-----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, OuivZcrValtp2w4FJufUEsC74rBwOY21hrl+WDBUWR+UIMZBJgOmUQZUfLEyGFQ8 8YyWeCCtddLHuSOfh41jKA== 0001012870-99-004766.txt : 19991224 0001012870-99-004766.hdr.sgml : 19991224 ACCESSION NUMBER: 0001012870-99-004766 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19991223 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: S-1 SEC ACT: SEC FILE NUMBER: 333-93483 FILM NUMBER: 99779562 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 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on December 23, 1999 Registration No. 333-______ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ______________________ GraphOn Corporation (Exact name of Registrant as specified in its charter) Delaware 7372 13-3899021 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
150 Harrison Avenue Campbell, California 95008 (408) 370-4080 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ______________________ Walter Keller President GraphOn Corporation 150 Harrison Avenue Campbell, California 95008 (408) 370-4080 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: ---------- Ira Roxland, Esq. Joseph H. Schmitt, Esq. Cooperman Levitt Winikoff Lester & Newman, P.C. 800 Third Avenue New York, New York 10022 (212) 688-7000 Fax: (212) 755-2839 ______________________ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [x] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------- Proposed Proposed Maximum Maximum Offering Aggregate Amount of Title of Each Class of Amount to Price Per Offering Registration Securities to be Registered be Registered Share (1) Price (1) Fee (1) --------------------------- ------------- --------- -------- ------- - ------------------------------------------------------------------------------------------------------------------- Common Stock............... 300,000 shs. $ 20.00 $6,000,000.00 $1,584.00 - -------------------------------------------------------------------------------------------------------------------
- -------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933. ---------------------- Pursuant to Rule 429, promulgated under the Securities Act of 1933, the prospectus forming a part of this registration statement also relates to (1)(i)(A) 1,250,000 shares of common stock issuable upon the exercise of 1,250,000 Class A redeemable common stock purchase warrants and (B) 1,250,000 shares of common stock issuable upon the exercise of 1,250,000 Class B redeemable common stock purchase warrants (collectively, the "IPO Securities"), (ii)(A) 125,000 shares of common stock, (B) 125,000 shares of common stock issuable upon the exercise of 125,000 Class A common stock purchase warrants and (C) 125,000 shares of common stock issuable upon the exercise of 125,000 Class B common stock purchase warrants, issuable to the managing underwriters of the IPO Securities upon the exercise of the managing underwriters' unit purchase option, and (iii)(A) 200,000 shares of common stock issuable upon the exercise of 200,000 Class A common stock purchase warrants and (B) 200,000 shares of common stock issuable upon the exercise of 200,000 Class B common stock purchase warrants issued to officers and directors of registrant, all initially included in the registrant's registration statement on Form S-1 (File No. 333-11165) declared effective on December 12, 1996 and (2)(i) 876,790 shares of common stock issuable upon the exercise of common stock purchase warrants assumed by registrant pursuant to a merger on July 12, 1999 and (ii) 250,000 shares of common stock issuable upon the exercise of 250,000 Class A common stock purchase warrants issued in consideration for consulting services performed in connection with the merger, all initially included in the registrant's registration statement on Form S-4 (File No. 333-76333) declared effective on June 15, 1999. ______________________ The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. - -------------------------------------------------------------------------------- Subject to Completion - Dated December 23, 1999 Prospectus GRAPHON CORPORATION 300,000 shares of Common Stock The person named on page 62 of this prospectus, whom we call the "selling stockholder," may use this prospectus to offer and sell up to 300,000 shares of our common stock from time to time. We are registering these shares for offer and sale as required under the terms of a certain registration rights agreement between us and the selling stockholder. Our registration of the offered shares does not mean that the selling stockholder will offer or sell any of these shares. We will receive no proceeds of any sales of the offered shares by the selling stockholder, but we will incur expenses in connection with the offering. The selling stockholder may sell the offered shares in public or private transactions, on or off the Nasdaq SmallCap Market, at prevailing market prices or at privately negotiated prices. The selling stockholder may sell the offered shares directly or through agents or broker-dealers acting as principal or agent, or in a distribution by underwriters. Our common stock is quoted on The Nasdaq SmallCap Market under the symbol "GOJO." The closing price of our common stock on December ___, 1999 was $_____ per share. Please read the Risk Factors beginning on page 7 of this prospectus before making a decision to invest in our common stock. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. It is illegal for any person to tell you otherwise. ___________, 1999 Table of Contents Page ---- Summary................................................... 3 Risk Factors.............................................. 7 Price Ranges of Securities................................ 19 Selected Historical Financial Data........................ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 22 Business.................................................. 32 Management................................................ 45 Certain Relationships and Transactions.................... 55 Principal Stockholders.................................... 59 Selling Stockholder....................................... 62 Description of Securities................................. 64 Legal Matters............................................. 69 Experts................................................... 69 Available Information..................................... 69 Index to Financial Statements............................. F-1 2 SUMMARY The following summary highlights selected information from this prospectus and may not contain all the information that is important to you. To understand our business and this offering fully, you should read this entire prospectus carefully, including the Risk Factors and the financial statements and accompanying notes. Unless otherwise indicated, all share and per share amounts give effect to our merger on July 12, 1999 with GraphOn Corporation, a California corporation. Our Business 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 were 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, Compuware and Corel, who have licensed our technology. Using our technology, Sun Microsystems provides its network computers access to UNIX applications. Compuware has expressed its intention to use our technology to provide access over the Internet to applications built with its UNIFACE product. Corel currently plans to use our technology to provide access to some of its applications, such as WordPerfect(TM), over the Internet. We are headquartered in Campbell, California with offices in Bellevue, Washington, Concord, New Hampshire, and Reading, United Kingdom. The Offering Common stock offered for sale by the selling stockholder 300,000 shares (1) Common stock to be outstanding after offering 11,566,302 shares (1)(2) __________ (1) Assumes the exercise by the selling stockholder of warrants to purchase a like number of shares of our common stock. 3 (2) Excludes 811,723 shares of our common stock issuable upon exercise of outstanding warrants and options under our stock option plans. An additional 1,418,677 shares are reserved for future grants under our stock option plans. Use of Proceeds We will not receive any proceeds from the sale of the common stock offered by the selling stockholder. We will receive the proceeds from the exercise of the selling stockholder's warrants, which will amount to $2,550,000 if all of these warrants are exercised. We intend to use any such monies, net of our expenses in preparing this prospectus, for working capital and other general corporate purposes. 4 Summary Historical Financial Data You should read the following summary consolidated financial data in conjunction with the audited financial statements and the unaudited financial statements, and their accompanying notes, which are contained elsewhere in this prospectus. You should also read "Selected Historical Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are both contained elsewhere in this prospectus. The results of operations for the nine months ending September 30, 1999 and 1998 are not necessarily indicative of results that may be expected for the full year. Statements of Operations Data (dollars in thousands, except per share amounts):
Nine Months Ended September 30, Year Ended December 31, ----------------------- ----------------------------------------------------------------- 1999 1998 1998 1997 1996 (1) 1995 (1) 1994 (1) Revenues................. $ 2,450 $ 1,499 $ 2,124 $ 1,926 $ 595 $ 588 $ 1,097 Costs of revenues........ 291 251 344 463 336 214 350 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit............. 2,159 1,248 1,780 1,463 259 375 747 Operating expenses: Selling and.............. 2,359 860 1,440 827 193 - - marketing General and.............. 3,725 783 1,119 325 219 389 647 administrative Research and development.............. 1,772 634 840 191 42 59 67 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses................. 7,856 2,277 3,399 1,343 453 448 714 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income from operations............... (5,697) (1,029) (1,619) 120 (194) (73) 33 Other income (expense): Interest and other income................... 77 9 10 7 6 - - Interest expense......... ( 9) (368) (522) (2) - - - Other expense............ - - (17) - - - - ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income before provision for income taxes......... (5,630) (1,389) (2,148) 125 (188) (73) 33 Provision for income taxes............. 1 1 1 1 1 - 15 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss) income........ $ (5,631) $ (1,390) $ (2,149) $ 124 $ (189) $ (73) $ 18 ========== ========== ========== ========== ========== ========== ========== Basic and diluted (loss) income per share................ $ ( 0.59) $ ( 0.39) $ (0.32) $ 0.02 $ (0.03) $ - $ - ========== ========== ========== ========== ========== ========== ========== Weighted average common shares outstanding.............. 9,540,148 3,583,798 6,762,669 6,000,000 6,000,000 3,345,600 3,345,600 ========== ========== ========== ========== ========== ========== ==========
5 Balance Sheet Data (in thousands): September 30, 1999 December 31, 1998 December 31, 1997 ------------------ ----------------- ----------------- Working capital....... $4,719 $1,193 $ 23 Total assets.......... 8,199 7,110 733 Total liabilities..... 952 1,202 615 Stockholders' equity.. 7,248 5,908 118 ___________ (1) During the years ended December 31, 1996, 1995 and 1994, 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." 6 RISK FACTORS Before you invest in our common stock, you should be aware that there are various risks, including those described below. You should carefully consider these risk factors together with all other information included in this prospectus, before you decide whether or not to purchase our shares. We recently changed our corporate strategy and have a limited history operating under our current business model Although we were founded in 1982, we have a relatively brief operating history as a provider of server-based software. We changed our strategic focus in early 1996 from manufacturing and selling computer terminal hardware to developing server-based software. This change in strategic focus required us to make changes to our business processes and to make a number of significant personnel changes, including changes and additions to our engineering and management teams. As a result of our relatively brief operating history as a provider of server-based software, you must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets. These risks include our: . substantial dependence on products with only limited market acceptance; . need to expand our sales and support organizations; . competition with established and emerging companies; . need to manage changing operations; . reliance upon strategic relationships; and . dependence upon key personnel. We also depend to a significant degree on the continued growing use of the Internet for commerce and communication. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. We have a history of operating losses and we expect these losses to continue and to 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 $5,630,500 and $2,148,500 for the nine months ended September 30, 1999 and for the year ended December 31, 1998. We expect our expenses to increase as we expand our business but we cannot assure you that our revenues will increase as a result of increased spending. If revenues grow more slowly than anticipated, or if operating expenses exceed expectations, we may not become profitable. Even if we become profitable, we may be unable to sustain profitability. Our operating results in one or more future periods are likely to fluctuate significantly and may fail to meet or exceed the expectations of securities analysts or investors Our operating results are likely to fluctuate significantly in the future on a quarterly and on an annual basis due to a number of factors, many of which are outside our control. Factors that could cause our revenues to fluctuate include the following: . the degree of success of our recently introduced products; . variations in the timing of and shipments of our products; . variations in the size of orders by our customers; . increased competition; . the proportion of overall revenues derived from different sales channels such as distributors, OEMs and others; . changes in our pricing policies or those of our competitors; . the financial stability of major customers; . new product introductions or enhancements by us or by competitors; . delays in the introduction of products or product enhancements by us or by competitors; . the degree of success of new products; . any changes in operating expenses; and . general economic conditions and economic conditions specific to the software industry. 8 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 one party to whom we pay royalties, although we hold an option, which is exercisable in the year 2001, to purchase the technology under such license. This license may be terminated upon material breach of the agreement, and if it is 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 9 new royalty or licensing agreements. New royalty or licensing agreements may not be available on beneficial terms, and may not be available at all. If a successful infringement claim is brought against us and we fail to license the infringed or similar technology, our business could be materially adversely affected. Our business significantly benefits from strategic relationships and there can be no assurance that such relationships will continue in the future Our business and strategy relies to a significant extent on our strategic relationships with other companies. There is no assurance that we will be able to maintain or develop any of these relationships or to replace them in the event any of these relationships are terminated. In addition, any failure to renew or extend any licenses between us and any third party may adversely affect our business. Because our market is new and emerging, we cannot accurately predict its future growth rate or its ultimate size, and widespread acceptance of our products is uncertain The market for server-based software, which enables programs to be accessed and run with minimal memory resident on a desktop computer or remote user device, still is emerging, and we cannot assure you that our products will receive broad-based market acceptance or that this market will continue to grow. Additionally, we cannot accurately predict our market's future growth rate or its ultimate size. Even if server-based software products achieve market acceptance and the market for these products grows, we cannot assure you that we will have a significant share of that market. If we fail to achieve a significant share of the server-based software market or if such market does not grow as anticipated, our business, results of operations and financial condition may be adversely affected. We may need additional capital in the future and may not be able to secure adequate funds on terms acceptable to us In the future, we may need to raise additional funds to meet our obligations, cover operating expenses, pursue business strategies, respond to financial, technological or marketing hurdles or take advantage of new opportunities. However, we cannot assure you that any additional funds required will be available at the time or times needed, or available on terms acceptable to us. If adequate funds are not available, or are not available on acceptable terms, we may not be able to meet our obligations, pursue business strategies, take advantage of market opportunities, develop new products or otherwise respond to competitive pressures. Such inability could have a material adverse effect on our business, financial condition and results of operations. 10 We rely on indirect distribution channels for our products and may not be able to retain existing reseller relationships or to develop new reseller relationships Our products primarily are sold through several distribution channels. An integral part of our strategy is to strengthen our relationships with resellers such as value-added resellers, distributors, OEMs, systems integrators and other vendors to encourage these parties to recommend or distribute our products and to add resellers both domestically and internationally. We currently invest in and intend to continue to invest significant resources to expand our sales and marketing capabilities. We cannot assure you that we will be able to attract and/or retain resellers to market our products effectively. Our inability to attract resellers and the loss of any current reseller relationships could have a material adverse effect on our business, results of operations and financial condition. Additionally, we cannot assure you that resellers will devote enough resources to provide effective sales and marketing support to our products. Our future success will depend in part upon our ability to enhance our existing products and to develop and introduce, on a timely basis, new products and features that meet changing customer requirements and emerging industry standards The server-based software market still is emerging and characterized by rapid technological change, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. The introduction of new technological products and the emergence of new industry standards could render our products obsolete and unmarketable. From time to time, we may develop new products, capabilities or technologies that have the potential to replace or shorten the life cycle of our existing products. Additionally, we cannot assure you that announcements of currently planned or newly introduced product offerings will not cause customers to defer purchasing our existing products. In addition, we cannot assure you that we will be able to develop products that keep pace with new technology, or that new technology will not obviate the need for our products. If any new or enhanced technology gains widespread acceptance and we fail to develop and provide compatible products on a timely basis, our competitive position, business, results of operations and financial condition could be adversely affected. Our future success depends in large part upon: . our ability to enhance our current products; . our ability to develop and successfully introduce new products that keep pace with technological developments; and . our ability to respond to evolving end-user requirements. 11 We cannot assure you that we will successfully develop and market new products or product enhancements on a timely basis, or that new products or product enhancements we develop will achieve market acceptance. We filed for bankruptcy on November 15, 1991 and may be required to pay up to $2.23 million and interest, if any, to creditors. On November 15, 1991, we 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. See "Business -- Corporate History" for a more complete description of these OEMs. 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 potential total remaining liability under the bankruptcy, as of September 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 12 that a court deems to be owed based upon a ruling that our interpretation is wrong. In addition, we cannot guarantee you that a creditor will not assert a claim for payment out of the royalties from subsequent licenses of the server- based technology. Such claims could be costly and time-consuming for us. If any of these events takes place, it could have a material adverse effect on our business, financial condition and results of operations. See Note 6 to our Financial Statements. 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 Ms. Robin Ford, our Executive Vice President, 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, 13 and therefore, we cannot assure you we will be able to attract or retain such personnel. The loss of the services of one or more members of our management group or the inability to retain or hire additional personnel as needed may have a material adverse effect on our business. Our planned expansion into international markets makes us susceptible to risks from international operations As part of our long term strategy we intend to address the global needs of our customers and expand our business to commit resources to international market expansion. In order to execute this strategy, we will need to hire and train additional personnel and recruit additional international resellers to successfully expand our international sales. We cannot assure you that we will be able to increase or maintain international sales of our products or that international reseller channels will be willing or able to adequately service and support our products. Our international operations will be subject to a number of risks including: . difficulties in staffing and managing foreign operations; . variability of foreign economic conditions and changing restrictions imposed by United States export laws; . unexpected changes in regulatory requirements; . tariffs and other trade barriers; . lack of acceptance of products in foreign countries; . the burdens of complying with a wide variety of foreign laws; and . foreign restrictions on the transfer of currency and variability of foreign currency exchange rates. We cannot assure you that these factors will not have a material adverse effect on our future international sales and, consequently, our business, results of operations and financial condition. 14 The market in which we participate is highly competitive and has more established competitors The market we participate in is intensely competitive, rapidly evolving and subject to technological changes. We expect competition to increase as other companies introduce additional competitive products. In order to compete effectively, we must continually develop and market new and enhanced products and market those products at competitive prices. As markets for our products continue to develop, additional companies, including companies in the computer hardware, software and networking industries with significant market presence, may enter the markets in which we compete and further intensify competition. A number of our current and potential competitors have longer operating histories, greater name recognition and significantly greater financial, sales, technical, marketing and other resources than we do. We cannot assure you that our competitors will not develop and market competitive products that will offer superior price or performance features or that new competitors will not enter our markets and offer such products. We believe that we will need to invest increasing financial resources in research and development to remain competitive in the future. Such financial resources may not be available to us at the time or times that we need them or upon terms acceptable to us. We cannot assure you that we will be able to establish and maintain a significant market position in the face of our competition and our failure to do so would adversely affect our business. We are subject to risk of undetected errors which could substantially reduce the effectiveness of our products and adversely affect us Our complex software products may contain undetected errors or failures when first introduced or as new versions are released. We cannot assure you that errors will not be found in our products after commencement of commercial shipments. In addition, third-party products that our products depend upon, including current and future versions of operating systems and application programs provided by companies such as Sun Microsystems, IBM and Microsoft, may contain defects which could reduce the performance of our products or render them useless. Because we do not develop our own application programs and depend upon third party applications, errors in any application utilized by our customers could adversely impact the marketability of our products. Similarly, we cannot assure you that errors or defects in our products will not be discovered, causing delays in product introductions and shipments or requiring design modifications that could adversely affect our reputation, competitive position, business, results of operations and financial condition. Our management are able to exert significant control over us Our executive officers, directors and their affiliates own or have voting control over approximately 38.47% of the outstanding shares of common stock. As a result, if they act as a 15 group, the executive officers and directors may exercise significant influence over such matters as amendments to our charter and fundamental corporate transactions such as mergers, asset sales and our sale. In addition, they will be able to influence the direction of our business and the election of members to the board of directors. We have agreed to contractual provisions that could discourage acquisition bids A number of our agreements contain express provisions that do not allow us to assign them without written consent. These provisions could deter third parties from making bids to acquire us. These provisions could also limit the price future investors are willing to pay for shares of our common stock. Our failure to be Year 2000 compliant would negatively impact our business Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field and therefore are not designed to handle any dates beyond the year 1999. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in a relatively short time, computer systems and/or software used by many companies may need to be upgraded to comply with such year 2000 requirements to remain functional. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Although we currently offer software products that are designed and, in certain circumstances, are warranted to be year 2000 compliant, there can be no assurance that our software products contain all necessary date code changes. In addition, there may be a significant amount of litigation arising out of year 2000 compliance issues. Because of the unprecedented nature of such litigation, it is uncertain whether or to what extent we may be affected by it. We believe that the purchasing patterns of customers and potential customers may be affected by year 2000 issues in a variety of ways. Many companies are expending significant resources to purchase new software or correct their current software systems for year 2000 compliance. These expenditures may result in reduced funds available to purchase our products. In addition, many potential customers may choose to defer purchasing year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the server-based software industry. Conversely, year 2000 issues may cause other companies to accelerate purchases, causing an increase in short-term demand and a consequent decrease in long-term demand for our year 2000 compliant products. There can be no assurance that year 2000 issues will not affect us in one or more of a number of possible ways, and will not result in a material adverse effect on our business, operating results and financial condition. 16 Potential public sales of a significant number of shares of our common stock could reduce the market price of our common stock We cannot predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. As of the date of this prospectus, there are 11,266,302 shares of our common stock outstanding and 5,004,125 shares issuable upon exercise of outstanding options and warrants. Restrictions under the securities laws and lock-up agreements prevent the immediate sale in the public market of 811,723 of such shares of common stock. However, all of these restricted shares will become available for sale on January 12, 2000. No dividends will be paid in the foreseeable future We have never paid cash dividends on our common stock and do not anticipate paying cash dividends for the foreseeable future. We intend to reinvest any funds that might otherwise be available for the payment of dividends in further development of our business. The price of our securities may fluctuate The market price of our securities is likely to be highly volatile as the stock market in general, and the market for technology companies in particular, has been highly volatile. Stockholders may have difficulty selling our common stock following periods of volatility because of the market's adverse reaction to such volatility. Factors which could cause such volatility may include, among others: . conditions or trends in the computer software industry; . changes in the market valuations of other computer software companies; . actual or anticipated variations in quarterly operating results; . announcements of technological innovations; . capital commitments and expenditures; 17 . departures of key employees; and . announcements by us or our competitors of strategic alliances, joint ventures and significant acquisitions. Many of these factors are beyond our control and may materially adversely affect the market price of our common stock, regardless of our future operating results. The trading prices of many technology companies' stocks have reached historical highs within the last 12 months and have reflected valuations substantially above historical levels. During the same period, such companies' stocks have also been highly volatile and have recorded lows well below such historical highs. We cannot assure you that our securities will trade at the same levels of other technology companies or that technology stocks in general will sustain their current levels. Our certificate of incorporation and bylaws could make it difficult for a third party to acquire us Our amended and restated certificate of incorporation and bylaws could have the effect of delaying, deferring or preventing an acquisition of us. For example, our board may issue preferred stock without stockholder approval. Additionally, such certificate of incorporation provides for a classified board, with each member having a staggered three year term, prohibits the stockholders from taking action by written consent and limits their ability to call special meetings and make proposals at such meetings. These provisions could make it more difficult for a third party to remove or replace our management or to acquire us. Forward-looking statements found in this prospectus may not be accurate indicators of our future performance This prospectus contains certain forward-looking statements and information relating to our business. We have identified forward-looking statements in this prospectus using words such as "believes," "intends," "expects," "predicts," "may," "will," "should," "contemplates," "anticipates," or similar statements. These statements are based on our beliefs as well as assumptions we made using information currently available to us. Because these statements reflect our current views concerning future events, these statements involve certain risks, uncertainties and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. 18 PRICE RANGES OF SECURITIES 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 Class B Common Stock Redeemable Warrants Redeemable Warrants ----------------------- ------------------------- ------------------------- Quarter Ended High Low High Low High Low - -------------------- ----------------------- ------------------------- ------------------------- March 31, 1997 $ 5-1/8 $ 4-3/8 $ 1-5/16 $ 5/8 $ 1-1/4 $ 5/8 June 30, 1997 5-1/8 4-7/16 1 3/8 1 5/16 September 30, 1997 5-1/8 4-9/16 3/4 1/4 9/16 1/8 December 31, 1997 5-3/8 4-5/8 1-1/16 5/16 3/4 3/16 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 1-17/32 1-1/16 1 7/16 June 30, 1999 7-15/16 5-1/8 2-13/16 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 14-5/16 6-1/8 8-3/4 3-1/8 6-3/4 2-1/6 (through December 3)
The above quotations represent prices between dealers and do not include retail markup, markdown or commission. They do not necessarily represent actual transactions. On December 3, 1999, the last reported closing bid prices of our common stock, Class A redeemable warrants and Class B redeemable warrants were $13, $7- 3/4 and $5-7/8. On that date, there were 257 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. 19 SELECTED HISTORICAL FINANCIAL DATA The following selected historical financial data should be read in conjunction with our historical financial statements and the notes thereto beginning on page F-1 of this prospectus. Our selected financial data as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 have been derived from our financial statements which have been audited by BDO Seidman LLP, independent public accountants. The data as of September 30, 1999 and for the nine months ended September 30, 1999 and 1998 and for the years ended December 31, 1995 and 1994 have 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. The results of operations for the nine months ended September 30, 1999 are not necessarily indicative of results that may be expected for the full year. Statements of Operations Data (dollars in thousands, except per share amounts):
Nine Months Ended September 30, Year Ended December 31, ----------------------- ---------------------------------------------------------------------- 1999 1998 1998 1997 1996 (1) 1995 (1) 1994 (1) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Revenues................... $ 2,450 $ 1,499 $ 2,124 $ 1,926 $ 595 $ 588 $ 1,097 Costs of revenues.......... 291 251 344 463 336 214 350 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit............... 2,159 1,248 1,780 1,463 259 375 747 Operating expenses: Selling and marketing............ 2,359 860 1,440 827 193 - - General and administrative....... 3,725 783 1,119 325 219 389 647 Research and development.......... 1,772 634 840 191 42 59 67 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses........ 7,856 2,277 3,399 1,343 453 448 714 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income from operations.............. (5,697) (1,029) (1,619) 120 (194) (73) 33 Other income (expense): Interest and other income............ 77 9 10 7 6 - - Interest expense........ ( 9) (368) (522) (2) - - - Other expense........... - - (17) - - - - ---------- ---------- ---------- ----------- ---------- ---------- ---------- (Loss) income before provision for income taxes........ (5,630) (1,389) (2,148) 125 (188) (73) 33
20 Provision for income taxes........... 1 1 1 1 1 - 15 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss) income......... $ (5,631) $ (1,390) $ (2,149) $ 124 $ (189) $ (73) $ 18 ========== ========== ========== ========== ========== ========== ========== Basic and diluted (loss) income per share.............. $ ( 0.59) $ ( 0.39) $ (0.32) $ 0.02 $ (0.03) $ - $ - ========== ========== ========== ========== ========== ========== ========== Weighted average common shares outstanding............ 9,540,148 3,583,798 6,762,669 6,000,000 6,000,000 3,345,600 3,345,600 ========== ========== ========== ========== ========== ========== ==========
Balance Sheet Data (in thousands): September 30, 1999 December 31, 1998 December 31, 1997 ------------------ ----------------- ----------------- Working capital........ $4,719 $1,193 $ 23 Total assets........... 8,199 7,110 733 Total liabilities...... 952 1,202 615 Stockholders' equity... 7,248 5,908 118 ___________ (1) During the years ended December 31, 1996, 1995 and 1994, 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." 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following description of our financial condition and results of operations should be read in conjunction with the information included in this prospectus. The description contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this prospectus. Overview We develop, market, sell and support server-based software that is designed to enable a diverse range of desktop computers to access server-based Windows and UNIX applications from any location, over fast or slow Internet connections. We were incorporated in May 1982 and engaged in the development and manufacture of hardware computer terminals. In 1996, we started to transition from a hardware to a software manufacturer by working with three independent software developers, with whom we entered into exclusive license agreements calling for royalties aggregating 16.4%, 9.7%, 4.8% and 2.9% of net revenues from sales of software products which contain the licensed technology for the years 1997, 1998, 1999 and 2000. After December 31, 2000, we have the option, under particular circumstances, to purchase the licensed technology or exclusive rights to it. We purchased most of the licensed technology from two of the software developers for an aggregate purchase price of $378,000 in the third quarter of 1999. Before October 1996, while we were developing our server-based software products, our revenue was derived principally from the sale and repair of hardware computer terminals. We discontinued selling hardware products in 1996 and now provide only return-to-factory repair for the installed customer base. Software licensing revenue in 1996 was $72,900, representing only 12.3% of our revenue. Software revenue consists of licensing fees for products sold and revenues from OEM license agreements relating to our software products called GO-Global, GO-Joe and GO-Between, in addition to fees for training and software maintenance. Consequently, we do not consider comparisons between 1997 and 1996 fiscal performance to be meaningful. In October 1996, Sun Microsystems licensed GO-Joe for distribution with its network computers, our server software for distribution with its UNIX operating systems and GO-Global for use by its employees. GO-Global was released for sale to customers other than Sun Microsystems in March 1997. In April 1998, IBM licensed GO-Joe for distribution with its network computers and our server software for distribution with computers using its UNIX operating systems. GO- Joe was released for sale to customers other than IBM in July 1998. In December 1998, Corel licensed our software for distribution with its WordPerfect Office Suite products. 22 During 1997 and part of 1998, we concentrated our efforts on OEM opportunities and strategic alliances to establish product acceptance. OEM licensing revenue from the Sun Microsystems agreement accounted for approximately 70.0% of revenue in 1997 and licensing revenue from the Sun Microsystems, IBM and Corel agreements accounted for approximately 18.8%, 16.5% and 20.6% of revenues in 1998. We intend to continue to commit significant financial and other resources toward our objective of expanding our strategic OEM relationships and developing reseller channels. In pursuit of this objective, in August 1998, we hired a Vice President of Sales and two sales directors to create and develop our reseller channel. In May 1998, we hired eight software engineers based in Bellevue, Washington and in December 1998 added eight engineers in Concord, New Hampshire in connection with the acquisition of Corel's jBridge technology. In February 1999, we hired a Chief Financial Officer. We have increased our headcount from 12 at December 31, 1997 to 49 at September 30, 1999. Product license revenues are recognized upon shipment only if we have no significant obligations and collection of the resulting receivable is deemed probable. When product licenses require product engineering development by us, recognition of revenue is after delivery and customer acceptance of contract milestones. Revenues for training are recognized when the services are performed. Revenue from customer yearly maintenance fees, for ongoing customer support and product updates are recognized equally over the term of the contract, which typically is 12 months. Our limited operating history as a software developer and manufacturer makes the prediction of future operating results difficult and unreliable. Future operating results may fluctuate due to many factors, including our ability to attract and retain strategic partners, the degree and rate of growth of the markets in which we compete and accompanying demand for our products, the level of product and price competition, and our ability to establish and build our software product reseller channels. Nine Months Ended September 30, 1999 Versus Nine Months Ended September 30, 1998 Revenues. Software revenues have been derived primarily from two sources: GO-Global product sales and OEM licensing revenues for GO-Joe, GO-Global and our server software. Total revenues for the nine-month period ended September 30, 1999 increased by $950,500, or 63.4%, to $2,449,500 from $1,499,000 for the same period in 1998. The most important contributing factor was an increase in OEM license sales in 1999 as compared to 1998. Sales and Marketing Expenses. Sales and marketing expenses primarily consist of salaries, sales commissions, travel expenses, trade show related activities and promotional costs. Sales and marketing expenses increased by $1,499,200, or 174.3%, to $2,359,200, or 96.3% of 23 revenue, for the nine months ended September 30, 1999 from $860,000, or 57.4% of revenue, for the same period in 1998. 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 corporate rent, utilities and administrative employee benefits are included in general and administrative expenses. General and administrative expenses increased by $2,942,700, or 375.9%, to $3,725,500, or 152.1% of revenue, for the nine months ended September 30, 1999 from $782,800, or 52.2% of revenue, for the same period in 1998. This increase is primarily due to: . amortization and depreciation expense recorded in connection with the acquisition of technology and assets from Corel Corporation in the approximate amount of $2,400,000 for the nine months ended September 30, 1999, respectively; . an increase in legal services; . hiring additional administrative personnel; and . increased utilities expenses necessary to support expanding operations. In addition, we recognized non-cash compensation charges in 1999 due to the recognition of deferred compensation charges in the latter part of 1998. Research and Development. Research and development expenses consist primarily of salaries and benefits to software engineers, supplies and payments to contract programmers and rent on facilities. Research and development expenses increased by $1,137,400, or 179.3%, to $1,771,800, or 72.3% of revenue, for the nine months ended September 30, 1999 from $634,400, or 42.3% of revenue, for the same period in 1998. The increase was primarily due to the addition of software engineers and the rent on new facility locations. As of September 30, 1999, we had 28 software engineers compared to 13 as of September 30, 1998. Interest Expense. Interest expense decreased in 1999 as compared to 1998 due to the repayment of a convertible note payable in January 1999. 24 Year Ended December 31, 1998 Versus 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. Revenues also include service fees from maintenance contracts and training services. The maintenance program was started in June 1997 to provide product updates and support from the time of purchase. It is expected that many of the maintenance programs will be renewed by customers to assure continued product updates and support. Service revenue was $116,000 in 1998, or 5.5% of revenue, as compared to a nominal amount of revenue in 1997. Cost of Goods Sold. Cost of goods sold consists primarily of royalties, 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. 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 goods sold over the shorter of three years or the remaining estimated life of the products, whichever produces the higher expense for the period. Cost of goods sold 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. 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. 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 25 administrative expenses increased 244.5% to $1,118,600, or 52.7% of 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. 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. 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. 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. Provision for Income Taxes. At December 31, 1998, we had approximately $2.8 million in federal net operating loss carryforwards. The federal net operating loss carryforwards will expire through 2018, 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 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, 1997 Versus Year Ended December 31, 1996 Before October 1996, while we were developing our server-based software products, our revenue was derived principally from the sale and repair of hardware computer terminals. We discontinued selling hardware products in 1996 and now provide only return-to-factory repair for the installed customer base. Software licensing revenue in 1996 was $72,900, representing only 12.3% of revenue as compared to 92.7% in 1997. Accordingly, the comparison of the year ended December 31, 1997 to the year ended December 31, 1996 is considered not meaningful by management. Revenues. Total revenues for the year ended December 31, 1997 were $1,926,100, an increase of 223.8% over the same period in 1996. We believe the most important contributing factor was a $1,712,000 increase in software- related revenues to $1,785,000 in 1997 versus 26 $72,900 in 1996 due to our change from selling hardware products in 1996 to software products in 1997. Cost of Goods Sold. Cost of goods sold was reduced to 24.1% of revenue in 1997, versus 50.4% in 1996. This reduction primarily is attributable to our change in products from hardware to software as discussed above. Sales and Marketing Expenses. Sales and marketing expenses increased 329.3% to $827,300, or 43.0% of revenue, in 1997 from $192,700, or 32.4% of revenue, in 1996. 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 increased by 48.4% to $324,700, or 16.9% of revenue, in 1997 from $218,900, or 36.8% of revenue, in 1996. This increase primarily is attributed to hiring additional administrative personnel, legal services and benefit expenses necessary to support expanding operations. Research and Development. Research and development expenses increased by 356.8% to $190,500, or 9.9% of revenue, in 1997 from $41,700, or 7.0% of revenue, in 1996 due to the change in our products as discussed above. Liquidity and Capital Resources Prior to 1998, we funded our operations, working capital needs and capital expenditures primarily through cash flow from operations. In 1998, we received $775,000 from the issuance of notes convertible into shares of our common stock and in October and December of 1998 received aggregate net proceeds of $2,697,400 in connection with the first and second closings of a private placement offering. On December 31, 1998, a $200,000 note converted into 111,520 shares of our common stock and a note in the amount of $100,000 was repaid by us. In January 1999, the above $475,000 convertible note was repaid from the net proceeds of the final closing of our private placement of securities whereby we received additional net proceeds of $1,708,600 in consideration of 1,095,053 shares of our common stock and warrants to purchase an additional 219,010 shares of our common stock. In February 1999, we sold 62,525 shares of our common stock and warrants to purchase an additional 676 shares of our common stock for gross proceeds of $97,200. 27 On July 12, 1999, we completed a merger with GraphOn Corporation, a California corporation ("GraphOn-CA"). By reason of the merger, each share of GraphOn-CA's common stock was exchanged for 0.5576 shares of our common stock and each outstanding option and warrant to purchase GraphOn-CA's common stock was exchanged for options or warrants to purchase 0.5576 shares of our common stock. We were the surviving corporation and changed our name, which was then Unity First Acquisition Corp., to GraphOn Corporation. Each of GraphOn-CA's officers is continuing in such role with us. The merger provided us with $5,425,000 in net cash proceeds which was previously held in trust for us until we consummated a merger with an operating business. As of September 30, 1999, we had and cash equivalents of $2,795,200 as well as $999,000 in available-for-sale securities compared to total liabilities of $876,500, exclusive of deferred revenue of $75,400. We anticipate that cash balances as of September 30, 1999, as well as anticipated revenue from operations, will be sufficient to meet our working capital and capital expenditure needs through the next twelve months. We have no material capital expenditure commitments for the next twelve months. Year 2000 Compliance We are aware of problems associated with computer systems as the year 2000 approaches. Many existing computer systems and applications and other control devices use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. Others do not correctly process "leap year" dates. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can correctly process data related to the year 2000 and beyond. These problems are expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "year 2000 problem." We are continuing to assess the impact that the year 2000 problem may have on our operations and have identified the following three key areas of our business that may be affected: . Products. We have evaluated each of our most current products and older versions and believe that each is substantially year 2000 compliant. However, we believe that it is not possible to determine whether all of our customers' products into which our products are incorporated or connected will be year 2000 complaint because we have little or no control over the design, production and testing of our customers' products. 28 . Internal Infrastructure. The year 2000 problem could affect the systems, transaction processing computer applications and devices used by us to operate and monitor all major aspects of our business, including financial systems, customer services, infrastructure, materials requirement planning, master production scheduling, networks and telecommunications systems. We believe that we have identified substantially all of the major systems, software applications and related equipment used in connection with our internal operations that must be modified or upgraded in order to minimize the possibility of a material disruption to our business. We have modified and upgraded all affected systems. Because most of the software applications used by us are recent versions of vendor supported, commercially available products, we have not incurred, and do not expect in the future to incur, significant costs to upgrade these applications as year 2000 complaint versions are released by the respective vendors. . Facility Systems. Systems such as heating, sprinklers, test equipment and security systems at our facilities also may be affected by the year 2000 problem. We currently are assessing the potential effect of and costs of remediating the year 2000 problem on our facility systems. We estimate that our total cost of completing any required modifications, upgrades or replacements of these systems will not have a material adverse effect on our business or results of operations. We presently estimate that the total cost of addressing our year 2000 issues will be less than approximately $10,000. This estimate was derived utilizing numerous assumptions, including the assumption that we already have identified our most significant year 2000 issues. However, there can be no guarantee that these assumptions are accurate, and actual results could differ materially from those anticipated. We currently are developing contingency plans to address the year 2000 issues that may pose a significant risk to our on-going operations. Such plans could include accelerated replacement of affected equipment or software, temporary use of back-up equipment or software or the implementation of manual procedures to compensate for system deficiencies. However, there can be no assurance that any contingency plans that we implement would be adequate to meet our needs without materially impacting our operations, that any such plan would be successful or that our results of operations would not be materially and adversely affected by the delays and inefficiencies inherent in conducting operations in an alternative manner. 29 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. 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 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 30 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. 31 BUSINESS General We develop, market, sell and support server-based software for the application service providers, independent software vendors, and 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 desktop computing. The ability to access such applications over computer networks and the Internet creates new computing and operational models, in addition to new sales channels. 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. 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, 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. 32 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 The nature of the Internet has led to the emergence of new operational models and sales channels. 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. 33 Remote Computing The cost and complexity of contemporary enterprise computing has been further complicated by the growth in remote access requirements. As business activities become physically distributed, computer users have looked to portable computers with remote access capabilities to stay connected in a highly dispersed work environment. One problem facing remote computing over the Internet or direct telephone connections is the slow speed of communication in contrast to the high speed of internal corporate networks. Today, applications requiring remote access must be tailored to the limited speed and lower reliability of remote connections, further complicating the already significant challenge of connecting desktop users to business-critical applications. 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 34 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. . 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 35 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 UNIX, Linux and Windows, applications from centrally managed servers without modification. Currently, our products provide the UNIX and Linux server-based software. With the integration of the WinBridge (formerly jBridge) technology in early 2000, our 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 36 whitepaper describing the UNIX access benefits of GO-Between for terminal server edition users. We began shipping GO-Between in October 1998. . WinBridge (formerly jBridge) 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. With the anticipated integration of the WinBridge 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 UNIX, Linux and Windows 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. 37 . 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. 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 38 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 September 30, 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 WinBridge (formerlyjBridge) 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 WinBridge into its UNIFACE deployment architecture as UNIFACE Jti. Corel Corporation. In December 1998, we acquired Corel's jBridge technology and its jBridge development team, in exchange for our securities. See "Description of Securities-Corel Warrant and Similar Warrant." jBridge 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 jBridge 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 WinBridge technology with any of Corel's applications. Under this non-exclusive perpetual license, Corel will bundle our WinBridge 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 $1,000,000 for this license, of which $600,000 has been recognized to date, with the balance scheduled to be paid prior to the end of calendar year 2000. 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 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, 39 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. Sales, Marketing and Support Our customers, to date, are primarily Fortune 1000 companies and large government organizations. Among our current customers are the following: Alcatel Johnson & Johnson Ameritech Corporation Lucent Technologies, Inc. Amoco Corporation Motorola, Inc. AT&T Corporation Nortel Technology Canadian Meteorological Centre National Semiconductor Corp. Cisco Systems, Inc. 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 ourselves 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. In August 1998, we hired three senior level sales professionals to develop our reseller channels. 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, which currently costs 15% of the product purchase price per year. 40 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 $1,771,800 in research and development in 1998 and in the first nine months of 1999. 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 jBridge 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. 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. 41 We believe our principal competitors for our current products include Citrix Systems, Inc., Hummingbird Communications, Ltd., SCO, WRQ, Network Computing Devices and NetManage. 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 license key components of our server-based technology from one software developer to whom we pay royalties pursuant to an exclusive license agreement. Minor elements of our server-based technology also are licensed pursuant to a non-exclusive agreement, which calls for royalty payments by us. Such royalty payments are 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 is an aggregate of 4.8% and 2.9% for 1999 and 2000. We hold options to purchase the developed technology and to purchase a perpetual license to some of the non-exclusively licensed technology which are exercisable beginning in December 2000. If we do not exercise our options under the exclusive license agreements, the applicable royalty rate would continue at 2% in 2001 and beyond. The exclusive license agreement, unless terminated earlier pursuant to its terms, will terminate on September 6, 2006. The non-exclusive agreement continues unless terminated for material breach. We purchased most of the licensed technology for an aggregate purchase price of $378,000 in the third quarter of 1999. 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. 42 In November 1999, we acquire 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 WinBridge (formerly jBridge) technology, was originally developed by a team of engineers formerly with Exodus Technology and hired by us in May 1998. Employees and Facilities As of September 30, 1999, we had a total of 49 employees, including 14 in marketing, sales and support, 28 in research and development and 7 in administration and finance. No employees are covered by a collective bargaining agreement. We currently occupy approximately 7,200 square feet of office space in Campbell, California pursuant to a lease which expires in April 2000, but is renewable each year at our option until April 2006. We are required to vacate these premises by the end of February 2000 as the City of Campbell has acquired the building for redevelopment. We anticipate no particular difficulty in locating and moving to new facilities in a timely fashion. 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. Annual lease payments currently are approximately $310,000. We believe our current facilities, other that those in Campbell, will be adequate to accommodate our needs until the end of 2000. 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. 43 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. 44 MANAGEMENT General The following table sets forth information regarding our executive officers, directors and other key employees:
Name Age Position ----- --- -------- Executive Officers and Directors Robert Dilworth .................. 58 Chairman of the Board of Directors Walter Keller .................... 49 President and Director Robin Ford ....................... 49 Executive Vice President, Marketing and Sales and Director Vince Pfeifer .................... 34 Vice President, Product Development Eric Lefebvre .................... 33 Vice President, Business Development Edmund Becmer .................... 41 Chief Financial Officer and Secretary Lawrence Burstein ................ 57 Director August P. Klein .................. 63 Director Michael P. O'Reilly .............. 46 Director Marshall C. Phelps, Jr. .......... 55 Director Key Employees Russann Keller ................... 30 Director of Marketing and Public Relations Prakash Jadeja .................. 44 Director of Engineering Robert Currey ................... 33 Principal Architect William Tidd ..................... 37 Director of Software Development
The members of our board of directors are classified into three classes, one of which is elected at each annual meeting of stockholders to hold office for a three-year term and until successors of such class have been elected and qualified. The respective members of each class are set forth below: . Class III: Walter Keller and Robin Ford (terms expire 2002) . Class II: Robert Dilworth and August Klein (terms expire 2001) 45 . Class I: Michael O'Reilly, Lawrence Burstein and Marshall C. Phelps, Jr. (terms expire 2000) 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 has served as Chairman of the Board of Metricom, Inc. since 1996, and as a director 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 VLSI Technology, Inc., Data Technology Corporation, Cortelco Systems, Inc. and Photonics Corp. Mr. Dilworth holds a B.S. in Business and Mathematics from L.A. State University. 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 from 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 our Executive Vice President, Marketing and Sales since July 1999 and of GraphOn-CA between 1996 and July 1999. She was elected as one of our directors in December 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. Vince Pfeifer has served as our Vice President, Product Development since July 1999 and of GraphOn-CA between October 1998 and July 1999. Mr. Pfeifer was General Manager and Director of Product Development of GraphOn-CA from June 1998 to August 1998. From June 1995 to May 1998, Mr. Pfeifer served as the Vice- President of Product Development for Exodus Technologies and ConnectSoft Communication Corporation and has nine years of experience in designing, developing, testing and supporting commercial grade software. 46 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, her 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. Edmund Becmer has served as our Chief Financial Officer and Vice President of Finance & Administration since July 1999 and of GraphOn-CA between February 1999 and July 1999. From May 1998 until December 1998, Mr. Becmer was Chief Financial Officer of TMCI Electronics, Inc., a publicly-traded company, based in San Jose, CA, with subsidiaries involved in the manufacturing of semiconductor equipment. In February, 1999, TMCI Electronics filed for reorganization under Chapter 11 of the United States Bankruptcy Code. Prior to joining TMCI Electronics, from March 1996 to May 1998, Mr. Becmer was a member of the accounting firm of Moore Stephens, P.C., where he was responsible for SEC audits, mergers and acquisitions and business consulting. From August 1993 to June 1995, Mr. Becmer was controller of First City Industries, Inc. in New York, NY, a holding company with subsidiaries in manufacturing, commercial real estate and residential real estate. From June 1987 to June 1993, Mr. Becmer was CFO/Controller of Lincorp Holdings, Inc., a public investment holding company in New York, NY, with investments in banking and commercial real estate and a Fortune Service 500 company. Mr. Becmer also was with the accounting firms of BDO Seidman, LLP and Deloitte and Touche LLP. Mr. Becmer holds a B.S.B.A. from San Diego State University and is a Certified Public Accountant. Lawrence Burstein has served as one of our directors since May 1996. Mr. Burstein was President and Treasurer between May 1996 and July 1999. For approximately ten years prior to 1996, Mr. Burstein was the President, a director and principal stockholder of Trinity Capital Corporation, a private investment banking concern. Trinity ceased operations upon the formation of Unity Venture Capital Associates Ltd. ("Unity VCA"). Since March 1996, Mr. Burstein has been President and a principal stockholder of Unity VCA. Mr. Burstein is a director of the following four public companies: T-HQ Inc., which designs and markets Nintendo and Sega 47 games; Brazil Fast Food Corp., the owner and operator of the second largest fast food restaurant chain in Brazil; CAS Medical Systems, Inc., engaged in the manufacture and marketing of blood pressure monitors and other medical products principally for the neonatal market; and The MNI Group Inc., engaged in the marketing of specially formulated medical foods. Mr. Burstein received an L.L.B. from Columbia Law School. August P. Klein has served as one of our directors since July 1999 and of GraphOn-CA between August 1998 and July 1999. Mr. Klein has been, since 1995, the Founder, CEO and Chairman of the Board of JSK Corporation and, since 1997, of APJK Corporation, general contractors and service providers for the insurance industry. From 1989 to 1993, Mr. Klein was founder and CEO of Uniquest, Inc., an object oriented application software company. From 1984 to 1988, Mr. Klein served as CEO of Masscomp, Inc., a developer of high performance real time mission critical systems and UNIX-based applications. Mr. Klein has served as Group Vice President, Serial Printers at Data Products Corporation and President and CEO at Integral Data Systems, a manufacturer of personal computer printers. From 1957 to 1982, he was General Manager of the Retail Distribution Business Unit and Director of Systems Marketing at IBM. Mr. Klein is a director of QuickSite Corporation and serves as a trustee of the Computer Museum in Boston, Massachusetts. Mr. Klein holds a B.S. in Mathematics from St. Vincent's College. Michael P. O'Reilly has served as one of our directors since July 1999 and of GraphOn-CA between December 1998 and July 1999. Mr. O'Reilly has served as Executive Vice President, Finance, Chief Financial Officer and Treasurer of Corel Corporation since December, 1997. Prior to joining Corel, from 1988 until 1997, Mr. O'Reilly was a senior tax partner in the Ottawa practice of KPMG, the international professional advisory services firm. Mr. O'Reilly is a Chartered Accountant. He holds a B.A. from the University of Western Ontario and an Hons. B. Comm from the University of Windsor. Mr. O'Reilly is a nominee of Corel. Marshall C. Phelps, Jr. has served as one of our directors since November 1999. From 1980 until August 1999, Mr. Phelps was employed by IBM in a series of executive positions, most recently as IBM's Vice President, Intellectual Property and Licensing, with responsibility for IBM's worldwide intellectual property activities, licensing, standards and telecommunications policy. He is a director of CommercialWare Inc., a developer of order processing and fulfillment sofware for direct marketing concerns. Mr. Phelps holds a BA from Muskingum College, an MS in Advanced Management from Stanford Graduate School of Business, and a JD from Cornell University School of Law. Russann Keller has served as our Director of Marketing Communications and Public Relations since early 1999 and previously held various sales, marketing, and technical positions with us since 1990, including MarCom Manager, Corporate Communications Manager and Support Manager. Ms. Kelley has also held various technical, editorial, and marketing positions at Knight-Ridder, Boole and Babbage, Elan Software, and was co-founder and Vice President at 48 Syber Sonic, Inc. Ms. Keller holds a degree in Environmental Biology. Ms. Keller is the daughter of Mr. Keller. Prakash Jadeja has served as our Director of Engineering since July 1999 and of GraphOn-CA between September 1997 and July 1999. From February 1996 to August 1997, Mr. Jadeja led the Digital Video Disc and Compact Disc Recordable System software group at Apple Computer. From February 1992 to January 1996, Mr. Jadeja was Vice President of Engineering at Workstation, Inc. Prior to that, Mr. Jadeja held a number of technical and management positions at Insignia Solutions, Inc., which he co-founded. Mr. Jadeja holds a B.S. in Applied Computer Science from De Montford University in England. Robert Currey has served as our Principal Architect and developer since July 1999 and of GraphOn-CA between June 1998 and July 1999. Prior to joining GraphOn-CA, beginning in November 1996, Mr. Currey served as team leader at Exodus Technologies. Mr. Currey was Senior Engineer at Connectsoft Corp. from January 1994 until November 1996. Previously, Mr. Currey was Senior Engineer at Attachmate Corp. from June 1992 to January 1994. Mr. Currey has an M.S. in computer science and a B.S. in applied mathematics from Oregon State University. William Tidd has served as our Director of Software Development since July 1999 and of GraphOn-CA between January 1999 and July 1999. Prior to joining GraphOn-CA, from 1996 to 1998, Mr. Tidd served on the jBridge development team for Corel Corporation. Mr. Tidd owned and operated Tirel Corporation, a software development company, from 1994 to 1996 after co-founding Atlantic Design Systems, which became Tirel Corporation in 1994. Mr. Tidd holds a Master of Engineering Degree in mechanical engineering from Carnegie Mellon University. Board of Directors and Committees Our board of directors consists of seven individuals. Corel has a contractual right to designate one individual to be a nominee to serve as a director until Corel controls less than 17% of the voting power of our capital stock. We also agreed not to reduce the size of the our board below six without Corel's prior written consent, until the date which is two years after the date of the initial public offering of our equity securities or the closing of the sale of all or substantially all of our assets or of any merger or consolidation with any other entity. The non-employee directors are eligible to participate in our stock option plan. We have established an audit committee which reviews and supervises our financial controls, including selection of our auditors, reviewing the books and accounts, meeting with our officers regarding our financial controls, acting upon recommendations of auditors and taking further actions as the audit committee deems necessary to complete an audit of our books and accounts. The audit committee also evaluates potential conflicts of interest between us and our 49 executive officers and directors and serves to evaluate any transactions or events which could be deemed to be improper, as well as other matters which may come before it or as directed by the board. The audit committee currently consists of two directors, Messrs. O'Reilly and Phelps. We have established a compensation committee, which reviews and approves the compensation and benefits for our executive officers, administers our stock plans and performs other duties as may from time to time be determined by the board. The compensation committee currently consists of two directors, Messrs. Dilworth and Klein. Executive Compensation and Employment Agreements The compensation for our key management is determined from time to time by our board or compensation committee. In addition, our board or compensation committee may, in our discretion, award these individuals cash bonuses, options to purchase shares of our common stock under the Stock Option Plan, and such other compensation, including equity-based compensation, as our board or compensation committee shall approve from time to time. The following table sets forth information with respect to the compensation of our Chief Executive Officer and each of the two other executive officers who were serving as our executive officers during fiscal year 1998 and whose total annual salary and bonus during such fiscal year exceeded $100,000: Summary Compensation
Annual Compensation ------------------- All Other Year Salary Bonus Compensation ---- --------- ------ ------------ Walter Keller ............................. 1998 $135,181 0 $ 0 President and Chief Executive Officer Robin Ford ................................ 1998 $141,960 0 $ 0 Executive Vice President, Marketing and Sales Zdravko Podolski(1) ....................... 1998 $ 94,750 0 $75,000 Vice President, Strategic Sales and Alliances
___________ (1) Mr. Podolski's employment with us was terminated on September 1, 1998. Pursuant to a severance agreement with Mr. Podolski, we paid him $75,000 in consideration for the release of any and all claims he may have had against us. 50 Employment Agreements On October 22, 1998, we entered into employment agreements with Mr. Keller and Ms. Ford which provide for a term of two years, annual base salaries of $140,000 and $130,000, respectively, and eligibility to receive bonuses at the discretion of our board. Such agreements contain provisions for bonuses upon achievement of milestones set forth in such agreements, non-competition for the term of each agreement and confidentiality. The base salaries are subject to change at the discretion of our board. Mr. Keller and Ms. Ford also are entitled to participate in any of our pension, insurance or benefit plans, including our stock option plans. Each employment agreement also provides for a severance payment in the amount of one year's compensation in the event that the employee is terminated by us without cause, or the employee resigns for Good Reason (as defined in the agreement) during the employment term. Good Reason includes, among other things, the failure of a successor to us to assume the employment agreements in connection with change in control transactions such as a merger, consolidation or a sale of all or substantially all of our assets. Good Reason also includes substantial changes in the duties, position, compensation and location of the employment. On February 8, 1999, we entered into an employment agreement with Mr. Becmer providing for employment at-will, an annual base salary of $125,000 and options to purchase up to 69,700 shares of common stock under our Stock Option/Stock Issuance Plan. Options to purchase 4,356 shares vested on May 8, 1999 and the remaining options will vest monthly in 45 equal installments. The base salary is subject to annual review by our board. The agreement provides for eligibility to receive additional options to purchase up to 13,940 shares of our common stock upon meeting quarterly management objectives during his first year of employment. Mr. Becmer also is entitled to participate in any of our pension, insurance or benefit plans, including our stock option plans. The agreement provides for a severance payment in the amount of six months' compensation in the event of a termination due to a merger or acquisition where Mr. Becmer's duties substantially change, a reduction in his compensation, a relocation or the failure of any successor to us to assume the agreement. 1998 Stock Option/Stock Issuance Plan Our 1998 Stock Option/Stock Issuance Plan is intended to promote our interests by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in us as an incentive for them to remain in our service. The plan was adopted by our board on June 23, 1998 and was approved by our stockholders on June 23, 1998. Pursuant to the terms of the plan, 2,230,400 shares of common stock may be issued to our officers and other employees, our non-employee board members and independent consultants in our service. However, in no event may any one participant in the plan receive option grants or 51 direct stock issuances for more than 278,000 shares of common stock in the aggregate per calendar year. The shares of common stock reserved for issuance under the plan are made available from authorized but unissued common stock or from shares of common stock reacquired by us, including shares repurchased on the open market. Should an option expire or terminate for any reason prior to exercise in full, the shares subject to the portion of the option not so exercised will be available for subsequent issuance under the plan. Unvested shares issued under the plan and subsequently repurchased by us will be added back to the share reserve and will accordingly be available for subsequent issuance under the plan. The compensation committee of the board will have exclusive authority to administer the plan with respect to option grants and stock issuances made to our executive officers and non-employee board members. The compensation committee and a secondary committee of one or more board members will each have separate but concurrent authority to make option grants and stock issuances under those programs to all other eligible individuals. The term "plan administrator," as used in this description of the plan, will mean either the compensation committee or the secondary committee, to the extent each such entity is acting in its capacity as administrator of the plan. The plan is divided into two separate components: . the option grant program under which eligible individuals may, at the discretion of the plan administrator, be granted options to purchase shares of common stock at an exercise price not less than 85% of their fair market value on the grant date and . the stock issuance program under which such individuals may, in the discretion of the plan administrator, be issued shares of common stock directly, through the purchase of vested or unvested shares at a price not less than 85% of their fair market value at the time of issuance or as a fully-vested bonus for past services rendered to us. The shares subject to each option granted under the option grant program and unvested shares issued under the stock issuance program will vest in one or more installments over the recipient's period of service with us. However, no vesting schedule will be at a rate less than 20% per year, with the initial vesting to occur no later than one year after the grant date of the option or the issue date of the unvested shares. No granted option may have a term in excess of ten years, and each granted option will be subject to earlier termination within a designated period following the optionee's cessation of service with us. 52 The exercise price may be paid in cash or in shares of common stock. Options may also be exercised for vested shares through a same-day sale program, pursuant to which a designated brokerage firm effects the immediate sale of those shares and pays over to us, out of the sale proceeds available on the settlement date, sufficient funds to cover the exercise price for the purchased shares. In addition, the plan administrator may provide financial assistance to one or more participants in connection with the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise or purchase price and any associated withholding taxes incurred in connection with such exercise or purchase. In the event that we are acquired by merger or sale of substantially all of our assets, each outstanding option under the option grant program which is not to be assumed by the successor corporation or otherwise continued in effect will automatically accelerate in full, and all unvested shares under the plan will immediately vest, except to the extent our repurchase rights with respect to those shares are assigned to the successor corporation or otherwise continued in effect. The plan administrator will have complete discretion to grant one or more options under the option grant program which will become exercisable on an accelerated basis for all of the option shares upon either: . an acquisition of us, whether or not those options are assumed or otherwise continued in effect or . the termination of the optionee's service within a designated period following an acquisition in which those options are assumed or continued in effect. The vesting of outstanding shares under the stock issuance program may be accelerated upon similar terms and conditions. The plan administrator also is authorized under the option grant and stock issuance programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights will immediately vest in connection with a change in ownership or control of us, whether by successful tender offer for more than 50% of the outstanding voting stock or by a change in the majority of the board by reason of one or more contested elections for board membership. Such accelerated vesting may occur either at the time of such change in ownership or control or upon the subsequent involuntary termination of the individual's service within a designated period, not to exceed 18 months, following such change in ownership or control. In the event any change is made to the outstanding shares of common stock by reason of any recapitalization, stock dividend, stock split, combination of shares, exchange of shares or 53 other change in corporate structure effected without our receipt of consideration, appropriate adjustments will be made to: . the maximum number and/or class of securities issuable under the plan; . the number and/or class of securities for which any one person may be granted stock options and direct stock issuances under the plan per calendar year; and . the number and/or class of securities and the exercise price per share in effect under each outstanding option. Such adjustments will be designed to preclude any dilution or enlargement of benefits under the plan or the outstanding options granted pursuant to the plan. The plan administrator has the authority to effect the cancellation of outstanding options under the option grant program in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the common stock on the new grant date. The board may amend or modify the plan at any time. The plan will terminate on June 22, 2007, unless sooner terminated by the board or in connection with an acquisition of us in which the plan is not assumed by the acquiring entity. 1996 Stock Option Plan Our 1996 Stock Option Plan was adopted by both our board and a majority in interest of our stockholders on May 30, 1996. The plan provides for the granting of options which are intended to qualify either as incentive stock options within the meaning of Section 422 of the Internal Revenue Code or as nonstatutory stock options which are not intended to meet the requirements of such section. The total number of shares of our common stock reserved for issuance under the plan is 187,500. Options to purchase shares may be granted under the plan to persons who, in the case of incentive stock options, are our employees, including officers, or, in the case of nonstatutory stock options, are our employees, including officers, or our non-employee directors. The plan provides for its administration by our board or a committee chosen by our board, which has discretionary authority, subject to restriction, to determine the number of shares issued pursuant to incentive stock options and nonstatutory stock options and the individuals to whom, the times at which and the exercise price for which options will be granted. 54 The exercise price of all incentive stock options granted under the plan must be at least equal to the fair market value of such shares on the date of the grant or, in the case of incentive stock options granted to the holder of more than 10% of our common stock, at least 110% of the fair market value of such shares on the date of the grant. The maximum exercise period for which incentive stock options may be granted is ten years from the date of grant or five years in the case of an individual owning more than 10% of our common stock. The aggregate fair market value of shares with respect to which incentive stock options are exercisable for the first time by the holder of the option during any calendar year shall not exceed $100,000. The aggregate fair market value is determined at the date of the option grant. As of September 30, 1999, options for 811,723 shares of common stock were outstanding under our 1998 and 1996 plans, no options had been exercised and 1,418,677 shares remained available for future issuance under these plans. CERTAIN RELATIONSHIPS AND TRANSACTIONS Mr. Keller, our Chairman and President, sold to Mr. Thomas A. Bevilacqua: . on January 1, 1998, 19,518 shares of our common stock for an aggregate purchase price of $700 and . on August 20, 1998, 38,049 shares of our common stock for an aggregate purchase price of $5,118. Mr. Bevilacqua, who was one of our directors until his resignation in December 1999, is a former partner in the law firm of Brobeck, Phleger & Harrison LLP, which firm we have retained from time to time for legal services. The 38,049 shares originally were subject to Mr. Keller's right of repurchase which lapses monthly in a series of equal monthly installments upon Mr. Bevilacqua's completion of each month of service on our board until May 2000. In addition, Mr. Keller has a right of first refusal exercisable in connection with any proposed transfer of such shares for which the repurchase right has lapsed. As of August 20, 1998, Mr. Keller sold 55,760 shares of our common stock to Mr. Bradlee, one of our former executive officers, for an aggregate purchase price of $7,500 evidenced by a full-recourse note secured by the shares purchased. The note bore interest at the rate of 5.41% per annum, compounded semi-annually. The 55,760 shares originally were subject to Mr. Keller's right of repurchase which began to lapse November 20, 1998 in a series of 45 successive, equal monthly installments upon Mr. Bradlee's completion of each month of service with us. In addition, Mr. Keller had a right of first refusal exercisable in connection with any proposed transfer of such shares for which the repurchase right has lapsed. Upon the end of 55 Mr. Bradlee's employment with us in May 1999, Mr. Keller repurchased 48,324 of such shares paid for by forgiving $6,500 of the note. As of August 20, 1998, Mr. Keller sold 13,940 shares of our common stock to Mr. Klein, one of our directors, for an aggregate purchase price of $1,875. The 13,940 shares are subject to Mr. Keller's right of repurchase which began to lapse November 20, 1998 in a series of 21 successive, equal monthly installments upon Mr. Klein's completion of each month of consulting services to us. In addition, Mr. Keller has a right of first refusal exercisable in connection with any proposed transfer of such shares for which the repurchase right has lapsed. As of August 20, 1998, Eric Kim, then one of our directors, and Messrs. Dilworth and Klein, each one of our directors, were each issued 41,820 shares of our common stock under our stock option plan at a purchase price of $0.135 per share. Such shares are subject to our right of repurchase which began to lapse November 20, 1998 in a series of 45 successive, equal monthly installments upon completion of each month of service on our board until May 2000. On September 30, 1999, Mr. Kim resigned as a director and we purchased 30,668 shares of our common stock from Mr. Kim for $4,294. In March 1998, Spencer Trask Investors, an affiliate of Spencer Trask, purchased 278,800 shares of our common stock from us for an aggregate purchase price of $25,000. Concurrently with such transaction, Spencer Trask Investors loaned us $475,000 evidenced by a convertible promissory note, bearing interest at a rate of 10% per annum. The convertible promissory note was redeemed by us on January 27, 1999. In March 1998, Spencer Trask Investors, entered into a sale arrangement with Mr. Keller and Ms. Ford, our Executive Vice President, Marketing and Sales, with respect to the sale of an aggregate of 1,951,600 shares of our common stock for aggregate consideration of $3,500,000, comprised of $200,000 cash, a non- recourse promissory note in the principal amount of $800,000 which became due on January 20, 1999, a non-recourse promissory note in the principal amount of $1,000,000 which became due on July 20, 1999, and a non-recourse promissory note in the principal amount of $1,500,000 which becomes due on January 20, 2000. Each of the foregoing notes bears interest at the rate of 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 of our common stock 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 by Spencer Trask Investors and the 446,080 shares pledged with respect to such note were released from escrow on January 20, 1999. The $1,000,000 note was paid by Spencer Trask Investors and the 557,600 shares pledged with respect to such note were released from escrow on July 20, 1999. In the event that a note is not paid, the shares securing it will be released to Mr. Keller and Ms. Ford, who also maintain voting control over such pledged shares unless and until the related notes are fully paid and the shares are released to Spencer Trask Investors. 56 In connection with the issuance and sale by us of an aggregate of 2,878,815 shares of our common stock for an aggregate purchase price of $5,162,868 in three separate closings, the final such closing occurring January 27, 1999, in connection with and pursuant to the terms of a private placement memorandum and related agreements (the "private placement"), we entered into a placement agency agreement, dated September 2, 1998, with Spencer Trask. Pursuant to the placement agency agreement, Spencer Trask received a fee equal to 10% of the aggregate offering price for our common stock sold in the private placement. In addition, we issued to Spencer Trask the Spencer Trask Warrants. See "Description of Securities-Spencer Trask Warrants and Similar Warrants." Spencer Trask, together with its affiliates, holds an aggregate of 1,686,461 shares of our common stock and warrants to purchase 880,427 shares of our common stock. Mr. Bevilacqua, together with his wife, Therese Mrozek, currently a partner in the law firm of Brobeck, Phleger & Harrison LLP, purchased 2,788 shares of our common stock in the private placement for an aggregate purchase price of $5,000 and Brobeck, Phleger & Harrison LLP purchased 27,880 shares for an aggregate purchase price of $50,000. Spencer Trask Investors and Mr. Keller, upon the commencement of the private placement, loaned $200,000 and $100,000, respectively, to us pursuant to convertible promissory notes which bore interest at 8% per annum and matured at the earlier of the first closing of the private placement or 12 months from the date of the notes. Spencer Trask converted the $200,000 note into 111,520 shares of our common stock on December 31, 1998 and we paid the $100,000 note held by Mr. Keller on that same date. In addition, Spencer Trask Investors was issued, upon the commencement of the private placement, a warrant to purchase 55,760 shares of our common stock at $1.79 per share, and Mr. Keller was issued a warrant to purchase 27,880 shares of our common stock at $1.79 per share. See "Description of Securities - Spencer Trask Warrants and Similar Warrants." On December 31, 1998, in consideration of tangible and intangible assets, we sold to Corel Corporation 2,167,114 shares of our common stock and a warrant to purchase up to 216,711 shares of our common stock. We also granted Corel the right to appoint a nominee to our board and registration. See "Management of Directors" and "Description of Securities-Corel Warrant and Similar Warrant." In consideration of consulting services performed in connection with the merger between us and GraphOn-CA, we issued to Spencer Trask Class A redeemable common stock purchase warrants to purchase an aggregate of up to 250,000 shares of our common stock at an exercise price of $5.50 per share, and pay Spencer Trask up to $575,000. In June 1996, we issued an aggregate of 625,000 shares of our common stock at a price of $.0001 per share, as follows: 150,000 shares to Lawrence Burstein, one of our directors, 25,000 57 shares to Unity VCA, an affiliate of Mr. Burstein, 136,500 shares to the three other then directors of GraphOn and their affiliates, and 313,500 shares to various other persons. In June 1996, we issued 58,334 and 141,666 Class A and a like number of Class B warrants to Mr. Burstein and the three other then directors of GraphOn in consideration for future services to be rendered by such persons on behalf of us. Such warrants are identical to our Class A and Class B redeemable warrants offered and sold in our initial public offering but are not redeemable by us. We paid Unity VCA between June 1996 and July 1999 a monthly fee of $7,500 for general and administrative services. Such fee included the use of approximately 500 square feet of office space in premises occupied by Unity VCA. Dalessio Miliner & Leben ("DML"), an accounting firm which is an affiliate of a then director of us, affords Unity VCA the use of such space at a monthly rental of $2,000. Mr. Burstein and two other then directors of GraphOn are each directors and stockholders of Unity VCA. The agreement with Unity VCA has been terminated. Unity VCA had made non-interest demand loans aggregating approximately $50,000 to us as of the November 12, 1996 to cover expenses incurred by us in connection with our initial public offering. We repaid these loans out of the proceeds of our initial public offering. 58 PRINCIPAL STOCKHOLDERS The following table sets forth information known to us as of December 3, 1999, based on information obtained from the persons named below, with respect to the beneficial ownership of shares of our common stock held by . each person known by us to be the owner of 5% or more of the outstanding shares of our common stock; . each of our directors; and . all of our executive officers and directors as a group. Unless otherwise indicated, the address for each stockholder is c/o GraphOn Corporation, 150 Harrison Avenue, Campbell, CA 95008.
Number of Shares Beneficially Owned (1) Percent of Class ------------------------- ----------------- Corel Corporation (2)................................ 2,383,825 20.76% 1600 Carling Avenue Ottawa, Ontario K1Z 8R7, Canada Spencer Trask Holdings, Inc. (3)...................... 1,686,461 19.48% 535 Madison Avenue New York, NY 10022 Walter Keller (4) ................................... 1,005,582 9.15% Robert Dilworth .................................... 41,820 * August P. Klein .................................... 55,760 * Michael O'Reilly (2) ................................ 2,383,825 20.76% Robin Ford (5) ...................................... 641,240 5.69% Vince Pfeifer (6) ................................... 19,143 * Edmund Becmer (7) ................................... 9,293 * Eric Lefebvre(8) ................................... 3,666 * Lawrence Burstein(9)................................. 291,668 2.56% Marshall C. Phelps, Jr............................... All executive officers and directors as a group 4,479,877 38.47% (10 persons) (10)..................................
___________ * Denotes less than 1% of our outstanding common stock 59 (1) As used in this prospectus, beneficial ownership means the sole or shared power to vote, or direct the voting of, a security, or the sole or shared power to invest or dispose, or direct the investment or disposition, of a security. Except as otherwise indicated, all persons named in this prospectus have sole voting power and investment power with respect to their respective shares of our common stock, except to the extent that authority is shared by spouses under applicable law, and record and beneficial ownership with respect to their respective shares of our common stock. With respect to each stockholder, any shares issuable upon exercise of all options and warrants held by such stockholder that are currently exercisable or will become exercisable within 60 days of December 3, 1999 are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Percentage ownership of our common stock is based on 11,266,302 shares of our common stock outstanding as of December 3, 1999. (2) Includes 2,167,114 shares of common stock and a warrant exercisable for up to 216,711 shares of our common stock at an exercise price of $1.79 per share held by Corel. Mr. O'Reilly is the Executive Vice President, Finance, Chief Financial Officer and Treasurer of Corel and a director of us. However, Mr O'Reilly disclaims beneficial ownership of all of these shares. (3) Includes 94,792 shares held by Spencer Trask, 717,631 shares held by Kevin Kimberlin Partners, L.P. ("KKP"), an affiliate of Spencer Trask Holdings, Inc., the 100% owner of Spencer Trask, 37,638 shares and warrants exercisable for up to an aggregate of 66,900 shares of our common stock at an exercise price of $1.79 per share held by William P. Dioguardi, the President of the Spencer Trask, three warrants exercisable for up to an aggregate of 58,971 shares of our common stock at an exercise price of $1.79 per share held by KKP, a warrant exercisable for up to an aggregate of 12,261 shares of our common stock at an exercise price of $1.79 per share held by Kevin Kimberlin, a general partner of KKP and a majority holder of Spencer Trask Holdings, four warrants exercisable for up to an aggregate of 242,293 shares of our common stock at an exercise price of $1.79 per share held by Spencer Trask Holdings and 250,000 warrants exercisable for up to an aggregate of 250,000 shares of our common stock at an exercise price of $5.50 held by Spencer Trask. Excludes 324,667 shares of our common stock issuable upon exercise of the Spencer Trask Warrants in which Spencer Trask has no beneficial interest. See "Description of Securities-Spencer Trask Warrants and Similar Warrants." (4) Includes 418,200 shares of our common stock placed in escrow with Brobeck, Phleger & Harrison LLP ("BPH"), as escrow agent, to be sold to Spencer Trask Investors on January 20, 2000. During the escrow period, Mr. Keller cannot sell or otherwise transfer such shares but retains all other stockholder rights, including, without limitation, the right to vote such shares. Also includes a warrant exercisable for up to 27,880 shares of our 60 common stock at an exercise price of $1.79 per share and 22,304 shares of our common stock held by relatives of Mr. Keller who, at the option of Spencer Trask, can be required to enter into a voting agreement granting Mr. Keller the right to vote such shares. Mr. Keller and Ms. Ford are husband and wife. See footnote 5 below. (5) Includes 418,200 shares of our common stock placed in escrow with BPH, as escrow agent, to be sold to Spencer Trask Investors on January 20, 2000. During the escrow period, Ms. Ford cannot sell or otherwise transfer such shares but retains all other stockholder rights, including, without limitation, the right to vote such shares. Also includes 16,728 shares held by relatives of Ms. Ford who, at the option of Spencer Trask, can be required to enter into a voting agreement granting Ms. Ford the right to vote such shares. Mr. Keller and Ms. Ford are husband and wife. See footnote 4 above. (6) Includes options exercisable for up to 5,203 shares of our common stock at an exercise price of $1.52 per share. (7) Includes options exercisable for up to 9,293 shares of our common stock at an exercise price of $1.52 per share. (8) Includes options exercisable for up to 3,666 shares of our common stock at an exercise price of $1.52 per share. (9) Includes 25,000 shares of our common stock owned by Unity VCA, over which shares Mr. Burstein shares voting and investment power. Also includes 58,334 shares issuable upon exercise of Class A warrants and 58,334 shares issuable upon exercise of Class B warrants. (10) See footnotes 3 through 7 above. Includes warrants held by Mr. Keller and Corel exercisable for up to 244,591 shares of our common stock at an exercise price of $1.79 per share and options exercisable for up to 18,162 shares of our common stock held by three of our officers. 61 SELLING STOCKHOLDER The registration statement, of which this prospectus forms a part, relates to our registration, for the account of the selling stockholder, of an aggregate of 300,000 shares of our common stock underlying warrants issued to the selling stockholder in October 1999. These shares are being registered pursuant to registration rights granted by us to the selling stockholder in connection with its acquisition of these warrants. We believe, based on information supplied by the selling stockholder, that except as noted, it has sole voting and investment power with respect to all shares of common stock which it beneficially owns. The last column in this table assumes the sale of all of our shares offered by this prospectus.
Number of Number of Shares Shares Beneficially Offered by Number of Shares Beneficially Owned Prior Selling Owned After Offering ---------------------------- Name of Selling Stockholder to Offering Stockholder Number Percent - ------------------------------ -------------- -------------- ------------ ---------- Super Tech Holdings Limited..... 300,000 300,000 -- --%
The sale of the selling stockholder's shares may be effected from time to time in transactions, which may include block transactions by or for the account of the selling stockholder, in the over-the-counter market or in negotiated transactions, or through the writing of options on the selling stockholder's shares, a combination of these methods of sale, or otherwise. Sales may be made at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. The selling stockholder may effect the transactions by selling its shares directly to purchasers, through broker-dealers acting as agents for the selling stockholder, or to broker-dealers who may purchase shares as principals and thereafter sell the selling stockholders's shares from time to time in the over- the-counter market, in negotiated transactions, or otherwise. In effecting sales, brokers and dealers engaged by the selling stockholder may arrange for other broker-dealers to participate in the resales. The selling stockholder may enter into hedging transactions with broker-dealers, and in connection with these transactions, broker-dealers may engage in short sales of the shares. The selling stockholder may also sell shares short and deliver these shares to close out their short positions. Selling stockholder may also enter into option or other transactions with broker-dealers that involve the delivery of these shares to the broker-dealers, who may then resell or otherwise transfer such shares. The selling stockholder may also pledge these shares to a broker-dealer who, upon a default, may sell or otherwise transfer these shares. 62 These broker-dealers, if any, may receive compensation in the form of discounts, concessions or commissions from the selling stockholder and/or the purchaser for whom such broker-dealers may act as agents or to whom they may sell as principals or both, which compensation as to a particular broker-dealer may be in excess of customary commissions. The selling stockholder and broker-dealers, if any, acting in connection with these sales might be deemed to be "underwriters" within the meaning of section 2(11) of the Securities Act of 1933. Any commission they receive and any profit upon the resale of the securities might be deemed to be underwriting discounts and commissions under the Securities Act. We have advised the selling stockholder that during such time as it may be engaged in a distribution of the common stock covered by this prospectus it will be required to comply with Regulation M promulgated under the Securities Exchange Act of 1934. With certain exceptions, Regulation M precludes any selling stockholder, any affiliated purchasers, and any broker-dealer or other person who participates in such distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security in connection with the distribution of that security. All of the foregoing may affect the marketability of our common stock. Sales of any shares of our common stock by the selling stockholder may depress the market price of our common stock. Any securities covered by this prospectus that qualify for sale pursuant to SEC Rule 144 under the Securities Act may be sold under that Rule rather than pursuant to this prospectus. There can be no assurance that the selling stockholder will sell any or all of the shares of common stock covered by this prospectus. 63 DESCRIPTION OF SECURITIES General We are authorized to issue 45,000,000 shares of common stock, par value $.0001 per share, and 5,000,000 shares of "blank check" preferred stock, par value $.01 per share. As of December 3, 1999, 11,266,302 shares of our common stock were outstanding, held of record by 257 persons. No shares of our preferred stock currently are outstanding. Common Stock The holders of our common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. The holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors out of funds legally available therefor. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over our common stock. Holders of our common stock, as such, have no conversion, redemption, preemptive or other subscription rights. All of the outstanding shares of our common stock are fully paid and nonassessable. Preferred Stock Our certificate of incorporation authorizes the issuance of 5,000,000 shares of preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of our common stock. Our preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us subsequent to the effective time. Although we do not currently intend to issue any shares of preferred stock, there can be no assurance that we will not do so in the future. Dividends We do not presently intend to pay any cash dividends as all available cash will be utilized to further the growth of our business for the proximate future thereafter. The payment of any cash dividends will be in the discretion of our board and will be dependent upon our results of operations, financial condition, contractual restrictions and other factors deemed relevant by our board. 64 Transfer Agent The transfer agent for the our common stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. IPO Warrants As of December 3, 1999, there were 1,056,949 Class A redeemable warrants and 1,249,799 Class B redeemable warrants (collectively, the "IPO warrants") outstanding, held of record by 6 and 7 persons. Each Class A redeemable warrant entitles the registered holder to purchase one share of our common stock at a price of $5.50 per share, subject to adjustment, for a period of five years commencing on July 12, 1999. Each Class B redeemable warrant entitles the registered holder to purchase one share of our common stock at a price of $7.50 per share, subject to adjustment, for a period of five years commencing on July 12, 1999. We may 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 our option, at a price of $.05 per IPO warrant at any time upon not less than 30 days' prior written notice, provided that the reported high bid price of our common stock equals or exceeds $8.50 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 shall have exercise rights until the close of business on the date fixed for redemption. On December 21, 1999, we called the warrants for redemption as the price of our common stock had satisfied the redemption criteria. We fixed January 24, 2000 as the redemption date. The IPO warrants are issued in registered form under a warrant agreement between us and American Stock Transfer & Trust Company, as warrant agent. The exercise price and number of shares of our common stock issuable on exercise of the IPO warrants are subject to adjustment, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of us. However, the IPO warrants are not subject to adjustment for issuances of our common stock at a price below their respective exercise prices. We have the right, in our sole discretion, to decrease the exercise price of the IPO warrants for a period of not less than 30 days on not less than 30 days' prior written notice to the warrantholders. In addition, we have the right, in our sole discretion, to extend the expiration date of the IPO warrants on five business days' prior written notice to the warrantholders. The IPO warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment 65 of the exercise price to the warrant agent for the number of IPO warrants being exercised. Payment of the exercise price is by certified check, payable to us. The warrantholders do not have the rights or privileges of holders of our common stock. No IPO warrants will be exercisable unless at the time of exercise we have filed with the SEC a current prospectus covering the shares of our common stock issuable upon exercise of IPO warrants and such shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of such IPO warrants. We will use our best efforts to have all shares so registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the IPO warrants, subject to the terms of the warrant agreement. While it is our intention to do so, there is no assurance that we will be able to do so. No fractional shares will be issued upon exercise of the IPO warrants. However, if a warrantholder exercises all IPO warrants then owned of record by him, we will pay to such warrantholder, in lieu of the issuance of any fractional share which otherwise is issuable to such warrantholder, an amount in cash based on the market value of our common stock on the last trading day prior to the exercise date. Upon consummation of our merger with GraphOn-CA, we issued to Spencer Trask 250,000 Class A redeemable common stock purchase warrants exercisable for an aggregate of up to 250,000 shares of our common stock at an exercise price of $5.50 per share. The terms of the warrants are substantially the same as the terms of the Class A redeemable warrants described above, except that the warrants will not be redeemable until the reported high bid price of our common stock equals or exceeds $15.00 per share for the 20 consecutive trading days immediately prior to the notice of redemption to the warrantholders. Underwriters' IPO Securities In connection with our initial public offering, we sold to GKN Securities Corp. and Gaines, Berland Inc., the underwriters of our initial public offering, for nominal consideration, the right to purchase up to an aggregate of 125,000 units (the "Underwriters' IPO Securities"). Each unit issuable upon exercise of the Underwriters' IPO Securities consists of one share of our common stock, one Class A warrant and one Class B warrant (the Class A warrants and the Class B warrants are collectively referred to in this prospectus as the "Warrants"). The Warrants are identical to the IPO warrants described above except that the Warrants cannot be redeemed. The Underwriters' IPO Securities are exercisable initially at $6.60 per unit (the "Exercise Price") for a period of five years commencing on November 12, 1996. The Underwriters' IPO Securities contain anti- dilution provisions providing for adjustment of the exercise price upon the occurrence of certain events including the issuance of shares of our common stock or other securities convertible into or exercisable for shares of our common stock at a price per share less 66 than the exercise price, or in the event of any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. We also agreed at the time of the issuance of the Underwriters' IPO Securities to use our best efforts to maintain an effective registration statement with respect to the Underwriters' IPO Securities and the underlying units. In addition, the Underwriters' IPO Securities grant to the holders of the securities "piggy back" and "demand" rights for periods of seven and five years from November 12, 1996 with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the Underwriters' IPO Securities. As of December 3, 1999, 34,125 of the Underwriters' IPO Securities remained outstanding and unexercised. Directors' Warrants In June 1996, we issued 58,334 and 141,666 Class A and a like number of Class B warrants to Mr. Burstein and the three other then directors of GraphOn in consideration for future services to be rendered by such persons on our behalf. Such warrants are identical to our Class A and Class B redeemable warrants offered and sold in our initial public offering but are not redeemable by us. Spencer Trask Warrants and Similar Warrants We issued 575,763 warrants to Spencer Trask to purchase up to an aggregate of 575,763 shares of our common stock in January 1999. Spencer Trask subsequently transferred its interests in 324,667 of such warrants to nonaffiliated parties. The exercise price of such warrants is $1.79 per share. The Spencer Trask warrants are exercisable until January 27, 2006. The exercise price and number of shares of our common stock issuable on exercise of the warrants are subject to adjustment in particular circumstances, including in the event of a stock dividend, recapitalization, subdivision or consolidation of us, or issuance of our common stock, or options, rights or warrants to subscribe for shares of our common stock, or securities convertible into or exchangeable for shares of our common stock, at a price below their respective exercise prices. The Spencer Trask warrants may be exercised upon surrender of the certificate evidencing the respective warrant on or prior to the expiration date at the offices of us, with the annexed exercise form completed and executed as indicated, accompanied by full payment of the exercise price to us for the number of warrant shares being exercised. The exercise price may be paid by certified or official bank check, in shares of our common stock or by the "net issuance" method. The holders of Spencer Trask warrants do not have the rights or privileges of holders of our common stock. No fractional shares will be issued upon exercise of such warrants. However, we will pay to such warrantholder, in lieu of the issuance of any fractional share which otherwise 67 is issuable to such warrantholder, an amount in cash based on the fair market value of our common stock as determined in good faith by our board. Spencer Trask Investors, an affiliate of Spencer Trask, and Mr. Keller hold warrants exercisable for up to 55,760 and 27,880 shares of our common stock, the terms of which are substantially the same as those of the Spencer Trask warrants. Corel Warrant and Similar Warrant Corel and one additional stockholder holding less than 1% of the outstanding shares of our common stock hold an aggregate of two warrants to purchase up to 216,711 and 676 shares of our common stock. The exercise price of such warrants is $1.79 per share, and they are exercisable until December 18, 2003. The exercise price and number of shares of our common stock issuable on exercise of such warrants are subject to adjustment in particular circumstances, including in the event of a stock dividend, subdivision or combination of our capital stock, reclassification, capital reorganization or change in our capital stock, or consolidation, merger or sale of all or substantially all of our assets. Such warrants may be exercised upon surrender of the certificates evidencing them, with the annexed exercise form completed and executed as indicated, accompanied by full payment of the exercise price to us for the number of warrant shares being exercised. The exercise price may be paid by cash or check or by the "net issuance" method. Holders of the warrants, as such, are not entitled to the rights or privileges of holders of our common stock. No fractional shares will be issued upon exercise of such warrants. However, we will pay to such warrantholders, in lieu of the issuance of any fractional share which otherwise is issuable to such warrantholders, an amount in cash based on the fair market value of our common stock as determined in good faith by the our board. Shares Eligible for Future Sale We cannot predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. As of the date of this prospectus, there are 11,266,302 shares of our common stock outstanding and 5,004,125 shares issuable upon exercise of outstanding options and warrants. Restrictions under the securities laws and lock-up agreements prevent the immediate sale in the public market of 9,435,383 of such shares of common stock. However, 7,268,269 of these restricted shares will become available for sale on January 12, 2000. 68 Legal Matters The validity of the shares of our common stock covered by this prospectus has been passed upon by Cooperman Levitt Winikoff Lester & Newman, P.C., New York, New York. Certain members of this firm own shares of our common stock. Experts Our financial statements as of December 31, 1998, 1997 and for the years ended December 31, 1998, 1997 and 1996 and related schedules included in this prospectus have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their reports appearing elsewhere herein and in this prospectus, and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting. Available Information We have filed with the SEC a registration statement on Form S-1, including all amendments, exhibits, schedules and supplements thereto, under the Securities Act and the rules and regulations thereunder for the regulations thereunder, for the registration of the our common stock offered hereby. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by the rules and regulations of the SEC. For further information about us and the common stock offered in this prospectus, you should refer to the registration statement and its exhibits. You may read and copy any document we file with the Securities and Exchange Commission at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at 3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 30326- 1232. Copies of such material may be obtained from the Public Reference Section of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. You can also review such material by accessing the SEC's Internet web site at http://www.sec.gov. This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. 69 INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report................................. F-2 Balance Sheets as of December 31, 1998 and 1997.............. F-3 Statements of Operations and Comprehensive Income as of December 31, 1998 and 1997............................. F-4 Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996............................. F-5 Statements of Cash Flows as of December 31, 1998 and 1997.... F-6 Summary of Accounting Policies............................... F-7 Notes to Financial Statements................................ F-10 Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998............................................ F-20 Statements of Operations and Comprehensive Income as of September 30, 1999 and September 30, 1998 (unaudited).. F-21 Statements of Stockholders' Equity for the nine months ended September 30, 1999 (unaudited)......................... F-22 Statements of Cash Flows as of September 30, 1999 and September 30, 1998 (unaudited)............................... F-23 Notes to Financial Statements (unaudited).................... F-24 F-1 Independent Auditors' Report Stockholders and Board of Directors GraphOn Corporation Campbell, California We have audited the accompanying balance sheets of GraphOn Corporation as of December 31, 1998 and 1997 and the related statements of operations and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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. These standards require that we plan and perform our audits 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 presentation of the financial statements. We believe 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO Seidman, LLP San Jose, California February 25, 1999, except with respect to matters discussed in Note 6 as to which the date is May 30, 1999. F-2 GraphOn Corporation Balance Sheets
December 31, ---------------------------- 1998 1997 ----------- ---------- Assets Current Assets: Cash and cash equivalents (Note 8).......................................... $ 1,798,400 $ 302,800 Accounts receivable, net of allowance for doubtful accounts of $25,000, $25,000 and $0, respectively (Notes 8 and 9)...................... 564,700 308,100 Available-for-sale securities (Notes 1 and 8)............................... -- 8,600 Prepaid expenses and other assets........................................... 32,100 18,300 ------------ ---------- Total Current Assets......................................................... 2,395,200 637,800 ------------ ---------- Property and Equipment, net (Notes 2 and 3).................................. 423,300 50,300 Purchased Technology, net (Note 3)........................................... 3,645,400 -- Capitalized Software, net.................................................... 74,200 43,200 Deferred Compensation Expense (Note 6)....................................... 566,000 -- Other Assets................................................................. 6,400 2,000 ------------ ---------- $ 7,110,500 $ 733,300 ============ ========== Liabilities And Stockholders' Equity Current Liabilities: Convertible note payable (Notes 5, 6 and 13)................................ $ 475,000 $ -- Accounts payable............................................................ 115,700 28,400 Accrued expenses (Note 4)................................................... 498,900 142,900 Deferred revenue............................................................ 112,600 443,800 ------------ ---------- Total Current Liabilities..................................................... 1,202,200 615,100 Commitments, Contingencies and Subsequent Events (Notes 5, 6, 10, 11, and 13)..................................................................... Stockholders' Equity (Notes 5, 6, and 13)..................................... Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding............................................. -- -- Common stock, no par value, 50,000,000 shares authorized, 16,363,959, 14,294,003 and 6,000,000 shares issued and outstanding............................................................... 8,431,500 505,000 Accumulated other comprehensive income (Notes 1 and 8)...................... -- (12,100) Accumulated deficit......................................................... (2,523,200) (374,700) ------------ ---------- Stockholders' Equity.......................................................... 5,908,300 118,200 ------------ ---------- $ 7,110,500 $ 733,300 ============ ==========
See accompanying summary of accounting policies and notes to financial statements. F-3 GraphOn Corporation Statements of Operations and Comprehensive Income For the Years Ended December 31, 1998, 1997 and 1996
Years ended December 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues (Notes 8 and 9): Product sales........................................... $ 608,700 $ 480,000 $ 505,000 Maintenance............................................. 320,300 8,200 75,000 OEM licenses............................................ 1,184,800 1,437,900 14,800 Training................................................ 10,400 -- -- ----------- ----------- ----------- Total Revenues........................................... 2,124,200 1,926,100 594,800 Cost of Revenues (Note 10): Product sales........................................... 28,500 43,500 261,300 Maintenance............................................. 22,200 16,600 12,800 OEM licenses............................................ 293,500 403,200 61,500 ----------- ----------- ----------- Total Cost of Revenues................................... 344,200 463,300 335,600 Gross Profit............................................. 1,780,000 1,462,800 259,200 ----------- ----------- ----------- Operating Expenses: Selling and marketing................................... 1,440,300 827,300 192,700 General and administrative (Notes 6 and 10)............. 1,118,600 324,700 218,900 Research and development................................ 840,200 190,500 41,700 ----------- ----------- ----------- Total Operating Expenses................................. 3,399,100 1,342,500 453,300 ----------- ----------- ----------- (Loss) Income From Operations............................ (1,619,100) 120,300 (194,100) Other Income (Expense): Interest and other income............................... 9,800 7,200 6,400 Interest expense (Note 6)............................... (521,900) (2,100) -- Loss on sale of available-for-sale securities (Note 1)............................................... (16,500) -- -- ----------- ----------- ----------- (Loss) Income Before Provision for Income Taxes ................................................ (2,147,000) 125,400 (187,700) Provision for Income Taxes (Note 7) ..................... 800 900 800 ----------- ----------- ----------- Net (Loss) Income........................................ (2,148,500) 124,500 (188,500) ----------- ----------- ----------- Other Comprehensive Income (Loss), net of tax Unrealized holding gain (loss) on investment (Note 1) .............................................. 12,100 (8,100) 7,500 ----------- ----------- ----------- Comprehensive (Loss) Income.............................. $(2,136,400) $ 116,400 $ (181,000) =========== =========== =========== Basic and Diluted (Loss) Earnings per Common Share............................................ $ (0.32) $ 0.02 $ (0.03) =========== =========== =========== Weighted Average Common Shares Outstanding............... 6,762,667 6,000,000 6,000,000 =========== =========== ===========
See accompanying summary of accounting policies and notes to financial statements F-4 GraphOn Corporation Statements of Stockholders' Equity For the Years Ended December 31, 1998, 1997 and 1996 (Notes 1,2,3,6 and 13)
Common Stock Accumulated ------------------------ Comprehensive Accumulated Shares Amount Income Deficit Total ---------- ---------- ------------- ----------- ----------- Balances, December 31, 1995................... 6,000,000 $ 505,000 $ (11,500) $ (310,700) $ 182,800 Change in market value of available-for- sale securities............................. -- -- 7,500 -- 7,500 Net loss...................................... -- -- -- (188,500) (188,500) ---------- ---------- ------------ ----------- ----------- Balances, December 31, 1996................... 6,000,000 505,000 (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................... 6,000,000 505,000 (12,100) (374,700) 118,200 Change in market value of available-for- sale securities............................ -- -- 12,100 -- 12,100 Compensation expense related to issuance of common stock and granted options.................................... -- 667,600 -- -- 667,600 Interest expense related to issuance of common stock............................... -- 475,000 -- -- 475,000 Proceeds from employee stock purchase......... 508,500 38,100 -- -- 38,100 Proceeds from sale of common stock, net of offering costs of $564,700.......... 3,699,000 2,659,300 -- -- 2,659,300 Issuance of common stock and warrants for property and equipment and purchased technology....................... 3,886,503 3,886,500 -- -- 3,886,500 Exchange of convertible notes payable......... 200,000 200,000 -- -- 200,000 Net loss...................................... -- -- -- (2,148,500) (2,148,500) ---------- ---------- ------------ ----------- ----------- Balances, December 31, 1998................... 14,294,003 $8,431,500 $ -- $(2,523,200) $ 5,908,300 ========== ========== ============ =========== ===========
See accompanying summary of accounting policies and notes to financial statements. F-5 Graphon Corporation Statements Of Cash Flows For The Years Ended December 31, 1998, 1997 and 1996 (Note 12)
Years Ended December 31, ------------------------------------- 1998 1997 1996 ---------- ---------- ----------- Increase (Decrease) In Cash and Cash Equivalents Cash Flows From Operating Activities: Net (loss) income........................................... $(2,148,500) $ 124,500 $(188,500) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization............................... 65,200 31,000 1,100 Allowance for doubtful accounts............................. 25,000 -- -- Loss (gain) on sale of available-for-sale securities................................................. 16,500 -- (4,400) Compensation expense (Note 6)............................... 101,600 -- -- Interest expense (Note 6)................................... 475,000 -- -- Changes in operating assets and liabilities: Accounts receivable........................................ (281,600) 232,000 (461,700) Related party receivable................................... -- 34,400 (8,500) Prepaid expenses and other assets.......................... (13,900) (400) 28,900 Accounts payable........................................... 87,300 12,900 (1,800) Accrued expenses........................................... 356,000 137,000 (19,500) Deferred revenue........................................... (331,200) (358,300) 802,100 ----------- --------- --------- Net Cash (Used In) Provided By Operating Activities.......... (1,648,600) 213,100 147,700 ----------- --------- --------- Cash Flows From Investing Activities: Proceeds from sale of available-for-sale securities................................................. 4,300 -- 40,500 Purchase of available-for-sale securities................... -- -- (20,700) Capitalization of software development costs................ (53,100) (24,000) (35,900) Capital expenditures........................................ (179,400) (39,300) (28,500) Other assets................................................ -- -- -- ----------- --------- --------- Net Cash Used In Investing Activities........................ (228,200) (63,300) (44,600) ----------- --------- --------- Cash Flows From Financing Activities: Proceeds from convertible notes payable..................... 775,000 -- -- Repayment of convertible notes payable...................... (100,000) -- -- Net proceeds from issuance of common stock.................. 2,697,400 -- -- Purchase and retirement of stock............................ -- -- -- ----------- --------- --------- Net Cash Provided By Financing Activities.................... 3,372,400 -- -- ----------- --------- --------- Net Increase in Cash and Cash Equivalents.................... 1,495,600 149,800 103,100 Cash and Cash Equivalents, beginning of the period........... 302,800 153,000 49,900 ----------- --------- --------- Cash and Cash Equivalents, end of the period................. $ 1,798,400 $ 302,800 $ 153,000 =========== ========= =========
See accompanying summary of accounting policies and notes to financial statements. F-6 GraphOn Corporation Summary of Accounting Policies Organization and Business 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 and UNIX applications from any location, over network or Internet connections. 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 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 Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Marketable Securities The Company accounts for investments in marketable 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 Equipment Property and equipment are stated at cost. 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 Technology Purchased technology is to be amortized on a straight-line basis over the life of the related technology or five years, whichever is less. Capitalized Software Costs Costs incurred internally in creating computer 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 F-7 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, 1998 and 1997, capitalized costs aggregated $113,000 and $59,800, with accumulated amortization of $38,800 and $16,600. For the three months ended March 31, 1999, no additional costs had been capitalized and accumulated amortization aggregated $48,200. Revenue Recognition and Deferred Revenue In October 1997, the American Institute of Certified Public Accountants (AICPA) issued 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 $112,600 and $443,800 as of December 31, 1998 and 1997. Advertising Costs The cost of advertising is expensed as incurred. Advertising costs for the years ended December 31, 1998, 1997 and 1996 and for the three month period ended March 31, 1999, were approximately $58,400, $60,000, $0, and $109,600, respectively. 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 Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximate 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. F-8 As of December 31, 1998 and 1997, the fair values of the Company's financial instruments approximate their historical carrying amounts. 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 Incentive Programs SFAS No. 123, Accounting for Stock-Based 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. Adoption of New Accounting Pronouncements In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, 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 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 in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged 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 in income in the period of change. SFAS No. 133 is effective for all fiscal years beginning June 15, 2000. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on July 1, 1999 to affect its financial statements. Earnings Per Common Share In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which was 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. Reclassifications Certain amounts in the 1997 financial statements have been reclassified to conform with the 1996 and 1998 presentation. F-9 GraphOn Corporation Notes to Financial Statements 1. Available-For-Sale Securities As of December 31, 1997, the Company held 4,000 shares of common stock in a publicly traded company. In 1998, the Company sold these shares and recorded a loss on the sale of $16,500. A summary of available-for-sale securities follows:
December 31, --------------------- 1998 1997 --------- -------- Cost of securities....................................... $ -- $ 20,700 Less unrealized loss..................................... -- 12,100 -------- -------- $ -- $ 8,600 ======== ========
2. Property and Equipment Property and equipment consisted of the following:
December 31, ----------------------- 1998 1997 --------- --------- Equipment................................................ $292,800 $61,700 Furniture and fixtures................................... 175,600 2,300 Leasehold improvements................................... 13,500 1,900 --------- --------- 481,900 65,900 Less accumulated depreciation and amortization........... 58,600 15,600 --------- --------- $423,300 $50,300 ========= =========
3. Purchased Technology In December 1998, the Company issued 3,886,503 shares of common stock and 388,650 warrants to Corel Corporation in exchange for certain fixed assets and technology for the deployment of Windows NT applications through server based computing (Note 6). 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 $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 ==========
F-10 GraphOn Corporation Notes to Financial Statements (Continued) 3. Purchased Technology (Continued)
December 31, 1998 -------------- Purchased technology........................... $3,645,400 Less accumulated amortization.................. -- ---------- $3,645,400 ==========
4. Accrued Expenses Accrued expenses consisted of the following:
December 31, ----------------------- 1998 1997 ---------- ---------- Payroll and related expenses................... $ 140,600 $ 34,400 Professional fees.............................. 180,000 35,000 Accrued payroll taxes.......................... 76,700 -- Royalties...................................... 65,300 46,100 Other.......................................... 36,300 27,400 ---------- ---------- $ 498,900 $ 142,900 ========== ==========
5. Convertible Note Payable In March 1998 the Company issued a convertible note payable for $475,000 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). The convertible note bears interest at 10% and is due upon the earlier date of the Company raising between $2,500,000 and $3,000,000 in the Offering or six months after its commencement. The note is convertible into shares of common stock at $1.00 per share at the option of the note holder (Note 13). 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, which mature at the earlier of the first closing of the Offering or 12 months from the date of the notes. Such notes, at the option of the lender, may be converted into shares of common stock at $1.00 per share. In connection with this transaction, the Agent Affiliate and CEO were issued warrants to purchase 100,000 and 50,000 shares, respectively, at $1.00 per share (Note 6). On December 31, 1998, the loan by the Agent Affiliate was converted into 200,000 shares of common stock. Also on December 31, 1998, the Company repaid the $100,000 loan from the CEO, plus accrued interest. F-11 GraphOn Corporation Notes to Financial Statements (Continued) 6. Stockholders' Equity Prior Bankruptcy In November 1991, the Company filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code. At that time, the Company had indebtedness in excess of $2.3 million and had 1,624,940 voting shares of common stock outstanding. In July 1994, the Company's plan of reorganization under Chapter 11 (the Reorganization Plan) was confirmed. At the time of the confirmation of the Reorganization Plan, all shares of stock, options, and warrants outstanding were canceled. In addition, the Reorganization Plan provided for the issuance of 100 shares of the Company's reorganized common stock in exchange for waiver of certain unsecured claims against the Company by its then, and current, CEO. In addition, all administrative claims, priority claims, and allowed claims in the administrative convenience class (generally, those under $200) were paid in full. Unsecured creditors are to receive payment of 50% of the gross royalties received by the Company from certain licensees up to the amount of their total liability, through the year 2000. However, the largest unsecured creditor will receive payments of 50% of the gross royalties received by the Company from the revenue from certain licensees until its claim is paid in full. The remaining 50% of the gross royalties received by the Company from these certain licensees was available to the Company to conduct its ongoing operations. As of December 31, 1998, the Company does not expect to pay any additional significant amounts under the Reorganization Plan. Accordingly, the amounts are treated as included in the relief of debt as part of the bankruptcy confirmed in 1994. The Company believes that its royalty payment obligations under the bankruptcy court order relate only to licenses in place as of July 11, 1994. However, there is no assurance that the court will not interpret the obligation of the Company to include making payments from royalties earned from subsequent licenses or licenses that it may secure in the future, or that its current technology will not be deemed derivative of its technology existing at July 11, 1994. Consequently, there can be no assurance that the Company will not be required to repay the creditors referenced in the bankruptcy proceedings to the full amount of its liability of approximately $2,230,000. In addition, there is no guarantee that a creditor will not attempt to assert a claim for royalties from subsequent licenses, which could be costly and could have a material adverse effect on the Company's business, financial condition, and/or results of operations. Common Stock In January 1998, the CEO personally sold 440,016 shares of his stock to various employees and directors of the Company at a price of $0.02, the then fair market value of the stock, and in May and August, 193,238 additional shares at $0.075. 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 1998, the Company issued and sold 508,500 shares under the Stock Grant Program, at $0.075 and granted 20,000 options, under Stock Option Plan, at $0.075 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 $1.00 per share, the price at which the Company offered its shares through a private placement stock offering in September 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. F-12 GraphOn Corporation Notes to Financial Statements (Continued) 6. Stockholders' Equity (Continued) In accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, the Company recorded, in General and Administrative expense, $101,600 of compensation costs for the year ended December 31, 1998 and $41,700 for the three months period ended March 31, 1999. In March 1998, the Company sold 500,000 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 expenses 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 2,500,000 and 4,500,000 shares of common stock, respectively, at $1.00 per share, plus an additional 675,000 shares in the event of over-subscriptions. As part of the Offering, the placement agent received warrants to purchase 20,000 shares of common stock at $1.00 per share for each 100,000 shares sold through the Offering. Pursuant to a Subscription Agreement, executed by each investor who purchased shares of the Company's common stock in connection with the first closing of the Offering (the First Closing Investors), each First Closing Investor holds the right to purchase his pro rata portion of any securities issued by the Company for cash at an amount equal to the price, or other consideration, for which such securities were issued until such time as there is an initial public offering of the Company's securities. Such preemptive rights do not apply to any securities issued pursuant to options, warrants and rights and option plans existing at the time of the first closing. The investors who purchased common stock in connection with the second closing of the Offering, as well as certain of the First Closing Investors who agreed to amend their rights, hold the same right except that such right does not apply to securities issued by the Company in connection with, or in consideration of, (i) the Company's acquisition of another corporation or entity by consolidation, merger, purchase of all or substantially all of the assets or other business combination in which the Company is the surviving entity, provided such issuance is approved by a majority of the Board of Directors or (ii) any equipment or real property lease, loan, credit line, guaranty of indebtedness or acquisition of assets, other than cash but including intellectual property or other intangible assets. 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 3,500,000 shares of their common stock in the Company to the Agent Affiliate under non-recourse installment notes. Under the terms of the notes, $200,000 was due and paid with the commencement of the Offering, with $800,000; $1,000,000; and $1,500,000 being due and payable January 1999, July 1999 and January 2000, respectively (Note 13). The notes bear interest at 6%, payable quarterly, and are secured by the underlying pledged shares. The CEO and Executive Vice President retained voting privilege on these shares until fully paid for, and said shares revert back to the CEO and Executive Vice President in case of default by the Agent Affiliate. In December 1998, the Company issued 3,886,503 shares of common stock with an ascribed value of $3,886,500, and granted warrants to purchase 388,650 shares of common stock at $1.00 in exchange for certain fixed assets and technology. The terms of this purchase agreement also require that the F-13 GraphOn Corporation Notes to Financial Statements (Continued) 6. Stockholders' Equity (Continued) Company shall issue an additional 1,607,000 shares of common stock, for no additional consideration, on June 30, 2000, if the Company at that date has not completed an initial public offering of any of its equity securities or a merger or sale of all, or substantially all, of its assets. Should these contingent shares be issued, they will be valued at their fair market value at the time of such issuance with a resulting charge to the statement of operations. Stock Purchase Warrants As of December 31, 1998, the following common stock warrants were issued and outstanding:
Shares Subject Exercise Expiration Issued with respect to: to Warrant Price Date ----------------------- -------------- -------- ------------ Convertible notes............................ 150,000 $1.00 (A) Private placement............................ 639,800 $1.00 (A) Purchased technology......................... 388,650 $1.00 12/2003 ======= ===== =======
- -------------------- (A) The warrants issued with respect to the convertible notes and the private placement expire upon earlier of three years after the closing date of a merger (Note 13), three years after the closing date of an IPO, or January 2006. Stock Grant Program In July 1998, the Company adopted a stock grant program (Stock Grant Program), which is restricted to employees, officers, and consultants of the Company. The Company has authorized the issuance of up to 1,300,000 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 2,700,000 shares to 4,000,000 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 vest over a four year period. During August 1998, the Company issued 508,500 shares under the Stock Grant Program. Stock Option Plan In July 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 four years and are exercisable over ten years. Non-satutory 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. F-14 GraphOn Corporation Notes to Financial Statements (Continued) 6. Stockholders' Equity (Continued) A summary of status of the Company's Stock Option Plan as of December 31, 1998, and changes during the year then ended is presented in the following table:
Options Outstanding -------------------- Weighted- Average Exercise Shares Price -------- --------- Balances, December 31, 1997..................................... -- $ -- Shares reserved................................................. 791,500 -- Granted......................................................... (20,000) 0.075 ------- --------- Balances, December 31, 1998..................................... 771,500 $0.075 ======= ========= Exercisable at year-end......................................... 2,664 $0.075 ======= ========= Weighted-average fair value of options granted during the period: $0.075 =========
During the three months ended March 31, 1999, the Company granted 748,500 stock options at an average exercise price of $0.85 per share, which represented 85% of the estimated fair market value of the stock. The following table summarizes information about stock options outstanding as of December 31, 1998:
Options Outstanding Options Exerccisable - ---------------------------------------------------------------------------- -------------------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Exercise Number Contractual Life Exercise Price Number Exercise Price Price Outstanding (Years) per Share Exercisable per Share - ------------------- ------------- ------------------ ----------------- ------------- ------------- $0.075 - $1.00 20,000 9.67 $0.075 2,664 $0.075
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 1998: dividend yield of 0; expected volatility of 112%; risk-free interest rate of 5.7%; and expected lives of three years for all plan options. Under the accounting provisions of SFAS No. 123, the Company's pro forma net loss would have been $2,137,900, and the basic net loss per common share would have remained unchanged at $0.32. 7. Income Taxes The provision for income taxes for the years ended December 31, 1998, 1997 and 1996 and for the three months ended March 31, 1999 and 1998 consist of minimum state taxes. F-15 GraphOn Corporation Notes to Financial Statements (Continued) 7. Income Taxes (Continued) The following summarizes the differences between income tax expense and the amount computed applying the federal income tax rate of 34%:
December 31, -------------------------------------- 1998 1997 1996 -------- ----------- -------- Federal income tax at statutory rate............................................................ $(599,400) $ 41,600 $(63,800) State income taxes, net of federal benefit........................................................... (102,400) 7,700 (11,500) Utilization of net operating loss carryforwards........................................................ -- (51,400) -- Tax benefit not currently recognizable.............................................................. 697,700 -- 75,300 Other....................................................................... 4,900 3,000 800 --------- ----------- -------- Provision for income taxes.................................................. $ 800 $ 900 $ 800 ========= =========== ========
Deferred income taxes and benefits result from temporary timing differences in the recognition of certain expenses and income items for tax and financial reporting purposes, as follows:
December 31, ---------------------- 1998 1997 ---------- --------- Net operating loss carryforward.................................................. $ 1,038,800 $ 452,900 Tax credit carryforward.......................................................... 112,100 22,800 Capitalized software............................................................. (29,600) (17,200) Depreciation and amortization.................................................... (6,000) (2,500) Accrued compensation and benefits................................................ 37,500 4,200 Reserves not currently deductible................................................ 35,800 17,900 ---------- --------- Total deferred tax asset......................................................... 1,188,600 478,100 Valuation allowance (1,188,600) (478,100) ---------- --------- Net deferred tax asset $ -- $ -- ========== =========
The Company has net operating loss carryforwards available to reduce future taxable income, if any, of approximately $2,780,800 for Federal income tax purposes. The benefits from these carryforwards expire through 2018. As of December 31, 1998, management believes it cannot be determined that it is more likely than not that these carryforwards and its other deferred tax assets will be realized, and accordingly, 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. F-16 GraphOn Corporation Notes to Financial Statements (Continued) 8. Concentration of Credit Risk Financial instruments, which potentially subject the 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. Major Customers 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 accounts receivable at December 31, 1997 of $62,500. In 1996, no one customer accounted for greater than 10% of revenues. 10. 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. 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. 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, 1998, 1997 and 1996 aggregated $48,300, $17,120 and $14,900, respectively. Rent expense for the three months ended March 31, 1999 and 1998 aggregated $76,400 and $12,100, respectively. Future minimum annual lease payments for these leases are as follows: Year Ending December 31, ------------------------ 1999.......................................................... $261,600 2000.......................................................... 256,900 2001.......................................................... 194,000 -------- $712,500 ========
F-17 GraphOn Corporation Notes to Financial Statements (Continued) 10. Commitments (Continued) Royalty Agreements The Company licenses essential components (Developed Technology) of its core technology from three different parties (collectively, Software Developers) to whom it pays royalties pursuant to three different exclusive license agreements (Technology Agreements). Certain minor elements of the Company's technology (Nonexclusive Technology) are also licensed from the Software Developers pursuant to non-exclusive agreements (Nonexclusive Agreements). The Technology Agreements and the Nonexclusive Agreements call for royalty payments to the Software Developers. Such royalty payments are based on a percentage of net revenues (Royalty Rate) received by the Company for sales of the Company's products that contain the Developed Technology. The Royalty Rate is 4.8% and 2.9% for 1999 and 2000, respectively. The Company also holds an option to purchase the Developed Technology, and to purchase a perpetual license to the Nonexclusive Technology from the Software Developers, which is exercisable beginning in December 2000, for an aggregate of $6,000 plus the difference between royalties paid to date and certain minimum royalty payments. If the Company does not exercise its option, the Royalty Rate would continue at 2.0% with respect to the Developed Technology. The Technology Agreements and the Nonexclusive Agreements also call for lump sum payments by the Company in the event of a change in control transaction, defined as a sale of all or substantially all of the Company's assets or a merger or reorganization with another business entity after which the shareholders of the Company hold 50% or less of the total equity or voting power of the surviving entity. The payments are based upon a percentage of the total consideration received by the Company or payable to its shareholders in such a transaction (Transaction Rate). The Transaction Rate would be 4.8% and 2.9% if the change in control transaction occurs in 1999 or 2000, respectively. Each of the Technology and Nonexclusive Agreements, unless terminated earlier pursuant to the terms of the Agreements, will terminate on September 6, 2006 (Note 13). 11. Employee 401(k) Plan In December 1998, the Company adopted a 401(k) Plan ("the Plan") to provide retirement benefit 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 1998. F-18 GraphOn Corporation Notes to Financial Statements (Continued) 12. Supplemental Disclosure of Cash Flow Information The following is supplemental disclosure for the statements of cash flows.
Years Ended December 31, ---------------------------------- 1998 1997 1996 ---------- -------- -------- Cash Paid: Income taxes................................................................. $ 900 $ 800 $ 800 Interest..................................................................... $ 11,300 $ 2,100 $ -- Noncash Investing Activities: Stock and warrants issued for purchased technology and other assets...................................................................... $3,886,500 $ -- $ -- Noncash Financing Activities: Issuance of common stock for convertible note payable.................................................... $ 200,000 $ -- $ --
13. Subsequent Events In January 1999, the Company completed the third and final closing of the Offering, in which it sold 1,963,868 shares of common stock at $1.00 per share, for net proceeds of $1,708,600, and granted additional warrants to purchase 392,774 shares of common stock. In January 1999, the convertible note payable for $475,000 to the Agent Affiliate was retired from proceeds from the third closing of the Offering. In January 1999, the CEO and Executive Vice President received $800,000 for the sale of 800,000 shares of their common stock of the Company to the Agent Affiliate. In February 1999, the Company and its shareholders entered into a merger agreement with Unity First Acquisition Corporation (UFAC), a publicly-traded holding company in New York, under which GraphOn will exchange all its outstanding common stock for UFAC shares at the rate of 0.5576 UFAC shares for every 1.00 GraphOn shares. The transaction will be a forward merger, with UFAC surviving the merger and changing its name to GraphOn Corporation. The merger is expected to close in June 1999 and is subject to approval of the respective shareholders of UFAC and GraphOn Corporation. In March 1999, the Company entered into a non-binding agreement with the Software Developers of the Technology Agreements (Note 10) whereby on the successful consumation of the UFAC merger, the Company would pay the Software Developers a lump sum of $520,400 in settlement of all future royalties due under the Technology Agreements. In May 1999, the Company granted 50,000 stock options at an average exercise price of $3.26 per share, which represented the estimated fair market value of the stock. F-19 PART I--FINANCIAL INFORMATION ITEM I Financial Statements GRAPHON CORPORATION BALANCE SHEETS
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) ASSETS ------ Current Assets: Cash and cash equivalents....................... $ 2,795,200 $ 1,798,400 Accounts receivable, net of allowance for doubtful accounts of $25,000 and $25,000....... 1,322,800 564,700 Available for sale securities................... 999,000 -- Prepaid expenses and other assets............... 554,100 32,100 ----------- ----------- Total Current Assets........................ 5,671,100 2,395,200 ----------- ----------- Property and Equipment, net....................... 548,200 423,300 Purchased Technology , net........................ 1,301,400 3,645,400 Capitalized Software, net......................... 231,500 74,200 Deferred Compensation Expense..................... 440,800 566,000 Other Assets...................................... 6,400 6,400 ----------- ----------- $ 8,199,400 $ 7,110,500 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Convertible note payable........................ $ -- $ 475,000 Accounts payable................................ 382,000 115,700 Accrued expenses................................ 494,500 498,900 Deferred revenue................................ 75,400 112,600 ----------- ----------- Total Current Liabilities................... 951,900 1,202,200 Commitments and Contingencies Stockholders' Equity Preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding... -- -- Common stock, $0.0001 par value, 20,000,000 shares authorized, 10,969,471 and 7,970,336 shares issued and outstanding.................. 1,100 800 Additional paid in capital...................... 15,399,800 8,430,700 Accumulated other comprehensive income........ 300 -- Accumulated deficit........................... (8,153,700) (2,523,200) ----------- ----------- Stockholders' Equity........................ 7,247,500 5,908,300 ----------- ----------- $ 8,199,400 $ 7,110,500 =========== ===========
See accompanying summary of accounting policies and notes to financial statements. F-20 GRAPHON CORPORATION STATEMENTS OF OPERATIONS
Nine Months Ended Three Months Ended September 30, September 30, ------------------------ ----------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ---------- (Unaudited) Revenues Product sales.............. $ 602,600 $ 447,700 $ 225,700 $ 207,400 Maintenance................ 131,900 76,300 36,900 28,400 OEM license................ 1,115,000 964,600 240,000 100,000 OEM license--related party..................... 600,000 -- 600,000 -- Training................... -- 10,400 -- -- ----------- ----------- ----------- ---------- Total Revenues......... 2,449,500 1,499,000 1,102,600 335,800 Cost of Revenues Product sales.............. 10,400 20,900 3,600 5,100 Maintenance................ 28,200 15,000 9,400 5,000 OEM license................ 251,900 215,500 79,300 60,000 ----------- ----------- ----------- ---------- Total Cost of Revenues.............. 290,500 251,400 92,300 70,100 Gross Profit........... 2,159,000 1,247,600 1,010,300 265,700 ----------- ----------- ----------- ---------- Operating Expenses: Selling and marketing...... 2,359,200 860,000 783,800 335,600 General and administrative............ 3,725,500 782,800 1,340,500 441,700 Research and development... 1,771,800 634,400 517,000 299,500 ----------- ----------- ----------- ---------- Total Operating Expenses.............. 7,856,500 2,277,200 2,641,300 1,076,800 ----------- ----------- ----------- ---------- Loss From Operations....... (5,697,500) (1,029,600) (1,631,000) (811,100) Other Income (Expense): Interest and other income.................. 76,900 8,800 49,900 1,700 Interest expense......... (9,100) (368,000) (1,700) (166,600) ----------- ----------- ----------- ---------- Loss Before Provision for Income Taxes.............. (5,629,700) (1,388,800) (1,582,800) (976,000) Provision for Income Taxes..................... 800 800 -- -- ----------- ----------- ----------- ---------- Net Loss................... $(5,630,500) $(1,389,600) $(1,582,800) $ (976,000) =========== =========== =========== ========== Basic and Diluted Loss per Common Share.............. $ (0.59) $ (0.39) $ (0.15) $ (0.26) =========== =========== =========== ========== Weighted Average Common Shares Outstanding........ 9,540,148 3,583,798 10,712,629 3,750,418 =========== =========== =========== ==========
See accompanying summary of accounting policies and notes to financial statements. F-21 GRAPHON CORPORATION STATEMENTS OF CASH FLOWS
Nine Months Nine Months Ended Ended September 30, 1999 September 30, 1998 ------------------ ------------------ (Unaudited) Cash Flows From Operating Activities: Net (loss) income....................... $(5,630,500) $(1,389,600) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization......... 2,473,900 41,700 Loss on available-for-sale securities........................... -- 16,500 Non-cash compensation expense......... 125,200 59,900 Interest expense...................... -- 323,100 Changes in operating assets and liabilities: Accounts receivable................. (758,100) 149,900 Available for sale securities....... (998,700) -- Prepaid expenses and other assets... (522,000) (31,600) Accounts payable.................... 266,300 204,000 Accrued expenses.................... (4,400) 202,100 Deferred revenue.................... (37,200) (398,100) ----------- ----------- Net Cash Used In Operating Activities....................... (5,085,500) (822,100) ----------- ----------- Cash Flows From Investing Activities: Other assets............................ -- (4,500) Capital expenditures.................... (412,100) (158,600) ----------- ----------- Net Cash Used In Investing Activities....................... (412,100) (163,100) ----------- ----------- Cash Flows From Financing Activities: Proceeds from convertible notes payable................................ -- 775,000 Repayment of convertible notes payable.. (475,000) -- Net proceeds from issuance of common stock.................................. 6,975,100 63,100 Purchase and retirement of common stock.................................. (5,700) -- ----------- ----------- Net Cash Provided By Financing Activities....................... 6,494,400 838,100 ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents............................ 996,800 (147,100) Cash and Cash Equivalents, beginning of period................................. 1,798,400 302,800 ----------- ----------- Cash and Cash Equivalents, end of period................................. $ 2,795,200 $ 155,700 =========== ===========
See accompanying summary of accounting policies and notes to financial statements. F-22 GRAPHON CORPORATION STATEMENT OF EQUITY
Common Stock Unrealized ------------------ Additional Paid Gain on Accumulated Shares Amount in Capital Securities Deficit Total ---------- ------ --------------- ----------- ----------- ----------- Balances, December 31, 1998................... 7,970,336 $ 800 $ 8,430,700 $ -- $(2,523,200) $ 5,908,300 Balance of information is unaudited through September 30,1999: Proceeds from sale of common stock.......... 62,525 -- 97,200 -- -- 97,200 Net proceeds from sale of common stock, net of offering costs of $255,300.............. 1,095,053 100 1,708,500 -- -- 1,708,600 Repurchase and retirement of common stock................. (40,952) -- (5,700) -- -- (5,700) Recapitalization of company through merger, net of merger costs of $255,700..... 1,875,000 200 5,169,100 -- -- 5,169,300 Unrealized gain on available for sale securities............ -- -- -- 300 -- 300 Issuance of common stock due to the exercise of warrants.. 7,509 -- -- -- -- -- Net loss............... -- -- -- -- (5,630,500) (5,630,500) ---------- ------ ----------- ----- ----------- ----------- Balances, September 30, 1999.................. 10,969,471 $1,100 $15,399,800 $ 300 $(8,153,700) $ 7,247,500 ========== ====== =========== ===== =========== ===========
F-23 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS 1. Merger with Unity First Acquisition Corp. and Basis of Presentation On July 12, 1999, GraphOn Corporation, a California corporation ("GraphOn- CA"), merged with and into Unity First Acquisition Corp., a Delaware corporation ("Unity"). Unity, as the surviving entity to the merger and the Registrant, then changed its name to GraphOn Corporation ("GraphOn"), and the GraphOn-CA management team continued in their existing roles at GraphOn. Pursuant to the merger, each outstanding share of GraphOn-CA common stock was exchanged for 0.5576 shares of Unity common stock and each outstanding option and warrant to purchase shares of GraphOn-CA common stock was exchanged for 0.5576 options or warrants to purchase shares of Unity common stock. Additionally, GraphOn received $5,425,000 in cash which was placed into trust upon Unity's initial public offering in November 1996 and released from trust upon consummation of the merger. As of July 12, 1999, GraphOn-CA had outstanding 16,296,559 shares of common stock. As a result of the merger, the GraphOn-CA shareholders acquired approximately 9,086,961 shares of Unity common stock, or approximately 82.9% of the then outstanding Unity common stock. The merger was accounted for as a capital transaction which is equivalent to the issuance of stock by GraphOn-CA for Unity's net monetary assets of approximately $5,425,000, accompanied by a recapitalization of GraphOn-CA. The unaudited historical financial statements of GraphOn-CA included herein have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of GraphOn-CA's results of operations, financial position and cash flows. We filed audited financial statements that included all information and footnotes necessary for a complete presentation for each of the years in the two-year period ended December 31, 1998 in the Unity Registration Statement on Form S-4 filed on June 15, 1999. The unaudited financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the three and nine months ended September 30, 1999. The results for the three and nine months ended September 30, 1999 are not necessarily indicative of the results expected for the full fiscal year. 2. Earnings Per Share Basic earnings per share is calculated using the weighted average number of shares outstanding during the period. Dilutive earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options and warrants using the "treasury stock" method and are not included since they are antidilutive. As noted above, in July 1999, GraphOn-CA merged with and into Unity. All references to share and per-share data for all periods presented have been adjusted to give effect to the .5576 exchange of GraphOn-CA stock (See Note 3). 3. Stockholders' Equity In January 1999, GraphOn-CA completed the third and final closing of a private placement offering, in which it sold 1,095,053 shares of its common stock at $1.79 per share and granted warrants to purchase an additional 219,010 shares of common stock for net proceeds of $1,708,600. In January 1999, a convertible note payable for $475,000 to Spencer Trask Investors, an affiliate of GraphOn-CA, was retired from proceeds from the third closing of the private placement offering. In February 1999, GraphOn-CA sold 62,525 shares of its common stock and warrants to purchase an additional 676 shares for gross proceeds of $97,200. F-24 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) In July 1999, GraphOn-CA merged with and into Unity. As discussed above, each share of GraphOn-CA common stock was exchanged for .5576 shares of Unity common stock and each outstanding GraphOn-CA option and warrant was exchanged for .5576 options and warrants of Unity. Additionally, GraphOn received $5,425,000 in cash and the merger was accounted for as a capital transaction giving effect to the 1,875,000 shares of Unity. All references to share and per-share data for all periods presented have been adjusted to give effect to this .5576 exchange of GraphOn-CA stock. 4. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged assets or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain and loss is recognized in income in the period of change. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative instruments and Hedging Activities--Deferring the Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to have a material impact on the Company's results of operations, financial position or cash flows. 5. Litigation On October 4, 1999, Insignia Solutions plc, a British company with a California subsidiary, filed a complaint against GraphOn Corporation in the Superior Court of the State of California, Santa Clara County, alleging the GraphOn intentionally disrupted Insignia's sale to Citrix Systems, Inc., on February 5, 1998, of assets related to Insignia's NTRIGUE software product line. The complaint alleges that, as a result of GraphOn's conduct in connection with that sale of assets, Insignia was required by Citrix to place $8.75 million in escrow to enable Citrix to deal with potential claims by GraphOn of proprietary rights in the assets being sold. The complaint seeks unspecified damages from GraphOn. The complaint also names Citrix and its subsidiary in the United Kingdom ("Citrix UK") as defendants, alleging that these companies breached the February 5, 1998 contract with Insignia. The complaint seeks compensatory damages from Citrix related to that company's refusal to release purchase money from escrow for payment to Insignia. Insignia's California state court complaint makes reference to a declaratory judgment lawsuit that Citrix filed against GraphOn, on November 23, 1998, in the United States District Court for the Southern District of Florida, seeking a declaration of Citrix's right to use software purchased from Insignia, free and clear of any claim by GraphOn that such software may incorporate proprietary information owned by GraphOn. On May 14, 1999, Citrix's Florida- based lawsuit against GraphOn was dismissed for lack of subject matter jurisdiction. Essentially, the Florida court held that GraphOn has not threatened Citrix with litigation, and there is no existing dispute between GraphOn and Citrix. Citrix has filed an appeal from this ruling, which is presently pending. At the request of Citrix and Insignia, GraphOn has agreed to participate in mediation aimed at resolving the dispute. In light of that effort, the parties to the California state court case have agreed to extend GraphOn's time to respond to the complaint until early December. GraphOn has not yet filed an answer or other responsive pleading in the California state court action, but GraphOn presently intends to deny the principal allegations made by Insignia in the complaint. GraphOn views the matter as a dispute between Citrix and Insignia, in which GraphOn is not directly involved. F-25 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth various expenses, other than underwriting discounts, which will be incurred in connection with this offering: SEC registration fee...................... $ 1,584.00 Printing and engraving expenses........... 12,500.00 Legal fees and expenses................... 35,000.00 Accounting fees and expenses.............. 10,000.00 Miscellaneous expenses.................... 916.00 ---------- Total $60,000.00 ========== Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee of or agent to the Registrant. The statute provides that it is not exclusive of other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise. The Registrant's by-laws provides for indemnification by the Registrant of any director or officer (as such term is defined in the by-laws) of the Registrant who is or was a director of any of its subsidiaries, or, at the request of the Registrant, is or was serving as a director or officer of, or in any other capacity for, any other enterprise, to the fullest extent permitted by law. The by-laws also provide that the Registrant shall advance expenses to a director or officer and, if reimbursement of such expenses is demanded in advance of the final disposition of the matter with respect to which such demand is being made, upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it is ultimately determined that the director or II-1 officer is not entitled to be indemnified by the Registrant. To the extent authorized from time to time by the board of directors of the Registrant, the Registrant may provide to any one or more employees of the Registrant, one or more officers, employees and other agents of any subsidiary or one or more directors, officers, employees and other agents of any other enterprise, rights of indemnification and to receive payment or reimbursement of expenses, including attorneys' fees, that are similar to the rights conferred in the by- laws of the Registrant on directors and officers of the Registrant or any subsidiary or other enterprise. The by-laws do not limit the power of the Registrant or its board of directors to provide other indemnification and expense reimbursement rights to directors, officers, employees, agents and other persons otherwise than pursuant to the by-laws. The Registrant intends to enter into agreements with certain directors, officers and employees who are asked to serve in specified capacities at subsidiaries and other entities. Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for payments of unlawful dividends or unlawful stock repurchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's certificate of incorporation provides for such limitation of liability. The Registrant maintains policies of insurance under which its directors and officers are insured, within the limits and subject to the limitations of the policies, against certain expenses in connection with the defense of, and certain liabilities which might be imposed as a result of, actions, suits or proceedings to which they are parties by reason of being or having been such directors or officers. Item 15. Recent Sales of Unregistered Securities On July 12, 1999, the Registrant issued to Spencer Trask 250,000 Class A common stock purchase warrants exercisable at $5.50 per share into 250,000 shares of common stock in consideration for consulting services performed in connection with the merger of GraphOn Corporation, a California corporation, with and into the Registrant that was consummated on that date. On October 14, 1999, the Registrant issued to SuperTech Holdings Ltd. common stock purchase warrants exercisable at $8.50 per share into 300,000 shares of common stock in consideration for consulting services related to the generation of business opportunities for the Registrant in the People's Republic of China. II-2 Each of these transactions were exempt from registration under the Securities Act of 1933 by reason of the provisions of Section 4(2) thereof. Item 21. Exhibits and Financial Statement Schedules. (a) Exhibits The following exhibits are filed as part of this Registration Statement: Exhibit Description of Exhibit Number ---------------------- - ------- 2.1 Agreement and Plan of Merger and Reorganization dated as of February 1, 1999, between Registrant and GraphOn Corporation, a California corporation(1) 3.1 Amended and Restated Certificate of Incorporation of Registrant(1) 3.2 Amended and Restated Bylaws of Registrant(1) 4.1 Form of certificate evidencing shares of common stock of Registrant(2) 4.2 Form of certificate evidencing Class A Redeemable Warrants of Registrant(2) 4.3 Form of certificate evidecing Class B Redeemable Warrants of Registrant(2) 4.4 Warrant Agreement dated November 12, 1996 between Registrant and GKN Securities Corp. and Gaines, Berland, Inc.(2) 4.5 Redeemable Warrant Agreement dated November 12, 1996 between Registrant and American Stock Transfer & Trust Company(2) 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(1) 4.7 Amendment to Registration Rights Agreement(1) 4.8 Amendment to Registration Rights Agreement(1) 4.9 Common Stock Purchase Warrant dated October 14, 1999 issued to SuperTech Holdings Limited 5.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C. 10.1 1996 Stock Option Plan of Registrant(2) 10.2 1998 Stock Option/Stock Issuance Plan of Registrant(1) 10.3 Placement Agency Agreement by and between Registrant and Spencer Trask Securities, Inc., dated as of September 2, 1998(1) 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(1) II-3 10.5 Securities Purchase Agreement by and among Registrant and Corel, dated as of December 18, 1998(1) 10.6 Standard Industrial Lease between Registrant and Mildred K. Dibona, dated April 14, 1995, as amended on October 2, 1998(1) 10.7 Hidden Valley Office Park Lease Agreement between Registrant and ASA Properties, Inc., dated June 5, 1998(1) 10.8 Lease Agreement between Corel Inc. and CML Realty Corp., dated September, 1998 and assumed by Registrant on December 31, 1998(1) 10.9 Consulting Agreement dated October 14, 1999 between Registrant and SuperTech Holdings Limited 23.1 Consent of BDO Seidman, LLP 23.2 Consent of Cooperman Levitt Winikoff Lester & Newman, P.C. (included in Exhibit 5.1) 24.1 Power of Attorney (included on the Signature Page of Part II of this Registration Statement) ___________ (1) Incorporated by reference from Registrant's Form S-4, file number 333- 76333, filed with the SEC on April 15, 1999. (2) Incorporated by reference from Registrant's Form S-1, file number 333- 11165, filed with the SEC on August 30, 1996. (b) Financial Statement Schedules. None. Item 17. Undertakings The undersigned registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) That for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new II-4 registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (a) To include any prospectus required by Section 10(a)(3) of the Securities Act; (b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in "Calculation of Registration Fee" table in the effective registration statement; (c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (4) That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of this offering. (6) To provide to the representatives at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the representatives to permit prompt delivery to each purchaser. (7) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Registrant pursuant to Item 14 of this Part II to the registration statement, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for II-5 indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 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 Campbell, State of California, on December 21, 1999. GRAPHON CORPORATION By: /s/ Walter Keller ------------------------------------------- Walter Keller, President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Walter Keller and Edmund Becmer as such person's true and lawful attorney-in-fact and agent, acting alone, with full powers of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert Dilworth Chairman of the Board December 21, 1999 - ------------------------- Robert Dilworth /s/ Walter Keller President (Principal Executive Officer) December 21, 1999 - ------------------------- and Director Walter Keller /s/ Edmund Becmer Chief Financial Officer (Principal December 21, 1999 - ------------------------- Financial and Accounting Officer) Edmund Becmer /s/ Robin Ford Executive Vice President, December 21, 1999 - ------------------------- Marketing and Sales Robin Ford and Director /s/ Lawrence Burstein Director December 21, 1999 - ------------------------- Lawrence Burstein /s/ August P. Klein Director December 21, 1999 - ------------------------- August P. Klein _________________________ Director Michael P. O'Reilly _________________________ Director Marshall C. Phelps, Jr.
II-7 EX-4.9 2 COMMON STOCK PURCHASE WARRANT DATED OCT. 12, 1999 EXHIBIT 4.9 GRAPHON CORPORATION (Incorporated under the laws of the State of Delaware) Void after 5:00 p.m., New York City time, on December 31, 2000 Dated: October 12, 1999 Warrant to Purchase 300,000 Shares of STH-1 Common Stock FOR VALUE RECEIVED, GRAPHON CORPORATION, a Delaware corporation (the "Corporation"), hereby certifies that SUPER TECH HOLDINGS LIMITED (the "Holder") is entitled, subject to the provisions of this warrant (the "Warrant"), to purchase from the Corporation during the period commencing on the day hereof and expiring at 5:00 p.m. New York City local time, on December 31, 2000 up to 300,000 fully paid and non-assessable shares of Common Stock of the Corporation at a price of U.S.$8.50 per share (such exercise price per share being hereinafter referred to as the "Exercise Price"). The term "Common Stock" means shares of Common Stock, par value $0.0001 per share, of the Corporation as constituted on October 12, 1999 (the "Base Date"), together with any other equity securities that may be issued by the Corporation in addition thereto or in substitution therefor. The number of shares of Common Stock to be received upon the exercise of this Warrant may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Stock". Upon receipt by the Corporation of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Corporation shall execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Corporation, whether or not this Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone. The Holder agrees with the Corporation that this Warrant is issued, and all the rights hereunder shall be held, subject to all of the conditions, limitations and provisions set forth herein. 1. Exercise of Warrant. ------------------- 1.1 Manner of Exercise. Subject to the provisions of Section 1.2, ------------------ this Warrant may be exercised in whole, or in part from time to time, to the extent of 300,000 shares of Common Stock, prior to adjustment as herein provided, up to and through 5:00 p.m. New York City local time on December 31, 2000 or, if any such day is a day on which banking institutions in the City of New York are authorized by law to close, then on the next succeeding day that shall not be such a day, by presentation and surrender hereof to the Corporation at its principal office, or at the office of its stock transfer agent, if any, with the Warrant Exercise Form attached hereto duly executed and accompanied by payment (either in cash or by certified or official bank check, payable to the order of the Corporation) of the Exercise Price for the number of shares specified in such Form and instruments of transfer, if appropriate, duly executed by the Holder or its duly authorized attorney. If this Warrant should be exercised in part only, the Corporation shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the shares purchasable hereunder. Upon receipt by the Corporation of this Warrant, together with the Exercise Price, at its office, or by the stock transfer agent of the Corporation at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Corporation shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. The Corporation shall pay any and all documentary stamp or similar issue taxes payable in respect of the issue or delivery of shares of Common Stock on exercise of this Warrant. 1.2 Limitations Upon Exercise. The Warrant, together with all other -------------------------- warrants of the same series as this Warrant, may not be exercised at any one time with respect to less than an aggregate of 100,000 shares of Common Stock (or that lesser number of shares of Common Stock then subject to purchase under all then outstanding Warrants, if less than 100,000 shares) or for any fractional shares. 2. Reservation of Shares. The Corporation will at all times reserve for --------------------- issuance and delivery upon exercise of this Warrant all shares of Common Stock or other shares of capital stock of the Corporation (and other securities and property) from time to time receivable upon exercise of this Warrant. All such shares (and other securities and property) shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and non- assessable and free of all preemptive rights. 3. Registration under Securities Act of 1933. ----------------------------------------- 3.1 No Registration of Warrant. This Warrant is not and will not be -------------------------- registered under the Act. 3.2 Restrictions Upon Transferability. The Warrant Stock and the --------------------------------- Warrant may be sold or otherwise disposed only in accordance with the provisions of Sections 4 and 5 of the Registration Rights Schedule. 3.3 Registration Commitment. The shares of Common Stock issuable ------------------------ upon exercise of this Warrant shall be registered under the Securities Act of 1933, as amended (the "Act"), as soon as practicable after the date hereof in accordance with the 2 provisions of Schedule 3.1 attached hereto (the "Registration Rights Schedule"). 4. Fractional Shares. No fractional shares or scrip representing ----------------- fractional shares shall be issued upon the exercise of this Warrant, but the Corporation shall issue one additional share of its Common Stock in lieu of each fraction of a share otherwise called for upon any exercise of this Warrant. 5. Exchange, Transfers, Assignment of Warrant. This Warrant is not ------------------------------------------ registered under the Act nor under any applicable state securities law or regulation. This Warrant cannot be exchanged, transferred or assigned, except in accordance with the provisions of Sections 3.2 and 10 hereof. Upon such event and upon surrender of this Warrant to the Corporation, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Corporation shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be cancelled. 6. Rights of the Holder. The Holder shall not, by virtue hereof, be -------------------- entitled to any rights of a stockholder of the Corporation, either at law or in equity, and the rights of the Holder are limited to those expressed in this Warrant. 7. Redemption. This Warrant is not redeemable by the Corporation. ---------- 8. Anti-Dilution Provisions. ------------------------ 8.1 Adjustment for Dividends in Other Securities, Property, Etc.; --------------------------------------------- --------------- Reclassification, Etc. In case at any time or from time to time after the Base - --------------------- Date the holders of Common Stock (or any other securities at the time receivable upon the exercise of this Warrant) shall have received, or on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive without payment therefor: (a) other or additional securities or property (other than cash) by way of dividend, (b) any cash paid or payable except out of earned surplus of the Corporation at the Base Date as increased (decreased) by subsequent credits (charges) thereto (other than credits in respect of any capital or paid-in surplus or surplus created as a result of a revaluation of property) or (c) other or additional (or less) securities or property (including cash) by way of stock-split, spin-off, split- up, reclassification, combination of shares or similar corporate rearrangement, then, and in each such case, the Holder of this Warrant, upon the exercise thereof as provided in Section 1, shall be entitled to receive the amount of securities and property (including cash in the cases referred to in clauses (b) and (c) above) which such Holder would hold on the date of such exercise if on the Base Date it had been the holder of record of the number of shares of Common Stock (as constituted on the Base Date) subscribed for upon such exercise as provided in Section 1 and had thereafter, during the period from the Base Date to and including the date of such exercise, retained such shares and/or all other additional (or less) securities and property (including 3 cash in the cases referred to in clauses (b) and (c) above) receivable by it as aforesaid during such period, giving effect to all adjustments called for during such period by Section 8.2. 8.2 Adjustment for Reorganization, Consolidation, Merger, Etc. In --------------------------------------------------------- case of any reorganization of the Corporation (or any other corporation, the securities of which are at the time receivable on the exercise of this Warrant) after the Base Date or in case after such date the Corporation (or any such other corporation) shall consolidate with or merge into another corporation or convey all or substantially all of its assets to another corporation, then, and in each such case, the Holder of this Warrant upon the exercise thereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation, merger or conveyance, shall be entitled to receive, in lieu of the securities and property receivable upon the exercise of this Warrant prior to such consummation, the securities or property to which such Holder would have been entitled upon such consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in Section 8.1; in each such case, the terms of this Warrant shall be applicable to the securities or property receivable upon the exercise of this Warrant after such consummation. 8.3 Impairment. The Corporation will not, by amendment of its ---------- Certificate of Incorporation or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, while any Warrant is outstanding, the Corporation (a) will not permit the par value, if any, of the shares of stock receivable upon the exercise of this Warrant to be above the amount payable therefor upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Corporation may validly and legally issue or sell fully-paid and non-assessable stock upon the exercise of all Warrants at the time outstanding, (c) will not issue or sell any stock of any class which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding-up, unless the rights of the holders thereof shall be limited to a fixed sum or percentage of par value in respect to participation in dividends and in any such distribution of assets and (d) will take no action to amend its Certificate of Incorporation which would change to the detriment of the holders of Common Stock the dividend or voting rights of the Corporation's Common Stock (as constituted on the Base Date). 8.4 Certificate as to Adjustments. In each case of an adjustment in ----------------------------- the number of shares of Common Stock (or other securities or property) receivable on the exercise of the Warrant, the Corporation at its expense will promptly compute such adjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based. The Corporation will forthwith mail a copy of each such certificate to each holder of the Warrant. 4 8.5 Notices of Record Date, Etc. --------------------------- In case: (a) the Corporation shall take a record of the holders of its Common Stock (or other securities at the time receivable upon the exercise of the Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Corporation (other than a stock split or reverse stock split), any reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation (other than a merger for purposes of change of domicile) or any conveyance of all or substantially all of the assets of the Corporation to another corporation; or (c) of any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, then, and in each such case, the Corporation shall mail or cause to be mailed to each holder of the Warrant at the time outstanding a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, is to be fixed, as to which the holders of record of Common Stock (or such other securities at the time receivable upon the exercise of the Warrant) shall be entitled to exchange their shares of Common Stock (or such other securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified and the Warrant may be exercised prior to said date during the term of the Warrant no later than five days prior to said date. 9. Applicable Law. This Warrant is issued under and shall for all -------------- purposes be governed by and construed in accordance with the laws of the State of New York. 10. Assignment. This Warrant is not assignable without the prior consent ---------- of the Corporation, except to executive officers, directors or other principals of the Holder. 11. Notice. Notices and other communications to be given to the Holder of ------ the Warrant evidenced by this certificate shall be deemed to have been sufficiently given, if delivered or mailed, addressed in the name and at the address of such owner appearing on the records of the Corporation, and if mailed, sent registered or certified mail, postage prepaid. Notices or other communications to the Corporation shall be deemed to have been sufficiently given if delivered by hand or mailed, by registered or certified mail, postage prepaid, to the Corporation at 150 Harrison Avenue, Campbell, California 95008, Attn: President, or at such other address as the Corporation shall have designated by 5 written notice to such registered owner as herein provided. Notice by mail shall be deemed given when deposited in the United States mail as herein provided. IN WITNESS WHEREOF, the Corporation has caused this Warrant to be signed on its behalf, in its corporate name, by its duly authorized officer, all as of the day and year first above written. GRAPHON CORPORATION By:__________________________________ Name: Walter Keller Title: President 6 WARRANT EXERCISE FORM The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing ________________________ Common Shares of GRAPHON CORPORATION and hereby makes payment at the rate of U.S.$8.50 per share, or an aggregate of $__________________, in payment therefor. -------------------------------------------------- Name of Registered Holder -------------------------------------------------- Signature -------------------------------------------------- Date INSTRUCTIONS FOR ISSUANCE OF STOCK (if other than to the registered Holder of the within Warrant) Name (Please typewrite or print in block letters) Address Social Security or Taxpayer Identification Number ASSIGNMENT FORM (See Sections 5 and 11 for terms of Assignment) The Holder hereby assigns and transfers unto Name (Please typewrite or print in block letters) Address the right to purchase Common Shares of GRAPHON CORPORATION represented by this Warrant to the extent of _________________________ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint __________________________________________________ Attorney, to transfer the same on the books of GRAPHON CORPORATION with full power of substitution in the premises. DATED:______________________, -------------------------------------------- Name of Registered Holder -------------------------------------------- Signature 7 Schedule 3.1 REGISTRATION RIGHTS, PROCEDURES AND RESTRICTIONS UPON TRANSFER 1. Restriction on Transfer. The Restricted Securities (as hereinafter ----------------------- defined), and any shares of capital stock received in respect thereof, whether by reason of a stock split or share reclassification thereof, a stock dividend thereon or otherwise, shall not be transferable except upon the conditions specified in this Schedule, which conditions are intended to insure compliance with the provisions of the Securities Act in respect of the transfer thereof. 2. Definitions. As used in this Schedule, the following terms shall have ----------- the following respective meanings: "Commission" shall mean the Securities and Exchange Commission, or any other Federal agency at the time administering the Securities Act. "Corporation" shall mean GRAPHON CORPORATION, a Delaware corporation, and its successors and assigns. "Person" shall mean and include an individual, a corporation, a partnership, a trust, an unincorporated organization and a government or any department, agency or political subdivision thereof. "Purchaser" shall mean the registered holder of the Warrants, or such Purchaser's permitted successors or assigns. "Restricted Securities" shall mean (i) the Warrants, and (ii) the shares of Common Stock of the Corporation issuable upon exercise of the Warrants. "Restricted Shares" shall mean the shares of Common Stock of the Corporation constituting Restricted Securities. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Transfer" shall include any disposition of Restricted Securities or of any interest therein which would constitute a sale thereof within the meaning of the Securities Act. "Warrant" shall mean that common stock purchase warrant to which this Schedule is attached, initially pertaining to the purchase of up to an aggregate of 300,000 shares of Common Stock of the Corporation, and any common stock purchase warrants issued in replacement or substitution therefor. 3. Restrictive Legend. Each certificate evidencing Restricted Shares and ------------------ any shares of capital stock received in respect thereof, whether by reason of a stock split or share reclassification thereof, a stock dividend thereon or otherwise, and each certificate for any such securities issued to subsequent transferees of any such certificate shall (unless otherwise permitted by the provisions of Sections 4 or 11 hereof) be stamped or otherwise imprinted with the following legend: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, offered for sale, assigned, transferred or otherwise disposed of, unless registered pursuant to the provisions of that Act or an opinion of counsel to the Corporation is obtained stating that such disposition is in compliance with an available exemption from such registration." 4. Notice of Transfer. The holder of any Restricted Securities, by ------------------ acceptance thereof, agrees, prior to any transfer of any Restricted Securities, to give written notice to the Corporation of such holder's intention to effect such transfer and to comply in all other respects with the provisions of this Section 4, and with those provisions of Section 3.2 and 10 of the Warrant to which this Schedule refers. Each such notice shall describe the manner and circumstances of the proposed transfer and shall be accompanied by (a) the written opinion, addressed to the Corporation, of counsel for the holder of Restricted Securities, as to whether in the opinion of such counsel (which opinion shall be satisfactory to counsel for the Corporation) such proposed transfer involves a transaction requiring registration of such Restricted Securities under the Securities Act, and (b) in the case of Restricted Shares, if in the opinion of such counsel such registration is required, a written request addressed to the Corporation by the holder of Restricted Securities, describing in detail the proposed method of disposition and requesting the Corporation to effect the registration of such Restricted Shares pursuant to the terms and provisions of Section 5 hereof; provided, however, that no such opinion shall be required in connection with a transaction complying with the requirements of Rule 144 (as amended from time to time) promulgated under the Securities Act (or successor Rule thereto). If in the opinion of such counsel (if such opinion is required hereunder) and counsel for the Corporation, the proposed transfer of Restricted Securities may be effected without registration under the Securities Act, the holder of Restricted Securities shall thereupon be entitled to transfer Restricted Securities in accordance with the terms of the notice delivered by it to the Corporation. Each certificate or other instrument evidencing the securities issued upon the transfer of any Restricted Securities (and each certificate or other instrument evidencing any untransferred balance of such securities) shall bear the legend described in Section 3 hereof unless (a) in the opinion of such counsel and counsel for the Corporation registration of future transfer is not required by the applicable provisions of the Securities Act or (b) the Corporation shall have waived the requirement of such legend; provided, however, that such legend shall not be required on any certificate or other instrument evidencing the securities issued upon such transfer in the event such transfer shall be made in compliance with the requirements of Rule 144 (as amended from time to time) promulgated under the Securities Act (or successor Rule thereto). The holder of Restricted Securities shall not transfer such Restricted Securities until such opinion of counsel has been given to the Corporation (unless waived by the Corporation or unless such opinion is not required in accordance with the provisions of this Section 4) or until registration of the Restricted Shares involved in the above-mentioned request has become effective under the Securities Act. 5. Registration. (a) As soon as practicable after the issuance date of ------------ the Warrant to which this Schedule refers, the Corporation shall file a registration statement on Form S-1 under the Securities Act covering the Restricted Shares and shall thereafter use its best efforts to cause such registration statement to be declared effective by the Commission at the earliest practicable date so as to permit offer and the sale or other disposition by the prospective seller or sellers of the Restricted Shares so registered. (b) Anything contained herein to the contrary notwithstanding, with respect to the registration statement contemplated by this Section 5, the Corporation may include in such registration statement for its own account any authorized but unissued securities of the Corporation and/or for the account of others any issued and outstanding securities of the Corporation. 6. Preparation and Filing. The Corporation shall, as expeditiously as ---------------------- practicable: (a) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for at least nine months and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Restricted Shares covered by such registration statement and will furnish to each selling stockholder prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any such amendment or supplement to which any such selling stockholder shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder; (b) furnish to each selling stockholder such number of copies of the registration statement and of each such amendment or supplement thereto (in each case including all exhibits) a summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such seller may reasonably request in order to facilitate the public sale or other disposition of such Restricted Shares; (c) use its best efforts to register or qualify the Restricted Shares covered by such registration statement under the securities or blue sky laws of such jurisdictions as each such seller shall reasonably request but in no event more than three states in the aggregate (provided, however, that the Corporation shall not be required to consent to general service of process for all purposes in any jurisdiction where it is not then qualified) and do any and all other acts or things which may be necessary or advisable to enable such seller to consummate the public sale or disposition in such jurisdictions of such securities; (d) notify each seller of Restricted Shares covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Securities Act, of the happening of any event as a result of which the registration statement, the prospectus or any document incorporated therein by reference, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading and at the request of such seller, prepare and furnish to such seller a post-effective amendment or supplement to the registration statement or the related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (e) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first month of the first fiscal quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (f) notify each selling stockholder, promptly, and confirm such advice in writing; (A) when the registration statement, any pre-effective amendment, the prospectus or any prospectus supplement or post-effective amendment to the registration statement has been filed, and, with respect to the registration statement or any post-effective amendment, when the same has become effective; (B) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose; (C) of the receipt by the Corporation of any qualification of the Restricted Shares for sale under the securities or "Blue Sky" laws of any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (D) of the existence of any fact which results in the registration statement, the prospectus or any document incorporated therein by reference containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (g) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the registration statement at the earliest possible moment; and (h) use its best efforts to cause all Restricted Shares covered by the registration statement to be listed on each securities exchange on which the Corporation's Common Stock is listed, if any. 7. Underwritten Offerings. [Intentionally Omitted]. ---------------------- 8. Preparation; Reasonable Investigation. In connection with the ------------------------------------- preparation and filing of the registration statement contemplated by Section 5 hereof, the Corporation will give the holders of Restricted Shares on whose behalf such Restricted Shares are to be so registered and their respective counsel and accountants the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, each document incorporated by reference therein and each amendment thereof or supplement thereto, and will give each of them such opportunities to discuss the business of the Corporation with its officers as shall be necessary, in the opinion of such holders or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 9. Expenses. All expenses incurred by the Corporation in complying with -------- Sections 5 and 6 hereof, including, without limitation, all registration and filing fees, fees and expenses of complying with securities and blue sky laws, printing expenses and fees and disbursements of both counsel and the independent certified public accountants of the Corporation shall be paid by the Corporation; provided, however, that all underwriting discounts and selling commissions and stock transfer taxes applicable to the Restricted Shares covered by the registration effected pursuant to Section 5 hereof shall be borne by the seller or sellers thereof, in proportion to the number of Restricted Shares sold by such seller or sellers shall be borne by such holders. 10. Indemnification. ---------------- (a) In the event of any registration of any Restricted Shares under the Securities Act pursuant to this Schedule or registration or qualification of any Restricted Shares pursuant to Section 6(c) hereof, the Corporation shall indemnify and hold harmless the seller of such shares, each underwriter of such shares, if any, each broker or any other person acting on behalf of such seller and each other person, if any, who controls any of the foregoing persons, within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which any of the foregoing persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such Restricted Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, any document incorporated by reference therein or any amendment or supplement thereto, or any document prepared and/or furnished by the Corporation incident to the registration or qualification of any Restricted Shares pursuant to Section 6(d) hereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or, with respect to any prospectus, necessary to make the statements therein in light of the circumstances under which they were made, not misleading, or any violation by the Corporation of the Securities Act or state securities or blue sky laws applicable to the Corporation and relating to action or inaction required of the Corporation in connection with such registration or qualification under such state securities or blue sky laws; and shall reimburse such seller, such underwriter, broker or other person acting on behalf of such seller and each such controlling person for any legal or any other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Corporation shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus or said prospectus or said amendment or supplement or any document incident to the registration or qualification of any Restricted Shares pursuant to Section 6(d) hereof in reliance upon and in conformity with written information furnished to the Corporation through an instrument duly executed by such seller or such underwriter specifically for use in the preparation thereof. (b) Before Restricted Shares held by any prospective seller shall be included in any registration pursuant to this Schedule, such prospective seller and any underwriter acting on its behalf shall have agreed to indemnify and hold harmless (in the same manner and to the same extent as set forth in the preceding paragraph (a) of this Section 10) the Corporation, each director of the Corporation, each officer of the Corporation who shall sign such registration statement and any person who controls the Corporation within the meaning of the Securities Act, with respect to any untrue statement or omission from such registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, if such untrue statement or omission was made in reliance upon and in conformity with written information furnished to the Corporation through an instrument duly executed by such seller or such underwriter specifically for use in the preparation of such registration statement, preliminary prospectus, final prospectus or amendment or supplement; provided, however, that the maximum amount of liability in respect of such indemnification shall be limited, in the case of each prospective seller of Restricted Shares, to an amount equal to the gross proceeds actually received by such prospective seller from the sale of Restricted Shares effected pursuant to such registration. (c) Promptly after receipt by an indemnified party of notice of the commencement of any actions involving a claim referred to in paragraph (a) or (b) of this Section 10, such indemnified party will, if a claim in respect thereof is made against an indemnifying party, give written notice to the latter of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that if any indemnified party shall have reasonably concluded that there may be one or more legal defenses available to such indemnified party which are differed from or additional to those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Section 10, the indemnifying party shall reimburse such indemnified party for that portion of the fees and expenses of any counsel retained by the indemnified party which are reasonably related to the matters covered by the indemnity agreement provided in this Section 10. (d) The failure to notify an indemnifying party promptly of the commencement of any such action, if materially prejudicial to the ability of the indemnifying party to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 10, but the omission so to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party otherwise than under this Schedule. The indemnifying party shall not make any settlement of any claims indemnified against hereunder without the written consent of the indemnified party or parties, which consent shall not be unreasonably withheld. (e) If the indemnification provided for in Section 10 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received from the offering by the Corporation, the holders of Restricted Shares and any underwriter; but if such allocation is not permitted by applicable law or if the indemnified party failed to give the notice required under paragraph (c) above, each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportions as are appropriate to reflect not only such relative benefits but also relative fault of the Corporation, the holders of Restricted Securities and any underwriter in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The parties agree that the relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged untrue statement of a material fact relates to information supplied by the Corporation, the holders of Restricted Shares or underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; that it would not be just and equitable if contribution pursuant to such agreement were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable consideration referred to above in this paragraph (e); that the amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof), referred to above in this paragraph (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim; that the holders of Restricted Shares shall not be required to contribute any amount in excess of the dollar amount by which the proceeds to be received by such holders from the sale of their respective Restricted Shares exceeds the amount of damages such holders of Restricted Shares would have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the shares or securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission; and that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 11. Removal of Legends, Etc. Notwithstanding anything to the contrary ----------------------- herein, the restrictions imposed by this Schedule upon the transferability of any Restricted Shares shall cease and terminate when any such Restricted Shares are registered under the Act as contemplated by Section 5 hereof. Whenever the restrictions imposed by this Schedule shall terminate, as herein provided, the holder of any Restricted Shares as to which such restriction has terminated shall be entitled to receive from the Corporation, without expense, a new certificate not bearing the restrictive legend referred to in Section 3 hereof and not containing any other reference to the restrictions imposed by this Schedule. EX-5.1 3 OPINION OF COOPERMAN LEVITT WINIKOFF LESTER NEWMAN EXHIBIT 5.1 [Letterhead of Cooperman Levitt Winikoff Lester & Newman, PC] December 21, 1999 GraphOn Corporation 150 Harrison Avenue Campbell, California 95008 Re: Registration Statement on Form S-1 Under the Securities Act of 1933 Ladies and Gentlemen: In our capacity as counsel to GraphOn Corporation, a Delaware corporation (the "Company"), we have been asked to render this opinion in connection with a Registration Statement on Form S-1 (File No. 333- ), being contemporaneously filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Registration Statement"), covering 300,000 shares of common stock, par value $.0001 per share, of the Company ("Warrant Shares") that are issuable upon future exercises of certain common stock purchase warrants heretofore issued by the Company, which are exercisable at $8.50 per share and will expire on December 31, 2000 (the "Warrants"), which have been included in the Registration Statement for the account of the person identified as the Selling Stockholder therein. In that connection, we have examined the Certificate of Incorporation and the By-Laws of the Company, both as amended to date, the Warrants, the Registration Statement, corporate proceedings of the Company relating to the issuance of each of, respectively, the Warrants and the Warrant Shares and such other instruments and documents as we have deemed relevant under the circumstances. In making the aforesaid examinations, we have assumed the genuineness of all signatures and the conformity to original documents of all copies furnished to us as original or photostatic copies. We have also assumed that the corporate records furnished to us by the Company include all corporate proceedings taken by the Company to date. Based upon the subject to the foregoing, we are of the opinion that: (1) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (2) The Warrant Shares have been duly and validly authorized and, when issued and paid for in accordance with the terms of the Warrants and as described in the Registration Statement, will be duly and validly issued fully paid and non-assessable. We hereby consent to the use of our opinion as herein set forth as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the prospectus forming a part of the Registration Statement. Very truly yours, COOPERMAN LEVITT WINIKOFF LESTER & NEWMAN, P.C. By: /s/Ira Roxland A Member of the Firm EX-10.9 4 CONSULTING AGREEMENT DATED OCTOBER 12, 1999 EXHIBIT 10.9 CONSULTING SERVICES AGREEMENT ----------------------------- The following confirms the non-exclusive agreement (the "Agreement") between Super Tech Holdings Limited (the "Consultant") and GraphOn Corporation (the "Company") with respect to the provision of consulting services to the Company. 1. Term of Agreement. This Agreement is effective as of October 12, 1999, ----------------- (the "Effective Date") continuing for a period of three (3) years, and will terminate October 12, 2002, (the "Termination Date") at the close of business unless terminated earlier pursuant to Paragraph 8 of this Agreement. This Agreement may be renewed for an additional similar term at any time upon the mutual written consent of the parties. 2. Independent Contractor Status. It is the express intention of the ----------------------------- parties to this Agreement that the Consultant is an independent contractor, and is classified by the Company as such for all employee benefit purposes, and is not an employee, agent, joint venturer, or partner of the Company. Nothing in this Agreement shall be interpreted or construed as creating or establishing an employment relationship between the Company and the Consultant. 3. Services. Consultant agrees to render consulting services (the -------- "Services") to the Company for the term of this Agreement. The Services shall include, but are not limited to, those duties set forth in Exhibit A attached --------- hereto. Consultant shall have the sole discretion to determine the method, means, and location of performing the Services, and that the Company has no right to, and will not, control or determine the method, means, or place of the performance of the Services. 4. Employment of Assistants. Should the Consultant, in its sole ------------------------ discretion, deem it necessary to employ assistants to aid it in the performance of the Services, the parties agree that the Company will not direct, supervise, or control such assistants to the Consultant in their performance of Services. The parties further agree that such assistants are employed solely by the Consultant, and that Consultant alone is responsible for providing workers' compensation insurance for its employees, for paying the salaries and wages of his employees, and for making all required tax withholdings. Consultant further represents and warrants that it maintains workers' compensation insurance coverage for its employees and acknowledges that it alone has responsibility for such coverage. Any and all sales generated by such assistants shall be counted as sales generated by Consultant. 5. Covenants of the Consultant. --------------------------- a. Consultant shall pay all taxes, withholdings and any other fees or payments required; and Consultant agrees to defend, indemnify and hold Company harmless from any and all claims made by any person, governmental or non- governmental entity alleging failure by Consultant to satisfy any such tax or withholding obligations. 1 b. Consultant shall supply all equipment necessary to perform the Services and shall pay all of its expenses incurred in connection with this Agreement. c. Consultant shall indemnify and hold the Company harmless from, and shall defend the Company against, any and all loss, liability, damage, claims, demands, or suits and related costs and expenses that arise, directly or indirect]y, from acts or omissions of the Consultant, or from the breach of any term or condition of this Agreement by Consultant or its agents. 6. Compensation. Upon signing of the agreement, Consultant will be ------------ granted options according to Exhibit B upon completion of Services as per --------- Exhibit A. Completion of Services is determined upon actual receipt of cash - --------- payment to Company. The foregoing payments are Consultant's sole compensation for rendering Services to the Company. The parties agree that the Company shall not be required to pay or reimburse any costs or expenses incurred by Consultant in performing the Services. Compensation is based on revenue derived from China. 7. Confidential Information. Consultant understands that the Company ------------------------ possesses Proprietary Information as defined below which is important to its business and that this Agreement creates a relationship of confidence and trust between Consultant and the Company with regard to Proprietary Information. a. For purposes of this Agreement, "Proprietary Information" is information that was or will be developed, created, or discovered by or on behalf of the Company, or is developed, created or discovered by Consultant while performing Services, or which became or will become known by, or was or is conveyed to the Company which has commercial value in the Company's business. "Proprietary Information" includes, but is not limited to, trade secrets, computer programs, ideas, techniques, inventions (whether patentable or not), business and product development plans, customers and other information concerning the Company's actual or anticipated business, research or development, personnel information, Inventions (as defined in subsection e below), or which is received in confidence by or for the Company from any other person. b. At all times, both during the term of this Agreement and after its termination, Consultant will keep in confidence and trust, and will not use or disclose, any Proprietary Information without the prior written consent of an officer of the Company, except as may be necessary in the ordinary course of performing the Services under this Agreement. c. Consultant understands that the Company possesses or will possess "Company Documents" which are important to its business. For purposes of this Agreement, "Company Documents" are documents or other media that contain or embody Proprietary Information or any other information concerning the business, operations or plans of the Company, whether such documents have been prepared by Consultant or by others. "Company Documents" include, but are not limited to, blueprints, drawings, photographs, charts, graphs, notebooks, customer lists, computer disks, personnel files, tapes or printouts, sound recordings and other printed, typewritten or handwritten documents. All Company Documents are and shall 2 remain the sole property of the Company. Consultant agrees not to remove any Company Documents from the business premises of the Company or deliver any Company Documents to any person or entity outside the Company, except as required to do in connection with performance of the Services under this Agreement. Consultant further agrees that, immediately upon the Company's request and in any event upon completion of the Services, Consultant shall deliver to the Company all Company Documents, apparatus, equipment and other physical property or any reproduction of such properly, excepting only Consultant's copy of this Agreement. d. Consultant represents that performance of all the terms of this Agreement will not breach any agreement and to keep in confidence any confidential or proprietary information of a third party acquired by Consultant in confidence or in trust prior to the execution of this Agreement. Consultant has not entered into, and Consultant agrees not to enter into, any agreement either written or oral that conflicts or might conflict with Consultant's performances of the Services under this Agreement. 8. Termination of Agreement. This Agreement may be terminated by mutual ------------------------ consent of the parties at any time prior to the Termination Dale for any reason, with or without cause. a. Any pending sale that closes within six (6) months after the termination of this Agreement may be deemed a sale, if Consultant clearly identifies the potential client with either a signed letter of intent or through written correspondence indicating a potential client's good-faith intention to enter into a business relationship. b. Company shall continue to pay commissions due and owing to Consultant for a period of no more than two (2) years after the termination of this Agreement. 9. Enforceability of Agreement. Consultant agrees that any dispute in the --------------------------- meaning, effect, or validity of this Agreement shall be resolved in accordance with the laws of the State of New York without regard to the conflict of laws provisions thereof. Consultant further agrees that if one or more provisions of this Agreement are held to be unenforceable under applicable New York law, such provision(s) shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 10. Assignment. This Agreement shall not be assignable by either ---------- Consultant or Company without the express written consent of the other party. 11. Arbitration. Consultant and Company agree that any and all disputes ----------- between the parties, which arise out of this Agreement shall be resolved through final and binding arbitration in Santa Clara County, California in accordance with the rules and regulations of the American Arbitration Association then in effect. Both parties understand and agree that the arbitration shall be in lieu of any civil litigation and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof. 3 12. Entire Understanding. This Agreement contains the entire -------------------- understanding of the parties regarding its subject matter and can only be modified by a subsequent written agreement executed by Consultant and Company. 13. Notices. All notices required or given herewith shall be addressed to ------- the Company or Consultant at the designated addresses shown below by registered mail, special delivery, or by certified courier service: a. To Company: GraphOn Corporation 150 Harrison Avenue Campbell, California, USA 95008 b. To Super Tech Holdings Limited: 11/F. Prosperity Centre, 77-81 Container Port Road, Kwai Chung, N.T. Hong Kong. 14. Attorneys' Fees. If any action at law or in equity is necessary to --------------- enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs, and necessary disbursements, in addition to any other relief to which the party may be entitled. Super Tech Holdings Limited Dated: Nov 11, 1999 By: /s/ Bailing Xia ------ ----------------------------- Name: Bailing Xia -------------------------- Title: President ------------------------ GraphOn Corporation Dated: Nov 11, 1999 By: /s/ Eric Lefebvre ------ ----------------------------- Name: Eric Lefebvre ------------------------- Title: VP Business Development ------------------------ 4 EXHIBIT A --------- DUTIES AND SERVICES OF CONSULTANT --------------------------------- 1. Consultant shall generate sales opportunities in China and contacts with new clients in China and promote the sale of Company's products. 2. Consultant shall actively participate throughout the negotiation of any potential agreement between Company and new clients up to and including the closing of a sale in China. 3. Consultant shall present names to Company of potential new clients it wishes to pursue for the purpose of generating sales revenue in China. 4. Company shall have the right to approve the names of potential new clients Consultant shall pursue. Company reserves the right to disapprove any potential opportunity with a new client at its sole discretion. 5. At the request of Company, Consultant shall pursue opportunities with one or more named accounts for the purpose of generating sales in China. Consultant shall receive a commission for sales to such named accounts as specified in Exhibit B. 5 EXHIBIT B --------- COMPENSATION SCHEDULE FOR COMPLETION OF CONSULTANT'S SERVICES ------------------------------------------------------------- 1. Upon execution of this Agreement: Company agrees to grant Consultant the option to purchase 300,000 (GOJO: NASDAQ) shares of Company's common stock at an exercise price of $8.50. Such right to purchase said options shall expire on December 31, 2000. A restriction on volume sale of stock will apply at the rate of 60,000 shares a month until December 31, 2000. 6 EX-23.1 5 CONSENT OF BDO SEIDMAN, LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors GraphOn Corporation We hereby consent to the use in the Prospectus constituting a part of this Registration Statement on Form S-1, of our report dated February 25, 1999, except with respect to matters discussed in Note 6 as to which the date is May 30, 1999, relating to the balance sheets of GraphOn Corporation as of December 31, 1998 and 1997, and the related statements of operations and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. We also consent to the reference to our firm under the heading "Experts" in the Registration Statement on Form S-1. /s/ BDO Seidman, LLP BDO Seidman, LLP San Jose, California December 21, 1999 -----END PRIVACY-ENHANCED MESSAGE-----