our common stock, for gross proceeds of $97,200. On July 12, 1999, we completed a merger with Unity First Acquisition Corp. pursuant to which each share of our common stock was exchanged for 0.5576 shares of Unity common stock and each outstanding option and warrant to purchase our common stock was exchanged for options or warrants to purchase 0.5576 shares of Unity common stock. The transaction was a forward merger with Unity surviving the merger and changing its name to GraphOn Corporation and with GraphOn's management team continuing in their existing roles. The merger provided us with $5,425,000 in net cash proceeds which was previously held in trust for Unity until it consummated a merger with an operating business. In December 1999, we issued 1,353,028 shares of our common stock in connection with the exercise of underwriter units and warrants, resulting in net cash proceeds of $8,402,000. As of December 31, 1999, we had cash and cash equivalents of $8,481,500 as well as $2,027,600 in available-for-sale securities. In January 2000, we issued 1,494,767 shares of our common stock in connection with the exercise of warrants, resulting in net cash proceeds of $9,870,900. We anticipate that our cash balances as of December 31, 1999, together with the net proceeds of warrant exercises in January 2000 and anticipated revenue from operations, will be sufficient to meet our working capital and capital expenditure needs through the next twelve months. We have no material capital expenditure commitments for the next twelve months. Year 2000 Compliance Although we believe that we have adequately addressed the Year 2000 problem, having experienced no failures or disruptions in our internal operating systems or our products or in those of our third party vendors or suppliers either on or after January 1, 2000 to date, it is possible that future failures or disruptions stemming from Year 2000 problems may yet result in our ability to process transactions, send invoices, accept customer orders or provide customers with products and services. Adoption Of New Accounting Pronouncements In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 132, "Employer's Disclosure about Pensions and Other Postretirement Benefits," which standardizes 18 the disclosure requirements for pension and other post-retirement benefits. The adoption of SFAS No. 132 did not impact our disclosures. Recently Issued Accounting Standards And Pronouncements Not Yet Adopted In June 1998, FASB issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires that every derivative instrument, including derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. The standard is effective for all fiscal years beginning after June 15, 2000. As we currently are not a party to any derivative financial instruments and do not anticipate becoming a party to any derivative instruments, management does not expect this standard to have a significant impact on our financial statements. ITEM 7A. Quantitative And Qualitative Disclosures About Market Risk We are not exposed to financial market risks from changes in foreign currency exchange rates or changes in interest rates and do not use derivative financial instruments. A substantial majority of our revenue and capital spending is transacted in U.S. dollars. However, in the future, we may enter into transactions in other currencies. An adverse change in exchange rates would result in a decline in income before taxes, assuming that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, such changes typically affect the volume of sales or foreign currency sales price as competitors' products become more or less attractive. RISK FACTORS 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 And Increase, At Least For The Near Future. We have experienced significant losses since we began operations. We expect to continue to incur significant losses for the foreseeable future. We incurred net losses of approximately $7,033,400 for the year ended December 31, 1999 and $2,148,500 for the year ended December 31, 1998. We expect our expenses to increase as we expand our business but cannot assure you that our revenues will increase as a result of increased spending. If revenues grow more slowly than anticipated, or if operating expenses exceed expectations, we may not become profitable. Even if we become profitable, we may be unable to sustain profitability. Our Operating Results In One Or More Future Periods Are Likely To Fluctuate Significantly And May Fail To Meet Or Exceed The Expectations Of Securities Analysts Or Investors Our operating results are likely to fluctuate significantly in the future on a quarterly and on an annual basis due to a number of factors, many of which are outside our control. Factors that could cause our revenues to fluctuate include the following: . the degree of success of our recently introduced products; . variations in the timing of and shipments of our products; . variations in the size of orders by our customers; . increased competition; . the proportion of overall revenues derived from different sales channels such as distributors, OEMs and others; 19 . changes in our pricing policies or those of our competitors; . the financial stability of major customers; . new product introductions or enhancements by us or by competitors; . delays in the introduction of products or product enhancements by us or by competitors; . the degree of success of new products; . any changes in operating expenses; and . general economic conditions and economic conditions specific to the software industry. In addition, our royalty and license revenues are impacted by fluctuations in OEM licensing activity from quarter to quarter which may involve one-time royalty payments and license fees. Our expense levels are based, in part, on expected future orders and sales. Therefore, if orders and sales levels are below expectations, our operating results are likely to be materially adversely affected. Additionally, because a significant portion of our expenses are fixed, a reduction in sales levels may disproportionately affect our net income. Also, we may reduce prices or increase spending in response to competition or to pursue new market opportunities. Because of these factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline. Our Failure To Adequately Protect Our Proprietary Rights May Adversely Affect Us Our commercial success is dependent, in large part, upon our ability to protect our proprietary rights. We rely on a combination of patent, copyright and trademark laws, and on trade secrets and confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. We cannot assure you that measures we have taken will be adequate to protect us from misappropriation or infringement of our intellectual property. We license essential components of our core technology from two different parties to whom we pay royalties, although we hold an option, which is exercisable in the year 2001, to purchase the technology under such licenses. These licenses may be terminated upon material breach of the agreements, and if they are terminated our business will be harmed. Despite our efforts to protect proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our intellectual property rights as fully as do the laws of the United States. Furthermore, we cannot assure you that the existence of any proprietary rights will prevent the development of competitive products. The infringement upon or loss of any proprietary rights, or the development of competitive products despite such proprietary rights, could have a material adverse effect on our business. We Face Risks Of Claims From Third Parties For Intellectual Property Infringement That Could Adversely Affect Our Business At any time, we may receive communications from third parties asserting that features or content of our products may infringe upon their intellectual property rights. Any such claims, with or without merit, and regardless of their outcome, may be time consuming and costly to defend. We may not have sufficient resources to defend such claims and they could divert management's attention and resources, cause product shipment delays or require us to enter into new royalty or licensing agreements. New royalty or licensing agreements may not be available on beneficial terms, and may not be available at all. If a successful infringement claim is brought against us and we fail to license the infringed or similar technology, our business could be materially adversely affected. Our Business Significantly Benefits From Strategic Relationships And There Can Be No Assurance That Such Relationships Will Continue In The Future Our business and strategy relies to a significant extent on our strategic relationships with other companies. There is no assurance that we will be able to maintain or develop any of these relationships or to replace them in the event any of these relationships are terminated. In addition, any failure to renew or extend any licenses between us and any third party may adversely affect our business. 20 Because Our Market Is New And Emerging, We Cannot Accurately Predict Its Future Growth Rate Or Its Ultimate Size, And Widespread Acceptance Of Our Products Is Uncertain The market for server-based software, which enables programs to be accessed and run with minimal memory resident on a desktop computer or remote user device, still is emerging, and we cannot assure you that our products will receive broad-based market acceptance or that this market will continue to grow. Additionally, we cannot accurately predict our market's future growth rate or its ultimate size. Even if server-based software products achieve market acceptance and the market for these products grows, we cannot assure you that we will have a significant share of that market. If we fail to achieve a significant share of the server-based software market or if such market does not grow as anticipated, our business, results of operations and financial condition may be adversely affected. We Rely On Indirect Distribution Channels For Our Products And May Not Be Able To Retain Existing Reseller Relationships Or To Develop New Reseller Relationships Our products primarily are sold through several distribution channels. An integral part of our strategy is to strengthen our relationships with resellers such as value-added resellers, distributors, OEMs, systems integrators and other vendors to encourage these parties to recommend or distribute our products and to add resellers both domestically and internationally. We currently invest in and intend to continue to invest significant resources to expand our sales and marketing capabilities. We cannot assure you that we will be able to attract and/or retain resellers to market our products effectively. Our inability to attract resellers and the loss of any current reseller relationships could have a material adverse effect on our business, results of operations and financial condition. Additionally, we cannot assure you that resellers will devote enough resources to provide effective sales and marketing support to our products. The Bankruptcy On November 15, 1991 Of A Predecessor Company May Expose Us To Creditors' Claims Of Up To $2.23 Million And Interest, If Any On November 15, 1991, GraphOn-CA filed for reorganization under Chapter 11 of the United States Bankruptcy Code and, later, submitted a Debtor's Proposed Amended Plan of Reorganization. The plan was confirmed by order of the bankruptcy court on July 11, 1994 and the court established a plan of payment for the benefit of our creditors. Under the bankruptcy court order, we established a disbursement account into which 50% of the ongoing terminal royalties we receive from OEMs with whom we had a current relationship must be deposited to pay named creditors. For all but one unsecured creditor, payments from the disbursement account were ordered to continue up to the earlier of: . the limit of our liability to each unsecured creditor; or . through the year 2000. However, the largest unsecured creditor's claim, which currently totals approximately $964,000, must be paid from available funds, if any, in the disbursement account until such amount is fully paid. Our total remaining liability under the bankruptcy, as of June 30, 1999, is limited to the lesser of: . approximately $2,230,000; or . 50% of future ongoing terminal royalties we receive from the OEMs. To date, only royalties received pursuant to some of our license agreements existing at the time of the bankruptcy have been deposited into the disbursement account, and we have not deposited into such account or paid creditors out of royalties received or currently received on our subsequently developed and licensed server-based technology. We believe that our royalty payment obligations under the bankruptcy court order relate only to licenses in place as of July 11, 1994, and no payments to creditors have been made since November 14, 1997. We cannot assure you that a court will not interpret our obligation to include payments to the disbursement account from royalties earned from subsequent licenses of the server-based technology or licenses that we secure in the future, or that our current technology will not be deemed derivative of our technology existing at July 11, 1994. Consequently, we cannot assure you that we will not be required to repay creditors referenced in the bankruptcy proceedings the full amount of our liability, which is approximately $2,230,000, and interest on any payments that a court deems to 21 be owed based upon a ruling that our interpretation is wrong. In addition, we cannot guarantee you that a creditor will not assert a claim for payment out of the royalties from subsequent licenses of the server-based technology. Such claims could be costly and time-consuming for us. If any of these events takes place, it could have a material adverse effect on our business, financial condition and results of operations. Our Failure To Manage Expanding Operations Could Adversely Affect Us. To exploit the emerging server-based software market, we must rapidly execute our business strategy and further develop products while managing our anticipated growth in operations. To manage our growth, we must: . continue to implement and improve our operational, financial and management information systems; . hire and train additional qualified personnel; . continue to expand and upgrade core technologies; and . effectively manage multiple relationships with various licensees, consultants, strategic and technological partners and other third parties. We cannot assure you that our systems, procedures, personnel or controls will be adequate to support our operations or that management will be able to execute strategies rapidly enough to exploit the market for our products and services. Our failure to manage growth effectively or execute strategies rapidly could have a material adverse effect on our business, financial condition and results of operations. Competition For Key Management And Other Personnel In Our Industry Is Intense, And We May Not Be Successful In Attracting And Retaining These Personnel. Our success and business strategy is dependent in large part on our ability to attract and retain key management and other personnel. Such individuals are in high demand and often have competing employment offers. In particular, our success depends on our ability to retain the services of Mr. Walter Keller, our President and Chief Executive Officer, and Ms. Robin Ford, our Executive Vice President of Marketing and Sales. We have entered into employment agreements with these individuals that each contain non-competition and confidentiality covenants. We currently anticipate the need to attract additional sales, marketing, financial and software engineer personnel in the near future. Competition for such personnel in the computer software and services industry is intense, and therefore, we cannot assure you we will be able to attract or retain such personnel. The loss of the services of one or more members of our management group or the inability to retain or hire additional personnel as needed may have a material adverse effect on our business. 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. 22 ITEM 8. Financial Statements and Supplementary Data. Index to Financial Statements ----------------------------- Page Independent Auditors' Report........................................... 24 Balance Sheets as of December 31, 1999 and 1998........................ 25 Statements of Operations and Comprehensive Loss for the Years Ended December 31, 1999, 1998 and 1997....................... 27 Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997....................................... 28 Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997....................................... 29 Summary of Accounting Policies......................................... 30 Notes to Financial Statements......................................... 37 23 Independent Auditors' Report To the Board of Directors and Shareholders of GraphOn Corporation We have audited the accompanying balance sheets of GraphOn Corporation as of December 31, 1999 and 1998 and the related statements of operations and comprehensive loss, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the financial position of GraphOn Corporation as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP San Jose, California January 27, 2000 24 GraphOn Corporation Balance Sheets ================================================================================
December 31, 1999 1998 - ----------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $ 8,481,500 $1,798,400 Available-for-sale securities 2,027,600 - Accounts receivable, net of allowance for doubtful accounts of $25,000 and $25,000, respectively 1,670,600 564,700 Prepaid expenses and other assets 604,300 32,100 - ----------------------------------------------------------------------------------------------- Total Current Assets 12,784,000 2,395,200 - ----------------------------------------------------------------------------------------------- Property and Equipment, net 537,000 423,300 Purchased Technology, net 1,264,800 3,645,400 Capitalized Software, net 221,800 74,200 Patent 400,000 - Other Assets 16,700 6,400 - ----------------------------------------------------------------------------------------------- $15,224,300 $6,544,500 ===============================================================================================
25 GraphOn Corporation Balance Sheets ================================================================================
December 31, 1999 1998 - ---------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities: Convertible note payable $ - $ 475,000 Accounts payable 259,700 115,700 Accrued expenses 464,000 498,900 Deferred revenue 119,000 112,600 - ------------------------------------------------------------------------------------------------ Total Current Liabilities 842,700 1,202,200 - ------------------------------------------------------------------------------------------------ Commitments and Contingencies (Notes 6, 10 and 11) Shareholders' Equity Preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding - - Common stock, $0.0001 par value, 20,000,000 shares authorized, 12,342,322, and 7,970,336 shares issued and outstanding, respectively 1,200 800 Additional paid-in capital 25,413,500 8,430,700 Deferred compensation (1,472,100) (566,000) Accumulated other comprehensive loss (4,400) - Accumulated deficit (9,556,600) (2,523,200) - ------------------------------------------------------------------------------------------------ Shareholders' Equity 14,381,600 5,342,300 - ------------------------------------------------------------------------------------------------ $15,224,300 $ 6,544,500 ================================================================================================
See accompanying summary of accounting policies and notes to financial statements. 26 GraphOn Corporation Statements of Operations and Comprehensive Loss ================================================================================
Years Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------- Revenues: Product sales $ 803,100 $ 608,700 $ 480,000 Maintenance 178,100 330,700 8,200 OEM licenses 1,198,300 1,184,800 1,437,900 OEM license, related party 1,455,000 - - - ----------------------------------------------------------------------------------------------- Total Revenues 3,634,500 2,124,200 1,926,100 - ----------------------------------------------------------------------------------------------- Cost of Revenues: Product sales 13,600 28,500 43,500 Maintenance 37,700 22,200 16,600 OEM licenses 318,000 293,500 403,200 Amortization of purchased technology 2,430,600 - - - ----------------------------------------------------------------------------------------------- Total Cost of Revenues 2,799,900 344,200 463,300 - ----------------------------------------------------------------------------------------------- Gross Profit 834,600 1,780,000 1,462,800 Operating Expenses: Selling and marketing 3,279,100 1,440,300 827,300 General and administrative 2,265,200 1,088,700 324,700 Research and development 2,466,200 870,100 190,500 - ----------------------------------------------------------------------------------------------- Total Operating Expenses 8,010,500 3,399,100 1,342,500 - ----------------------------------------------------------------------------------------------- (Loss) Income From Operations (7,175,900) (1,619,100) 120,300 Other Income (Expense): Interest and other income 150,100 9,800 7,200 Interest expense (6,800) (521,900) (2,100) Loss on sale of available-for-sale securities - (16,500) - - ----------------------------------------------------------------------------------------------- (Loss) Income Before Provision for Income Taxes (7,032,600) (2,147,700) 125,400 Provision for Income Taxes 800 800 900 - ----------------------------------------------------------------------------------------------- Net (Loss) Income (7,033,400) (2,148,500) 124,500 Other Comprehensive Loss, net of tax: Reclassification adjustment - 12,100 - Unrealized holding gain (loss) on investment (4,100) - (8,100) Foreign currency translation adjustment (300) - - - ----------------------------------------------------------------------------------------------- Comprehensive (Loss) Income (7,037,800) (2,136,400) 116,400 =============================================================================================== Basic and Diluted (Loss) Earnings per Common Share $ (0.71) $ (0.57) $ 0.04 =============================================================================================== Weighted Average Common Shares Outstanding 9,950,120 3,770,863 3,345,600 =============================================================================================== See accompanying summary of accounting policies and notes to financial statement.
27 GraphOn Corporation Statements of Shareholders' Equity ================================================================================
Common Stock --------------------------- Additional Paid Deferred Shares Amount in Capital Compensation - -------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 3,345,600 $ 400 $ 504,600 $ - Change in market value of available-for-sale securities - - - - Net income - - - - - ------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 3,345,600 400 504,600 - - - Proceeds from sale of common stock 278,800 - 25,000 - Interest expense related to issuance of common stock - - 475,000 - Proceeds from sale of common stock, net of offering costs of $564,700 1,783,762 200 2,634,100 - Issuance of common stock and warrants for property and equipment and purchased technology 2,167,114 200 3,886,300 - Exchange of convertible notes payable 111,520 - 200,000 - Deferred compensation related to issuance of common stock and granted options - - 667,600 (667,600) Amortization of deferred compensation - - - 101,600 Proceeds from employee stock purchase 283,540 - 38,100 - Reclassification adjustment - - - - Net loss - - - - - ------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1998 7,970,336 800 8,430,700 (566,000) Proceeds from sale of common stock 62,525 - 97,200 - Repurchase and retirement of common stock (71,620) - (10,000) - Proceeds from sale of common stock, net of offering costs of $255,300 1,095,053 100 1,708,500 - Recapitalization of company through merger, net of merger costs of $255,700 1,875,000 200 5,169,100 - Issuance of common stock for patent 58,000 - 400,000 - Issuance of common stock due to the exercise of warrants and underwriter units, net of costs of $154,300 1,353,028 100 8,401,900 - Deferred compensation related to stock options - - 1,216,100 (1,216,100) Amortization of deferred compensation - - - 310,000 Change in market value of available-for-sale securities - - - - Foreign currency translation adjustment - - - - Net loss - - - - - ------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1999 12,342,322 $1,200 $25,413,500 $(1,472,100) ========================================================================================================================= Comprehensive Accumulated Loss Deficit Totals - --------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 $ (4,000) $ (499,200) $ 1,800 Change in market value of available-for-sale securities (8,100) - (8,100) Net income - 124,500 124,500 - -------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 (12,100) (374,700) 118,200 Proceeds from sale of common stock - - 25,000 Interest expense related to issuance of common stock - - 475,000 Proceeds from sale of common stock, net of offering costs of $564,700 - - 2,634,300 Issuance of common stock and warrants for property and equipment and purchased technology - - 3,886,500 Exchange of convertible notes payable - - 200,000 Deferred compensation related to issuance of common stock and granted options - - - Amortization of deferred compensation - - 101,600 Proceeds from employee stock purchase - - 38,100 Reclassification adjustment 12,100 - 12,100 Net loss - (2,148,500) (2,148,500) - -------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1998 - (2,523,200) 5,342,300 Proceeds from sale of common stock - - 97,200 Repurchase and retirement of common stock - - (10,000) Proceeds from sale of common stock, net of offering costs of $255,300 - - 1,708,600 Recapitalization of company through merger, net of merger costs of $255,700 - - 5,169,300 Issuance of common stock for patent - - 400,000 Issuance of common stock due to the exercise of warrants and underwriter units, net of costs of $154,300 - - 8,402,000 Deferred compensation related to stock options - - - Amortization of deferred compensation - - 310,000 Change in market value of available-for-sale securities (4,100) - (4,100) Foreign currency translation adjustment (300) - (300) Net loss - (7,033,400) (7,033,400) - -------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1999 $ (4,400) $(9,556,600) $14,381,600 ==================================================================================================================== See accompanying summary of accounting policies and notes to financial statements.
28 GraphOn Corporation Statements of Cash Flows ================================================================================
Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Increase (Decrease) In Cash and Cash Equivalents Cash Flows From Operating Activities: Net (loss) income $(7,033,400) $(2,148,500) $ 124,500 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 2,637,200 65,200 31,000 Allowance for doubtful accounts - 25,000 - Loss on sale of available-for-sale securities - 16,500 - Compensation expense 310,000 101,600 - Interest expense - 475,000 - Changes in operating assets and liabilities: Accounts receivable (1,105,900) (281,600) 232,000 Related party receivable - - 34,400 Prepaid expenses and other assets (572,200) (13,900) (400) Accounts payable 144,000 87,300 12,900 Accrued expenses (34,900) 356,000 137,000 Deferred revenue 6,400 (331,200) (358,300) - ------------------------------------------------------------------------------------------------------------------ Net Cash (Used In) Provided By Operating Activities (5,648,800) (1,648,600) 213,100 - ------------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities: Proceeds from sale of available-for-sale securities - 4,300 - Purchase of available-for-sale securities (2,031,700) - - Capitalization of software development costs (185,300) (53,100) (24,000) Capital expenditures (332,600) (179,400) (39,300) Other assets (10,300) - - - ------------------------------------------------------------------------------------------------------------------ Net Cash Used In Investing Activities (2,559,900) (228,200) (63,300) - ------------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities: Proceeds from convertible notes payable - 775,000 - Repayment of convertible notes payable (475,000) (100,000) - Net proceeds from issuance of common stock 15,377,100 2,697,400 - Purchase and retirement of stock (10,000) - - - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided By Financing Activities 14,892,100 3,372,400 - - ------------------------------------------------------------------------------------------------------------------ Effect of exchange rate fluctuations on Cash and Cash Equivalents (300) - - Net Increase in Cash and Cash Equivalents 6,683,100 1,495,600 149,800 Cash and Cash Equivalents, beginning of year 1,798,400 302,800 153,000 - ------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents, end of year $ 8,481,500 $ 1,798,400 $ 302,800 ================================================================================================================== See accompanying summary of accounting policies and notes to financial statements.
29 GraphOn Corporation Summary of Accounting Policies ================================================================================ The Company GraphOn Corporation (the Company) was incorporated in the state of California in May 1982 and has headquarters in Campbell, California. The Company develops, markets, sells and supports server-based software that empowers a diverse range of desktop computing devices (desktops) to access server-based Windows, UNIX and LINUX applications from any location, over network or Internet connections. Business Combination On July 12, 1999, GraphOn Corporation ("GraphOn- CA") merged with and into Unity First Acquisition Corporation ("Unity"), a Delaware corporation. Unity, as the surviving entity to the merger and the Registrant, then changed its name to GraphOn Corporation, and the GraphOn-CA management team continued in their existing roles at GraphOn Corporation. For accounting purposes, the merger has been treated as the acquisition of Unity by GraphOn-CA with GraphOn-CA as the acquiror. Since Unity prior to the merger was a public shell corporation with no significant operations, pro- forma information giving effect to the merger is not presented. All shares and per share data prior to the merger have been restated to reflect the stock issuance and related stock split (Note 6). As the former shareholders of GraphOn-CA received approximately 82.9% of the shares in the Company immediately after the acquisition, the financial statements for periods prior to the reorganization are those of GraphOn-CA. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash The Company considers all highly liquid investments Equivalents purchased with original maturities of three months or less to be cash equivalents. 30 GraphOn Corporation Summary of Accounting Policies ================================================================================ Marketable The Company accounts for investments in marketable Securities securities under the provisions of Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No. 115, securities are classified and accounted for as follows: . Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. . Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. . Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Property and Property and equipment are stated at cost. Equipment Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Amortization of leasehold improvements is calculated using the straight-line method over the lesser of the lease term or useful lives of the respective asset, generally seven years. Purchased Purchased technology is amortized on a straight- Technology line basis over the life of the related technology or five years, whichever is less. 31 GraphOn Corporation Summary of Accounting Policies ================================================================================ Capitalized Software Costs incurred internally in creating computer Costs software products to be sold, leased, or otherwise marketed are charged to expense when incurred as research and development until technological feasibility has been established for the product. Thereafter, such costs are capitalized until the product is available for general release to customers and amortized based on either estimated current and future revenue for each product or straight-line amortization over the shorter of three years or the remaining estimated life of the product, whichever produces the higher expense for the period. As of December 31, 1999, 1998 and 1997, capitalized costs aggregated $298,300, $113,000 and $59,800, with accumulated amortization of $76,500, $38,800 and $16,600, respectively. Patent Patent cost is amortized on a straight-line basis over the life of the patent or ten years, whichever is less. Revenue In October 1997, the American Institute of Recognition and Certified Public Accountants (AICPA) issued Deferred Revenue Statement of Position (SOP) 97-2, Software Revenue Recognition, which generally requires revenue earned on software arrangements involving multiple elements to be 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, the Company recognizes revenue from the sale of software licenses when all the following conditions are met: the software has been shipped to the customer, no significant obligations remain, and collection is probable. Revenue from sale of maintenance agreements is recognized ratably over the term of the agreement. OEM (Original Equipment Manufacturer) licenses revenue is generally recognized as deliveries are made or at the completion of contractual billing milestones. Deferred revenue, resulting from maintenance and license agreements, aggregated $119,000 and $112,600 as of December 31, 1999 and 1998. Advertising Costs The cost of advertising is expensed as incurred. Advertising costs for the years ended December 31, 1999, 1998 and 1997, were approximately $557,400, $58,400 and $60,000, respectively. 32 GraphOn Corporation Summary of Accounting Policies ================================================================================ Income Taxes Income taxes are calculated using the liability method of accounting for income taxes specified by SFAS No. 109, Accounting for Income Taxes. Deferred income taxes are recognized for the tax consequences of temporary differences between the financial statements and income tax bases of assets, liabilities and carryforwards using enacted tax rates. Valuation allowances are established when necessary, to reduce deferred tax assets to the amount expected to be realized. Realization is dependent upon future pre-tax earnings, the reversal of temporary differences between book and tax income, and the expected tax rates in effect in future periods. Fair Value of The following methods and assumptions were used by Financial the Company in estimating its fair value Instruments disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported on the balance sheet for cash and cash equivalents approximates fair value. Investment securities: The fair values of marketable debt and equity securities are based on quoted market prices. Short-term debt: The fair value of short-term debt is estimated based on current interest notes available to the Company for debt instruments with similar terms and maturities. As of December 31, 1999 and 1998, the fair values of the Company's financial instruments approximate their historical carrying amounts. 33 GraphOn Corporation Summary of Accounting Policies ================================================================================ Long-Lived Assets Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, or whenever management has committed to a plan to dispose of the assets. Such assets are carried at the lower of book value or fair value as estimated by management based on appraisals, current market value, comparable sales value, and undiscounted future cash flows as appropriate. Assets to be held and used affected by such impairment loss are depreciated or amortized at their new carrying amount over the remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. Stock-Based SFAS No. 123, Accounting for Stock-Based Incentive Programs Compensation, encourages entities to recognize compensation costs for stock-based employee compensation plans using the fair value-based method of accounting defined in SFAS No. 123, but allows for the continued use of the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company continues to use the accounting prescribed by APB Opinion No. 25 and as such is required to disclose pro forma net income and earnings per share as if the fair value-based method of accounting had been applied. Earnings Per In February 1997, the FASB issued SFAS No. 128, Common Share Earnings Per Share, which became effective December 28, 1997. Conforming to SFAS No. 128, the Company changed its method of computing earnings per share and restated all prior periods included in the financial statements. Under SFAS No. 128, the dilutive effect of stock options is excluded from the calculation of basic earnings per share. 34 GraphOn Corporation Summary of Accounting Policies ================================================================================ Comprehensive In June 1997, the FASB issued SFAS No. 130, Income Reporting establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during the period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealizable gain/loss of available-for-sale securities. The individual components of comprehensive income (loss) are reflected in the statements of shareholders' equity. As of December 31, 1999 accumulated other comprehensive loss was comprised of foreign currency translation loss and unrealized losses on available-for-sale securities. As of December 31, 1998 the Company did not have any accumulated other comprehensive income or loss. Adoption of New In February 1998, the Financial Accounting Accounting Standards Board (FASB) issued SFAS No. 132, Pronouncements Employer's Disclosure about Pensions and Other Postretirement Benefits, which standardizes the disclosure requirements for pension and other postretirement benefits. The adoption of SFAS No. 132 did not have a material impact on the Company's current disclosures. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities on the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. In June 1999, the FASB issued SFAS No. 137 Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133, which amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. 35 GraphOn Corporation Summary of Accounting Policies ================================================================================ Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to have a material impact on the Company's results from operations, financial position or cash flows. Reclassifications Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation. 36 GraphOn Corporation Notes to Financial Statements ================================================================================
1. Available-For- As of December 31, 1999 the Company's available- Sale Securities for-sale securities consisted of investments in corporate bonds at an aggregate par value of $2,035,000. The bonds bear interest in the range of 6.19% to 6.50% and mature in 2000 and 2001. A summary of available-for-sale securities follows: December 31, 1999 1998 ----------------------------------------------------------- Cost of securities $2,031,700 $ - Less unrealized loss 4,100 - ----------------------------------------------------------- $2,027,600 $ - =========================================================== 2. Property and Property and equipment consisted of the following: Equipment December 31, 1999 1998 ----------------------------------------------------------- Equipment $ 558,500 $292,800 Furniture and fixtures 178,500 175,600 Leasehold improvements 27,500 13,500 ----------------------------------------------------------- 764,500 481,900 Less accumulated depreciation and amortization 227,500 58,600 ------------------------------------------------------------ $ 537,000 $423,300 ===========================================================
37 GraphOn Corporation Notes to Financial Statements ================================================================================
3. Purchased In December 1998, the Company issued 2,167,114 Technology shares of common stock and 216,711 warrants to Corel Corporation in exchange for certain fixed assets and technology for the deployment of Windows NT applications through server-based computing. Based on the fair market value of the securities issued, as determined by the prices associated with the Private Placement Offering (Note 6), the aggregate purchase price was determined to be $3,886,500, which was allocated to the following respective assets based on their fair market value at the time of the transaction: ------------------------------------------------------------- Equipment $ 77,100 Furniture 164,000 Purchased technology 3,645,400 ------------------------------------------------------------- $3,886,500 ============================================================= Purchased technology consisted of the following: December 31, 1999 1998 ------------------------------------------------------------- Purchased technology $3,695,400 $3,645,400 Less accumulated amortization 2,430,600 - ------------------------------------------------------------- $1,264,800 $3,645,400 ============================================================= 4. Accrued Expenses Accrued expenses consisted of the following: December 31, 1999 1998 ------------------------------------------------------------- Payroll and related expenses $ 202,400 $ 140,600 Professional fees 155,000 180,000 Accrued payroll taxes 76,700 76,700 Royalties 5,500 65,300 Other 24,400 36,300 ------------------------------------------------------------- $ 464,000 $ 498,900 =============================================================
38 GraphOn Corporation Notes to Financial Statements ================================================================================ 5. Convertible Note In March 1998, the Company issued a convertible note Payable payable for $475,000, bearing interest at 10% per annum, to an affiliate (the Agent Affiliate) of the placement agent dated September 2, 1998 for the Company's subsequent private placement offering of common stock (the Offering). In January 1999, the convertible note was redeemed from proceeds from the third closing of the Offering. In September 1998, the Agent Affiliate and the Company's CEO loaned $200,000 and $100,000, respectively, to the Company pursuant to convertible promissory notes bearing interest at 8% per annum. In connection with this transaction, the Agent Affiliate and CEO were issued warrants to purchase 55,760 and 27,880 shares, respectively, at $1.79 per share (Note 6). On December 31, 1998, the loan by the Agent Affiliate was converted into 111,520 shares of common stock. Also on December 31, 1998, the Company repaid the $100,000 loan from the CEO, plus accrued interest. 6. Stockholders' Common Stock Equity In January 1998, the CEO personally sold 245,353 shares of his stock to various employees and directors of the Company at a price of $0.04, the then fair market value of the stock, and in May and August 1998, 107,750 additional shares at $0.14. The ownership of these shares vest over approximately four years, with the CEO having the right to repurchase non-vested shares upon termination of employment. In May 1999, the CEO exercised this right and repurchased 48,324 of such shares. In May 1998, the Company issued and sold 283,540 shares under the Stock Grant Program, at $0.14 and granted 11,152 options, under the Stock Option Plan, at $0.14 to employees of the Company, which also vest over a four-year period. The shares sold and options granted from March 1998 forward were ascribed a fair market value of $1.79 per share, the price at which the Company offered its shares through a private placement stock offering in September 1998. 39 GraphOn Corporation Notes to Financial Statements ================================================================================ In 1998, the Company recognized $667,600 in deferred compensation expense associated with the sale of the above securities, to be amortized over the vesting period of the underlying securities. In accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, the Company recorded, in 1999 and 1998, in general and administrative expense, $166,900 and $101,600, respectively, of compensation costs associated with this deferred compensation expense. Additionally, in March 1998, the CEO and Executive Vice President of the Company entered into a contingent sale arrangement with respect to the sale of an aggregate 1,951,600 shares of their common stock in the Company to the Agent Affiliate for aggregate consideration of $3,500,000, comprised of $200,000 cash, due and paid with the commencement of the Offering, a non-recourse promissory note in the principal amount of $800,000, which became due in January 1999; a non-recourse promissory note in the principal amount of $1,000,000, which became due in July 1999; and a non-recourse promissory note in the principal amount of $1,500,000, which becomes due in January 2000. Each of the foregoing notes bears interest at 6% per annum, payable quarterly, and each note is secured by a pledge of the shares purchased, with one share pledged for each $1.79 of principal amount. The shares pledged with respect to each note were placed in escrow until payment in full of the principal and accrued interest of the note, representing the purchase price of such shares. The $800,000 note was paid and the 446,080 shares pledged with respect to such note were released from escrow in January 1999. The $1,000,000 note was paid and the 557,600 shares pledged with respect to such note were released from escrow in July 1999. In January 2000, the CEO and Executive Vice President received $1,500,000 for the sale of 836,400 shares of their common stock of the Company to the Agent Affiliate. 40 GraphOn Corporation Notes to Financial Statements ================================================================================ In March 1998, the Company sold 278,800 shares of common stock for cash proceeds of $25,000 to the Agent Affiliate, concurrent with the issuance of convertible notes for $475,000. During 1998, the Company recognized interest expense of $475,000 relating to this transaction. In July 1998, the Company's Board of Directors declared a 60,000 to 1 stock split. All references to number of shares and per share data in the financial statements have been adjusted to reflect the stock split on a retroactive basis. In September 1998, the Company offered shares of its common stock through a private placement stock offering (the Offering). The Offering established a minimum and maximum offering of 1,394,000 and 2,509,200 shares of common stock, respectively, at $1.79 per share, plus an additional 376,380 shares in the event of over-subscriptions. As part of the Offering, the placement agent received warrants to purchase 11,152 shares of common stock at $1.79 per share for each 55,760 shares sold through the Offering. An aggregate of 2,878,815 shares of common stock were issued and sold in the Offering for an aggregate purchase price of $5,162,900 in three separate closings, the final such closing occurring in January 1999. In December 1998, the Company issued 2,167,114 shares of common stock with an ascribed value of $3,886,500, and granted warrants to purchase 216,711 shares of common stock at $1.79 in exchange for certain fixed assets and technology. On July 12, 1999, GraphOn Corporation merged with and into Unity First Acquisition Corporation ("Unity"). Unity, as the surviving entity of the merger, then changed its name to GraphOn. Pursuant to the merger, each outstanding share of GraphOn common stock was exchanged for 0.5576 shares of Unity common stock and each outstanding option and warrant to purchase shares of GraphOn common stock was exchanged for 0.5576 options and warrants to purchase shares of Unity common stock. 41 GraphOn Corporation Notes to Financial Statements ================================================================================ Additionally, GraphOn received $5,425,000 in cash, which was placed into trust upon Unity's initial public offering in November 1996 and released from trust upon consummation of the merger. As of July 12, 1999, GraphOn had 16,296,559 shares of common stock outstanding. As a result of the merger, the GraphOn shareholders acquired approximately 9,086,961 shares of Unity common stock, or approximately 82.9% of the then outstanding Unity common stock. The merger was accounted for as a capital transaction, which is equivalent to the issuance of stock by GraphOn for Unity's monetary assets of approximately $5,425,000, accompanied by a recapitalization of GraphOn. All references to number of shares and per share data in the financial statements have been adjusted to reflect the exchange of stock on a retroactive basis. In November 1999, the Company issued 58,000 shares of common stock in exchange for a U.S. Patent entitled "Method and System for Dynamic Translation Between Different Graphical User Interface Systems". Based on the then fair market value of the shares issued, the purchase price was $400,000. 42 GraphOn Corporation Notes to Financial Statements ================================================================================ Stock Purchase Warrants As of December 31, 1999, the following common stock warrants were issued and outstanding:
Shares Subject Exercise Expiration Issued with respect to: to Warrant Price Date ----------------------------------------------------------------- Convertible notes 83,640 $ 1.79 1/2006 Private placement 575,763 $ 1.79 1/2006 Purchased technology 216,711 $ 1.79 12/2003 Financing 676 $ 1.79 12/2003 IPO redeemable Class A 649,986 $ 5.50 1/2000 IPO redeemable Class A* 250,000 $ 5.50 2/2000 IPO Directors Class A 200,000 $ 5.50 7/2004 IPO redeemable Class B 850,631 $ 7.50 1/2000 IPO Directors Class B 200,000 $ 7.50 7/2004 Consulting services 300,000 $ 8.50 12/2003 ================================================================
The Company had the right to call the Class A redeemable warrants and the Class B redeemable warrants for redemption, each as a class, in whole and not in part, at the Company's option, at a price of $0.05 per IPO warrant at any time upon not less than 30 days' prior written notice, provided that the reported high bid price of the Company's common stock equaled or exceeded $8.50 per share with respect to the Class A warrants ($15.00 per share with respect to the Class A* warrants), and $10.50 per share with respect to the Class B warrants, for the 20 consecutive trading days immediately prior to the notice of redemption to warrantholders. The warrantholders have exercise rights until the close of business on the date fixed for redemption. On December 21, 1999, the Company called the Class A and B warrants for redemption as the price of the Company's stock had satisfied the redemption criteria. The Company fixed January 24, 2000, as the redemption date. 43 GraphOn Corporation Notes to Financial Statements ================================================================================ Stock Grant Program In June 1998, the Company adopted a stock grant program (Stock Grant Program), which is restricted to employees, officers and consultants of the Company. The Company had authorized the issuance of up to 724,880 shares of the Company's common stock in connection with the Stock Grant Program and the Stock Option Plan, discussed below. In May 1999, the number of shares authorized under the Plan was increased by 1,505,520 shares to 2,230,400 shares. Under the Stock Grant Program, eligible individuals may, at the Plan Administrator's discretion, be issued shares of common stock directly, either through (a) the purchase of shares at a price not less than 85% of the estimated fair market value of the stock at the time of the issuance, or (b) as a bonus for past services rendered. Ownership of such shares generally vests over a four-year period. During August 1998, the Company issued 283,540 shares under the Stock Grant Program. Stock Option Plan In June 1998, the Company adopted a Stock Option Plan (The Plan). The Plan is restricted to employees, officers, and consultants of the Company. Options granted under the Plan generally vest over three to four years and are exercisable over ten years. Non- statutory options are granted at prices not less than 85% of the estimated fair value of the stock on the date of grant as determined by the Board of Directors. Incentive options are granted at prices not less than 100% of the estimated fair value of stock on the date of grant. However, options granted to shareholders who own greater than 10% of the outstanding stock are established at no less than 110% of the estimated fair value of the stock on the date of grant. 44 GraphOn Corporation Notes to Financial Statements ================================================================================ A summary of the status of the Company's stock option plan as of December 31, 1999, 1998 and 1997, and changes during the years then ended is presented in the following table:
-------------------------------------------------------------------------------------- Options Outstanding -------------------------------------------------------------------------------------- December 31, 1999 December 31, 1998 December 31, 1997 Wtd. Avg. Wtd. Avg. Wtd. Avg. Shares Ex. Price Shares Ex. Price Shares Ex Price -------------------------------------------------------------------------------------- Beginning 11,152 $ 0.14 $ - - $ - Granted 1,826,379 $ 5.02 11,152 $ 0.14 - $ - Exercised - $ - $ - - $ - Forfeited (7,297) $ 5.28 $ - - $ - ------------------------------------------------------------------------------------------------------------- Ending 1,830,234 $ 4.99 11,152 $ 0.14 - $ - ============================================================================================================= Exercisable at year-end 126,234 1,485 - ============================================================================================================= Weighted-average fair value of options granted during the period: $ 4.99 $ 0.14 $ - ======== ======== ======== The following table summarizes information about stock options outstanding as of December 31, 1999: Options Outstanding Options Exercisable ----------------------------------------------------------------------------------- Wtd. Avg. Range of Number Remaining Wtd. Avg. Number Wtd. Avg. Exercise Outstanding Contractual Exercise Exercisable Exercisable Prices at 12/31/99 Life Price of 12/31/99 Price --------------------------------------------------------------------------------------------------------- $0.01-1.00 11,152 8.65 years $ 0.14 3,220 $ 0.14 $1.01-3.00 416,243 9.09 years $ 1.52 73,112 $ 1.52 $3.01-6.00 160,839 9.46 years $ 5.38 12,819 $ 5.48 $6.01-9.00 1,242,000 9.84 years $ 6.14 37,083 $ 6.13 ----------- 1,830,234 $ 4.99 126,234 $ 3.24 =========== =========== ======== ===========
45 GraphOn Corporation Notes to Financial Statements ================================================================================ In connection with the grant of certain warrants and stock options in 1999, the Company recorded deferred compensation of $1,216,100, representing the difference between the deemed fair market value and the exercise price of the warrants and options as determined by the Board of Directors on the date of grant. The deferred compensation is being amortized over the vesting period of the underlying warrants and options. The amount recognized as compensation expense in 1999, relating to these options and warrants, amounted to $143,100. SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net (loss) income and (loss) earnings per share as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value-based method prescribed in SFAS No.123. The Company estimates the fair value of stock options at the grant date by using the Black-Scholes option pricing-model with the following weighted average assumptions used for grants in 1999 and 1998: dividend yield of 0; expected volatility of 130% and 112%; risk-free interest rate of 5.6% and 5.7%; and expected lives of four years for all plan options. The Company adopted its Stock Option Plan in June 1998 and consequently had no stock options granted in 1997. Under the accounting provisions of SFAS No. 123, the Company's pro forma net loss and the basic and diluted net loss per common share would have been adjusted to the pro forma amounts below.
1999 1998 1997 --------------------------------------------------------------------------------------------------------- Net income (loss): As reported $(7,033,400) $(2,148,500) $ 124,500 Pro forma $(7,405,400) $(2,149,800) $ 124,500 Basic and diluted earnings (loss) per share: As reported $ (0.71) $ (0.57) $ 0.04 Pro forma $ (0.74) $ (0.57) $ 0.04
46 GraphOn Corporation Notes to Financial Statements ================================================================================ 7. Income Taxes The provision for income taxes for the years ended December 31, 1999, 1998 and 1997 consist of minimum state taxes. The following summarizes the differences between income tax expense and the amount computed applying the federal income tax rate of 34%:
December 31, 1999 1998 1997 ------------------------------------------------------------------------------------------------------------ Federal income tax at statutory rate $(2,392,900) $ (599,400) $ 41,600 State income taxes, net of federal benefit (422,300) (102,400) 7,700 Utilization of net operating loss carryforwards - - (51,400) Tax benefit not currently recognizable 2,811,800 697,700 - Other 4,200 4,900 3,000 ------------------------------------------------------------------------------------------------------------ Provision for income taxes $ 800 $ 800 $ 900 ============================================================================================================ Deferred income taxes and benefits result from temporary timing differences in the recognition of certain expense and income items for tax and financial reporting purposes, as follows: December 31, 1999 1998 1997 ------------------------------------------------------------------------------------------------------------- Net operating loss carryforward $ 2,664,600 $ 1,038,800 $ 452,900 Tax credit carryforward 338,900 112,100 22,800 Capitalized software (95,000) (29,600) (17,200) Depreciation and amortization 536,400 (6,000) (2,500) Accrued compensation and benefits 521,600 37,500 4,200 Reserves not currently deductible 33,900 35,800 17,900 ------------------------------------------------------------------------------------------------------------- Total deferred tax asset 4,000,400 1,188,600 478,100 Valuation allowance (4,000,400) (1,188,600) (478,100) ------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ - $ - $ - =============================================================================================================
47 GraphOn Corporation Notes to Financial Statements ================================================================================ The Company has net operating loss carryforwards available to reduce future taxable income, if any, of approximately $7,209,000 for Federal income tax purposes. The benefits from these carryforwards expire through 2019. As of December 31, 1999, management cannot determine that it is more likely than not that these carryforwards and other deferred tax assets will be realized, and accordingly, management has fully reserved for these deferred tax assets. In 1998 the Company experienced a "change of ownership" as defined by the provisions of the Tax Reform Act of 1986. As such, the Company's utilization of its net operating loss carryforwards will be limited to approximately $400,000 per year until such carryforwards are fully utilized. 8. Concentration of Financial instruments, which potentially subject the Credit Risk Company to concentration of credit risk, consist principally of cash and cash equivalents, investments and trade receivables. The Company places its cash and cash equivalents with high quality financial institutions and, by policy, limits the amounts of credit exposure to any one financial institution. Available-for-sale securities are held in public companies for which there is a ready market. The Company's accounts receivable are derived from many customers in various industries. The Company believes any risk of accounting loss is significantly reduced due to the diversity of its end-customers and geographic sales areas. The Company performs credit evaluation of its customers' financial condition whenever necessary, and generally does not require cash collateral or other security to support customer receivables. 9. Related Party In connection with the asset purchase from Corel Transactions Corporation, which was consummated in December 1998, Corel obtained approximately 27% ownership interest in the Company, and at December 31, 1999, such ownership interest was approximately 18%. Corel was in 1999 also a significant customer of the Company. Sales to Corel represented 40% of total Company revenues for the year ended December 31, 1999. 48 GraphOn Corporation Notes to Financial Statements ================================================================================ Management believes that the transaction with Corel is at arms length and is under terms no less favorable to the Company than those with other customers. At December 31, 1999, accounts receivable from Corel totaled $1,500,000. 10. Major Customers For the year ended December 31, 1999, three customers accounted for approximately 40%, 13% and 10% of revenues, respectively, with related accounts receivable as of December 31, 1999 of $1,500,000, $0 and $0, respectively. For the year ended December 31, 1998, three customers accounted for approximately 29%, 21% and 17% of revenues, respectively, with related accounts receivable as of December 31, 1998 of $0, $500,000 and $0, respectively. For the year ended December 31, 1997, one customer accounted for approximately 70% of revenues, with related account receivable as of December 31, 1997 of $62,500. 11. Commitments Operating Leases In April 1995, the Company entered into an operating lease for its current headquarters facility, which is renewable in one-year increments for ten years. The Company will terminate this lease in February 2000 and believes that it will be able to find another lease without experiencing any business interruptions in 2000 as a result of the above. In June 1998, the Company entered into a three-year non-cancelable operating lease for a facility in Washington. In December 1998, the Company entered into a five-year operating lease for a facility in New Hampshire, which is cancelable as of October 31, 2001. In October 1999, the Company entered into an 18 months operating lease for a facility in London, United Kingdom. 49 GraphOn Corporation Notes to Financial Statements ================================================================================ The facility leases require the Company to pay certain maintenance and operating expenses, such as taxes, insurance and utilities. Rent expense for the years ended December 31, 1999, 1998 and 1997 aggregated $332,700, $48,300 and $17,120, respectively. Future minimum annual lease payments for these leases are as follows:
Year ending December 31, -------------------------------------------------------------------------------- 2000 $ 298,900 2001 206,800 --------------------------------------------------------------------------------- $ 505,700 =================================================================================
Royalty Agreements The Company licenses key components of its server-based technology from three software developers to whom the Company pays royalties pursuant to exclusive license agreements. Minor elements of its server-based technology are also licensed pursuant to non-exclusive agreements, which call for royalty payments. Such royalty payments are based on a percentage of net revenues received by the Company for sales of the Company's products that contain the licensed technology. The royalty rate under all of these agreements is an aggregate of 4.8% and 2.9% for 1999 and 2000, respectively. In the third quarter of 1999, the Company acquired two of the above license agreements for an aggregate purchase price of $378,000. Included in other assets is, as of December 31, 1999, $240,000 representing the unamortized portion of these license rights. 50 GraphOn Corporation Notes to Financial Statements ================================================================================ Prior Bankruptcy In July 1999, GraphOn Corporation (the predecessor company) merged with and into Unity First Acquisition Corporation ("Unity"). Unity, as the surviving entity to the merger, then changed its name to GraphOn (the Company). GraphOn Corporation filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code in November 1991 and may be required to pay up to $2.23 million and interest, if any, to creditors. The Company believes that only royalties received pursuant to some of the predecessor company's license agreements existing at the time of its bankruptcy are subject to claims. To date, the Company has not received any claims related to the bankruptcy. There can be no assurance that future claims will not arise from the predecessor company's creditors or that a former creditor may assert a claim relating to royalties earned from subsequent licenses, which could be costly and could have a material effect on the Company's business, financial condition and/or results of operations. Legal Proceedings In late 1996, GraphOn Corporation disclosed numerous aspects of its proprietary technology on a confidential basis to Insignia Solutions plc, some of whose assets were later acquired by Citrix Systems, Inc. In January 1998, when GraphOn learned of that acquisition it made inquiry of Citrix and Insignia seeking assurance that there had been no potential misuse of its confidential information. In November 1998, Citrix instituted litigation in the United States District Court for the Southern District of Florida seeking a judicial declaration that neither Citrix nor Insignia had misappropriated or infringed upon GraphOn's proprietary technology or breached the non-disclosure agreement. GraphOn responded by filing a motion to dismiss the action for lack of jurisdiction. In May 1999, the court granted GraphOn's motion and dismissed the case. In effect, the Florida court held there was no existing dispute between GraphOn and Citrix. Citrix has appealed the dismissal of its case to the United States Court of Appeals for the Eleventh Circuit, where the matter is awaiting oral argument. 51 GraphOn Corporation Notes to Financial Statements ================================================================================ In October 1999, Insignia filed a complaint against GraphOn in the Superior Court of the State of California, Santa Clara County, alleging that GraphOn had attempted to disrupt Insignia's sale to Citrix, in February 1998, of assets related to Insignia's NTRIGUE software product line. The complaint alleges that, as a result of such efforts, Insignia was required by Citrix to place $8.75 million in escrow to enable Citrix to deal with potential claims by GraphOn of proprietary rights in the assets being sold. The complaint seeks unspecified general and punitive damages. In December 1999, GraphOn filed an answer denying the material allegations in Insignia's complaint. Insignia's complaint also names Citrix and its UK subsidiary as defendants, alleging that these companies have breached their February 1998 contract with Insignia by refusing to release money from the escrow. The complaint seeks compensatory damages from Citrix related to that company's refusal to release purchase money from escrow for payment to Insignia and other unspecified damages. 12. Employee 401(k) In December 1998, the Company adopted a 401(k) Plan Plan ("the Plan") to provide retirement benefits for its employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible employees. Employees may contribute up to 15% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service. The Company made no contributions to the Plan in 1999 and 1998. 52 13. Supplemental The following is supplemental disclosure for the Disclosure of Cash statements of cash flows. Flow Information
Years Ended December 31, 1999 1998 1997 -------------------------------------------------------------------------------------------- Cash Paid: --------- Income taxes $ 800 $ 900 $ 800 Interest $ 42,400 $ 11,300 $ 2,100 Noncash Investing Activities: ---------------------------- Stock and warrants issued for purchased technology and other assets $ - $ 3,886,500 $ - Stock issued for patent $ 400,000 $ - $ - Noncash Financing Activities: ---------------------------- Issuance of common stock for convertible note payable $ - $ 200,000 $ - ============================================================================================
14. Supplemental In November 1999, the Agent Affiliate granted the Events Company's Chairman of the Board the right to acquire up to 300,000 shares of the Company's common stock at $1.79 per share. Compensation expense associated with this transfer could aggregate $1,302,000 and will be amortized over the 33 month period beginning March 2000. In January 2000, the Agent Affiliate sold 72,000 shares of the Company's common stock to the Company's Chairman of the Board of Directors, under the terms above. In January 2000, we issued 1,494,767 shares of our common stock in connection with the exercise of warrants, resulting in net cash proceeds of $9,870,900. 53 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant (a) Information called for by Item 10 concerning our directors is set forth under the heading "Election of Directors" in our Proxy Statement related to the 2000 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after our fiscal year end (the "2000 Proxy Statement"), which is incorporated herein by reference. (b) The information required by this Item concerning our executive officers is set forth at the end of Part I of this Form 10-K. Item 11. Executive Compensation Information called for by Item 11 is set forth under the heading "Executive Compensation" in the 2000 Proxy Statement, which is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information called for by Item 12 is set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 2000 Proxy Statement, which is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information called for by Item 13 is set forth under the heading "Certain Relationships and Related Transactions" in the 2000 Proxy Statement, which is incorporated herein by reference. 54 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Financial statements filed as a part of this report are listed on the "Index to Financial Statements" at page 23 herein. All other schedules are omitted because either (i) they are not required under the instructions, (ii) they are inapplicable, or (iii) the information is included in the Financial Statements. (b) The Company did not file any reports on Form 8-K during the fourth quarter of the year ended December 31, 1999.
EXHIBITS Exhibit Number - --------- Description of Exhibit ---------------------- 2.1 Agreement and Plan of Merger and Reorganization dated as of February 1, 1999, between Registrant and GraphOn Corporation, a California corporation(2) 3.1 Amended and Restated Certificate of Incorporation of Registrant(2) 3.2 Amended and Restated Bylaws of Registrant(2) 4.1 Form of certificate evidencing shares of common stock of Registrant(3) 4.2 Form of certificate evidencing Class A Redeemable Warrants of Registrant(3) 4.3 Form of certificate evidencing Class B Redeemable Warrants of Registrant(3) 4.4 Warrant Agreement dated November 12, 1996 between Registrant and GKN Securities Corp. and Gaines, Berland, Inc.(3) 4.5 Redeemable Warrant Agreement dated November 12, 1996 between Registrant and American Stock Transfer & Trust Company(3) 4.6 Registration Rights Agreement dated October 28, 1998 between Registrant, Spencer Trask Investors, Walter Keller and the investors purchasing units in Registrant's private placement(2) 4.7 Amendment to Registration Rights Agreement(2) 4.8 Common Stock Purchase Warrant dated October 12, 1999 issued to SuperTech Holdings Limited(2) 10.1 1996 Stock Option Plan of Registrant(3) 10.2 1998 Stock Option/Stock Issuance Plan of Registrant(2) 10.3 Placement Agency Agreement by and between Registrant and Spencer Trask Securities, Inc., dated as of September 2, 1998(2) 10.4 Asset Purchase Agreement by and among Registrant, Corel Corporation, Corel Corporation Limited and Corel, Inc. (collectively, "Corel"), dated as of December 18, 1998(2) 10.5 Securities Purchase Agreement by and among Registrant and Corel, dated as of December 18, 1998(2)
55 10.6 Standard Industrial Lease between Registrant and Mildred K. Dibona, dated April 14, 1995, as amended on October 2, 1998(2) 10.7 Hidden Valley Office Park Lease Agreement between Registrant and ASA Properties, Inc., dated June 5, 1998(2) 10.8 Lease Agreement between Corel Inc. and CML Realty Corp., dated September, 1998 and assumed by Registrant on December 31, 1998(2) 10.9 Lease Agreement between Registrant and Thoits Brothers, Inc., dated February 24, 2000. 10.10 Consulting Agreement dated October 14, 1999 between Registrant and SuperTech Holdings Limited(1) 23.1 Consent of BDO Seidman, LLP 24.1 Power of Attorney (included on the Signature Page of Part II of this Registration Statement) 27.1 Financial Data Schedule
___________ (1) Incorporated by reference from Registrant's Form S-1, file number 333-93483, filed with the SEC on December 23, 1999. (2) Incorporated by reference from Registrant's Form S-4, file number 333- 76333, filed with the SEC on April 15, 1999. (3) Incorporated by reference from Registrant's Form S-1, file number 333- 11165, filed with the SEC on August 30, 1996. 56 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Morgan Hill, State of California, on March 29, 2000. GRAPHON CORPORATION By: /s/ William Swain ---------------------------- William Swain Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date ---------- ----- ---- /s/ Robert Dilworth Chairman of the Board March 29, 2000 - ------------------------------ Robert Dilworth /s/ Walter Keller President (Principal Executive Officer) March 29, 2000 - ------------------------------ and Director Walter Keller /s/ William Swain Chief Financial Officer (Principal March 29, 2000 - ------------------------------ Financial and Accounting Officer) William Swain /s/ Robin Ford Executive Vice President, March 29, 2000 - ------------------------------ Marketing and Sales and Director Robin Ford /s/ August P. Klein Director March 29, 2000 - ------------------------------ August P. Klein /s/ Marshall C. Phelps, Jr. Director March 29, 2000 - ------------------------------ Marshall C. Phelps, Jr.
57 EX-10.9 2 STANDARD INDUSTRIAL COMMERCIAL SINGLE TENANT LEASE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS) 1 Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, February 24, 2000, is made and between Thoits Brothers,Inc. ("Lessor") and - ----------------- ------------------- GraphOn Corporation ("Lessee), (collectively the "Parties," or individually a - ------------------- "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 400 Cochrane Circle, Morgan Hill, 95037 located in the County of Santa Clara, - --------------------------------------- ----------- State of California, and generally described (described the nature of property ---------- and, if applicable, the "Project", if the property is located within a Project) approximately 13,100 square feet freestanding building located in Sutter - ------------------------------------------------------------------------ Business Park. See Exhibit "A". ("Premises"), (See also Paragraph 2) - -------------------------------- 1.3 Term: 5 years and - months ("Original Date") commencing May 1, 2000 ---- -- ----------- ("Commencement Date") April 30, 2005 also ("Expiration Date"). See also -------------------- Paragraph 3) 1.4 Early Possession: - - - ("Early Possession Date"). (See also Paragraphs ------ 3.2 and 3.3) 1.5 Base Rent: $15,065.00 per month ("Base Rent"), payable on the first day ----- of each month commencing May 1, 2000. (See also Paragraph 4) ----------- [x] If this box is checked, there are provisions in this Lease for the Base Rent to be adjuste. 1.6 Base Rent Paid Upon Execution: $15,065.00 as Base Rent for the ------------ period__________________________. 1.7 Security Deposit: $16,044.00 ("Security Deposit"). (See also Paragraph ------------ 5) 1.8 Agreed Use: Office research and development and distribution of software ------------------------------------------------------------ products. (See also Paragraph 6) - -------- 1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated herein. (see also Paragraph 8) 1.10 Real Estate Brokers: (See also Paragraph 15) (a) Representation: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in the transaction (check applicable boxes): [ ]_____________________ represents Lessor exclusively (Lessor's Broker"); [ ]___________________ represents Lessee exclusively ("Lessee's Broker"); or [x] Colliers International represents both Lessor and Lessee ("Dual Agency"). ----------------------- (b) Payment to Brokers: Upon execution and delivery of this Lease by both parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of ________%of the total Base Rent for the brokerage services rendered by said Broker). 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by - - - ("Guarantor"). (See also Paragraph 37) ------- 1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 11 and Exhibits "A", "B" , all of - -- - -------- which constitute a part of this Lease. 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether of not the actual size is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("Start Date"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30) days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "Building") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessors sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessors expense. If, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense (excluding any capital repairs, replacements or improvements). 2.3 Compliance. Lessor warrants that the improvements on the Premises comply with all applicable rows, covenants or restrictions of record, building codes, regulations and ordinances ("Applicable Requirements") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises Page 1 of 11 Initials GB WRT -- --- by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including, but not limited to, the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty (6(}) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all additional obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within three (3) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. Rent. 4.1. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("Rent"). 4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessors reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7,4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Except as expressly provided by this Lease, Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Page 2 of 11 Initials GB WRT -- --- Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) Lessee Indemnification. Lessee shall Indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease, No termination, cancellation or release agreement entered Into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. (e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) Lessor Termination Option. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessors expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceed twenty-four (24) times the then monthly Base Rent, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice, In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required fun Js or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such Inspection is reasonably related to the violation or contamination. 7. Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.2 (Hazardous Substances), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior), ceilings, floors, windows, doors, plate glass, skylights, signs, located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity. (b) Service Contracts. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment (iii) fire extinguishing systems, including fire alarm and/or smoke detection, Page 3 of 11 Initials GB WRT -- --- 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent, Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein, Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) Removal. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) Surrender/Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. Insurance; Indemnity. 8.1 Payment For Insurance. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an insured contract' for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carded by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance - Building, Improvements and Rental Value. (a) Building and Improvements. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility installations Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance Page 4 of 11 Initials GB WRT -- --- coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed a reasonable amount, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (c) Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.4 Lessee's Property/Business Interruption Insurance. (a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, asset forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessors master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect, if such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following Page 5 of 11 Initials GB WRT -- --- the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor, Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in Insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 Abatement of Rent; Lessee's Remedies. (a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises Is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Termination - Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 Definition of "Real Property Taxes. "As used herein, the term "Real Property Taxes" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or Indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, but specifically excluding, a change in the ownership of the Premises. 10.2 a) Payment of Taxes. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) Advance Payment. In the event Lessee incurs two or more late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, al least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All monies paid to Lessor under this Paragraph may be intermingled with other monies of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, at the option of Lessor, be treated as an additional Security Deposit. 10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements Included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the feel property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (b) a change in the control of Lessee shall constitute an assignment requiring consent. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Page 6 of 11 Initials GB WRT -- --- Breach: Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease; (ii) release Lessee of any obligations hereunder;, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver of estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may, after providing ten (10) days notice, proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies, against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000 or ten percent (10%) of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. a "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) a Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. (S) 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph 13.1 (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. 13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If more than two (2) checks given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall Page 7 of 11 Initials GB WRT -- --- immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which In the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessors right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to seven percent (7%) of each such overdue amount. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non- scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The interest ("Interest") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 Breach by Lessor. (a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform any obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall In no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that If the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the Premises, or more than twenty-five percent (25%) of the land area portion of the Premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Lessee shall be entitled to any compensation for value of leasehold, Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. Brokers' Fee. 15.1 Additional Commission. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.2 Assumption of Obligations. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Each Broker shall be a third party beneficiary of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts due as and for commissions pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within ten (10) days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker. 15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Page 8 of 11 Initials GB WRT -- --- Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. Estoppel Certificates. (a) Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Estoppel Certificate" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's Rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including, but not limited to, Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Definition of Lessor. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease, in the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Days. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. Limitation on Liability. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Brokers have no responsibility with respect thereto respect to any default or breach hereof by either Party. 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. PostaI Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. a copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given three (3) days after the same is addressed as required herein and three (3) days mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof, Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lessor's Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) Page 9 of 11 Initials GB WRT -- --- be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor;, or (Iii) be bound by prepayment of more than one (1) month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not i[i Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. Attorneys' Fees. If any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on or about the Premises any ordinary "For Sublease" sign. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. Signs. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including, but not limited to, architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including, but not limited to, consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. Guarantor. 37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. Options. 39.1 Definition. "Option" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2 Options Personal To Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) months period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Multiple Buildings. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. Page 10 of 11 Initials GB WRT -- --- 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to Institute suit for recovery of such sum. if it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 44. Authority. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within thirty (30) days after request, deliver to the other Party satisfactory evidence of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. Multiple Parties. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [ ] is [ ] is not attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. - -------------------------------------------------------------------------------------------------------------------------------- ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN a STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO - -------- COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. - ---------------------------------------------------------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Palo Alto, Calif. Executed at: Campbell, CA ----------------- ------------ on: 2/25/00 on: 2-24-00 ------- ------- By LESSOR: By LESSEE: Thoits Brothers, Inc. GraphOn Corporation --------------------- ------------------- By:/s/ Warren R. Thoits By:/s/ Edmund Becmer --------------------- ------------------- Name Printed: Warren R Thoits Name Printed: Edmund Becmer --------------------- ------------------- Title: President Title: Cfo + VP of Admin. --------------------- ------------------- By:____________________ By:________________________ Name Printed:__________ Name Printed:______________ Title:_________________ Title:_____________________ Address:_______________ Address:___________________ Telephone: (___)_______ Telephone: (___)___________ Facsimile: (___)_______ Facsimile: (___)___________ Federal ID No._________ Federal ID No._____________ GraphOn 012700 JB/cc NOTE:These forms are often modified to meet the changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213) 687-8616 Page 11 of 11 ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -------------------------------------------------------------- The following are modifications to that certain Standard Industrial/Commercial Single-Tenant Lease - Net ("Lease") between THOITS BROTHERS INC., a California Corporation ("Lessor") and GRAPHON CORPORATION, a California corporation ("Lessee"), dated as of February 24, 2000. The term "this Lease" when used herein shall mean the Lease as modified by this Addendum. All capitalized terms not defined in this Addendum shall have the meanings given in the Lease. In the event there is a conflict or inconsistency between the terms of the Lease and the terms of this Addendum, the terms of this Addendum shall control. 1. Rent Adjustments. The Base Rent shall be adjusted on each annual ---------------- anniversary of the Commencement Date based on the net annual change in the Consumer Price Index for all Urban Consumers, San Francisco, Oakland, San Jose- CA (1984=100% base) during the previous twelve (12) month period. In no event, however, shall said increases be more than eight percent (8%) or less than three percent (3%) per such twelve month period. 2. Completion of Tenant Improvements; Commencement Date. Paragraph 1.3 is ---------------------------------------------------- superseded by the terms and conditions of the Work Letter relating to the Commencement Date. If Lessor does not deliver possession of the Premises to Lessee by May 1, 2000, the Expiration Date shall be adjusted to reflect the delay in possession (with the intent that the Original Term will not be shortened as a result of any such delay). Notwithstanding Paragraph 7.4, Lessee shall only be required to remove at the expiration or termination of this Lease those Tenant Improvements which Lessor specifically designates in writing to Lessee after reviewing the proposed plans for the Tenant Improvements (and any additions or modifications thereto). Any improvements constructed after the initial Tenant Improvements shall be subject to the requirements in Paragraph 7.4. 3. Structural Condition/Hazardous Materials. The following provision shall ---------------------------------------- be added to the end of Paragraph 2.2 of the Lease: Lessor represents and warrants that (i) the structural components of the Building and the roof membrane shall be delivered to Lessee in good condition, free from material faults or defects, and that the Premises is in a water-tight condition, and (ii) Lessor has no knowledge of the presence of any Hazardous Substances in, on or about the Premises, or if Lessor is aware of any such Hazardous Substances those matters have been disclosed to Lessee in writing. If during the course of completion of the Tenant Improvements, any asbestos containing materials or other Hazardous Substances are found to exist in the Premises, which Hazardous Substances are required by governmental regulation or law to be removed and remediated as a condition of the construction of the Tenant Improvements or as a condition of Lessee's occupancy of the Premises, then Lessor shall be obligated to remove and remediate such Hazardous Substances as soon as reasonably practicable, at its own cost and in conformance with all applicable laws and regulations, prior to the Commencement Date. 4. Common Areas: Changes. The following provision shall be added as --------------------- Paragraph 2.6 of the Lease: Lessee shall have the non-exclusive right to use the common areas and no less than thirty (30) parking places (subject to increase as required by Applicable Requirements) adjacent to the Premises in the Sutter Business Park ("Common Areas") at no additional cost to Lessee. The parties acknowledge and agree that additional spaces may not be adjacent to the Premises. Lessor shall not make any reductions to the Common Areas or allow third parties to use the Common Areas in such a manner which would materially or unreasonably interfere with Lessee's nonexclusive use and enjoyment of the Common Areas, Lessee's access to the Premises, the number of parking spaces available to Lessee, or any other rights Lessee has under the Lease. Any construction work performed by Lessor shall be done in a manner which causes the least amount of inconvenience and interference to Lessee's use of the Premises and the Common Areas as is reasonably possible. Lessor shall notify Lessee in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessor or the Premises and Common Areas to comply with any Applicable Requirements. 1 5. Hazardous Substances: Indemnification. The following provision shall be ------------------------------------- added to the end of Paragraph 6.2(a) of the Lease: Lessor agrees that Lessee shall have no liability or responsibility whatsoever for any Hazardous Substances in, on, about or underneath the Premises or the Common Areas that were present prior to the Commencement Date or were not caused by, contributed to, or created by Lessee or Lessee's agents or employees. Lessor shall indemnify, defend and hold Lessee harmless against all claims, losses, costs or liabilities arising out of or related to testing for, or the presence, use, storage, disposal, removal, remediation or clean-up of any Hazardous Substance in or about the Premises, the Common Areas, or any other part of the Sutter Business Center that were present prior to the Commencement Date, unless caused by, contributed to, or created by Lessee or Lessee's agents or employees. If Lessor knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or Common Areas, Lessor shall immediately give written notice of such fact to Lessee, and provide Lessee with a copy of any report, notice, claim, or other documentation which it has concerning the presence of such Hazardous Substance. 6. Capitol Repairs; Compliance with Requirements. The following provision --------------------------------------------- shall be added to Paragraph 6.3 of the Lease: Notwithstanding anything to the contrary in this Lease, Lessee shall in no event, except as may be required solely by Lessee's negligence or Lessee's particular and unique use of the Premises, be obligated to make or pay for: (a) any capital repairs, replacements, or improvements to the Premises or Common Areas or (b) structural repairs or alterations or capital improvements to the Premises or Common Areas which may be required by any Applicable Requirements (whether presently existing or hereinafter enacted), including but not limited to the Americans with Disabilities Act and Title 24. 7. Lessee Indemnity. Paragraph 8.7 of the Lease shall be revised to read ---------------- as follows: Except for Lessor's negligence and/or willful misconduct and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the premises, Lessor and its agents, Lessor's master or ground lessor, partners and lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising, out of or related to any injury or death to any person or injury or damage to property caused by, arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. This indemnity shall survive the expiration or earlier termination of this Lease. 8. Lessor Indemnity. A paragraph 8.9 shall be added to the Lease to read ---------------- as follows: Except for Lessee's negligence and/or willful misconduct, Lessor shall indemnify, protect, defend and hold harmless the premises, Lessee and its agents, partners and lenders, from and against any and all claims, damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of or related to any injury or death to any person or injury or damage to property caused by, arising out of, involving, or in connection with any willful act, omission or neglect of Lessor, its agents, contractors, employees or invitees, and out of any default or breach by Lessor in the performance in a timely manner of any obligation on Lessor's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether 2 or not (in the case of claims made against Lessee) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessee by reason of any of the foregoing matters, Lessor upon notice from Lessee shall defend the same at Lessor's expense by counsel reasonably satisfactory to Lessee and Lessee shall cooperate with Lessor in such defense. Lessee need not have first paid any such claim in order to be so indemnified. This indemnity shall survive the expiration or earlier termination of this Lease. 9. Permitted Assignment. The following provision shall be added to the end -------------------- of Paragraph 12.1 of the Lease: Notwithstanding anything to the contrary contained in this Lease, Lessor's prior consent or approval shall not be required for: (a) any assignment, sublease or other transfer of Lessee's interest in the Premises or the Lease to any an entity in which Lessee has a controlling interest (referred to as "Lessee's Affiliates") or (b) changes in ownership or control of Tenant resulting solely from transfers of publicly traded shares. In the event that the Tenant merges with or is wholly acquired by a separate legal entity, assignment of this Lease to the new legal entity, if applicable, will require Landlord's consent as provided in Paragraph 12.1. 10. Non-Disturbance Agreement from Existing Lenders. The following ----------------------------------------------- provision shall be added to the end of Paragraph 30.3 of the Lease: Prior to the Commencement Date, Lessor shall provide Lessee with a non- disturbance agreement reasonably acceptable to Lessee from any lender that currently holds a Security Device against the Premises. 11. Interim Occupancy. As inducement to sign this Lease, Lessor grants ----------------- Lessee the right to occupy and use certain space comprised of approximately 6,672 rentable square feet (the "Interim Space") located at 225 Cochrane Circle, Morgan Hill, California (the "Interim Building") upon execution of this Lease. The right to occupy the Interim Space shall be under the same terms of this Lease (except as otherwise provided in this Paragraph 11) but shall terminate upon the Commencement Date or the earlier termination of this Lease. Lessee shall pay in advance to Lessor monthly rent (or portion thereof) in the amount of Eight Thousand Three Hundred Dollars and 00/100ths ($8,340.00). In addition to the foregoing, Lessee shall pay to Lessor upon demand fifty-one percent (51%) of the actual monthly operating expenses for the Interim Building, as determined by generally accepted accounting practices (GAAP), during Lessee's occupancy of the Interim Space. The parties acknowledge and agree that the Interim Building is currently being leased to one other tenant. For purposes of illustration Gout without placing any limits on Lessee's obligations for monthly operating expenses under this Lease), monthly operating expenses have averaged approximately twenty five cents per square foot. 3 EXHIBIT A [Floor Plan Lot 5] EXHIBIT B --------- TENANT IMPROVEMENT WORK LETTER ------------------------------ 1. Tenant Improvement Allowance. Landlord shall contribute Three Hundred ---------------------------- Nine Thousand Nine Hundred Dollars ($327,000.00) ("Tenant Improvement Allowance") for the Tenant Improvements (as defined below) to be constructed in the Premises pursuant to this Work Letter. Any additional cost exceeding the Tenant Improvement Allowance shall be borne by Tenant. Tenant understands and agrees that should the cost of the completion of the tenant improvements be less than the maximum amount provided for the Tenant Improvement Allowance, such savings shell inure to the benefit of Landlord and Tenant shall not be entitled to any credit or payment. 2. Construction of Tenant Improvements. Lessor agrees to perform certain ----------------------------------- work in or about the Premises (the "Tenant Improvements") in conformance with the Approved Plans described below, subject to all the terms and conditions contained in this Work Letter. The Tenant Improvements are described generally in the preliminary plans dated January 27, 2000 and prepared by Wayne Renshaw, 255 North Market Street, San Jose, California. 3. Payment of Tenant Improvement Expenses. Invoices for the work of Tenant -------------------------------------- Improvements shall be borne by Lessor and Lessee in the same proportion as the parties share the total costs of Tenant Improvements. Upon receipt of each such invoice, Lessor shall submit a copy thereof to Lessee with Lessor's calculation of the Lessee's portion to be paid by Lessee. Lessee shall forward payment of Lessee's shares to Lessor within seven (7) days of Lessor's delivery of a copy of the invoice to Lessee. Any unpaid balance of such payment remaining after said seven (7) day period shall bear interest until paid at the rate often percent (10%) per annum until paid. If any such balance, including accrued interest, remains unpaid at Commencement Date, it shall be deemed a default by Lessee under the Lease entitling Lessor to all of the remedies to which Lessor would be entitled if Lessee defaults in the payment of rent. 4. Approval of Plans. ----------------- (a) Preparation of Preliminary Plans. As soon as reasonably -------------------------------- practicable after the execution of this Lease, Lessee and Lessor shall meet and confer with each other to develop mutually acceptable plans and specifications with respect to the construction of the Tenant Improvements listed in Paragraph 1 above (the "Preliminary Plans"). Any architectural or other costs associated with preparing the Preliminary Plans shall be paid by Lessee. Lessor shall obtain such written bids as Lessor may desire with respect to the cost of the proposed work. (b) Governmental Approvals. Once the parties have agreed on the ---------------------- Preliminary Plans, Lessor or its contractor shall submit them to the appropriate governmental authorities for any permits that are required by law. If any changes are required by the governmental authorities, Lessor and Lessee shall cooperate to incorporate such changes into the Preliminary Plans, and neither party shall unreasonably withhold or delay its approval of such changes. Immediately after all such governmental approvals have been obtained, Lessor and Lessee shall initial and date such approved plans ("Approved Plans"), which by this reference shall then become a part of this Work Letter as though fully set forth herein. (c) Agents for Approval. Tenant hereby designates Ed Becmer, Telephone ------------------- No.(408) 370-4080, Facsimile No. (408) 370-5047, as its representative, agent and attorney-in-fact for the purpose of receiving notices, approving submittals and issuing requests for changes, and Landlord shall be entitled to rely upon authorizations and directives of such person(s) as if given by Tenant. Landlord hereby designates Candace Peterson, Telephone No. (650) 323-4868, Facsimile No. (650) 323-4068 as its representative, agent and attorney-in-fact for the purpose of receiving notices, approving submittals and issuing requests for changes, and Tenant shall be entitled to rely upon authorizations and directives of such person(s) as if given by Landlord. The parties may amend the designation of their respective construction representative(s) at any time upon delivery of written notice to the other party. 5. Change Orders. No material changes, modifications or alterations in the ------------- Approved Plans or in the Tenant Improvement work pursuant thereto shall be made by either 1 party without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. Any additional costs resulting from changes requested by Lessee shall be solely borne by Lessee. 6. Completion and Commencement Date. -------------------------------- (a) Lessor's Obligations. Upon obtaining all necessary governmental -------------------- approvals, Lessor shall commence construction of and diligently pursue the completion of the Tenant Improvements substantially in compliance with the Approved Plans, in good and workmanlike manner, free from faults or defects, and in conformance with all conditions applicable to the Tenant Improvements which are necessary for lawful occupancy of the Premises. (b) Commencement Date; Completion. The Commencement Date of the Lease ----------------------------- and Lessee's obligations for the payment of rent under the Lease shall commence on the later of: (i) May 1, 2000 or (ii) upon completion of the Tenant Improvements as determined by the architect who prepared the plans for the Tenant Improvements. 7. Fixturing Entry by Lessee. Lessee shall have the right to enter upon ------------------------- the Premises prior to completion of the Tenant Improvements for the purpose of installing fixtures, equipment, telecommunications cabling, and other improvements necessary for Lessee to open for business in the Premises, subject to the following conditions: (a) Lessee shall obtain Lessor's prior consent, which shall be based on Lessor's reasonable determination that such entry will not result in interference with Lessor's work. (b) Lessee shall perform such fixturing work at its own cost and expense, and shall abide by all instructions from Lessor or Lessor's contractor. (c) Any such entry by Lessee or its contractors shall be deemed to be under all the terms and conditions of the Lease (including, without limitation, Lessee's obligations to indemnify and hold Lessor harmless, which shall apply with respect to any matter arising out of or connected with such entry), excepting the obligation to pay rent, which shall begin to accrue only upon the Commencement Date pursuant to the terms of the Lease. 2 Lessor's Initials WRT --- Lessee's Initials GB -- EX-23.1 3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23.1 Consent of Independent Certified Public Accountants We hereby consent to the incorporation by reference in the Registration Statementon Form S-8 (No. 33-88255) of GraphOn Corporation of our report dated January 27, 2000, appearing within GraphOn Corporation Annual Report on Form 10-K for the year ended December 31, 1999. /s/ BDO Seidman, LLP BDO Seidman, LLP San Jose, California March 29, 2000 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 8481 1798 2028 0 1686 590 (25) (25) 0 0 12784 2395 764 482 227 59 15224 6544 843 1202 0 0 0 0 0 0 1 0 14380 5342 15224 6544 803 609 3635 2124 14 29 2800 344 8015 3416 25 25 7 522 (7033) (2149) 1 1 (7034) (2149) 0 0 0 0 0 0 (7034) (2149) (0.71) (0.57) (0.71) (0.57)
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