-----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, K472l/1EIen0Bln/nyCoDIHUU5Xyd3RSh/apVPSHIY7kstw0r9kdO20FDs036mAw Unwz+u1kjK5RSCpDOebHmA== 0001021435-05-000005.txt : 20050204 0001021435-05-000005.hdr.sgml : 20050204 20050204164828 ACCESSION NUMBER: 0001021435-05-000005 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050131 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Triggering Events That Accelerate or Increase a Direct Financial Obligation under an Off-Balance Sheet Arrangement ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050204 DATE AS OF CHANGE: 20050204 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21683 FILM NUMBER: 05577758 BUSINESS ADDRESS: STREET 1: 3130 WINKLE AVENUE CITY: SANTA CRUZ STATE: CA ZIP: 95065 BUSINESS PHONE: 8004727466 MAIL ADDRESS: STREET 1: 3130 WINKLE AVENUE CITY: SANTA CRUZ STATE: CA ZIP: 95065 FORMER COMPANY: FORMER CONFORMED NAME: UNITY FIRST ACQUISITION CORP DATE OF NAME CHANGE: 19960823 8-K 1 form8k.txt NES PIPE FORM 8K EFFECTIVE AUGUST 23RD, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) January 31, 2005 GraphOn Corporation (Exact name of registrant as specified in its charter) Delaware 0-21683 13-3899021 (State or other (Commission (IRS Employer jurisdiction of incorporation) File Number) Identification No.) 3130 Winkle Avenue, Santa Cruz, CA 95065 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (800) 472-7466 N/A (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): - ------------------------------------------------------------------------------- [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 1.01 Entry Into a Material Definitive Agreement. GraphOn Corporation (the "Company") has entered into a Unit Subscription Agreement, dated as of February 2, 2005 (the "Agreement"), with the persons listed on Exhibit A to the Agreement (collectively, the "Purchasers"). Pursuant to the Agreement, the Company has issued and sold to the Purchasers, in a private placement, approximately 148,148 shares of newly created Series A Preferred stock (the "Series A Stock") at $27.00 per share (the "Shares") and warrants to purchase approximately 74,070 shares of newly created Series B Preferred Stock (the "Series B Stock" and collectively with the Series A Stock, the "Preferred Stock") at $40.00 per share (the "Warrants"), for an aggregate purchase price of approximately $4,000,000 (the "Financing"). Pursuant to a finder's agreement, the Company issued warrants to purchase an additional 14,815 shares of Series A Stock and 7,407 shares of Series B Stock. The Shares and Warrants were issued in reliance upon the exemption from registration contained in Regulation D, Rule 506 of the Securities Act of 1933, as amended. The Company determined that this exemption was available because of the nature and limited number of the Purchasers. In making this determination, the Company relied in part upon representations made by each Purchaser. Pursuant to the terms of an Investor Rights Agreement entered into with the Purchasers in connection with the Financing (the "Rights Agreement"), the Company has agreed to prepare and file with the SEC a registration statement covering the resale of shares of the Company's common stock (the "Common Stock") underlying the Series A Stock and the Series B Stock (underlying the Warrants). In addition, under the terms of a Holder Agreement entered into in connection with the Merger (as defined in Item 2.01 below), the Company has agreed to register the shares of Common Stock issued in the Merger. Under the terms of the Financing, upon the effectiveness of an amendment to the Company's Certificate of Incorporation to increase the authorized number of shares of Common Stock, all shares of Series A Stock and Series B Stock will automatically convert into shares of Common Stock at a rate of one hundred shares of Common Stock for each share of Preferred Stock, and all Warrants will automatically become exercisable for shares of Common Stock at a rate of one hundred shares of Common Stock for each share of Preferred Stock underlying such Warrants. The Agreement is attached hereto as Exhibit 10.1, the form of Warrant is attached hereto as Exhibit 4.1 the Rights Agreement is attached hereto as Exhibit 4.2 and the Holder Agreement is attached hereto as Exhibit 4.3. The descriptions of the Agreement, the Warrants, the Rights Agreement and the Holder Agreement contained in this Item are qualified in their entirety by the contents of the Agreement, the form of Warrant and the Rights Agreement. The contents of Item 2.04 are incorporated into this Item in their entirety. Item 2.01 Completion of Acquisition or Disposition of Assets. On January 31, 2005, the Company consummated the transactions contemplated by the Agreement and Plan of Merger and Reorganization (the "Reorganization Agreement") entered into with Network Engineering Software, Inc., a California corporation ("NES"), on December 3, 2004, including the merger of a wholly owned subsidiary of the Company with and into NES (the "Merger"). In accordance with the terms of the Reorganization Agreement, all outstanding shares of NES were automatically converted into approximately 7,250,000 shares of the Common Stock. Under the Reorganization Agreement, the Company has issued an additional 1,750,000 shares of Common Stock to satisfy an obligation of NES pursuant to a contingency fee agreement, which obligation was triggered by the consummation of the Merger. Pursuant to the terms of an Escrow Agreement entered into in connection with the Merger, approximately 2,000,000 of the shares issued in connection with the Merger have been deposited into an escrow account and will be available to satisfy certain rights of the Company to indemnification and reimbursement arising out of breaches of and inaccuracies in certain representations, warranties and covenants made by NES in the Reorganization Agreement. The Company has issued an additional 500,000 shares of Common Stock and an aggregate of approximately $900,000 has been paid in satisfaction of various other outstanding liabilities of NES, including the $665,000 settlement referred to in Item 2.04. The shares of Common Stock issued in connection with the Merger have been issued in reliance upon the exemption from registration contained in Regulation D, Rule 506 of the Securities Act of 1933, as amended. The Company determined that this exemption was available because of the nature and limited number of NES shareholders. In making this determination, the Company relied in part upon representations made by each NES shareholder. 2 In connection with the consummation of the Merger, the former President and majority shareholder of NES has entered into an employment arrangement with the Company pursuant to which, among other things, the Company has granted this individual an option to purchase 1,000,000 shares of Common Stock. The contents of Item 2.01 are incorporated into this Item in their entirety. Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement. On December 10, 2004, the Company entered into a Reimbursement Agreement with Orin Hirschman ("Hirschman"), a major shareholder of the Company, pursuant to which the Company agreed to reimburse Hirschman in the amount of $665,000 in connection with the payment he made to settle certain litigation against NES and certain affiliates of NES. The Company's obligation to reimburse Hirschman was contingent upon the consummation of the transactions contemplated by the Reorganization Agreement, including the closing of the Financing. Pursuant to the terms of the Reimbursement Agreement, upon the closing of the Financing the Company satisfied its reimbursement obligation to Hirschman by issuing to Hirschman shares of Series A Stock and Warrants in the Financing. In connection with the Financing, the Company and Hirschman executed an amendment to the Financial Advisory Agreement that was entered into as of January 29, 2004 (the "Hirschman Amendment"). The Hirschman Amendment extends to February 2, 2008 the term of the Financial Advisory Agreement, which by its terms would otherwise have expired on January 29, 2007. The Hirschman Amendment is attached hereto as Exhibit 10.2. Item 3.02. Unregistered Sales of Equity Securities The contents of Items 1.01, 2.01 and 2.04 are incorporated into this Item in their entirety. Item 9.01. Financial Statements and Exhibits. (a) Financial Statements of Businesses Acquired. The financial statements required by this item will be filed by an amendment to this Current Report on Form 8-K as soon as practicable but not later than 71 days after the date of filing of this Current Report. (b) Pro Forma Financial Information. The pro forma financial statements required by this item will be filed by an amendment to this Current Report on 8-K as soon as practicable but not later than 71 days after the date of filing of this Current Report. (c) Exhibits. 2.1(1) Agreement and Plan of Merger and Reorganization dated December 3, 2004, by and among the Company, GraphOn Via Sub III Inc., GraphOn NES Sub, LLC, NES and Ralph Wesinger 4.1 Form of Warrant to purchase shares of Series B Preferred Stock. 4.2 Investor Rights Agreement, dated as of February 2, 2005, by and among the Company and the persons listed on Exhibit A thereto. 4.3 Holder Agreement, dated as of January 31, 2005, by and among the Company and the persons listed on Schedule A thereto. 10.1 Unit Subscription Agreement, dated as of February 2, 2005, by and among the Company and the persons listed on Exhibit A thereto. 10.2 Amendment to Financial Advisory Agreement, dated as of February 2, 2005, by and between the Company and Orin Hirschman. - ------------- (1) Incorporated by reference from the Company's Current Report on From 8-K filed with the Securities and Exchange Commission on December 9, 2004. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GRAPHON CORPORATION (Registrant) Date: February 4, 2005 By: /s/ William Swain ------------------ (Signature) William Swain Chief Financial Officer EX-4.1 2 seriesb.txt PURCHASE WARRANT SERIES B PREFERRED. Warrant: B-WARRANT-___ B-WARRANT-___ Expiring February 2, 2010. This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933. This Warrant and such shares may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act. This Warrant and such shares may not be transferred except upon the conditions specified in this Warrant, and no transfer of this Warrant or such shares shall be valid or effective unless and until such conditions shall have been complied with. Right to Purchase ________ Shares of Series B Participating Convertible Preferred Stock of GraphOn Corporation, a Delaware corporation (subject to adjustment as provided herein) SERIES B PARTICIPATING CONVERTIBLE PREFERRED STOCK PURCHASE WARRANT February 2, 2005 GRAPHON CORPORATION, a Company organized under the laws of the State of Delaware (the "Company"), hereby certifies that, for value received, ___________, or its assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after February 2, 2005 (the "Original Issue Date") and before 5:00 p.m., New York time, on February 2, 2010, _________ fully paid and nonassessable shares of Series B Stock (as hereinafter defined), $0.01 par value per share, of the Company, at a per share price of $40.00 (such purchase price per share as adjusted from time to time as herein provided is referred to herein as the "Purchase Price"). The number and character of such shares of Series B Stock and the Purchase Price are subject to adjustment as provided herein. Background: This Warrant is one of (i) the 5-year warrants, exercisable to purchase an aggregate of 74,074 shares of Series B Stock (the "Series B Warrants"), sold to the Investors in Units with an aggregate of 148,148 shares of Series A Participating Convertible Preferred Stock of the Company (the "Series A Stock") upon the terms and conditions set forth in that certain Unit Subscription Agreement, dated of even date herewith, between the Company and the Investors (the "Unit Subscription Agreement") or (ii) warrants of like tenor to purchase an additional 7,407 shares of Series B Stock granted to Griffin Securities, Inc. in connection with the sale of securities to the Investors. Capitalized terms not otherwise defined herein have the meaning set forth in the Unit Subscription Agreement. As used herein, the following terms, unless the context otherwise requires, have the following respective meanings: The term "Company" shall include GraphOn Corporation and any corporation or other entity which shall succeed to or assume, directly or indirectly, the obligations of the Company hereunder. The term "Common Stock" includes (a) the Company's Common Stock, $0.0001 par value per share, as authorized on the date of the Subscription Agreement, (b) any other common stock of any class or classes of the Company, authorized on or after such date, and (c) any other securities into which any of the common stock described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. The term "Holder" shall mean the registered holder of this Warrant. The term "Series B Stock" means (a) the Company's Series B Participating Convertible Preferred Stock, $0.01 par value per share, as authorized on the Original Issue Date, and (b) any other securities into which any of the Series B Stock may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. The term "Expiration Date" shall mean February 2, 2010. The term "Other Securities" refers to any stock (other than Series B Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Series B Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Series B Stock or Other Securities pursuant to Sections 3, 4 and 5 or otherwise. The term "Warrant" means, as applicable, this Warrant or each right as set forth in this Warrant to purchase one share of Series B Stock. 1. Exercise of Warrant. 1.1. Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder hereof shall be entitled to receive, upon exercise of this Warrant, in whole or in part, in accordance with the terms of subsection 1.2, such number of shares of Series B Stock of the Company as are designated by the Holder in the form of subscription attached as Schedule A hereto (the "Subscription Form"), subject to adjustment pursuant to Sections 3, 4 and 5. 1.2. Exercise. This Warrant may be exercised in full or in part by the Holder hereof by surrender of this Warrant, with the Subscription Form duly executed by the Holder, to the Company at its principal office or at the office of its Warrant agent (as provided in Section 11), and (a) accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, 2 in the amount obtained by multiplying the number of shares of Series B Stock for which this Warrant is to be exercised by the Purchase Price (as hereinafter defined) then in effect or (b) accompanied by a form of cashless exercise in the form attached hereto as Schedule B hereto (a "Cashless Exercise"). In the event of a Cashless Exercise, the Holder shall exchange its Warrant for that number of shares of Series B Stock determined by multiplying the number of shares of Series B Stock designated in the Subscription Form by a fraction, the numerator of which shall be the difference between the Fair Market Value per share of Series B Stock (as defined below) and the per share Purchase Price, and the denominator of which shall be the then Fair Market Value per share of Series B Stock. In the event of partial exercise of the Warrant, the Company, at its expense, will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant of like tenor, in the name of the Holder hereof or as the Holder (upon payment by the Holder of any applicable transfer taxes), may request, the number of shares of Series B Stock for which such Warrant may still be exercised. 1.3. Fair Market Value. Fair Market Value of a share of Series B Stock as of a particular date (the "Determination Date") shall mean the Fair Market Value of the shares of the Common Stock issuable upon conversion of such share. Fair Market Value of a share of Common Stock as of a Determination Date shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market System or the NASDAQ SmallCap Market, then the closing or last sale price, respectively, reported for the last five trading days immediately preceding the Determination Date. (b) If the Common Stock is not traded on an exchange or on the NASDAQ National Market System or the NASDAQ SmallCap Market but is traded in the over-the-counter market, then the average of the high sales prices reported for the last five trading days immediately preceding the Determination Date; provided that if there is no reported high sales price reported on any of the ten trading days immediately preceding this Determination Date, then the Fair Market Value shall be the average of the high bid and asked prices for such days; and if there are no reported high bid and asked prices, as the case may be, reported on any of the ten trading days preceding the Determination Date hereunder, then the Fair Market Value shall be determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. (c) Except as provided in clause (d) below, if the Common Stock is not publicly traded, then as the Holder and the Company agree, or in the absence of agreement by arbitration in accordance with the rules then standing of the American Arbitration Association, before a single 3 arbitrator to be chosen by the Company from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to Holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon conversion of the Series B Stock issuable upon exercise of the Warrant are outstanding at the Determination Date. 1.4. Corporate Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the Holder, acknowledge in writing its continuing obligation to afford to the Holder any rights to which the Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to the Holder any such rights. 1.5. Trustee for Warrant Holders. In the event that a bank or trust company shall have been appointed as trustee for the Holders of the Warrants pursuant to Subsection 4.2, such bank or trust company shall have all the powers and duties of a warrant agent appointed pursuant to Section 11 and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. 2. Delivery of Stock Certificates, etc. on Exercise. The Company agrees that the shares of Series B Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within ten (10) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as the Holder (upon payment by the Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Series B Stock (or Other Securities) to which the Holder shall be entitled to upon such exercise, plus, in lieu of any fractional shares to which the Holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which the Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 4 3. Adjustment for Dividends In Other Stock, Property, etc. Reclassification, etc. In case at any time or from time to time, the holders of Series B Stock, Common Stock or Other Securities shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or (c) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate arrangement, other than additional shares of Series B Stock, Common Stock or Other Securities issued as a stock dividend or in a stock split (adjustments in respect of which are provided for in Section 5), then and in each such case the Holder, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 3) which the Holder would hold on the date of such exercise if on the date hereof the Holder had been the holder of record of the number of shares of Series B Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 3) receivable by the Holder as aforesaid during such period, giving effect to all adjustments called for during such period by Sections 4 and 5. 4. Adjustment for Reorganization, Consolidation, Merger, etc. 4.1. Reorganization, Consolidation, Merger, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Series B Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which the Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if the Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 3 and 5. 5 4.2. Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holders of the Warrants after the effective date of such dissolution pursuant to this Section 4 to a bank or trust company having its principal office in New York, New York, as trustee for the Holder or Holders of the Warrants. 4.3. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any such transfer) referred to in this Section 4, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 6. 5. Voting Rights. The Holder of this Warrant shall have the right to vote as a class with other holders of warrants of similar tenor and holders of Series B Stock on the following proposals by the Company to the extent such proposals are submitted to a vote of holders of Series B Stock: (a) amend or repeal any provision of, or add any provision to, the Company's Certificate of Incorporation or By-Laws if such action would alter adversely the liquidation preferences of, or other priorities, rights or privileges provided for the benefit of, the Series B Stock; or (b) authorize or issue shares of any class or series of stock (other than the Series A Stock and Series B Stock) having any preference or priority as to dividends, voting or liquidation or other rights superior to any such preference, priority, right or privilege of the Series B Stock, or authorize or issue shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of the Company having any preference or priority as to dividends, voting or liquidation or other rights superior to any such preference, priority, right or privilege of the Series B Stock; or (c) reclassify any class or series of stock junior to the Series B Stock into stock senior to the Series B Stock with respect to any preference, priority, right or privilege; or 6 (d) elect to (i) sell or otherwise dispose of all or substantially all of the assets of the Company, (ii) merge or consolidate the Company with or into any other corporation or other entity in any transaction as a result of which the stockholders of the Company immediately prior to such transaction do not hold a majority of the combined voting power of the surviving corporation or other entity immediately after such transaction, (iii) wind up, dissolve or liquidate the Company or (iv) revoke any such election. 6. Extraordinary Events Regarding Common Stock or Series B Stock. In the event that the Company shall (a) issue additional shares of Common Stock as a dividend or other distribution on outstanding Series B Stock or Common Stock, (b) subdivide its outstanding shares of Series B Stock or Common Stock or (c) combine its outstanding shares of Series B Stock or Common Stock into a smaller number of shares of Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then effective Purchase Price by a fraction, the numerator of which shall be the fully diluted number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the fully diluted number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 6. The number of shares of Series B Stock that the Holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased only to a number determined by multiplying the number of shares of Series B Stock that would otherwise (but for the provisions of this Section 6) be issuable on such exercise by a fraction of which (I) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 6) be in effect and (II) the denominator is the Purchase Price in effect on the date of such exercise. 7. Chief Financial Officer's Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Series B Stock (or Other Securities) issuable on the exercise of the Warrants, the Company at its expense will promptly cause its Chief Financial Officer to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of: (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold; (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding; and (c) the Purchase Price and the number of shares of Series B Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 7 8. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial Statement. The Company will at all times reserve and keep available solely for issuance and delivery on the exercise of the Warrants, all shares of Series B Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. This Warrant entitles the Holder hereof to receive, upon request, copies of all financial and other information distributed or required to be distributed to the holders of the Series B Stock or Common Stock. 9. Assignment; Exchange of Warrant. (a) Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred in whole or in part by any registered Holder hereof (a "Transferor"). On the surrender for transfer of this Warrant, with the Transferor's endorsement in the form of Schedule C attached hereto (the "Transferor Endorsement Form"), to the Company, the Company at its expense, but with payment by the Transferor of any applicable transfer taxes, will issue and deliver to or on the order of the Transferor thereof, a new Warrant or Warrants of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Series B Stock called for on the face or faces of the Warrant so surrendered by the Transferor. (b) In the event the Company files the Certificate of Amendment in accordance with the Unit Subscription Agreement and simultaneously reserves for issuance upon conversion of the Series A Stock and Series B Stock a number of shares of Common Stock equal to the aggregate number of shares of Common Stock then issuable upon conversion of all the Series A Stock and Series B Stock, this Warrant shall automatically be converted into an Exchange Warrant, in substantially the form attached to the Unit Subscription Agreement, exercisable to purchase the number of shares of Common Stock and other securities issuable upon conversion of the Series B Stock and Other Securities underlying this Warrant at an aggregate exercise price equal to the aggregate exercise price of this Warrant. Thereafter, upon surrender for exchange of this Warrant, the Company at its expense will issue and deliver to the registered Holder a new Exchange Warrant in the name of the Holder for such number of shares. 10. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. Warrant Agent. The Company may, by written notice to the Holder of the Warrant, appoint an agent having an office in New York, New York for the purpose of issuing Series B Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1; transferring or exchanging this Warrant pursuant to Section 9, and replacing this Warrant pursuant to Section 10, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 8 12. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company or converted into an Exchange Warrant, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by the Holder or, until any the Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 14. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Holders of outstanding Series B Warrants exercisable to purchase a majority of the shares of Series B Stock underlying all outstanding Series B Warrants. This Warrant shall be construed and enforced in accordance with and governed by the laws of state of New York. Headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. GraphOn Corporation By:_________________________________ Name: Title: 9 SCHEDULE A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: GraphOn Corporation The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, _____ shares of Series B Participating Convertible Preferred Stock of GraphOn Corporation. and herewith makes payment of $_________ therefor, and requests that the certificate for such shares be issued in the name of, and delivered to _________ whose address is ___________________. Dated: _______, 20___ - ------------------------------------ (Signature must conform to name of Holder as specified on the face of the Warrant) - ------------------------------------ (Address) 10 SCHEDULE B CASHLESS EXERCISE FORM The undersigned hereby irrevocably elects to surrender the undersigned's Warrant for such shares of Series B Participating Convertible Preferred Stock of GraphOn Corporation pursuant to the Cashless Exercise provisions of the within Warrant, as provided for in Section 1.2(b) of such Warrant. Please issue a certificate or certificates for such Series B Participating Convertible Preferred Stock in the name of, and pay cash for fractional shares to: Name:_____________________________________ (Please print Name, Address and Taxpayer Identification No.) Address:________________________________________ ---------------------------------------- Taxpayer Identification No. ________________________ Signature: ______________________________________ NOTE: The above signature should correspond exactly with the name on the first page of this Warrant or with the name of the assignee appearing in the assignment form. 11 SCHEDULE C FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Series B Participating Convertible Preferred Stock of GraphOn Corporation to which the within Warrant relates specified under headings "Percentage Transferred" and "Number Transferred", respectfully, opposite the name(s) of such person(s) and appoints each such person(s) Attorney to transfer its respective right on the books of the Company with full power of substitution in the premises. Percentage Number Transferees Transferred Transferred Dated: ________________, 20__ - ---------------------------------- (Signature must conform to name of Holder as specified on the face of the Warrant) Signed in the presence of: - ---------------------------- - ---------------------------------- (Name) (Address) ACCEPTED AND AGREED: [TRANSFEREE] __________________________________ (Address) - ---------------------------- (Name) EX-4.2 3 rights.txt INVESTORS RIGHTS INVESTOR RIGHTS AGREEMENT This INVESTOR RIGHTS AGREEMENT (this "Agreement") is made as of February 2, 2005 by and among GraphOn Corporation, a Delaware corporation (the "Company") and the investors listed on Exhibit A hereto (collectively the "Investors"). WHEREAS, the Company desires to sell to the Investors, and the Investors desire to purchase an aggregate of 148,148 shares of Series A Stock of the Company (the "Shares") and 5-year warrants, exercisable to purchase an aggregate of 74,074 shares of Series B Stock of the Company (the "Warrant Shares") at $40.00 per share (the "Series B Warrants"), upon the terms and conditions set forth in that certain Unit Subscription Agreement, dated of even date herewith, between the Company and the Investors (the "Unit Subscription Agreement"); WHEREAS, the terms of the Unit Subscription Agreement provide that it shall be a condition precedent to the closing of the transactions thereunder for the Company and the Investors to execute and deliver this Agreement; and WHEREAS, at the Closing, Griffin Securities, Inc. ("Griffin") is receiving warrants in substantially the same form as the Warrants, exercisable to purchase an aggregate of 14,815 shares of Series A Stock and 7,407 shares of Series B Stock, (the "Griffin Warrants"), and Griffin is entitled to share the Investors' rights under this Agreement; WHEREAS, capitalized terms used herein and not otherwise defined are defined in the Unit Subscription Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereto hereby agree as follows: 1. Definitions. The following terms shall have the meanings provided below: "Additional Shares" shall mean any additional shares of Common Stock which may be issued or become issuable from time to time upon conversion of the Shares or Series B Stock or the exercise of a Purchased Warrant or a Griffin Warrant, or a distribution with respect to, or in exchange for, or in replacement of a Purchased Warrant, a Griffin Warrant, Shares or Warrant Shares, as a result of anti-dilution provisions of a Purchased Warrant, a Griffin Warrant, Shares or otherwise. "Board of Directors" shall mean the board of directors of the Company. "Convertible Securities" means (i) options to purchase or rights to subscribe for Common Stock, (ii) securities by their terms convertible into or exchangeable for Common Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities. "Demand Registrable Shares" shall mean the Shares, the Warrant Shares and all Other Securities and Additional Shares. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and all of the rules and regulations promulgated thereunder. "Exchange Warrants" shall mean 5-year warrants, exercisable as of the date hereof to purchase an aggregate of 7,407,400 shares of Common Stock at $0.40 per share, subject to adjustment. "Exchange Shares" shall mean shares of Common Stock from time to time issuable upon exercise of Exchange Warrants. "Excluded Stock" shall mean (i) all shares of Common Stock issued or issuable to employees, directors or consultants pursuant to any equity compensation plan that is in effect on the date of this Agreement, (ii) all shares of Common Stock issued or issuable to employees or directors pursuant to any equity compensation approved by the stockholders of the Company after the date of this Agreement, (iii) all shares of Common Stock issued or issuable to employees or directors in the form of a hiring bonus, (iv) all shares of Common Stock issued or issuable to bona fide leasing companies, strategic partners, or major lenders, (v) all shares of Common Stock issued or issuable as the purchase price in a bona fide acquisition or merger (including reasonable fees paid in connection therewith) or (vi) all shares of Common Stock issued upon conversion or exercise of the Shares, Purchased Warrants, Exchange Warrants or other Convertible Securities outstanding on the date hereof. "Griffin Exchange Shares" shall mean shares of Common Stock from time to time issuable upon exercise of Griffin Exchange Warrants. "Griffin Exchange Warrants" shall mean 5-year warrants exercisable to purchase 1,481,400 shares of Common Stock at $.27 per share and 740,700 shares of Common Stock at $.40 per share. "Griffin Warrants" shall mean warrants issued to Griffin Securities Inc. ("Griffin") in substantially the same form as the Series B Warrants to purchase an aggregate of 14,815 shares of Series A Stock at $27.00 per share and 7,407 shares of Series B Stock at $40.00 per share. "Holder" shall mean the Investors and Griffin or any transferee of the Purchased Warrants, Registrable Shares or Demand Registrable Shares that were held by Investors or Griffin. "Majority Holders" shall mean, at the relevant time of reference thereto, those Holders holding more than fifty percent (50%) of the Registrable Shares (or Demand Registrable Shares, to the extent that the Holders have a right to make a Demand Registration Request pursuant to Section 3A hereof) Owned by all of the Holders. "Other Stockholders" refers to stockholders of the Company other than the Holders. "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) 2 that the Holders of the Shares or Purchased Warrants at any time shall be entitled to receive, or shall have received, upon conversion of the Shares, the exercise of the Purchased Warrants or conversion of the Warrant Shares, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to the terms of the Shares, Purchased Warrants, Warrant Shares or otherwise. "Own" shall mean to own beneficially, as that term is defined in the rules and regulations of the SEC. "Purchased Warrants" shall mean the Series B Warrants and any securities into which the Series B Warrants may be converted (other than by exercise of the Purchased Warrants by the holder thereof), including without limitation, the Exchanged Warrants. "Registrable Shares" shall mean any shares of Common Stock or Other Securities issued or issuable from time to time upon conversion of the Shares, the Warrant Shares, the Exchange Shares, the Griffin Exchange Shares or the exercise of a Purchased Warrant, or a distribution with respect to, in exchange for, or in replacement of Shares, the Warrant Shares, the Exchange Shares, the Griffin Warrants or Purchased Warrants, including without limitation Additional Shares. "Rule 144" shall mean Rule 144 promulgated under the Securities Act and any successor or substitute rule, law or provision. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended, and all of the rules and regulations promulgated thereunder. "Selling Expenses" shall mean all underwriting discounts, brokerage and selling commissions applicable to the sale of Registrable Shares or Demand Registrable Shares, including standard underwriters' cutbacks. "Series A Stock" means the Series A Participating Convertible Preferred Stock, par value $.01 per share, of the Company. "Series B Stock" means the Series B Participating Convertible Preferred Stock, par value $.01 per share, of the Company. 2. Effectiveness. This Agreement shall become effective upon the Closing. 3. Mandatory Registration. (a) No later than sixty (60) days after the Closing, the Company will prepare and file with the SEC a registration statement on Form S-1 for the purpose of registering (such registration, the "Mandatory Registration") under the Securities Act all of the Registrable Shares for resale by, and for the account of, the Investors and Griffin as selling stockholders thereunder (the "Registration Statement"). The Registration Statement shall permit the Investors to offer and sell, on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, any or all of the Registrable 3 Shares. Such Registration Statement also shall cover, to the extent allowable under the Securities Act and the rules promulgated thereunder (including Rule 416), such indeterminate number of additional shares of Common Stock resulting from stock splits, stock dividends or similar transactions with respect to the Registrable Shares. (b) The Company agrees to use commercially reasonable efforts to cause the Registration Statement to become effective as soon as practicable after filing, but in no event later than one hundred twenty (120) days after filing. (c) The Company shall be required to keep the Registration Statement, as amended, effective until such date that is the earlier of (i) two years after the Closing, (ii) the date when all of the Registrable Shares registered thereunder shall have been sold or (iii) such time as all the Registrable Shares held by the Investors can be sold pursuant to Rule 144(k) and without compliance with the registration requirements of the Securities Act (such date is referred to herein as the "Mandatory Registration Termination Date"). Thereafter, the Company shall be entitled to withdraw the Registration Statement and the Investors shall have no further right to offer or sell any of the Registrable Shares pursuant to the Registration Statement (or any prospectus relating thereto). (d) The Company shall not grant any registration rights that are senior to the registration rights of the Investors under this Agreement if such registration rights would adversely affect the Investors' ability to sell Registrable Shares pursuant to the Registration Statement. The Company represents that no stockholders other than the Investors and Griffin have the right to sell any Common Stock or other securities of the Company pursuant to the Registration Statement other than rights granted pursuant to the transactions contemplated by the Reorganization Agreement. 3A. Demand Registration (a) Request for Registration. In the event that the Company has not adopted the Certificate of Amendment on or prior to July 1, 2005, any Holder shall have the right to make a written request to the Company (such request, a "Demand Registration Request") that the Company effect a registration with respect to all or a part of the Demand Registrable Shares held by such Holder (such Holder, an "Initiating Holder"). In response to such Demand Registration Request, the Company shall: (i) promptly give written notice of the proposed registration ("Demand Registration") to all other Holders (such notice, a "Demand Registration Notice"); and (ii) use its best efforts to file a registration statement on Form S-3, if the Company is eligible for Form S-3, or, if not so eligible, on Form S-1 (it being understood that the Company shall use commercially reasonable efforts to qualify for registration on Form S-3 for secondary sales) (such registration statement filed pursuant to this Section 3A, a "Demand Registration Statement") as soon as practicable, but not later than thirty (30) days following receipt of the Demand 4 Registration Notice in order to permit or facilitate the sale and distribution of all or such portion of such Demand Registrable Shares as are specified in the Demand Registration Request, together with all or such portion of the Demand Registrable Shares of any Holder or Holders joining in such request (each such Holder, a "Requesting Holder") as are specified in a written request received by the Company from such Holder or Holders within ten (10) days after the Demand Registration Notice is given by the Company. In the event any Holder requests a Demand Registration pursuant to this Section 3A in connection with a distribution of Demand Registrable Shares to its partners or other beneficial owners, the registration shall provide for the resale by such partners or beneficial owners, assuming such distribution was effected in accordance with applicable securities laws. (b) Limitations on Demand Registration. The Company shall not be obligated to effect, or take any action to effect, any Demand Registration pursuant to this Section 3A: (i) if the Company has effected three (3) Demand Registrations, provided that each of such Demand Registration Statements has been declared or ordered effective in accordance with the terms of this Agreement and provided that the Demand Registrable Shares subject to the current Demand Registration Request could have been included for registration, sale and distribution in connection with such previous two effective registrations, but were not, for reasons other than the marketing limitations connected to the underwriting of such previous Demand Registrations, as described in Section 3A(c)(iii) below; (ii) if the Demand Registrable Shares included in the written registration requests of all Requesting Holders pursuant to Section 3A(a) above (including the Demand Registrable Shares of the Initiating Holder) do not have an anticipated aggregate public offering price (before any underwriting discounts and commissions) of at least US$3,000,000; (iii)for a period of time not to exceed 90 days following receipt of a Demand Registration Request if, in the discretion of the Company's Board of Directors, effecting such Demand Registration at the time of receipt of such Demand Registration Request would be seriously detrimental to the Company; (iv) if the Demand Registration Request is received by the Company after February 2, 2009; or (v) if the Certificate of Amendment is filed in Delaware prior to the date which is thirty (30) days after receipt of the Demand Registration Request. (c) Underwriting. (i) Request Regarding Underwriting. If the Requesting Holders intend to distribute the Demand Registrable Shares covered by their Demand Registration Request by means of an underwriting, they shall so advise the Company as a part of such Demand Registration Request or their response to any Demand Registration Notice given pursuant to Section 3A(a)(i). 5 (ii) Participation of Other Stockholders and the Company in Underwritten Offering. The Demand Registration Statement may, subject to the provisions described herein, include securities of the Company which are held by Other Stockholders. If Other Stockholders request such inclusion, Requesting Holders with more than 50% in interest of the Demand Registrable Shares to be included in the Demand Registration Statement may in their discretion offer to include the securities of such Other Stockholders in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 3A. If the underwriter has not limited the number of Demand Registrable Shares to be underwritten, the Company may include its or their securities for its own account in such Demand Registration if the Underwriter Representative (as defined below) so agrees and if the number of Demand Registrable Shares will not thereby be limited. (iii)Underwriting Agreement; Exclusion of Shares from Offering. All Requesting Holders whose shares are to be included in an underwriting pursuant to this Section 3A and the Company shall (together with all Other Stockholders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by the vote of the Holders of a majority of the Demand Registrable Shares subject to the Demand Registration Request (and reasonably acceptable to the Company) (such representative, the "Underwriter Representative"). Notwithstanding any other provision of this Section 3A, if the Underwriter Representative advises the Requesting Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the securities of the Company held by Other Stockholders and then the Company shall be excluded from such Demand Registration to the extent so required by such limitation. If, after the exclusion of such shares, further reductions are still required, the number of Demand Registrable Shares included in the registration by each Requesting Holder (other than the Initiating Holder) shall be reduced on a pro rata basis (based on the number of Demand Registrable Shares requested to be so registered by each such Requesting Holder) by such minimum number of shares as is necessary to comply with the requisite reduction. If, after the exclusion of such shares, further reductions are still required, the number of shares included in the registration by the Initiating Holder shall be reduced by such minimum number of shares as is necessary to comply with the requisite reduction; provided, however, that any Demand Registrable Shares proposed to be included by any Requesting Holder in a given registration that are excluded due to marketing limitations of the underwriter shall not be subject to exclusion from future Demand Registration Requests on the basis of Section 3A(i) above. No Demand Registrable Shares or any other securities excluded from an underwriting by reason of the underwriter's marketing limitation shall be included in the Demand Registration related to such underwriting. If any Requesting Holder, or Other Stockholder who has requested inclusion in such Demand Registration as provided above disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holder. Any securities so withdrawn shall also be withdrawn from the Demand Registration. 6 (d) Expenses of Registration. Expenses related to the registration and sale of the Demand Registrable Shares pursuant to this Section 3A shall be borne as provided by Section 6 hereof. (e) Termination of Demand Registration Statement. At its expense, the Company will keep any Demand Registration Statement effective for a period of one hundred twenty (120) days or until the Holders (or in the case of a distribution to the partners of such Holder, such partners), as applicable, have completed the distribution described in the Demand Registration Statement relating thereto, whichever first occurs (such date on which the Demand Registration Statement need no longer be kept effective, subject to the further provisions of this Section 3A(e), the "Demand Registration Termination Date"); provided, however, that (i) such 120-day period shall be extended for a number of days equal to the number of days of all suspensions (as defined in Section 9(b)) occurring during such 120-day period; and (ii) in the case of any Demand Registrations on Form S-3 (which are intended to be offered on a continuous or delayed basis), such 120-day period shall be extended to the earlier of one year from the date of the Demand Registration Statement's effectiveness or until all Demand Registrable Shares registered pursuant to such Form S-3 are sold, provided that Rule 415 under the Securities Act, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment that (y) includes any prospectus required by Section 10(a) of the Securities Act or (z) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (y) and (z) above to be contained in periodic reports filed pursuant to Section 12 or 15(d) of the Exchange Act in the Demand Registration Statement. 4. Obligations of the Company. In connection with the Company's obligations (i) under Sections 3 and 3A hereof to file the Registration Statement and Demand Registration Statements, respectively, with the SEC and to use its reasonable efforts to cause the Registration Statement and Demand Registration Statement to become effective as soon as practicable after filing, the Company shall, as expeditiously and as reasonably as possible, subject to Section 9 hereof: (a) prepare and file with the SEC such amendments and supplements to the Registration Statement or Demand Registration Statement, as the case may be, and the prospectus used in connection therewith, as may be necessary, and, in the case of the Mandatory Registration or a Demand Registration, as necessary to keep the Registration Statement or Demand Registration Statement effective until the Mandatory Registration Termination Date or Demand Registration Termination Date, as the case may be; (b) furnish to the selling Holders such reasonable number of copies of the Registration Statement or Demand Registration Statement, as the case may be, and a prospectus and preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents (including, without limitation, prospectus amendments and supplements as are prepared by the Company in accordance with Section 4(a) above) as the selling Holders may reasonably 7 request, in order to facilitate the public or other disposition of such selling Holders' Registrable Shares and Demand Registrable Shares; (c) use reasonable efforts to register and qualify the Registrable Shares and Demand Registrable Shares covered by the Registration Statement or Demand Registration Statement under such other securities laws or blue sky ("Blue Sky") laws of all states requiring such securities or Blue Sky registration or qualification, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (d) use reasonable efforts to cause all such Registrable Shares and Demand Registrable Shares registered hereunder to be listed on each securities exchange (including without limitation any Nasdaq market) on which securities of the same class issued by the Company are then listed; and (e) in the case of an underwritten Demand Registration pursuant to Section 3A(c), on the date that such Demand Registrable Shares are delivered to the underwriters for sale, (i) furnish an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering addressed to the underwriters, and (ii) cause the Company's independent certified public accountants to furnish a letter, dated as of such date, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering addressed to the underwriters. 5. Furnish Information. (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement that the selling Holders and Griffin shall furnish to the Company such information regarding them and the securities held by them as the Company shall reasonably request and as shall be required in order to effect any registration by the Company pursuant to this Agreement. (b) The Registration Statement and, except in the case of an underwriting pursuant to Section 3A(c), any Demand Registration Statement will provide for a plan of distribution with respect to the Registrable Shares or Demand Registrable Shares (as the case may be) substantially as follows: The Registrable Shares and Demand Registrable Shares may be sold from time to time by the Holders, or by pledgees, donees, transferees or other successors in interest. Such sales may be made on one or more exchanges or in the over-the-counter market, or otherwise at prices and at terms then prevailing or at prices related to the then-current market price, or in negotiated transactions. The Registrable Shares and Demand Registrable Shares may be sold by one or more of the following: (i) a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (ii) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to the resale registration statement; (iii) an exchange distribution in accordance with the rules of such exchange; (iv) one or more underwritten offerings on a firm commitment or best efforts basis; (v) ordinary brokerage transactions and transactions in which the broker solicits purchasers; and (vi) transactions between sellers and purchasers without a broker/dealer. In addition, any securities covered by the Registration Statement and any Demand Registration Statement that qualify for sale pursuant to Rule 144 may be sold 8 under Rule 144 rather than pursuant to the Registration Statement or Demand Registration Statement. From time to time the selling Holders may engage in short sales, short sales versus the box, puts and calls and other transactions in securities of the issuer or derivatives thereof, and may sell and deliver the shares in connection therewith. For so long as an Holder owns any Registrable Shares, such Holder shall not maintain a Net Short Position. For purposes of this Section, a "Net Short Position" by a person means a position whereby such person has executed one or more sales of Common Stock that is marked as a short sale and that is executed at a time when such Holder has no equivalent offsetting long position in the Common Stock. For purposes of determining whether an Holder has an equivalent offsetting long position in the Common Stock, all Common Stock that is beneficially owned by such Holder shall be deemed to be held long by such Holder. The Holders may also distribute the shares to their partners, members, stockholders or shareholders to the extent such distributions are effected in full compliance with applicable securities laws and provided that the distributing Holders and the distributees provide the Company with such documents and other information as reasonably requested by the Company. In effecting sales, brokers or dealers engaged by the selling Holders may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from selling Holders in amounts to be negotiated immediately prior to the sale. 6. Expenses of Registration. All expenses incurred in connection with the registration of the Registrable Shares and Demand Registrable Shares pursuant to this Agreement, including without limitation all registration and qualification and filing fees, printing expenses, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders selected by the selling Holders, shall be borne by the Company; provided, however, that all Selling Expenses shall be borne by the Holders of the Registrable Shares and Demand Registrable Shares so registered and sold, pro rata on the basis of the number of their Registrable Shares and Demand Registrable Shares (as the case may be) so registered and sold. 7. Indemnification. (a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder (including the partners or officers, directors and stockholders of such Holder), and each person, if any, who controls such selling Holder within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which they may become subject under the Securities Act, the Exchange Act, and other federal or state securities laws, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) (i) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement or Demand Registration Statement, in any preliminary prospectus or final prospectus relating thereto or in any amendments or supplements to the Registration Statement or Demand Registration Statement or any such preliminary prospectus or final prospectus, (ii) 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 (iii) arise out of any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any other federal or state 9 securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any other federal or state securities law; and will reimburse such selling Holder, or such officer, director or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld or delayed), nor shall the Company be liable in any such case for any such loss, damage, liability or action, to the extent that it arises out of or is based upon an untrue statement or alleged untrue statement or omission made in connection with the Registration Statement, or Demand Registration Statement, any preliminary prospectus or final prospectus relating thereto or any amendments or supplements to the Registration Statement or Demand Registration Statement or any such preliminary prospectus or final prospectus, in reliance upon and in conformity with written information furnished expressly for use in connection with the Registration Statement or Demand Registration Statement or any such preliminary prospectus or final prospectus by the selling Holders, any broker/dealer acting on their behalf or controlling person with respect to them. (b) To the extent permitted by law, Griffin and each selling Holder will severally and not jointly indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement or Demand Registration Statement, as the case may be, each person, if any, who controls the Company within the meaning of the Securities Act, or any selling Holders, and all other selling Holders against any losses, claims, damages or liabilities to which the Company or any such director, officer, controlling person or such other selling Holder may become subject to, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement or Demand Registration Statement or any preliminary prospectus or final prospectus, relating thereto or in any amendments or supplements to the Registration Statement or Demand Registration Statement or any such preliminary prospectus or final prospectus, 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, in each case to the extent and only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement or Demand Registration Statement, in any preliminary prospectus or final prospectus relating thereto or in any amendments or supplements to the Registration Statement or Demand Registration Statement or any such preliminary prospectus or final prospectus, in reliance upon and in conformity with written information furnished by the selling Holder expressly for use in connection with the Registration Statement or Demand Registration Statement, or any preliminary prospectus or final prospectus; and such selling Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, or other selling Holder in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the liability of each selling Holder hereunder (when aggregated with amounts contributed, if any, pursuant to Section 7(d)) shall be limited to the difference (the "Difference") between the amount received by such Holder from the sale of the Registrable Shares or Demand Registrable Shares pursuant to the Registration Statement or Demand Registration Statement, as the case may be, and the amount paid by such Holder to the Company for such Registrable Shares or Demand Registrable Shares pursuant to the Unit Subscription Agreement, and provided further, however, that the indemnity 10 agreement contained in this Section 7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of those selling Holder(s) against which the request for indemnity is being made (which consent shall not be unreasonably withheld or delayed). (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in and, to the extent the indemnifying party desires, jointly with any other indemnifying party similarly noticed, to assume at its expense the defense thereof with counsel mutually satisfactory to the indemnifying parties with the consent of the indemnified party, which consent will not be unreasonably withheld, conditioned or delayed. In the event that the indemnifying party assumes any such defense, the indemnified party may participate in such defense with its own counsel and at its own expense, provided, however, that the counsel for the indemnifying party shall act as lead counsel in all matters pertaining to such defense or settlement of such claim and the indemnifying party shall only pay for such indemnified party's reasonable legal fees and expenses for the period prior to the date of its participation in such defense, and provided further, however, that the indemnified party (together with all indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses of such separate counsel to be paid by the indemnifying party, if the representation of the indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between the indemnified party and any other party represented by such counsel in such proceeding. Notwithstanding the foregoing, the indemnifying party shall not be obligated to pay the fees of more than one separate counsel. The failure to notify an indemnifying party of the commencement of any such action will not relieve such indemnifying party of any liability to the indemnified party under this Section 7 (except to the extent that such failure materially and adversely affects the indemnifying party's ability to defend such action), nor shall the omission so to notify an indemnifying party relieve such indemnifying party of any liability which it may have to any indemnified party otherwise other than under this Section 7. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation and otherwise in form and substance reasonably satisfactory to the indemnified party. (d) If the indemnification provided in this Section 7 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that shall have resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations; provided that in no event shall any contribution by an Holder 11 under this Section 7(d), when aggregated with amounts paid, if any, pursuant to Section 7(b), exceed the Difference. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) The obligations of the Company, Griffin and Holders under this Section 7 shall survive the completion of any offering of Registrable Shares or Demand Registrable Shares in a Registration Statement or Demand Registration Statement under Sections 3 and 3A, respectively, and otherwise. 8. Reports Under the Exchange Act. With a view to making available to the Holders the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit the Holders to sell the Registrable Shares and Demand Registrable Shares to the public without registration, the Company agrees to use reasonable efforts: (a) to make and keep public information available, as those terms are understood and defined in Rule 144, (b) to file with the SEC in a timely manner all reports and other documents required to be filed by an issuer of securities registered under the Securities Act or the Exchange Act and (c) undertake any additional actions reasonably necessary to maintain the availability of the Registration Statement and Demand Registration Statement or the use of Rule 144. 9. Selling Procedures. Any sale of Registrable Shares or Demand Registrable Shares pursuant to a registration statement filed in accordance with Section 3 or 3A hereof shall be subject to the following conditions and procedures: (a) Updating the Prospectus. (i) If the Company informs the selling Holder that the Registration Statement or Demand Registration Statement or final prospectus then on file with the SEC is not current or otherwise does not comply with the Securities Act, the Company shall use its commercially reasonable efforts to provide to the selling Holder a current prospectus that complies with the Securities Act as soon as practicable, but in no event later than three (3) business days after delivery of such notice. (ii) If the Company requires more than three (3) business days to update the prospectus under Section 9(a)(i) above, the Company shall have the right to delay the preparation of a current prospectus that complies with the Securities Act without explanation to Griffin or such Holder, subject to the limitations set forth in Section 9(b) below, for a total of not more than ninety (90) days in the aggregate during any twelve-month period. (b) General. Notwithstanding the foregoing, upon receipt of any notice from the Company of (i) any request by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement or Demand Registration Statement for amendments or supplements to the Registration Statement or Demand Registration Statement or related prospectus or for additional information relating to the Registration Statement or Demand Registration Statement (ii) the issuance by the SEC or 12 any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or Demand Registration Statement or the initiation of any proceedings for that purpose, (iii) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Shares or Demand Registrable Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (iv) the happening of any event which makes any statement made in the Registration Statement or Demand Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or which requires the making of any changes in the Registration Statement or Demand Registration Statement or prospectus so that, in the case of the Registration Statement or Demand Registration Statement, it will not contain 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, and that in the case of the prospectus, it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (v) that, in the judgment of the Board of Directors, it is advisable to suspend use of the prospectus for a discrete period of time due to pending corporate developments, public filings with the SEC or that there exists material nonpublic information about the Company that the Board of Directors, acting in good faith, determines not to disclose in a registration statement, then the Company may suspend use of the prospectus (each a "Suspension"), in which case the Company shall promptly so notify each Holder and each Holder shall not dispose of Registrable Shares or Demand Registrable Shares (as the case may be) covered by the Registration Statement or Demand Registration Statement or prospectus until copies of a supplemented or amended prospectus are distributed to the Holders or until the Holders are advised in writing by the Company that the use of the applicable prospectus may be resumed; provided, however, that, notwithstanding the foregoing, the Company may suspend use of the prospectus pursuant to Sections 9(a)(ii), 9(b)(iv) and 9(b)(v), and an Holder may be prohibited from selling or otherwise disposing of the Registrable Shares or Demand Registrable Shares covered by the Registration Statement or Demand Registration Statement or prospectus, for no more than ninety (90) days in the aggregate during any such twelve-month period. The Company shall use its best efforts to ensure the use of the prospectus may be resumed as soon as practicable. The Company shall use its best efforts to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement or Demand Registration Statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the securities for sale in any jurisdiction, at the earliest practicable moment. The Company shall, upon the occurrence of any event contemplated by clause (iv), prepare a supplement or post-effective amendment to the Registration Statement or Demand Registration Statement or a supplement to 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 the Registrable Shares or Demand Registrable Shares being sold thereunder, such prospectus will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 10. Pre-emptive Rights. In the event that at any time after the date hereof until the date that is five (5) years after the Closing Date, the Company 13 proposes to issue additional shares of Common Stock or Convertible Securities, other than Excluded Stock, the Company shall send a notice (an "Additional Share Notice") to the Holder setting forth the terms of such proposed issuance. The Holder shall be entitled to purchase the proposed number of shares of Common Stock or Convertible Securities, proposed to be issued in proportion to the Holder's Proportionate Percentage (as hereafter defined) on substantially the same terms set forth in the Additional Share Notice by (a) notice to the Company (the "Purchase Notice") within 10 days of the date of the Additional Share Notice and (b) payment of the price for such shares of Common Stock or Convertible Securities, by wire transfer of immediately available funds or such other method of payment as the Company may approve, within 10 days after delivery to the Company of the Purchase Notice. The "Proportionate Percentage" of the Holder means the percentage obtained by dividing (x) the aggregate number shares of Common Stock Owned by the Holder by (y) the aggregate number of shares of Common Stock of the Company then issued and outstanding. 11. Issuance of Certain Securities. The Company shall not issue any (a) Convertible Securities or similar securities that contain a provision that provides for any change or determination of the applicable conversion price, conversion rate, or exercise price (or a similar provision which might have a similar effect) based on any determination of the market price or other value of the Company's securities or any other market based or contingent standard, such as so-called "toxic" or "death spiral" convertible securities; provided, however, that this prohibition shall not include Convertible Securities or similar securities the conversion or exercise price or conversion rate of which is (i) fixed on the date of issuance, (ii) subject to adjustment as a result of or in connection with a business combination or similar transaction or (iii) subject to adjustment based upon the issuance by the Company of additional securities, including without limitation, standard anti-dilution adjustment provisions which are not based on calculations of market price or other variable valuations; and provided, further, that in no event shall this provision be deemed to prohibit the transactions contemplated in the Unit Subscription Agreement; (b) any preferred stock, debt instruments or similar securities or investment instruments providing for (i) preferences or other payments substantially in excess of the original investment by purchasers thereof or (ii) dividends, interest or similar payments other than dividends, interest or similar payments computed on an annual basis and not in excess, directly or indirectly, of the lesser of a rate equal to (A) twice the interest rate on 10 year US Treasury Notes and (B) 20%. 12. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the Holders shall also be for the benefit of and enforceable by any subsequent holder of any Registrable Shares who has executed a copy of this Agreement or otherwise indicated its agreement to be bound hereby. Without limitation on the Holders' rights to transfer Registrable Shares, the Company acknowledges that any Holder may, at any time, transfer any of the Registrable Shares which they may own, beneficially or of record, to (a) their affiliates or (b) their partner(s), investor(s), security holder(s) or beneficial holder(s) pursuant to their organization documents or other agreements, and that, upon the consummation of any such transfer, the provisions of this Agreement shall be binding upon and inure to the benefit of each transferee of such Registrable Shares. 14 13. Entire Agreement. This Agreement (including the exhibits hereto), the Unit Subscription Agreement and the Purchased Warrants constitute and contain the entire agreement and understanding of the parties with respect to the subject matter hereof, and such agreements also supersede any and all prior negotiations, correspondence, agreements or understandings with respect to the subject matter hereof. 14. Miscellaneous. (a) Amendments. This Agreement may not be amended, modified or terminated, and no rights or provisions may be waived, except with the written consent of the Majority Holders and the Company. (b) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York. Each party hereby irrevocably consents and submits to the jurisdiction of any New York State or United States Federal Court sitting in the State of New York, County of New York, over any action or proceeding arising out of or relating to this Agreement and irrevocably consents to the service of any and all process in any such action or proceeding by registered mail addressed to such party at its address specified herein (or as otherwise noticed to the other party). Each party further waives any objection to venue in New York and any objection to an action or proceeding in such state and county on the basis of forum non conveniens. Each party also waives any right to trial by jury. (c) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors or assigns. This Agreement shall also be binding upon and inure to the benefit of any transferee of any of the Registrable Shares or Demand Registrable Shares. Notwithstanding anything in this Agreement to the contrary, if at any time any Holder shall cease to own any Registrable Shares or Demand Registrable Shares, all of such Holder's rights under this Agreement shall immediately terminate. (d) Notices (i) Any notices, reports or other correspondence (hereinafter collectively referred to as "correspondence") required or permitted to be given hereunder shall be sent by mail, courier (overnight or same day) or fax or delivered by hand to the party to whom such correspondence is required or permitted to be given hereunder (except that notices of Suspensions or stop orders must be made by fax). The date of giving any notice shall be the date of its actual receipt. (ii) All correspondence to the Company shall be addressed as follows: GraphOn Corporation 3130 Winkle Avenue Santa Cruz, California 95065 Attention: William Swain Fax number: (831) 475-3017 with a copy to: 15 Cooley Godward LLP One Maritime Plaza, 20th Floor San Francisco, CA 94111-3580 Attention: Kenneth Guernsey Fax number: (415) 951-3699. (iii) All correspondence to any Holder shall be sent to the most recent address furnished by the Holder to the Company. (iv) Any Holder may change the address to which correspondence to it is to be addressed by notification as provided for herein. (e) Injunctive Relief. The parties acknowledge and agree that in the event of any breach of this Agreement, remedies at law may be inadequate, and each of the parties hereto shall be entitled to seek specific performance of the obligations of the other parties hereto and such appropriate injunctive relief as may be granted by a court of competent jurisdiction. (f) Attorney's Fees. If any action at law or in equity is necessary to enforce or interpret any of 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 such party may be entitled. (g) Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, such provision shall be replaced with a provision that accomplishes, to the extent possible, the original business purpose of such provision in a valid and enforceable manner, and the balance of the Agreement shall be interpreted as if such provision were so modified and shall be enforceable in accordance with its terms. (h) Aggregation of Shares. Registrable Shares and Demand Registrable Shares held or acquired by affiliated entities or persons shall be aggregated for the purpose of determining the availability of any rights under this Agreement. (i) Counterparts. This Agreement may be executed in a number of counterparts, any of which together shall for all purposes constitute one Agreement, binding on all the parties hereto notwithstanding that all such parties have not signed the same counterpart. [Remainder of Page Intentionally Left Blank] 16 SIGNATURE PAGE TO GRAPHON INVESTOR RIGHTS AGREEMENT IN WITNESS WHEREOF, the parties hereto have executed this Investor Rights Agreement as of the date and year first above written. GRAPHON CORPORATION By: /S/ WILLIAM SWAIN ----------------------------- Name: William Swain Title: Chief Financial Officer INVESTORS: [Signatures on file] --------------------------------- Name: [ ] By: ----------------------------- Name: Title: GRIFFIN SECURITIES, INC. By: /S/ ADRIAN STECYK ----------------------------- Name: Adrian Stecyk Title: President and CEO 17 Exhibit A - --------- SCHEDULE OF INVESTORS Hershel Berkowitz Paul Packer Globis Capital Partners Globis Overseas Fund Ltd. Richard Grossman Joshua Hirsch James Kardon AIGH Investment Partners, LLC IDT Capital, Inc. The Hewlett Fund Dr. Jack Dodick Spira Family Investment Partnership Fame Associates Cam Co Anfel Trading Limited Ganot Corporation Mazel D&K, Inc. F. Lyon Polk III Paul Tramontano SLAM Partners Griffin Securities, Inc. EX-4.3 4 holder.txt HOLDER AGREEMENT HOLDER AGREEMENT THIS HOLDER AGREEMENT is entered into as of January 31 2005, by and among GRAPHON CORPORATION, a Delaware corporation ("GraphOn"), and the Persons listed on Exhibit A hereto, referred to hereinafter as the "Holders" and each individually as a "Holder." RECITALS A. Pursuant to an Agreement and Plan of Merger and Reorganization dated as of December 3, 2004, among GraphOn, GraphOn Via Sub III Inc., a Delaware corporation and a wholly owned subsidiary of GraphOn ("Merger Sub"), GraphOn NES Sub, LLC, a California limited liability company and a wholly owned subsidiary of GraphOn ("Merger Sub II"), Network Engineering Software, Inc., a California corporation ("NES"), and Ralph Wesinger (the "Reorganization Agreement"), it is contemplated that (i) Merger Sub will merge with and into NES (the merger of Merger Sub with and into NES being referred to in this Holder Agreement as the "Merger") with NES being the surviving corporation in the Merger, (ii) following the Merger, NES will merge with and into Merger Sub II and (iii) NES's stockholders will receive shares of common stock, $0.0001 par value per share, of GraphOn ("GraphOn Common Stock") in exchange for their shares of common stock of NES ("NES Common Stock"). B. GraphOn's obligations in the Reorganization Agreement are conditioned upon the execution and delivery of this Holder Agreement by each Holder. C. Capitalized terms used but not defined herein are defined in the Reorganization Agreement. AGREEMENT GraphOn and the Holders, intending to be legally bound, agree as follows: SECTION 1. REGISTRATION RIGHTS. 1.1 Definitions. For the purpose of this Section 1: (a) the term "Registration Statement" shall mean any registration statement required to be filed by Section 1.2 and shall include any preliminary prospectus, final prospectus, exhibit or amendment included in or relating to such registration statements; and (b) the term "Registrable Shares" shall mean all shares of GraphOn Common Stock issued to the Holders in connection with the Merger. 1.2 Registration Procedures and Expenses. GraphOn shall: (a) use its best efforts to file a Registration Statement with the SEC within ninety (90) days following the Closing Date to register the 1 Registrable Shares on Form S-1 and Rule 415 under the Securities Act or on such other appropriate form that GraphOn may be permitted to use to register such Registrable Shares for resale from time to time by the Holders; (b) use commercially reasonable efforts, subject to receipt of necessary information from the Holders, to cause any such Registration Statement filed pursuant to Section 1.2(a) above to become effective as promptly after filing of such Registration Statement as practicable; (c) prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement continuously effective until termination of such obligation as provided in Section 1.4, subject to GraphOn's right to suspend pursuant to Section 1.3; (d) furnish to each Holder who received Registrable Shares (and to each underwriter, if any, of such Registrable Shares) such number of copies of prospectuses in conformity with the requirements of the Securities Act and such other documents as the Holders may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Registrable Shares by the Holders; (e) file such documents as may be required of GraphOn for normal securities law clearance for the resale of the Registrable Shares in such states of the United States as may be reasonably requested by each Holder; provided, however, that GraphOn shall not be required in connection with this paragraph "(e)" to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; and (f) advise each Holder who received Registrable Shares promptly: (i) of the effectiveness of the Registration Statement or any post-effective amendments thereto; (ii) of any request by the SEC for amendments to the Registration Statement or amendments to the prospectus or for additional information relating thereto; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement under the Securities Act or of the suspension by any state securities commission of the qualification of the Registrable Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes; (iv) of the suspension by GraphOn of the use of the prospectus forming a part of the Registration Statement; and (v) of the existence of any fact and the happening of any event that makes any statement of a material fact made in the Registration Statement, the prospectus and amendment or supplement thereto, or any document incorporated by reference therein, untrue, or that requires the making of any additions to or changes in the Registration Statement or the prospectus in order to make the statements therein not misleading; and 2 (g) use commercially reasonable efforts to cause all Registrable Shares to be listed on each securities exchange, if any, on which equity securities of GraphOn are then listed. 1.3 Delay and Suspension of Prospectus. At GraphOn's reasonable discretion, GraphOn may delay the effectiveness of, and may suspend the use of, the prospectus forming a part of the Registration Statement, including to the extent necessary to file any post-effective amendment to the Registration Statement. In addition, notwithstanding any other provision of this Agreement, the Holders understand that there may be periods during which GraphOn's Board of Directors may determine, in good faith, that it is in the best interest of GraphOn and its stockholders to defer disclosure of non-public information until such information has reached a more advanced stage and that during such periods sales of Registrable Securities and the effectiveness of any registration statement covering Registrable Securities may be suspended or delayed. The Holders agree that upon receipt of any notice from GraphOn of the development of any non-public information, such Holders will forthwith discontinue such Holders' disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such Holders' receipt of copies of an appropriately supplemented or amended prospectus and, if so directed by GraphOn, such Holders will use their best efforts to deliver to GraphOn (at GraphOn's expense) all copies, other than permanent file copies then in such Holders' possession, of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. In the event GraphOn shall give any such notice, the applicable time period during which a Registration Statement is to remain effective shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of a Registrable Share covered by such registration statement shall have received the copies of the appropriate supplemented or amended prospectus. 1.4 Termination of Obligations. The obligations of the Company pursuant to Section 1.2 hereof shall cease and terminate upon the earlier to occur of (a) such time as all of the Registrable Shares have been resold, (b) such time as all of the Registrable Shares may be resold in a three-month period pursuant to Rule 144 or (c) the second anniversary of the Closing Date. 1.5 Rights Upon Transfer. No Transferee of Registrable Shares shall be entitled to have the shares transferred to it covered by the Registration Statement unless such Transferee agrees in writing to be bound by all of the provisions of this Holder Agreement applicable to such Holder and to return a properly completed and executed Registration Statement Questionnaire and Investment Suitability Questionnaire (the "Questionnaires") furnished by GraphOn. SECTION 2. INDEMNIFICATION OBLIGATIONS; APPOINTMENT OF SHAREHOLDERS' REPRESENTATIVE 2.1 Acknowledgement of Obligation. Each Holder acknowledges such Holders' obligation, pursuant to Section 9 of the Reorganization Agreement, and subject to any limitations contained therein, to hold harmless and indemnify each of the Indemnitees from and against any, and to compensate and reimburse each of the Indemnitees for any Damages directly or indirectly suffered or incurred by any Indemnitee or to which any Indemnitee may otherwise be subject; provided, 3 however, that, except as otherwise set forth in Section 9 of the Reorganization Agreement, each Holder's obligation pursuant to Section 9 of the Reorganization Agreement shall be limited to such Holder's share of the Escrow Amount. Each Holder hereby expressly agrees to be bound by the provisions of Section 9 of the Reorganization Agreement. 2.2 Shareholders' Representatives. (a) Appointment. The Holders hereby appoint Ralph Wesinger as agent and attorney-in-fact (the "Shareholders' Representative") for and on behalf of the Holders. The Shareholders' Representative shall have full power and authority to represent all Holders and their successors with respect to all matters arising under this Holder Agreement, the Reorganization Agreement and the Escrow Agreement and all actions taken by the Shareholders' Representative hereunder and thereunder shall be binding upon all such Holders and their successors as if expressly confirmed and ratified in writing by each of them and no Holder shall have the right to object, dissent, protest or otherwise contest the same. The Shareholders' Representative may take any and all actions that it believes to be necessary or appropriate under this Holder Agreement, the Reorganization Agreement and the Escrow Agreement for and on behalf of the Holders, as fully as if the Holders were acting on their own behalf, including, without limitation, executing the Escrow Agreement as Shareholders' Representative, giving and receiving any notice or instruction permitted or required under this Holder Agreement, the Reorganization Agreement or the Escrow Agreement by the Shareholders' Representative or any Holder, interpreting all of the terms and provisions of this Holder Agreement, the Reorganization Agreement and the Escrow Agreement, authorizing payments to be made with respect hereto or thereto, obtaining reimbursement as provided for herein for all out-of-pocket fees and expenses and other obligations of or incurred by the Shareholders' Representative in connection with this Holder Agreement, the Reorganization Agreement and the Escrow Agreement, defending all indemnity claims against the Holders pursuant to Section 9.2 of the Reorganization Agreement (each an "Indemnity Claim"), consenting to, compromising or settling all Indemnity Claims, conducting negotiations with GraphOn and its agents regarding such claims, dealing with GraphOn and the Escrow Agent under this Holder Agreement, the Reorganization Agreement and the Escrow Agreement with respect to all matters arising under this Holder Agreement, the Reorganization Agreement and the Escrow Agreement, taking any and all other actions specified in or contemplated by this Agreement and the Escrow Agreement, and engaging counsel, accountants or other Representatives in connection with the foregoing matters. Without limiting the generality of the foregoing, the Shareholders' Representative shall have full power and authority to interpret all the terms and provisions of this Holder Agreement, the Reorganization Agreement and the Escrow Agreement and to consent to any amendment hereof or thereof on behalf of all such Holders and such successors. Notwithstanding the foregoing, each Shareholder shall have the right to exercise any voting rights appertaining to the Escrow Shares and the Reimbursement Shares. (b) Authorization. The Holders hereby authorize the Shareholders' Representative, on behalf of each Holder, to: (i) receive all notices or documents given or to be given to any of the Holders by GraphOn pursuant hereto or to the Reorganization Agreement or Escrow Agreement or in connection herewith or therewith and to receive and 4 accept service of legal process in connection with any suit or proceeding arising under this Holder Agreement, the Reorganization Agreement or the Escrow Agreement; (ii) eliver to GraphOn at the Closing all certificates and documents to be delivered to GraphOn by any Holder pursuant to this Holder Agreement or the Reorganization Agreement, together with any other certificates and documents executed by any Holder and deposited with the Shareholders' Representative for such purpose; (iii) engage counsel, and such accountants and other advisors for any of the Holders and incur such other expenses on behalf of any of the Holders in connection with this Holder Agreement, the Reorganization Agreement or the Escrow Agreement and the transactions contemplated hereby or thereby as the Shareholders' Representative may in its sole discretion deem appropriate; and (iv) take such action on behalf of any of the Holders as the Shareholders' Representative may in its sole discretion deem appropriate in respect of: (A) waiving any inaccuracies in the representations or warranties of GraphOn contained in the Reorganization Agreement or in any document delivered by GraphOn pursuant hereto or pursuant to the Reorganization Agreement; (B) waiving the fulfillment of any of the conditions precedent to GraphOn's obligations hereunder or pursuant to the Escrow Agreement; (C) taking such other action as the Shareholders' Representative or any of the Holders are authorized to take under this Holder Agreement, the Reorganization Agreement or the Escrow Agreement; (D) receiving all documents or certificates and making all determinations, on behalf of any of the Holders, required under this Holder Agreement, the Reorganization Agreement or the Escrow Agreement; (E) all such other matters as the Shareholders' Representative may in its sole discretion deem necessary or appropriate to consummate this Holder Agreement, the Reorganization Agreement or the Escrow Agreement and the transactions contemplated hereby and thereby; and (F) all such action as may be necessary after the Closing Date to carry out any of the transactions contemplated by this Holder Agreement, the Reorganization Agreement and the Escrow Agreement, including, without limitation, the defense and/or settlement of any claims for which indemnification is sought pursuant to Section 9 of the Reorganization Agreement and any waiver of any obligation of GraphOn, Surviving Entity I or the Surviving Entity. All actions, decisions and instructions of the Shareholders' Representative shall be conclusive and binding upon all of the Holders and no Holder nor any other Person shall have any claim or cause of action against the Shareholders' Representative, and the Shareholders' Representative shall have no liability to any Holders or any other Person, for any action taken, decision made or 5 instruction given by the Shareholders' Representative in connection with the Escrow Agreement, this Holder Agreement or the Reorganization Agreement, except in the case of its own willful misconduct. (c) Indemnification of Shareholders' Representative. The Shareholders' Representative shall incur no liability to the Holders or the Escrow Agent or any other person with respect to any action taken or suffered by it in reliance upon any note, direction, instruction, consent, statement or other documents reasonably believed by the Shareholders' Representative to be genuinely and duly authorized by a majority in interest of the Holders (or the successors or assigns thereto), nor for other action or inaction taken or omitted in good faith in connection herewith or with the Escrow Agreement, in any case except for liability to the Holders for its own willful misconduct. The Shareholders' Representative shall be indemnified by the Holders out of the Remaining Shares (as defined below) for and shall be held harmless against any loss, liability or expense incurred by the Shareholders' Representative or any of its Affiliates and any of its partners, directors, officers, employees, agents, Holders, consultants, attorneys, accountants, advisors, brokers, representatives or controlling persons, in each case relating to the Shareholders' Representative's conduct as Shareholders' Representative, other than such losses, liabilities or expenses resulting from the Shareholders' Representative's willful misconduct in connection with their performance under this Holder Agreement, the Reorganization Agreement and the Escrow Agreement. This indemnification shall survive the termination of this Agreement. Such indemnification (including the costs and expenses of enforcing this right of indemnification) shall be borne pro rata by the Holders and paid solely out of the Deposited Shares, if any, that remain after the full and final satisfaction of all claims asserted as of the Initial Termination Date (the "Remaining Shares"). In no event shall a Holder be liable to the Shareholders' Representative for any liabilities or expenses incurred by the Shareholders' Representative in excess of such Holder's pro rata portion of the Remaining Shares. For all purposes hereunder, a majority-in-interest of the Holders shall be determined on the basis of each such Holder's ownership of GraphOn Common Stock received upon conversion of the Holder's shares of NES Common Stock in connection with the Merger immediately following the Effective Time of Merger I. The Escrow Agent shall from time to time sell such amount of the Reimbursement Shares as necessary to pay the Shareholders' Representative's costs and expenses, to the extent required by this Section 2.2(c). (d) Reasonable Reliance. In the performance of its duties hereunder, the Shareholders' Representative shall be entitled to rely upon any document or instrument reasonably believed by it to be genuine, accurate as to content and signed by any Holders or GraphOn. The Shareholders' Representative may assume that any person purporting to give any notice in accordance with the provisions hereof has been duly authorized to do so. (e) Attorney-in-Fact. (i) The Shareholders' Representative is hereby appointed and constituted the true and lawful attorney-in-fact of each Holder, with full power in his, her or its name and on his, her or its behalf to act according to the terms of this Holder Agreement, the Reorganization Agreement and the Escrow Agreement in the absolute discretion of the Shareholders' Representative; and in general to do all things and to perform all acts including, without limitation, 6 executing and delivering the Escrow Agreement and any other agreements, certificates, receipts, instructions, notices or instruments contemplated by or deemed advisable in connection with the Escrow Agreement. (ii) This power of attorney and all authority hereby conferred is granted and shall be irrevocable and shall not be terminated by any act of any Holders, by operation of law, whether by such Holder's death, disability, protective supervision or any other event. Without limiting the foregoing, this power of attorney is to ensure the performance of a special obligation and, accordingly, each Holder hereby renounces its, his or her right to renounce this power of attorney unilaterally any time before the end of the Escrow Period (as such term is defined in the Escrow Agreement). (iii) Each Holder hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the Shareholders' Representative taken in good faith under the Escrow Agreement. (iv) Notwithstanding the power of attorney granted in this Section 2.2, no agreement, instrument, acknowledgement or other act or document shall be ineffective by reason only of a Holder having signed or given such directly instead of the Shareholders' Representative. (f) Liability. If the Shareholders' Representative is required by the terms of the Escrow Agreement to determine the occurrence of any event or contingency, the Shareholders' Representative shall, in making such determination, be liable to the Holders only for its proven willful misconduct as determined in light of all the circumstances, including the time and facilities available to it in the ordinary conduct of business. In determining the occurrence of any such event or contingency, the Shareholders' Representative may request from any of the Holders or any other person such reasonable additional evidence as the Shareholders' Representative in its sole discretion may deem necessary to determine any fact relating to the occurrence of such event or contingency, and may at any time inquire of and consult with others, including any of the Holders, and the Shareholders' Representative shall not be liable to any Holder for any Damages resulting from its delay in acting hereunder pending receipt and examination of additional evidence requested by it. (g) Orders. The Shareholders' Representative is authorized, in its sole discretion, to comply with final, nonappealable orders or decisions issued or process entered by any court of competent jurisdiction or arbitrator with respect to the Escrow Fund. (h) Removal of a Shareholders' Representative; Authority of Successor Shareholders' Representative. Holders who in the aggregate hold a majority of the shares in the Escrow Fund shall have the right at any time during the term of the Escrow Agreement to remove the then-acting Shareholders' Representative and to appoint a successor Shareholders' Representative; provided, however, that neither such removal of any then acting Shareholders' Representative nor such appointment of the successor Shareholders' Representative shall be effective until the delivery to the Escrow Agent of executed counterparts of a writing signed by each such Holder with respect to such removal and appointment, together with an acknowledgment signed by the successor Shareholders' Representative appointed in such writing that he or she accepts the responsibility of being the successor Shareholders' Representative and agrees to 7 perform and be bound by all of the provisions of this Agreement applicable to the Shareholders' Representative. Each successor Shareholders' Representative shall have all of the power, authority, rights and privileges conferred by this Agreement upon the original Shareholders' Representative, and the term "Shareholders' Representative" as used herein and in the Escrow Agreement shall be deemed to include any interim or successor Shareholders' Representative. (i) Expenses of the Shareholders' Representative. The Holders shall have no claim or cause of action against, may not assert any claim against, and shall indemnify and hold harmless the Shareholders' Representative and its Affiliates and any of their respective partners, directors, officers, employees, agents, Holders, consultants, attorneys, accountants, advisors, brokers, representatives or controlling persons, as provided for in Section 2.2(c) above. The Shareholders' Representative shall bear and pay, on behalf of the Holders, all costs and expenses (including legal, accounting and other advisors' fees and expenses, if applicable) incurred in connection with the protection, defense or enforcement of any rights under this Holder Agreement or the Escrow Agreement. The Holders shall indemnify the Shareholders' Representative out of the Remaining Shares in accordance with Section 2.2(c) above for costs and expenses reasonably incurred and paid by the Shareholders' Representative. (j) Irrevocable Appointment. Subject to Section 2.2(i), the appointment of the Shareholders' Representative hereunder is irrevocable and any action taken by the Shareholders' Representative pursuant to the authority granted in this Section 2.2 shall be effective and absolutely binding on each Holder thereof notwithstanding any contrary action of, or direction from any Holder, except for actions taken by the Shareholders' Representative that constitute willful misconduct. 2.3 Defense of Third-Party Claims. In the event of the assertion or commencement by any Person of any claim or Legal Proceeding (whether against Surviving Entity I, against the Surviving Entity, against GraphOn or against any other Person) with respect to which an Indemnitee may seek indemnification pursuant to Section 9 of the Reorganization Agreement, GraphOn shall have the right, at its election, to proceed with the defense of such claim or Legal Proceeding on its own. If GraphOn so proceeds with the defense of any such claim or Legal Proceeding: (a) all reasonable expenses relating to the defense of such claim or Legal Proceeding shall be borne and paid by the Holders, subject to the limitations referenced in Section 2.1; (b) each Holder shall make available to GraphOn any documents and materials in his possession or control that may be necessary to the defense of such claim or Legal Proceeding; and (c) GraphOn shall have the right to settle, adjust or compromise such claim or Legal Proceeding with the consent of the Shareholders' Representative; provided, however, that such consent shall not be unreasonably withheld. 8 GraphOn shall give the Shareholders' Representative prompt notice of the commencement of any such Legal Proceeding against GraphOn, against Surviving Entity I or against the Surviving Entity; provided, however, that any failure on the part of GraphOn to so notify the Shareholders' Representative shall not limit any indemnification obligations under Section 9 of the Reorganization Agreement (except to the extent such failure materially prejudices the defense of such Legal Proceeding). 2.4 Exercise of Remedies by Indemnitees Other Than GraphOn. No Indemnitee (other than GraphOn or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under the Reorganization Agreement or this Holder Agreement unless GraphOn (or any successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim or the exercise of such other remedy. SECTION 3. CERTIFICATION 3.1 Representations, Warranties and Certification of the Holders. Each Holder represents, warrants and certifies to GraphOn as follows. (a) Before giving effect to the Merger: (i) each Holder is the beneficial owner of the number of shares of NES Common Stock set forth opposite the Holder's name on the Schedule of Holders attached hereto as Exhibit A (the "Shares"); (ii) each Holder has good and valid title to the Shares free and clear of any Encumbrances; (iii) the Shares are the only outstanding shares of the capital stock of NES beneficially owned by the Holder; and (iv) the Holder has the sole power to vote all of the Shares at any meeting of the stockholders of NES and the sole power to act by written consent with respect to the Shares in lieu of any such meeting. The Holder has not appointed or granted any proxy or entered into any agreement, contract, commitment or understanding with respect to any of the Shares. (b) The Holder has the absolute and unrestricted right, power, authority and capacity to enter into, execute, deliver and perform all of his obligations under this Holder Agreement and under each other agreement, document or instrument referred to in or contemplated by this Holder Agreement to which the Holder is or is to become a party (each such other agreement, document or instrument being referred to herein as an "Other Applicable Document"). (c) This Holder Agreement and each Other Applicable Document (i) has been (or will when executed by the Holder be) duly and validly executed by the Holder and (ii) constitutes (or will when executed by the Holder constitute) a valid and binding obligation of the Holder, enforceable against the Holder in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors, and to general equitable principles. (d) Neither the execution, delivery or performance of this Holder Agreement or of any Other Applicable Document, nor the consummation of the Merger or any of the other transactions contemplated by this Holder Agreement, the Reorganization Agreement or by any Other Applicable Document, will directly or indirectly: (i) result in any violation or breach of any agreement or other 9 instrument to which the Holder is a party or by which the Holder or any of the Shares is bound or affected; or (ii) result in a violation of any Legal Requirement or order to which the Holder or any of the Shares is subject. No authorization, consent or approval of, or notice to, any Person is required to be obtained or given by the Holder in connection with the execution, delivery or performance of the Reorganization Agreement or of any Other Applicable Document. (e) There is no Legal Proceeding by or before any Governmental Body pending or, to the knowledge of the Holder, threatened against the Holder that challenges or would challenge the execution, delivery or performance of this Holder Agreement or of any Other Applicable Document or the taking of any of the actions required to be taken under this Holder Agreement or under any Other Applicable Document. (f) The Holder is aware that (i) the GraphOn Common Stock to be issued to the Holder in the Merger will not be issued pursuant to a registration statement under the Securities Act, but will instead be issued in reliance on the exemption from registration set forth in Regulation D under the Act and (ii) neither the Transaction nor the issuance of such GraphOn Common Stock has been approved or reviewed by the SEC or by any other Governmental Body. (g) The Holder is aware that the GraphOn Common Stock to be issued in the Merger cannot be offered, sold or otherwise transferred, assigned, pledged or hypothecated unless such GraphOn Common Stock is registered under the Securities Act or unless an exemption from registration is available. (h) The GraphOn Common Stock to be issued to the Holder in the Merger will be acquired by the Holder for investment purposes only and for the Holder's own account, and not with a view to, or for resale in connection with, any unregistered distribution thereof. (i) The Holder is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in securities presenting investment decisions like that involved in the Holder's contemplated investment in the GraphOn Common Stock to be issued in connection with the Merger. (j) The Holder is an "accredited investor," as that term is defined in Rule 501 under the Securities Act. (k) The Holder understands that stop transfer instructions will be given to GraphOn's transfer agent with respect to the GraphOn Common Stock to be issued to the Holder in the Merger, and that there will be placed on the certificate or certificates representing such GraphOn Common Stock a legend identical or similar in effect to the following legend (together with any other legend or legends required by applicable state securities laws or otherwise): "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS REGISTERED UNDER THE ACT OR UNLESS AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS AVAILABLE." 10 3.2 Reliance. The Holder acknowledges that GraphOn will rely on the Holder's representations, warranties and certification set forth in Section 3.1 above for purposes of determining the Holder's suitability as an investor in GraphOn Common Stock and for purposes of confirming the availability of an exemption from the registration requirements of the Securities Act for the issuance of shares of GraphOn Common Stock in the Merger. 3.3 Prohibitions Against Transfer. The Holder understands and acknowledges that it shall not effect any sale, transfer or other disposition, or any assignment, pledge or hypothecation, of any shares of GraphOn Common Stock that he is to receive in the Merger unless: (i) such sale, transfer, disposition, assignment, pledge or hypothecation has been registered under the Securities Act; (ii) counsel reasonably satisfactory to GraphOn shall have advised GraphOn in a written opinion letter (satisfactory in form and content to GraphOn), upon which GraphOn may rely, that such sale, transfer, disposition, assignment, pledge or hypothecation will be exempt from registration under the Securities Act; or (iii) an authorized representative of the SEC shall have rendered written advice to the Holder to the effect that the SEC would take no action, or that the staff of the SEC would not recommend that the SEC take action, with respect to such sale, transfer, disposition, assignment, pledge or hypothecation and a copy of such written advice and all other related communications with the SEC shall have been delivered to GraphOn. 3.4 No "Net Short" Position. For so long as Holder owns any Shares, such Holder shall not maintain a Net Short Position. For purposes of this Section, a "Net Short Position" by a person means a position whereby such person has executed one or more sales of GraphOn Common Stock that is marked as a short sale and that is executed at a time when such Holder has no equivalent offsetting long position in the GraphOn Common Stock. For purposes of determining whether a Holder has an equivalent offsetting long position in the GraphOn Common Stock, all GraphOn Common Stock that is owned by such Holder shall be deemed to be held long by such Holder. 3.5 Questionnaires. Holder has completed or caused to be completed and delivered to GraphOn the Questionnaires, and the answers to the questions in the Questionnaires are true and correct as of the date of this Agreement; provided, that the Holders shall be entitled to update such information by providing written notice thereof to GraphOn before the effective date of the Registration Statement. SECTION 4. MISCELLANEOUS PROVISIONS 4.1 Further Assurances. Each party hereto shall execute and cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the date of this Holder Agreement) for the purpose of carrying out or evidencing any of the transactions contemplated by this Holder Agreement. 11 4.2 Fees and Expenses. Except as explicitly contained in this Holder Agreement, each party to this Holder Agreement shall bear and pay all fees, costs and expenses (including legal fees and accounting fees) that have been incurred or that are incurred by or on behalf of such party in connection with the transactions contemplated by this Holder Agreement. 4.3 Attorneys' Fees. If any action or proceeding relating to this Holder Agreement or the enforcement of any provision of this Holder Agreement is brought against any party hereto, the prevailing party shall be entitled to recover reasonable attorneys' fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled). 4.4 Notices. Any notice or other communication required or permitted to be delivered to any party under this Holder Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile number set forth on the signature pages to this Holder Agreement (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto). 4.5 Time of the Essence. Time is of the essence of this Holder Agreement. 4.6 Headings. The underlined headings contained in this Holder Agreement are for convenience of reference only, shall not be deemed to be a part of this Holder Agreement and shall not be referred to in connection with the construction or interpretation of this Holder Agreement. 4.7 Counterparts. This Holder Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. 4.8 Governing Law. This Holder Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of California (without giving effect to principles of conflicts of laws). 4.9 Successors and Assigns. This Holder Agreement shall be binding upon: each Holder and its successors and assigns (if any); and GraphOn and its successors and assigns (if any). This Agreement shall inure to the benefit of each Holder, GraphOn and the respective successors and assigns (if any) of the foregoing. No Holder may assign any rights under this Holder Agreement to any Person unless such Person agrees in writing to be bound by the terms and provisions of this Holder Agreement, and such transfer is in compliance with the terms and provisions of this Holder Agreement and permitted by federal and state securities law. GraphOn may freely assign any or all of its rights under this Holder Agreement, in whole or in part, to any other Person without obtaining the consent or approval of any other party hereto or of any other Person. 4.10 Remedies Cumulative. The rights and remedies of the parties hereto shall be cumulative (and not alternative). 12 4.11 Waiver. (a) No failure on the part of any Person to exercise any power, right, privilege or remedy under this Holder Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Holder Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. (b) No Person shall be deemed to have waived any claim arising out of this Holder Agreement, or any power, right, privilege or remedy under this Holder Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. 4.12 Amendments. This Holder Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of all of the parties hereto. 4.13 Severability. Any term or provision of this Holder Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties hereto agree that the court making such determination shall have the power to limit the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Holder Agreement shall be enforceable as so modified. In the event such court does not exercise the power granted to it in the prior sentence, the parties hereto agree to replace such invalid or unenforceable term or provision with a valid and enforceable term or provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid or unenforceable term. 4.14 Parties in Interest. Except for the provisions of Section 2, none of the provisions of this Holder Agreement is intended to provide any rights or remedies to any Person other than the parties hereto and their respective successors and assigns (if any). 4.15 Entire Agreement. This Holder Agreement and the Reorganization Agreement set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof; provided, however, that (a) the Confidentiality Agreement executed on behalf of GraphOn and the Company on August 20, 2004 (the "Confidentiality Agreement") shall not be superseded by this Holder Agreement and shall remain in effect until the date on which such Confidentiality Agreement is terminated in accordance with its terms and (b) the "Binding Provisions" set forth in Part 2 of the Letter of Intent dated as of October 6, 13 2004 (the "LOI") shall remain in effect until such provisions terminate in accordance with the terms of the LOI. 4.16 Construction. (a) For purposes of this Holder Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include the masculine and feminine genders. (b) The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. (c) As used in this Holder Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation." (d) Except as otherwise indicated, all references in this Holder Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this Holder Agreement and Exhibits to this Holder Agreement. [Signature page follows] 14 IN WITNESS WHEREOF, the parties hereto have executed this HOLDER AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: HOLDERS: GRAPHON CORPORATION By:/s/ William Swain By: [Signatures of each Holder on file --------------------------- -------------------------------------- Address: 3130 Winkle Avenue Printed Name: ----------------------- Santa Cruz, CA 95065 Entity Name (if applicable): -------- Fax: (831) 475-3017 ------------------------------------- Attn: William Swain Title (if applicable):--------------- Address: ---------------------------- Facsimile: -------------------------- 15 SCHEDULE A SCHEDULE OF HOLDERS SHARES OF NES HOLDER COMMON STOCK Ralph Wesinger 53,480 Crystal Bay Company 19,905 Oso Partners 2,004 William Kennedy 1,810 Forrest R.and Judith A. Romas 1,544 Clark Reams 575 Neil Ison 312 Steven Levy 312 William Sanders 200 Sierra Patent Group, Ltd. 0 Ken D'Alessandro 0 Timothy Brisson 0 Total: 80,142 EX-10.1 5 sbscrpt.txt UNIT SUBSCRIPTION AGREEMENT GRAPHON CORPORATION UNIT SUBSCRIPTION AGREEMENT COMMON STOCK AND WARRANTS UNIT SUBSCRIPTION AGREEMENT (the "Agreement") dated as of February 2, 2005 among GRAPHON CORPORATION, a Delaware corporation (the "Company"), and the persons who execute this Agreement as investors (the "Investors"). Background: The Company desires to sell to the Investors, and the Investors desire to purchase, an aggregate of 148,148 shares of Series A Stock of the Company (the "Shares") in Units with 5-year warrants, in substantially the form attached hereto as Exhibit 1A, exercisable to purchase an aggregate of 74,074 shares of Series B Stock of the Company (the "Warrant Shares") at $40.00 per share (the "Series B Warrants"), all for an aggregate price of $3,999,996. The Shares are convertible into an aggregate of 14,814,800 shares of Common Stock. The Warrant Shares will be convertible into an aggregate of 7,407,400 shares of Common Stock. The Series B Warrants are convertible under certain circumstances into 5-year warrants, in substantially the form attached hereto as Exhibit 1B, exercisable to purchase an aggregate of 7,407,400 shares of Common Stock at $0.40 per share (the "Exchange Warrants"). The proceeds are necessary for the proposed acquisition by the Company of Network Engineering Software, Inc. ("NES") and the development and continuance of the business of the Company and each of its Subsidiaries. Certain Definitions: "Acquisition" shall mean the acquisition by the Company of NES substantially in accordance with the terms set forth in the Agreement and Plan of Merger and Reorganization, dated December 3, 2004, (the "Reorganization Agreement"). "Action" has the meaning set forth in Section 2.10. "Agreement" has the meaning set forth in the Preamble. "Blue Sky Laws" has the meaning set forth in Section 2.7(b). "Certificate of Amendment" has the meaning set forth in Section 2.2(b)(i). "Certificate of Incorporation" has the meaning set forth in Section 2.2(a). "Closing" and "Closing Date" have the meanings set forth in Section 1.2. "Common Stock" shall mean stock of the Company of any class (however designated) whether now or hereafter authorized, which generally has the right to participate in the voting and in the distribution of earnings and assets of the Company without limit as to amount or percentage, including the Company's Common Stock, $.0001 par value per share. "Company" includes the Company and any corporation or other entity that shall succeed to or assume, directly or indirectly, the obligations of the Company hereunder. The term "corporation" shall include an association, joint stock company, business trust, limited liability company or other similar organization. "Company Disclosure Letter" means the disclosure letter delivered to the Investors prior to the execution of this Agreement, which letter is incorporated in this Agreement. "Contemplated Transactions" has the meaning set forth in Section 2.1(b). "Exchange Act" has the meaning set forth in Section 2.7(b). "Exchange Warrants" has the meaning set forth in Background. "Existing Investor Rights Agreement" means the Investor Rights Agreement, dated as of January 29, 2004, by and among the Company and the investors party thereto. "Existing Warrants" means 5-year warrants, dated January 29, 2004, exercisable to purchase an aggregate of 2,500,000 shares of Common Stock at $0.33 per share, issued pursuant to that certain Unit Subscription Agreement, dated as of January 29, 2004, among the Company and the investors party thereto and the warrants of similar tenor, currently exercisable to purchase 720,000 shares, held by the Griffin Holders. "Financial Advisory Agreement" has the meaning set forth in Section 1.3(b). "Financial Statements" has the meaning set forth in Section 2.9(g). "Form 10-K Financial Statements" has the meaning set forth in Section 2.9(d). "Governmental Body" has the meaning set forth in Section 2.7(b). "Griffin" has the meaning set forth in Section 2.6. "Griffin Holders" means Griffin and certain other persons to whom Griffin transferred Existing Warrants, who are also parties to the Waiver. "Griffin Agreement" means the agreement, dated January 8, 2005, between Griffin and the Company, in form previously provided and acceptable to counsel for the Investors governing compensation of Griffin. "Hirschman" has the meaning set forth in Section 1.3(b). "Investor Rights Agreement" has the meaning set forth in Section 1.3(a). "Investors" has the meaning set forth in the Preamble. 2 "June 30 Form 10-Q Financial Statements" has the meaning set forth in Section 2.9(e). "Legal Fee" has the meaning set forth in Section 6.9. "Legal Requirement" has the meaning set forth in Section 2.8. "Loss" has the meaning set forth in Section 5.2(b). "March 31 Form 10-Q Financial Statements" has the meaning set forth in Section 2.9(f). "Material Adverse Change" shall mean a material adverse change in the business, financial condition, results of operation, properties or operations of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" has the meaning set forth in Section 2.1(a). "Material Agreements" has the meaning set forth in Section 2.8. "NES" has the meaning set forth in Background. "Ordinary Course of Business" has the meaning set forth in Section 2.11. "Own" means own beneficially, as that term is defined in the rules and regulations of the SEC. "Person" means any individual, sole proprietorship, partnership, corporation, limited liability company, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity, any university or similar institution, or any government or any agency or instrumentality or political subdivision thereof. "Proposal" has the meaning set forth in Section 2.2(b)(i). "Proprietary Assets" has the meaning set forth in Section 2.12. "Proxy Statement" has the meaning set forth in Section 2.2(b)(i). "Purchased Shares" has the meaning set forth in Section 1.1(a). "Purchased Warrants" has the meaning set forth in Section 1.1(a). "Required Stockholder Approval" has the meaning set forth in Section 2.2(b)(i). "SEC" means the Securities and Exchange Commission. "SEC Documents" has the meaning set forth in Section 2.9(a). 3 "Securities" has the meaning set forth in Section 1.1(a). "Securities Act" has the meaning set forth in Section 2.5. "September 30 Form 10-Q Financial Statements" has the meaning set forth in Section 2.9(g). "Series A Stock" means the Series A Participating Convertible Preferred Stock, par value $.01 per share, of the Company, having the terms set forth in Exhibit 1C hereto. "Series B Stock" means the Series B Participating Convertible Preferred Stock, par value $.01 per share, of the Company, having the terms set forth in Exhibit 1C hereto. "Series B Warrants" has the meaning set forth in Background. "Shares" has the meaning set forth in Background. "Stockholders Meeting" has the meaning set forth in Section 2.2(b)(i). "Subsidiary" shall mean, immediately prior to the Closing, any corporation of which stock or other interest having ordinary power to elect a majority of the Board of Directors (or other governing body) of such entity (regardless of whether or not at the time stock or interests of any other class or classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is, immediately prior to the Closing, directly or indirectly owned by the Company or by one or more Subsidiaries. For purposes of clarity, the definition of Subsidiary shall not include NES for any purpose. "Transaction Documents" means the Agreement, the Financial Advisory Agreement, the Purchased Warrants and the Investor Rights Agreement. "Transfer Agent" has the meaning set forth in Section 1.2(b). "Underlying Shares" shall mean the shares of Common Stock issued or from time to time issuable upon (a) conversion of (i) the Shares or (ii) the Series B Stock issuable upon exercise of the Series B Warrants, and (b) exercise of the Exchange Warrants. "Unit" shall mean (i) one (1) Share and (ii) one Series B Warrant to purchase one half (0.5) of a Warrant Share. In consideration of the mutual covenants contained herein, the parties agree as follows: 4 1. Purchase and Sale of Stock. 1.1. Sale and Issuance of Securities. (a) The Company shall sell to the Investors and the Investors shall purchase from the Company, 148,148 Units (the "Units") at a price per Unit equal to $27.00, or an aggregate of (x) 148,148 Shares (the "Purchased Shares") and (y) Series B Warrants to purchase an aggregate of 74,074 Warrant Shares (the "Purchased Warrants" and, collectively with the Purchased Shares, the "Securities"), for an aggregate purchase price of $3,999,996.00. (b) The number of Purchased Shares and Purchased Warrants to be purchased by each Investor from the Company is set forth on Schedule 1.1(b) hereto, subject to acceptance, in whole or in part, by the Company. 1.2. Closing. The closing (the "Closing") of the purchase and sale of the Securities hereunder shall take place within three (3) days of the date of this Agreement or such other date within fifteen (15) business days of this Agreement as agreed to by the Company and Hirschman (the "Closing Date"). The Closing shall take place at the offices of Hahn & Hessen LLP, the Investors' counsel, in New York, New York, or at such other location as is mutually acceptable to the Investors and the Company, subject to fulfillment of the conditions of closing set forth in the Agreement. At the Closing: (a) each Investor purchasing Securities at the Closing shall deliver to the Company or its designees by wire transfer or such other method of payment as the Company shall approve, an amount equal to the purchase price of the Securities purchased by such Investor hereunder, as set forth opposite such Investor's name on the signature pages hereof; (b) the Company shall authorize its transfer agent (the "Transfer Agent") to arrange delivery to each Investor of one or more stock certificates registered in the name of the Investor, or in such nominee name(s) as designated by the Investor in writing, representing the number of Purchased Shares set forth opposite such Investors named on Schedule 1.1(b); and (c) the Company shall issue and deliver to each Investor the number of Purchased Warrants set forth opposite such Investors named on Schedule 1.1(b). 1.3. Investors' Conditions of Closing. The obligation of the Investors to complete the purchase of the Securities at the Closing is subject to fulfillment of the following conditions: (a) the Company shall execute and deliver an Investor Rights Agreement, dated the Closing Date, in the form attached as Exhibit 2, with respect to the Purchased Shares and the Underlying Shares (the "Investor Rights Agreement"); 5 (b) the Company and Orin Hirschman ("Hirschman") shall execute and deliver an amendment to the existing Financial Advisory Agreement, dated January 29, 2004, in the form attached as Exhibit 3 (the "Financial Advisory Agreement Amendment"); (c) the Company shall cause to be delivered to the Investors an Opinion of Counsel, dated the Closing Date and reasonably satisfactory to counsel for the Investors, with respect to the matters set forth on Exhibit 4; (d) the representation and warranties of the Company set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and (to the extent such representations and warranties speak as of a later date) as of such later date as though made on and as of the Closing Date, and the Company shall have performed in all material respects all covenants and other obligations required to be performed by it under this Agreement at or prior to the Closing Date. (e) the absence of a Material Adverse Change from the date of this Agreement up to, and including, the Closing Date; (f) the Company shall have executed and delivered all other documents reasonably requested by counsel for the Investors that are necessary to complete the contemplated transactions; (g) All Securities delivered at the Closing shall have any necessary stock transfer tax stamps (purchased at the expense of the Company) affixed; (h) the Company shall pay the Investors' expenses to the extent set forth in Section 6.9 hereof; (i) the Company shall deliver to the Investors a certified copy of its Certificate of Incorporation, as amended, and by-laws and a Certificate of Good Standing from the Secretary of State of the State of Delaware; (j) the Company, Hirschman and Griffin (as defined in Section 2.6) shall have entered into an agreement regarding the fees owed by the Company to Griffin and Hirschman. (k) the Acquisition shall have been completed; (l) the Company shall have received a waiver of preemptive rights and antidilution rights and related acknowledgments from each holder of Existing Warrants pursuant to the Existing Investor Rights Agreement and the Existing Warrants with respect to all Securities issued hereunder in the form attached hereto as Exhibit 6 (the "Waiver"); 6 (m) the executive officers and members of the Board of Directors of the Company shall have executed and delivered the Voting Agreement in the form attached hereto as Exhibit 7 (the "Voting Agreement"); and (n) the Investors shall have received a certificate signed on behalf of the Company by the President and Secretary of the Company, in such capacities, to the effect that all covenants and other obligations required to be performed by the Company at a prior to the Closing Date under this Agreement shall have been performed in all material respects (the "Closing Certificate"). 1.4. Company's Condition of Closing. The obligation of the Company to complete the sale of the Securities at the Closing is subject to fulfillment of the following conditions: (a) The Investors shall execute and deliver the Investor Rights Agreement. (b) The Company shall have received the Waiver, executed by each holder of Existing Warrants. 2. Representations, Warranties and Covenants of the Company. The Company hereby represents and warrants to, and covenants with, each of the Investors as follows: 2.1. Corporate Organization; Authority; Due Authorization. (a) The Company (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the corporate power and authority to own or lease its properties as and in the places where such business is conducted and to carry on its business as conducted and (iii) is duly qualified as a foreign corporation authorized to do business in every jurisdiction where the failure to so qualify, individually or in the aggregate, would have a material adverse effect on the operations, assets, liabilities, financial condition or business of the Company (a "Material Adverse Effect"). Set forth in the Company Disclosure Letter is a complete and correct list of all Subsidiaries. Each Subsidiary is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and is qualified to do business as a foreign corporation in each jurisdiction in which qualification is required, except where failure to so qualify would not have a Material Adverse Effect. (b) The Company (i) has the requisite corporate power and authority to execute, deliver and perform the Griffin Agreement, the Waiver, this Agreement and the other Transaction Documents to which it is a party and to incur the obligations herein and therein and (ii) has been authorized by all necessary corporate action to execute, deliver and perform the Griffin Agreement, the Waiver, this Agreement and the other Transaction Documents to which it is a party and to consummate the transactions contemplated hereby and thereby (the "Contemplated Transactions"). Each of the Griffin Agreement, the 7 Waiver, this Agreement and the other Transaction Documents is a valid and binding obligation of the Company enforceable in accordance with its terms except as limited by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting the enforcement of creditors' rights and the availability of equitable remedies (regardless of whether such enforceability is considered in a proceeding at law or equity). Each of the Exchange Warrants, when issued upon conversion of the Series B Warrants, will be a valid and binding obligation of the Company enforceable in accordance with its terms except as limited by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting the enforcement of creditors' rights and the availability of equitable remedies (regardless of whether such enforceability is considered in a proceeding at law or equity). 2.2. Capitalization; Authorization of Additional Shares of Common Stock. (a) Current Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 45,000,000 shares of Common Stock, $.0001 par value, of which 21,716,765 shares of Common Stock are outstanding and (ii) 5,000,000 shares of Preferred Stock, $.01 par value, of which no shares are outstanding. All outstanding shares were issued in compliance with all applicable Federal and state securities laws, and the issuance of such shares was duly authorized. Except as contemplated by this Agreement or as set forth in the Company Disclosure Letter, there are (i) no outstanding subscriptions, warrants, options, conversion privileges or other rights or agreements obligating the Company to purchase or otherwise acquire or issue any shares of capital stock of the Company (or shares reserved for such purpose), (ii) no preemptive rights contained in the Company's Certificate of Incorporation, as amended (the "Certificate of Incorporation"), By-Laws of the Company or contracts to which the Company is a party or rights of first refusal with respect to the issuance of additional shares of capital stock of the Company (other than as set forth in the Investor Rights Agreement, including without limitation the Securities and the Underlying Shares, and (iii) no commitments or understandings (oral or written) of the Company to issue any shares, warrants, options or other rights. Except as set forth in the Company Disclosure Letter, none of the shares of Common Stock are subject to any stockholders' agreement, voting trust agreement or similar arrangement or understanding. Except as set forth in the Company Disclosure Letter, the Company has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter. With respect to each Subsidiary, (i) all the issued and outstanding shares of the Subsidiary's capital stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with applicable federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and (ii) except as disclosed in the Company Disclosure Letter, there are no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of the Subsidiary's capital stock or any such options, rights, 8 convertible securities or obligations. Except as disclosed in the Company Disclosure Letter, the Company owns 100% of the outstanding equity of each Subsidiary. (b) Amendment to Certificate of Incorporation; Proxy Statement; Stockholders Meeting. (i) The Board of Directors of the Company has approved an amendment to the Certificate of Incorporation authorizing the issuance of additional shares of Common Stock, which, if ratified by the Company's stockholders, would enable the Company to be in compliance with the covenant set forth in Section 5.1(c) below (the "Certificate of Amendment"). In furtherance thereof, as promptly as possible, but in no event later than 15 business days following the date of this Agreement, the Company shall take all action necessary to call a meeting of its stockholders (together with any adjournments or postponements thereof, the "Stockholders Meeting"), other than actions with respect to the preparation and filing of any Proxy Statement (as defined below) for such meeting, for the purpose of seeking the requisite stockholder approval (the "Required Stockholder Approval") of the Certificate of Amendment and for all matters to be voted upon incident thereto (collectively, the "Proposal"). In connection therewith, the Company will promptly prepare and file with the SEC proxy materials (including one or more proxy statements (as amended or supplemented, the "Proxy Statement") and form of proxy) for use at the Stockholders Meeting and, after receiving and promptly responding to any comments of the SEC thereon, shall promptly mail such proxy materials to the stockholders of the Company. The Company will comply with Section 14(a) of the Exchange Act and the rules promulgated thereunder in relation to any proxy statement and any form of proxy to be sent to the stockholders of the Company in connection with the Stockholders Meeting, and the Proxy Statement shall not, on the date the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to stockholders or at the time of the Stockholders Meeting, contain any statement that, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the Stockholders Meeting or the subject matter thereof which has become false or misleading. If the Company should discover at any time prior to the Closing Date any event relating to the Company or any of its Subsidiaries or any of their respective affiliates, officers or directors that is required to be set forth in a supplement or amendment to the Proxy Statement, in addition to the Company's obligations under the Exchange Act, the Company will promptly inform its stockholders thereof. (ii) Subject to its fiduciary obligations under applicable law (as determined in good faith by the Company's Board of Directors, 9 after having taken into account the written advice of the Company's outside counsel), the Company's Board of Directors shall recommend to the Company's stockholders (and not revoke or amend such recommendation) that the stockholders vote in favor of the Proposal and shall cause the Company to take all commercially reasonable action to solicit the Required Stockholder Approval. Whether or not the Company's Board of Directors determines at any time after the date hereof that, due to its fiduciary duties, it must revoke or amend its recommendation to the Company's stockholders, the Company is required to, and will take, in accordance with applicable law and its Certificate of Incorporation and Bylaws, all action necessary to convene the Stockholders Meeting as promptly as practicable to consider and vote upon the approval of the Proposal. (iii)In the event that (x) the Company does not file the Proxy Statement within 15 business days following the date of this Agreement, (y) the Company fails to use its best efforts to cause the Stockholders Meeting to take place within 90 days following the date of this Agreement, or (z) the Company's Board of Directors has withdrawn or modified its recommendation to its stockholders pursuant to the provisions of Section 2.2(b)(ii), the Company shall pay to each Investor a cash penalty equal to 25% of the aggregate amount invested by such Investor at the Closing; provided, however, that, with respect to clause (y) above, no such penalty shall apply in the event that a delay beyond the 90th day arises out of review by the SEC as long as the Company continues to use its best efforts to cause the Stockholders Meeting to take place as soon as practicable. 2.3. Validity of Securities. The issuance of the Securities has been duly authorized by all necessary corporate action on the part of the Company and, when issued to, delivered to, and paid for by the Investors in accordance with this Agreement, the Purchased Shares will be validly issued, fully paid and non-assessable. 2.4. Underlying Shares. The issuance of (a) the Underlying Shares upon conversion of the Shares or the Series B Stock or exercise of the Exchange Warrants and (ii) the Warrant Shares upon exercise of the Purchased Warrants has been duly authorized. At all times prior to such exercise, the Series B Stock and, to the extent authorized under the Certificate of Incorporation, the Underlying Shares, will have been duly reserved for issuance upon such exercise and, in each case, when so issued, will be validly issued, fully paid and non-assessable. 2.5. Private Offering. Neither the Company nor anyone acting on its behalf has within the last 12 months issued, sold or offered any security of the Company (including, without limitation, any Common Stock or warrants of similar tenor to the Purchased Warrants) to any Person under circumstances that would cause the issuance and sale of the Securities, as contemplated by this Agreement, to be subject to the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). The Company agrees that neither the Company nor anyone acting on its behalf will offer the Securities or any part thereof or any similar securities for issuance or sale to, or solicit any offer to acquire any of the same from, anyone so as to make the issuance and sale of the Securities subject to the registration requirements of Section 5 of the Securities Act. 10 2.6. Brokers and Finders. Except as set forth in the Company Disclosure Letter or in this Section 2.6, neither the Company, nor any of its officers, directors, employees or stockholders, has employed any broker or finder. Pursuant to the Griffin Agreement, the Company shall pay to Griffin Securities, Inc. ("Griffin") a fee consisting of $50,000 in cash and warrants in substantially the same form as the Series B Warrants (A) to purchase an aggregate of 14,815 shares of Series A Stock at $27.00 per share and (B) to purchase an aggregate of 7,407 shares of Series B Stock at $40.00 per share; and Griffin shall be a party to the Investor Rights Agreement. 2.7. No Conflict; Required Filings and Consents. (a) The execution, delivery and performance of the Griffin Agreement, the Waiver, this Agreement and the other Transaction Documents by the Company do not, and the consummation by the Company of the Contemplated Transactions will not, (i) conflict with or violate the Certificate of Incorporation (as to be amended by the Certificate of Amendment) or By-Laws of the Company or its Subsidiaries, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or its Subsidiaries or by which any property or asset of the Company or its Subsidiaries is bound or affected or (iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, result in the loss of a material benefit under, or give to others any right of purchase or sale, or any right of termination, amendment, acceleration, increased payments or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company or of any of its Subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its Subsidiaries is a party or by which the Company or of any of its Subsidiaries or any property or asset of the Company or of any of its Subsidiaries is bound or affected; except, in the case of clauses (ii) and (iii) above, for any such conflicts, violations, breaches, defaults or other occurrences that would not prevent or delay consummation of any of the Contemplated Transactions in any material respect or otherwise prevent the Company from performing its obligations under the Griffin Agreement, the Waiver, this Agreement or any of the other Transaction Documents in any material respect, and would not, individually or in the aggregate, have a Material Adverse Effect. (b) The execution and delivery of the Griffin Agreement, the Waiver, this Agreement and the other Transaction Documents by the Company do not, and the performance of the Griffin Agreement, the Waiver, this Agreement and the other Transaction Documents and the consummation by the Company of the Contemplated Transactions will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Body (as hereinafter defined) except for the filing of a Form D with the Securities and 11 Exchange Commission and the filing of the Proxy Statement and the filing of a Form 8-K and other applicable requirements, if any, of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any state securities or "blue sky" laws ("Blue Sky Laws"), any approval required by applicable rules of the markets in which the Company's securities are traded and any required filing of the Voting Agreement with the appropriate Governmental Body. For purposes of this Agreement, "Governmental Body" shall mean any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or entity and any court or other tribunal). Without limitation on the foregoing, the consummation of the Contemplated Transactions, with the exception of the Acquisition, does not require the approval of The Nasdaq Stock Market (or any related regulatory body) or, other than the Required Stockholder Approval, the stockholders of the Company. 2.8. Compliance. Except as set forth in the Company Disclosure Letter, neither the Company nor any Subsidiary is in conflict with, or in default or violation of (i) any law, rule, regulation, order, judgment or decree applicable to the Company or such Subsidiary or by which any property or asset of the Company or such Subsidiary is bound or affected ("Legal Requirement") or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or such Subsidiary is a party or by which the Company or such Subsidiary or any property or asset of the Company or such Subsidiary is bound or affected (the "Material Agreements"), in each case except for any such conflicts, defaults or violations that would not, individually or in the aggregate, have a Material Adverse Effect. Neither the Company nor any Subsidiary has received any written notice or communication from any Governmental Body regarding any actual or possible violation of, or failure to comply with, any Legal Requirement. 2.9. SEC Documents; Financial Statements. (a) The information contained in the following documents did not, as of the date of the applicable document, include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading, as of their respective filing dates or, if amended, as so amended (the following documents, together with any other filings made by the Company with the SEC after the date of this Agreement prior to the Closing Date, collectively, the "SEC Documents"), provided that the representation in this sentence shall not apply to any misstatement or omission in any SEC Document filed prior to the date of this Agreement which was superseded by a subsequent SEC Document filed prior to the Closing Date: (i) the Company's Annual Report on Form 10-K for the year ended December 31, 2003; 12 (ii) the Company's definitive Proxy Statement with respect to its 2004 Annual Meeting of Stockholders, filed with the Commission on November 24, 2004; (iii) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004; and (iv) The Company's Current Reports on Form 8-K, filed with the Commission on February 3, 2004, February 6, 2004, March 4, 2004, May 12, 2004, December 9, 2004 and December 16, 2004. (b) In addition, as of the date of this Agreement and as of the Closing Date, the Company Disclosure Letter, when read together with the information, qualifications and exceptions contained in this Agreement, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made and the time period about which they were made, not misleading. (c) The Company has filed all forms, reports and documents required to be filed by it with the SEC since December 31, 2000, including, without limitation, the SEC Documents. As of their respective dates, the SEC Documents have complied, and will have complied, as to form in all material respects with the applicable requirements of the Securities Act, the Exchange Act and the rules and regulations thereunder. (d) The Company's Annual Report on Form 10-K for the year ended December 31, 2003 includes consolidated balance sheets as of December 31, 2002 and 2003 and consolidated statements of income for the one year periods then ended (collectively, the "Form 10-K Financial Statements"). (e) The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, includes consolidated balance sheets as of June 30, 2004 and December 31, 2003 and consolidated statements of operations and comprehensive loss for the quarters ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004 (the "June 30 Form 10-Q Financial Statements"). (f) The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, includes consolidated balance sheets as of March 31, 2004 and December 31, 2003 and consolidated statements of operations and comprehensive loss for the quarters ended March 31, 2003 and 2004, (the "March 31 Form 10-Q Financial Statements"). (g) The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, includes consolidated balance sheets as of December 31, 2003 and September 30, 2004 and consolidated statements of operations and comprehensive loss for the 13 quarters ended September 30, 2003 and September 30, 2004 and the nine months ended September 30, 2004 and September 30, 2003 (the "September 30 Form 10-Q Financial Statements" and together with the Form 10-K Financial Statements, the March 31 Form 10-Q Financial Statements and the June 30 Form 10-Q Financial Statements, the "Financial Statements"). (h) The Financial Statements (including the related notes and schedules thereto and all other financial information included in the SEC Documents) fairly present in all material respects the consolidated financial position, the results of operations, retained earnings or cash flows, as the case may be, of the Company for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments that would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. (i) Any SEC Documents filed after the date of this Agreement and prior to the Closing Date will not, as of the date of the applicable document, include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading, as of their respective filing dates or, if amended, as so amended. 2.10.Litigation. Except as set forth in the SEC Documents or the Company Disclosure Letter, there are no claims, actions, suits, investigations, inquiries or proceedings (each, an "Action") pending against the Company or any of its Subsidiaries or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, at law or in equity, or before or by any court, tribunal, arbitrator, mediator or any federal or state commission, board, bureau, agency or instrumentality, that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. 2.11.Absence of Certain Changes. Except (i) as specifically contemplated by this Agreement or the Reorganization Agreement and related agreements and the transactions contemplated thereby, or (ii) as set forth in the Company Disclosure Letter, the SEC Documents, or the Financial Statements, since September 30, 2004, there has not been (a) any Material Adverse Change; (b) any return of any capital or other distribution of assets to stockholders of Company (except to Company); (c) except for the Acquisition, any acquisition (by merger, consolidation, acquisition of stock and/or assets or otherwise) of any Person; or (d) any transactions, other than in the ordinary course of business, consistent with past practices and reasonable business operations ("Ordinary Course of Business"), with any of its officers, directors, principal stockholders or employees or any Person affiliated with any of such persons. 2.12.Proprietary Assets. 14 (a) For purposes of this Agreement, "Proprietary Assets" shall mean all right, title and interest of the Company and the Subsidiaries in and to the following items or types of property: (i) every patent, patent application, trademark (whether registered or unregistered), trademark application, trade name, fictitious business name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, maskwork, maskwork application, trade secret, know-how, customer list, franchise, system, computer software, computer program, invention, design, blueprint, engineering drawing, proprietary product, technology, proprietary right or other intellectual property right or intangible asset other than goodwill; and (ii) all licenses and other rights to use or exploit any of the foregoing. (b) Except as set forth in the Company Disclosure Letter, the Company or its Subsidiaries have good, valid and marketable title to each of the Proprietary Assets as owned by it, free and clear of all liens and other encumbrances; has a valid right to use all Proprietary Assets of third parties; and is not obligated to make any payment to any Person for the use of any Proprietary Asset except as set forth in the applicable license agreement. Except as set forth in the Company Disclosure Letter, neither the Company nor any of its Subsidiaries has developed jointly with any other Person any material Proprietary Asset with respect to which such other Person has any rights. (c) Each of the Company and its Subsidiaries has taken commercially reasonable and customary measures and precautions to protect and maintain the confidentiality and secrecy of all Proprietary Assets of the Company and its Subsidiaries (except Proprietary Assets whose value would be unimpaired by public disclosure) and otherwise to maintain and protect the value of all Proprietary Assets of the Company and its Subsidiaries. Except as set forth in the Company Disclosure Letter, neither the Company nor any of its Subsidiaries has (other than pursuant to license agreements identified in the Company Disclosure Letter) disclosed or delivered to any Person, or permitted the disclosure or delivery to any Person of, (i) the source code, or any portion or aspect of the source code, of any Proprietary Asset, (ii) the object code, or any portion or aspect of the object code, of any Proprietary Asset of the Company and its Subsidiaries, except in the ordinary course of its business or (iii) any patent applications (except as required by law). (d) To the knowledge of the Company, (i) none of the Proprietary Assets of the Company and its Subsidiaries infringes or conflicts with any Proprietary Asset owned or used by any other Person; (ii) neither the Company nor any Subsidiary is infringing, misappropriating or making any unlawful use of any Proprietary Asset owned or used by any other Person; and (iii) no other Person is infringing, misappropriating or making any unlawful use of, and no Proprietary Asset owned or used by any other Person infringes or conflicts with, any Proprietary Asset of the Company or any of its Subsidiaries. (e) Except as set forth in the Company Disclosure Letter, excluding warranty claims received by Company or any of its 15 Subsidiaries in the ordinary course of business, there has not been any claim by any customer or other Person alleging that any Proprietary Asset of the Company or any of its Subsidiaries (including each version thereof that has ever been licensed or otherwise made available by the Company to any Person) does not conform in all material respects with any specification, documentation, performance standard, representation or statement made or provided by or on behalf of the Company. (f) To the knowledge of the Company, the Proprietary Assets of the Company and its Subsidiaries constitute all the Proprietary Assets necessary to enable the Company and its Subsidiaries to conduct their respective businesses in the manner in which such businesses have been and are being conducted. Except as set forth in the Company Disclosure Letter, (i) neither the Company nor any Subsidiary has licensed any of its Proprietary Assets to any Person on an exclusive, semi-exclusive or royalty-free basis and (ii) neither the Company nor any Subsidiary has entered into any covenant not to compete or contract limiting such entity's ability to exploit fully any of such entity's material Proprietary Assets or to transact business in any material market or geographical area or with any Person. (g) Except as set forth in the Company Disclosure Letter, neither the Company nor any of its Subsidiaries has at any time received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of, any Proprietary Asset owned or used by any other Person. 2.13.No Adverse Actions. Except as set forth in the Company Disclosure Letter, there is no existing, pending or, to the knowledge of the Company, threatened termination, cancellation, limitation, modification or change in the business relationship of the Company or any of its Subsidiaries, with any supplier, customer or other Person except such as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. 2.14 Registration Rights. Except as set forth in the Investor Rights Agreement, the SEC Documents, or in the Company Disclosure Letter, the Company is not under any obligation to register under the Securities Act any of its currently outstanding securities or any securities issuable upon exercise or conversion of its currently outstanding securities nor is the Company obligated to register or qualify any such securities under any state securities or blue sky laws. 2.15.Corporate Documents. The Company's Certificate of Incorporation and Bylaws, each as amended to date and prior to the Closing Date, which have been requested and previously provided to the Investors are true, correct and complete and contain all amendments thereto. 2.16.Disclosure. No representation or warranty of the Company herein, no exhibit or schedule hereto, and no information contained or referenced in the SEC Documents, when read together, contains or will 16 contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. On or before 9:00 a.m., New York City Time, on the third business day after the Closing Date, the Company shall file a Current Report on Form 8-K describing the material terms of the transactions contemplated by this Agreement, and disclosing such portions of the Griffin Agreement, the Waiver and the other Transaction Documents as contain material nonpublic information with respect to the Company that has not previously been publicly disclosed by the Company, and attaching as an exhibit to such Form 8-K a form of this Agreement. Except for information that may be provided to the Investors pursuant to this Agreement, the Company shall not, and shall use commercially reasonable efforts to cause each of its officers, directors, employees and agents not to, provide any Investor with any material nonpublic information regarding the Company from and after the filing of such Form 8-K without the express prior consent of such Investor. Notwithstanding the foregoing, this prohibition shall not extend to information received by Hirschman in the normal course of the performance of Hirschman's financial advisory and other services to the Company. 2.17.Use of Proceeds. The net proceeds received by the Company from the sale of the Securities shall be used by the Company for working capital and general corporate purposes, including without limitation to support the operations, if any, of each of the Subsidiaries. 3. Representations and Warranties of the Investors. Each Investor represents and warrants to the Company as follows: 3.1. Authorization. Such Investor (a) has full power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which it is a party and to incur the obligations herein and therein and (b) if applicable has been authorized by all necessary corporate or equivalent action to execute, deliver and perform this Agreement and the other Transaction Documents and to consummate the Contemplated Transactions. Each of this Agreement and the other Transaction Documents is a valid and binding obligation of such Investor enforceable in accordance with its terms, except as limited by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting the enforcement of creditors' rights and the availability of equitable remedies (regardless of whether such enforceability is considered in a proceeding at law or equity). 3.2. Brokers and Finders. Such Investor has not retained any investment banker, broker or finder in connection with the Contemplated Transactions. 4. Securities Laws. 4.1. Securities Laws Representations and Covenants of Investors. (a) This Agreement is made with each Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, 17 that the Securities to be received by such Investor will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof such that such Investors would constitute an "underwriter" under the Securities Act; provided that this representation and warranty shall not limit the Investor's right to sell the Underlying Shares pursuant to the Investor Rights Agreement or in compliance with an exemption from registration under the Securities Act or the Investor's right to indemnification under this Agreement or the Investor Rights Agreement. (b) Each Investor understands and acknowledges that the offering of the Securities pursuant to this Agreement will not be registered under the Securities Act or qualified under any Blue Sky Laws, on the grounds that the offering and sale of the Securities are exempt from registration and qualification, respectively, under the Securities Act and the Blue Sky Laws. (c) Each Investor covenants that, unless the Purchased Shares, the Purchased Warrants, the Exchange Warrants, the Underlying Shares or any other shares of capital stock of the Company received in respect of the foregoing have been registered pursuant to the Investor Rights Agreement being entered into among the Company and the Investors, such Investor will not dispose of such securities unless and until such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with an opinion of counsel reasonably satisfactory in form and substance to the Company to the effect that (i) such disposition will not require registration under the Securities Act and (ii) appropriate action necessary for compliance with the Securities Act and any applicable state, local or foreign law has been taken; provided, however, that an investor may dispose of such securities without providing the opinion referred to above if the Company has been provided with adequate assurance that such disposition has been made in compliance with Rule 144 under the Securities Act (or any similar rule). (d) Each Investor represents that: (i) such Investor has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of such Investor's prospective investment in the Securities; (ii) such Investor has the ability to bear the economic risks of such Investor's prospective investment and can afford the complete loss of such investment; (iii) such Investor has been furnished with and has had access to such information as is in the Company Disclosure Letter together with the opportunity to obtain such additional information as it requested to verify the accuracy of the information supplied; and (iv) such Investor has had access to officers of the Company and an opportunity to ask questions of and receive answers from such officers and has had all questions that have been asked by such Investor satisfactorily answered by the Company. (e) Each Investor further represents by execution of this Agreement that such Investor qualifies as an "accredited investor" as 18 such term is defined under Rule 501 promulgated under the Securities Act. Any Investor that is a corporation, a partnership, a limited liability company, a trust or other business entity further represents by execution of this Agreement that it has not been organized for the purpose of purchasing the Securities. (f) By acceptance hereof, each Investor agrees that the Purchased Shares, the Purchased Warrants, the Exchange Warrants, the Underlying Shares and any shares of capital stock of the Company received in respect of the foregoing held by it may not be sold by such Investor without registration under the Securities Act or an exemption therefrom, and therefore such Investor may be required to hold such securities for an indeterminate period. 4.2. Legends. All certificates for the Purchased Shares, Purchased Warrants, Exchange Warrants and the Underlying Shares, and each certificate representing any shares of capital stock of the Company received in respect of the foregoing, 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 (unless otherwise permitted herein) shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT." 5. Additional Covenants of the Company. 5.1. Reports, Information, Authorization of Sufficient Shares. (a) The Company shall cooperate with each Investor in supplying such information as may be reasonably requested by such Investor to complete and file any information reporting forms presently or hereafter required by the SEC as a condition to the availability of an exemption, presently existing or hereafter adopted, from the Securities Act for the sale of any of the Purchased Shares, the Purchased Warrants, the Exchange Warrants, the Underlying Shares and shares of capital stock of the Company received in respect of the foregoing. (b) For so long as an Investor (or the successor or assign of such Investor) holds either Securities or Underlying Shares, the Company shall deliver to such Investor (or the successor or assign of such Investor), contemporaneously with delivery to other holders of Common Stock, a copy of each report of the Company delivered to holders of Common Stock. (c) Upon receiving the Required Stockholder Approval and at every time thereafter, the Company shall keep reserved for issuance a 19 sufficient number of authorized but unissued shares of Series B Stock and Common Stock (or other securities into which the Series A Stock or Series B Stock are convertible or for which the Purchased Warrants and Exchange Warrants, respectively, are then exercisable) so that the Shares, the Series B Stock, the Purchased Warrants and the Exchange Warrants may be converted or exercised to purchase Series B Stock or Common Stock, as applicable (or such other securities). 5.2. Expenses; Indemnification. (a) The Company agrees to pay on each Closing Date and hold the Investors harmless against liability for the payment of, any stamp or similar taxes (including interest and penalties, if any) that may be determined to be payable in respect of the execution and delivery of this Agreement, the issue and sale of any Securities, Series B Stock and Underlying Shares, the expense of preparing and issuing the Securities, Series B Stock and Underlying Shares, the cost of delivering the Securities, Series B Stock and Underlying Shares of each Investor to such Investor's address, insured in accordance with customary practice, and the costs and expenses incurred in the preparation of all certificates and letters on behalf of the Company and of the Company's performance and compliance with all agreements and conditions contained herein on its part to be performed or complied with. Each Investor shall be responsible for its out-of-pocket expenses arising in connection with the Contemplated Transactions, except that, at the Closing, the Company shall pay fees and disbursements of counsel to the Investors as set forth in Section 6.9. (b) The Company hereby agrees and acknowledges that the Investors have been induced to enter into this Agreement and to purchase the Securities hereunder, in part, based upon the representations, warranties and covenants of the Company contained herein. The Company hereby agrees to pay, indemnify and hold harmless the Investors and any director, officer, partner, member, employee or other affiliate of any Investor against all claims, losses and damages resulting from any and all legal or administrative proceedings, including without limitation, reasonable attorneys' fees and expenses incurred in connection therewith (collectively, "Loss"), resulting from a breach by the Company of any representation or warranty of the Company contained herein or the failure of the Company to perform any covenant made herein; provided that the Company's liability under this Section 5.2(b) shall be limited to the aggregate purchase price of the Securities. (c) As soon as reasonably practicable after receipt by an Investor of notice of any Loss in respect of which the Company may be liable under this Section 5.2, the Investor shall give notice thereof to the Company. Each Investor may, at its option, claim indemnity under this Section 5.2 as soon as a claim has been threatened by a third party, regardless of whether an actual Loss has been suffered, so long as counsel for such Investor shall in good faith determine that such claim is not frivolous and that such Investor may be liable or otherwise incur a Loss as a result thereof and shall give notice of such determination to the Company. Each Investor shall permit the Company, at the Company's option and expense, to assume the defense 20 of any such claim by counsel mutually and reasonably satisfactory to the Company and the Investors who are subject to such claim, and to settle or otherwise dispose of the same; provided, however, that each Investor may at all times participate in such defense at such Investor's expense; and provided, further, that the Company shall not, in defense of any such claim, except with the prior written consent of each Investor subject to such claim, (i) consent to the entry of any judgment that does not include as an unconditional term thereof the giving by the claimant or plaintiff in question to each Investor and its affiliates of a release of all liabilities in respect of such claims or (ii) consent to any settlement of such claim. If the Company does not promptly assume the defense of such claim irrespective of whether such inability is due to the inability of the afore-described Investors and the Company to mutually agree as to the choice of counsel, or if any such counsel is unable to represent one or more of the Investors due to a conflict or potential conflict of interest, then an Investor may assume such defense and be entitled to indemnification and prompt reimbursement from the Company for such Investor's costs and expenses incurred in connection therewith, including without limitation, reasonable attorneys' fees and expenses. Such fees and expenses shall be reimbursed to the Investors as soon as practicable after submission of invoices to the Company. (d) The Company shall maintain the effectiveness of the Registration Statement (as defined in the Investor Rights Agreement) under the Securities Act for as long as is required under the Investor Rights Agreement. 6. Miscellaneous. 6.1. Entire Agreement; Successors and Assigns. This Agreement and the other Transaction Documents constitute the entire contract between the parties relative to the subject matter hereof and thereof, and no party shall be liable or bound to the other in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. This Agreement and the other Transaction Documents supersede any previous agreement among the parties with respect to the Securities. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective executors, administrators, heirs, successors and assigns of the parties. Except as expressly provided herein, nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 6.2. Survival of Representations and Warranties. Notwithstanding any right of the Investors fully to investigate the affairs of the Company and notwithstanding any knowledge of facts determined or determinable by any Investor pursuant to such right of investigation, each Investor has the right to rely fully upon the representations, warranties, covenants and agreements of the Company contained in this Agreement or in any documents delivered pursuant to this Agreement. All such representations and warranties of the Company shall survive the execution and delivery of this Agreement and the Closing hereunder and shall continue in full force and effect for one year after the Closing. The covenants of the Company set forth in Section 5 shall remain in effect as set forth therein. 21 6.3. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of law. Each party hereby irrevocably consents and submits to the jurisdiction of any New York State or United States Federal Court sitting in the State of New York, County of New York, over any action or proceeding arising out of or relating to this Agreement and irrevocably consents to the service of any and all process in any such action or proceeding by registered mail addressed to such party at its address specified in Section 6.6 (or as otherwise noticed to the other party). Each party further waives any objection to venue in New York and any objection to an action or proceeding in such state and county on the basis of forum non conveniens. Each party also waives any right to trial by jury. 6.4. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6.5. Headings. The headings of the sections of this Agreement are for convenience and shall not by themselves determine the interpretation of this Agreement. 6.6. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, delivery by fax (with answer back confirmed), addressed to a party at its address or sent to the fax number shown below or at such other address or fax number as such party may designate by three days advance notice to the other party. Any notice to the Investors shall be sent to the addresses set forth on the signature pages hereof, with a copy to: Hahn & Hessen LLP 488 Madison Avenue New York, New York 10022 Attention: James Kardon Fax Number: (212) 478-7400 Any notice to the Company shall be sent to: GraphOn Corporation 3130 Winkle Avenue Santa Cruz, California 95065 Attention: William Swain Fax Number: (831) 475-3017 with a copy to: Cooley Godward LLP 22 One Maritime Plaza, 20th Floor San Francisco, CA 94111-3580 Attention: Kenneth Guernsey Fax: 415-951-3699 6.7. Rights of Transferees. Any and all rights and obligations of each of the Investors herein incident to the ownership of Securities or the Underlying Shares shall pass successively to all subsequent transferees of such securities until extinguished pursuant to the terms hereof. 6.8. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or any other provision of this Agreement. 6.9. Expenses. Irrespective of whether any Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. Each Investor shall be responsible for all costs incurred by such Investor in connection with the negotiation, execution, delivery and performance of this Agreement including, but not limited to, legal fees and expenses, except that the Company shall pay at the Closing the reasonable legal fees and expenses of Hahn & Hessen LLP (the "Legal Fee"), as counsel to the Investors, and shall pay additional legal expenses of the Investors relating to this Offering as incurred. Hirschman may, at his option, deduct the Legal Fee from the purchase price paid to the Company for his Securities for payment to Hahn & Hessen LLP. 6.10.Amendments and Waivers. Unless a particular provision or section of this Agreement requires otherwise explicitly in a particular instance, any provision of this Agreement may be amended and the observance of any provision of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of 75% of the Purchased Shares (not including for this purpose any Purchased Shares that have been sold to the public pursuant to a registration statement under the Securities Act or an exemption therefrom). Any amendment or waiver effected in accordance with this Section 6.10 shall be binding upon each holder of any Securities at the time outstanding (including securities into which such Securities are convertible), each future holder of all such Securities, and the Company. [REMAINDER OF PAGE INTENTIONALLY BLANK] 23 SIGNATURE PAGE TO GRAPHON CORPORATION SUBSCRIPTION AGREEMENT Dated February 2, 2005 IF the PURCHASER is an INDIVIDUAL, please complete the following: IN WITNESS WHEREOF, the undersigned has executed this Agreement this 2nd day of February, 2005. Amount of Subscription: $ ___________________________________ ----------- Print Name Number of Units to be Purchased: , including ___[SIGNATURES ON FILE]__________ - ------------ --------------------------------- __________ Purchased Shares and Signature of Investor related Purchased Warrants ----------------------------------- Social Security Number ----------------------------------- Address and Fax Number ----------------------------------- E-mail Address ACCEPTED AND AGREED: GRAPHON CORPORATION By: /S/ WILLIAM SWAIN ---------------------------- Dated: February 2, 2005 24 SIGNATURE PAGE TO GRAPHON CORPORATION SUBSCRIPTION AGREEMENT Dated February 2, 2005 IF the INTERESTS will be held as JOINT TENANTS, as TENANTS IN COMMON, or as COMMUNITY PROPERTY, please complete the following: IN WITNESS WHEREOF, the undersigned has executed this Agreement this 2nd day of February, 2005. Amount of Subscription: ___________________________________ $ Print Name of Purchaser ----------- Number of Units to be Purchased: ___[SIGNATURES ON FILE]__________ --------------------------------- , including Signature of a Purchaser _____________ Purchased Shares and related Purchased Warrants ----------------------------------- Social Security Number ----------------------------------- Print Name of Spouse or Other Purchaser ----------------------------------- Signature of Spouse or Other Purchaser ----------------------------------- Social Security Number ----------------------------------- Address ----------------------------------- Fax Number ------------------------------------ E-mail Address ACCEPTED AND AGREED: GRAPHON CORPORATION By: /S/ WILLIAM SWAIN ---------------------------- Dated: February 2, 2005 25 SIGNATURE PAGE TO GRAPHON CORPORATION SUBSCRIPTION AGREEMENT Dated February 2, 2005 IF the PURCHASER is a PARTNERSHIP, CORPORATION, LIMITED LIABILITY COMPANY, TRUST or OTHER ENTITY, please complete the following: IN WITNESS WHEREOF, the undersigned has executed this Agreement this 2nd day of February, 2005. Number of Units to be Purchased: , including _____________ Purchased Shares and related Purchased Warrants ---------------------------------- Print Full Legal Name of Partnership, Company, Limited Liability Company, Trust or Other Entity By: ___[SIGNATURES ON FILE]________ (Authorized Signatory) Name: -------------------------------- Title: --------------------------------- Address and Fax Number: ----------------------------------- Taxpayer Identification Number: ---------- Date and State of Incorporation or Organization: ------------------ Date on which Taxable Year Ends: ------------------------------ E-mail Address: ------------------------ ACCEPTED AND AGREED: GRAPHON CORPORATION By: /S/ WILLIAM SWAIN --------------------- Dated: February 2, 2005 26 Schedule 1.1(b) INVESTORS Name Purchased Purchased Total Shares Warrants Purchase Price - --------------------------------------------------------------------- Hershel Berkowitz 6,667 3,333 $180,009 - --------------------------------------------------------------------- Paul Packer 3,704 1,852 $100,008 - --------------------------------------------------------------------- Globis Capital Partners 11,111 5,555 $299,997 - --------------------------------------------------------------------- Globis Overseas Fund Ltd. 3,704 1,852 $100,008 - --------------------------------------------------------------------- Richard Grossman 1,852 926 $50,004 - --------------------------------------------------------------------- Joshua Hirsch 1,852 926 $50,004 - --------------------------------------------------------------------- James Kardon 589 294 $15,903 - --------------------------------------------------------------------- AIGH Investment Partners, LLC 30,368 15,184 $819,936 - --------------------------------------------------------------------- IDT Capital, Inc. 37,037 18,518 $999,999 - --------------------------------------------------------------------- The Hewlett Fund 2,777 1,388 $ 74,979 - --------------------------------------------------------------------- Dr. Jack Dodick 5,897 2,948 $159,219 - --------------------------------------------------------------------- Spira Family Investment Partnership 2,778 1,389 $ 75,006 - --------------------------------------------------------------------- Fame Associates 2,778 1,389 $ 75,006 - --------------------------------------------------------------------- Cam Co 9,259 4,629 $249,993 - --------------------------------------------------------------------- Anfel Trading Limited 12,962 6,481 $349,974 - --------------------------------------------------------------------- Ganot Corporation 5,556 2,778 $150,012 - --------------------------------------------------------------------- Mazel D&K, Inc. 7,407 3,703 $199,989 - --------------------------------------------------------------------- F. Lyon Polk III 740 370 $19,980 - --------------------------------------------------------------------- Paul Tramontano 740 370 $19,980 - --------------------------------------------------------------------- SLAM Partners 370 185 $9,990 - --------------------------------------------------------------------- 148,148 74,070 $3,999,996 - --------------------------------------------------------------------- 27 EXHIBITS AND SCHEDULES TO THE UNIT SUBSCRIPTION AGREEMENT Schedule 1.1(b) Investors Exhibit 1A: Form of Purchased Warrants Exhibit 1B: Form of Exchange Warrants Exhibit 1C Form of Certificate of Designations for Series A Stock and Series B Stock Exhibit 2: Form of Investor Rights Agreement Exhibit 3: Form of Amendment to Financial Advisory Agreement Exhibit 4: Legal Opinion Exhibit 5: [Reserved] Exhibit 6: Waiver Exhibit 7: Voting Agreement 28 Exhibit 1A: Form of Purchased Warrants [See Exhibit 4.1 to the Current Report on Form 8-K to which this Unit Subscription Agreement is attached] 29 Exhibit 1B: Form of Exchange Warrants Void after January xx, 2010 Warrant No. ________ This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933. This Warrant and such shares may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act. This Warrant and such shares may not be transferred except upon the conditions specified in this Warrant, and no transfer of this Warrant or such shares shall be valid or effective unless and until such conditions shall have been complied with. GRAPHON CORPORATION COMMON STOCK PURCHASE WARRANT GraphOn Corporation (the "Company"), having its principal office at 3130 Winkle Avenue, Santa Cruz, California 95065, hereby certifies that, for value received, _____________, or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time on or from time to time after _________ __, 2005 and before 5:00 P.M., New York City time, on January__, 2010, or as extended in accordance with the terms hereof (the "Expiration Date"), ______________ fully paid and non-assessable shares of Common Stock of the Company, at the initial Purchase Price per share (as defined below) of $0.40. The number and character of such shares of Common Stock and the Purchase Price per share are subject to adjustment as provided herein. Background. The Company agreed to issue warrants to purchase an aggregate of 8,148,100 shares of Common Stock (subject to adjustment as provided herein) (the "Warrants"), each Warrant entitling the Holder thereof to purchase one share of Common Stock in exchange for the Series B Participating Convertible Preferred Stock Purchase Warrants issued January __, 2010 in connection with a private placement of the Company's Units (the "January Offering"). As used herein the following terms, unless the context otherwise requires, have the following respective meanings: The term "Company" includes the Company and any corporation which shall succeed to or assume the obligations of the Company hereunder. The term "corporation" shall include an association, joint stock company, business trust, 30 limited liability company or other similar organization. The term "Common Stock" includes all stock of any class or classes (however designated) of the Company, authorized upon the Original Issue Date or thereafter, the Holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the Holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency). The term "Convertible Securities" means (i) options to purchase or rights to subscribe for Common Stock, (ii) securities by their terms convertible into or exchangeable for Common Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities. The term "Exchange Act" means the Securities Exchange Act of 1934 as the same shall be in effect at the time. "Excluded Stock" shall mean (i) all shares of Common Stock issued or issuable to employees, directors or consultants pursuant to any equity compensation plan that is in effect on the date of this Agreement, (ii) all shares of Common Stock issued or issuable to employees or directors pursuant to any equity compensation approved by the stockholders of the Company after the date of this Agreement, (iii) all shares of Common Stock issued or issuable to employees, directors or consultants in the form of a hiring bonus, (iv) the warrants issued to Griffin Securities Inc. ("Griffin") on the date hereof, (iv) all shares of Common Stock issued or issuable to bona fide leasing companies, strategic partners, or major lenders, (v) all shares of Common Stock issued or issuable as the purchase price in a bona fide acquisition or merger (including reasonable fees paid in connection therewith), or (vi) all shares of Common Stock issued upon conversion or exercise of the Purchased Warrants or other Convertible Securities outstanding on the date hereof. "Fair Market Value" of assets or securities (other than Common Stock) shall mean the fair market value as reasonably determined by the Board of Directors of the Company in good faith in accordance with generally accepted accounting principles. The term "Holder" means any record owner of Warrants or Underlying Securities. The "Original Issue Date" means __________ __, 2005. The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 6 or otherwise. 31 The term "Purchase Price per share" means $0.40 per share, as adjusted from time to time in accordance with the terms hereof. The terms "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act, to permit the disposition of Common Stock (or Other Securities) issued or issuable upon the exercise of Warrants, and any post-effective amendments and supplements filed or required to be filed to permit any such disposition. The term "Securities Act" means the Securities Act of 1933 as the same shall be in effect at the time. The term "Underlying Securities" means any Common Stock or Other Securities issued or issuable upon exercise of Warrants. The term "Warrant" means, as applicable, this Warrant or each right as set forth in this Warrant to purchase one share of Common Stock, as adjusted. 1. Registration, etc. The Holder shall have the rights to registration of Underlying Securities issuable upon exercise of the Warrants that are set forth in the Investor Rights Agreement, dated January __, 2005, between the Company and the Holder (the "Investor Rights Agreement"). 2. Sale or Exercise Without Registration. If, at the time of any exercise, transfer or surrender for exchange of a Warrant or of Underlying Securities previously issued upon the exercise of Warrants, such Warrant or Underlying Securities shall not be registered under the Securities Act, the Company may require, as a condition of allowing such exercise, transfer or exchange, that the Holder or transferee of such Warrant or Underlying Securities, as the case may be, furnish to the Company an opinion of counsel, reasonably satisfactory to the Company, to the effect that such exercise, transfer or exchange may be made without registration under the Securities Act, provided that the disposition thereof shall at all times be within the control of such Holder or transferee, as the case may be, and provided further that nothing contained in this Section 2 shall relieve the Company from complying with any request for registration pursuant to the Investor Rights Agreement. 3. Exercise of Warrant. 3.1.Exercise in Full. Subject to the provisions hereof, this Warrant may be exercised in full by the Holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such Holder, to the Company at its principal office accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock issuable upon exercise of this Warrant by the Purchase Price per share, after giving effect to all adjustments through the date of exercise. 32 3.2. Partial Exercise. Subject to the provisions hereof, this Warrant may be exercised in part by surrender of this Warrant in the manner and at the place provided in Section 3.1 except that the amount payable by the Holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock (without giving effect to any adjustment therein) designated by the Holder in the subscription at the end hereof by (b) the Purchase Price per share. Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the Holder in the subscription at the end hereof. 3.3. Exercise by Surrender of Warrant or Shares of Common Stock. In addition to the method of payment set forth in Sections 3.1 and 3.2 and in lieu of any cash payment required thereunder, the Holder(s) of the Warrants shall have the right at any time and from time to time to exercise the Warrants in full or in part by surrendering shares of Common Stock, this Warrant or other securities issued by the Company in the manner and at the place specified in Section 3.1 as payment of the aggregate Purchase Price per share for the Warrants to be exercised. The number of Warrants or shares of Common Stock to be surrendered in payment of the aggregate Purchase Price for the Warrants to be exercised shall be determined by multiplying the number of Warrants to be exercised by the Purchase Price per share, and then dividing the product thereof by an amount equal to the Market Price (as defined below) . The number of shares of Common Stock or such other securities to be surrendered in payment of the aggregate Purchase Price for the Warrants to be exercised shall be determined in accordance with the preceding sentence as if the other securities had been converted into Common Stock immediately prior to exercise or, in the case the Company has issued other securities which are not convertible into Common Stock, at the Market Price thereof. 3.4. Definition of Market Price. As used herein, the phrase "Market Price" at any date shall be deemed to be (i) if the principal trading market for such securities is an exchange, the average of the high reported sale prices per share of Common Stock for the last five previous trading days in which a sale was reported, as officially reported on any consolidated tape, (ii) if the principal market for the Common Stock is the over-the-counter market, the average of the high reported sale prices per share on such trading days as set forth by such market or, (iii) if the Common Stock is not quoted by such over-the-counter market, the average of the average of the mean of the bid and asking prices per share on such trading days as set forth in the National Quotation Bureau sheet listing such securities for such days. Notwithstanding the foregoing, if there is no reported high sale price, as the case may be, reported on any of the ten trading days preceding the event requiring a determination of Market Price hereunder, then the Market Price shall be the average of the 33 high bid and asked prices for such days; and if there is no reported high bid and asked prices, as the case may be, reported on any of the ten trading days preceding the event requiring a determination of Market Price hereunder, then the Market Price shall be determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it or in the event of a dispute of the determination of the Board of Directors of the Company provided in clause (b) above, by arbitration in accordance with the rules then standing of the American Arbitration Association, before a single arbitrator to be chosen by the Company and reasonably acceptable to a majority in interest of the holders of Warrants from a panel of persons qualified by education and training to pass on the matter to be decided. 3.5. Company to Reaffirm Obligations. The Company will, at the time of any exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder any rights (including, without limitation, any right to registration of the Underlying Securities) to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant, provided that if the Holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such Holder any such rights. 3.6. Certain Exercises. If an exercise of a Warrant or Warrants is to be made in connection with a registered public offering or sale of the Company, such exercise may, at the election of the Holder, be conditioned on the consummation of the public offering or sale of the Company, in which case such exercise shall not be deemed effective until the consummation of such transaction. 4. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three business days thereafter, the Company at its own expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock or Other Securities to which such Holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then current Market Price of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 5 or otherwise. 5. Adjustment for Dividends in Other Stock, Property, etc.; Reclassification, etc. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or, if applicable, Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor (a) other or additional stock or other securities or property (other than cash) by way of dividend, or 34 (b) any cash paid or payable (including, without limitation, by way of dividend), or (c) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, then, and in each such case the Holder of this Warrant, upon the exercise hereof as provided in Section 3, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 5 which such Holder would hold on the date of such exercise if on the Original Issue Date such Holder had been the Holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the Original Issue Date to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 5 receivable by such Holder as aforesaid during such period, giving effect to all adjustments called for during such period by Sections 6 and 7 hereof. If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, the Purchase Price per share shall be increased, and the number of shares of Common Stock purchasable under this Warrant shall be decreased in proportion to such decrease in outstanding shares of Common Stock. 6. Reorganization, Consolidation, Merger, etc. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the Holder of this Warrant, upon the exercise hereof as provided in Section 3 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Underlying Securities issuable upon such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof. The Company shall not effect any such reorganization, consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate corporation or entity shall assume, by written instrument, the obligation to deliver to each Holder the shares of stock, cash, other securities or assets to which, in accordance with the foregoing provisions, each Holder may be entitled to and all other obligations of the Company under this Warrant. In any such case, if necessary, the provisions set forth in this Section 6 with respect to the rights thereafter of the Holders shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any Other Securities or assets thereafter deliverable on the exercise of the Warrants. 35 7. Other Adjustments. 7.1. General. Other than as set forth in Sections 5 and 6, if the Company shall issue any Common Stock other than Excluded Stock for a consideration per share (determined as set forth below) less than the Purchase Price per share in effect immediately prior to the issuance of such Common Stock (the "New Issuance"), the Purchase Price per share in effect immediately prior to each issuance shall forthwith be reduced to a new Purchase Price per share determined by dividing (x) the sum of (I) the consideration received by the Company in such issue less (II) the Fair Market Value of any securities or other assets transferred by the Company in units or otherwise together with such Common Stock ("Additional Assets"), by (y) the number of shares of Common Stock (not including shares issuable upon conversion or exercise of Additional Assets) issued in the New Issuance (the "New Purchase Price"). The number of shares of Common Stock for which this Warrant is exercisable shall be increased to a new number of shares determined by multiplying the number of shares of Common Stock for which this Warrant is exercisable prior to the New Issuance by a fraction, the numerator of which is the Purchase Price per share in effect prior to the New Issuance and the denominator is the New Purchase Price per share. 7.2. Convertible Securities. (a) In case the Company shall issue or sell any Convertible Securities (including without limitation Additional Assets), other than Excluded Stock, after the date hereof, there shall be determined the price per share for which Common Stock is issuable upon the conversion or exchange thereof, such determination to be made by dividing (i) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the then current aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the maximum number of shares of Common Stock of the Company issuable upon the conversion or exchange of all of such Convertible Securities. (b) If the price per share so determined shall be less than the applicable Purchase Price per share, then such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such Convertible Securities shall by their terms provide for an increase or increases or decrease or decreases, with the passage of time, in the amount of additional consideration, if any, to the Company, or in the rate of exchange, upon the conversion or exchange thereof, the adjusted Purchase Price per share shall, forthwith upon any such increase or decrease becoming effective, be readjusted to reflect the same, and provided further, that upon the expiration of such rights of conversion or exchange of such Convertible Securities, if any thereof shall not have been exercised, the adjusted Purchase Price per share shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were issued or sold upon the conversion or exchange of such Convertible Securities, and that they were issued or sold for the consideration actually received by the Company upon such conversion or exchange, plus the consideration, if any, actually received by the Company 36 for the issue or sale of all of such Convertible Securities which shall have been converted or exchanged. 7.3. Rights and Options. (a) In case the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Common Stock, other than Excluded Stock, there shall be determined the price per share for which Common Stock is issuable upon the exercise of such rights or options, such determination to be made by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the then current amount of additional consideration payable to the Company upon the exercise of such rights or options, by (ii) the maximum number of shares of Common Stock of the Company issuable upon the exercise of such rights or options. (b) If the price per share so determined shall be less than the applicable Purchase Price per share, then the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such rights or options shall by their terms provide for an increase or increases or decrease or decreases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted Purchase Price per share shall, forthwith upon any such increase or decrease becoming effective, be readjusted to reflect the same, and provided, further, that upon the expiration of such rights or options, if any thereof shall not have been exercised, the adjusted Purchase Price per share shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised. 7.4. Other Securities. If any event occurs as to which the provisions of this Warrant are strictly applicable and the application thereof would not fairly protect the rights of the Holders in accordance with the essential intent and principles of such provisions, then the Company shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as the Board of Directors, in good faith, determines to be reasonably necessary to protect such rights as aforesaid. In case at any time or from time to time the Company shall take any action in respect of its Common Stock, other than any action described in Sections 5, 6 and 7, then, unless such action will not have a materially adverse effect upon the rights of the Holders, the number of shares of Common Stock or other stock for which this Warrant is exercisable and the Purchase Price per share shall be adjusted in such manner as the Board of Directors, in good faith, determines to be equitable in the circumstances. In furtherance and not in limitation of the foregoing, if any event occurs of the type contemplated by Section 7 but not expressly provided for by such Section (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights or arrangements with equity features), then the Company's Board of Directors shall make an appropriate adjustment in the 37 Purchase Price per share and the number of shares of Common Stock or Other Securities issuable upon the exercise of a Warrant so as to protect the rights of the Holders of such Warrants. No adjustment made pursuant to this Section 7 shall increase the Purchase Price per share or decrease the number of shares of Common Stock or Other Securities issuable upon exercise of the Warrants. 8. Further Assurances. The Company will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of stock upon the exercise of all Warrants from time to time outstanding. 9. Officer's Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of the Warrants, the Company at its expense will promptly cause its Chief Financial Officer to compute such adjustment or readjustment in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, and the number of shares of Common Stock outstanding or deemed to be outstanding, including a statement of: (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold; (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding; and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to each Holder. 10. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of its stockholders for the purpose of determining the stockholders thereof who are entitled to receive any 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 property, or to receive any other right, or for the purpose of determining stockholders who are entitled to vote in connection with any proposed capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (b) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or (c) any proposed issue or grant by the Company of any Common Stock, Convertible Securities or any other securities, or any right or option to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities (other than the issue of Common Stock on the exercise of the Warrants), then and in each such event the Company will mail or cause to be mailed to each 38 Holder of a Warrant a notice specifying (i) the date on which any such 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, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the Holders of record of Underlying Securities shall be entitled to exchange their shares of Underlying Securities for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 20 days prior to the date therein specified. 11. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrants. 12. Listing on Securities Exchanges; Registration; Issuance of Certain Securities. 12.1.In furtherance and not in limitation of any other provision of this Warrant, if the Company at any time shall list any Common Stock on any national securities exchange or Nasdaq, the Company will, at its expense, simultaneously list on such exchange or Nasdaq, upon official notice of issuance upon the exercise of the Warrants, and maintain such listing of all shares of Common Stock from time to time issuable upon the exercise of the Warrants; and the Company will so list on any national securities exchange or Nasdaq, will so register and will maintain such listing of, any Other Securities if and at the time that any securities of like class or similar type shall be listed on such national securities exchange or Nasdaq by the Company. 12.2.The Company shall not issue any (a) Convertible Securities or similar securities that contain a provision that provides for any change or determination of the applicable conversion price, conversion rate, or exercise price (or a similar provision which might have a similar effect) based on the Market Price or any other determination of the market price or value of the Company's securities or any other market based or contingent standard, such as so-called "toxic" or "death spiral" convertible securities; provided, however, that this prohibition shall not include Convertible Securities or similar securities the conversion or exercise price or conversion rate of which is fixed on the date of issuance or subject to adjustment based upon the issuance by the Company of additional securities, including without limitation, standard anti-dilution adjustment provisions which are not based on calculations of the Market Price or other variable valuations; and provided, further, that in no event shall this provision be deemed to prohibit the transactions contemplated in the January Offering; or (b) any preferred stock, debt instruments or similar securities or investment instruments providing for (i) preferences or other payments substantially in excess of the original investment by purchasers thereof or (ii) dividends, interest or similar payments other than dividends, interest or similar payments computed on an annual basis and not in excess, directly or indirectly, of the lesser of a rate equal to (A) twice the interest 39 rate on 10 year US Treasury Notes and (B) 20%. 13. Exchange of Warrants. Subject to the provisions of Section 2 hereof, upon surrender for exchange of any Warrant, properly endorsed, to the Company, as soon as practicable (and in any event within three business days) the Company at its own expense will issue and deliver to or upon the order of the Holder thereof a new Warrant or Warrants of like tenor, in the name of such Holder or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 14. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 15. Warrant Agent. The Company may, by written notice to each Holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 16. Remedies. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 17. Negotiability, etc. Subject to Section 2 above, this Warrant is issued upon the following terms, to all of which each Holder or owner hereof by the taking hereof consents and agrees: (a) subject to the provisions hereof, title to this Warrant may be transferred by endorsement (by the Holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) subject to the foregoing, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser and each 40 such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 18. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder, or, until an address is so furnished, to and at the address of the last Holder of this Warrant who has so furnished an address to the Company. 19. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Holders of outstanding Warrants to purchase a majority of the shares of common Stock underlying all the outstanding Warrants. This Warrant is being delivered in the State of New York and shall be construed and enforced in accordance with and governed by the laws of such State. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. 20. Assignability. Subject to Section 2 hereof, this Warrant is fully assignable at any time. Dated: __________ __, 2005 GRAPHON CORPORATION By:________________________________ Name: Title: Attest:___________________________ 41 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To: GRAPHON CORPORATION The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, shares of Common Stock of GraphOn Corporation, and herewith makes payment therefor: (i) of $ * or (ii) by surrender of the number of Warrants included in the within Warrant required for full exercise pursuant to Section 3.3 of the Warrant, and requests that the certificates for such shares be issued in the name of, and delivered to, ___________________, whose address is _______________________. Dated: ---------------------------------------- (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) ________________________________________ (Address) * Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 42 FORM OF ASSIGNMENT (To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns and transfers unto _________________________ the right represented by the within Warrant to purchase _________ of Common Stock of GraphOn Corporation to which the within Warrant relates, and appoints ______________________________ Attorney to transfer such right on the books of GraphOn Corporation with full power of substitution in the premises. The Warrant being transferred hereby is one of the Warrants issued by GraphOn Corporation as of __________ __, 2005 to purchase an aggregate of 600,000 shares of Common Stock. Dated:_______________ ---------------------------------- (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) ----------------------------------- (Address) - ------------------------------------ Signature guaranteed by a Bank or Trust Company having its principal office in New York City or by a Member Firm of the New York or American Stock Exchange 43 Exhibit 1C Form of Certificate of Designations for Series A Stock and Series B Stock [See Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2005 44 Exhibit 2: Form of Investor Rights Agreement [See Exhibit 4.2 to the Current Report on Form 8-K to which this Unit Subscription Agreement is attached] 45 Exhibit 3: Form of Amendment to Financial Advisory Agreement [See Exhibit 10.2 to the Current Report on Form 8-K to which this Unit Subscription Agreement is attached] 46 Exhibit 4: Legal Opinion 1. The Company is a corporation incorporated and validly existing and in good standing under the laws of the State of Delaware. 2. The Company has the requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted. 3. The Company has the corporate power to execute and deliver the Transaction Documents, to sell and issue the Securities under the Subscription Agreement, to issue the Series B Stock upon exercise of the Purchased Warrants, to issue the Underlying Shares upon conversion of the Shares or Series B Stock or upon exercise of the Exchange Warrants, and to carry out and perform its obligations under the terms of the Transaction Documents. 4. The authorized capital stock of the Company consists of 45,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. 5. The Shares issued under the Subscription Agreement are validly issued, fully paid and nonassessable and free of any preemptive or similar rights contained in the Certificate of Incorporation or Bylaws of the Company, or, to our knowledge, in any Material Agreement, except as specifically provided in the Subscription Agreement or in the Company Disclosure Letter. The shares of Series B Stock issuable upon exercise of the Purchased Warrants have been duly and validly reserved and, when issued in accordance with the Purchased Warrants, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights contained in the Certificate of Incorporation or Bylaws of the Company, or, to our knowledge, in any Material Agreement, except as specifically provided in the Agreement or in the Company Disclosure Letter. Assuming the Required Stockholder Approval is obtained and the Certificate of Amendment is accepted for filing with the Secretary of State of the State of Delaware, the Underlying Shares, when issued upon conversion of the Shares or the Series B Shares or upon exercise of the Exchange Warrants, will be validly issued, fully paid and nonassessable. 6. All corporate action on the part of the Company, its board of directors and its stockholders necessary for the authorization, execution and delivery of the Transaction Documents by the Company, the authorization, sale and issuance of the Securities, the issuance of the Series B Stock upon exercise of the Purchased Warrants, the performance by the Company of its obligations under the Transaction Documents and, assuming the Required Stockholder Approval is obtained and the Certificate of Amendment is accepted for filing with the Secretary of State of the State of Delaware, the authorization of the Underlying Shares, has been taken. Each of the Transaction Documents has been duly and validly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except as rights to indemnity and contribution under the Transaction Documents may be limited by applicable laws and except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting creditors' rights, and subject to general equity principles, and to limitations on the enforceability of waivers of rights to jury trials and limitations on availability of equitable relief, including specific performance. 47 7. The execution and delivery by the Company of the Transaction Documents, the performance by the Company of its obligations under the Transaction Documents to be performed on or prior to the Closing, and the issuance of the Securities do not violate any provision of the Certificate of Incorporation or Bylaws or any provision of any applicable federal or state law, rule or regulation known to us to be customarily applicable to transactions of this nature. The execution and delivery by the Company of the Transaction Documents, the performance by the Company of its obligations under the Transaction Documents, and the issuance of the Securities do not violate, or constitute a default under, any Material Agreement. 8. With your consent based solely on a certificate of an officer of the Company as to factual matters, the Company is not, and immediately after giving effect to the sale of the Securities in accordance with the Transaction Documents and the application of the proceeds as described in Section 2.17 of the Subscription Agreement will not be required, to be registered as an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 9. Subject to the accuracy of the Investors' representations in Sections 3 and 4 of the Agreement, the issuance of the Securities in conformity with the terms of the Agreement and, if issued to the Investors at the Closing, the issuance of the Series B Stock upon exercise of the Purchased Warrants in conformity with the terms thereof, and the issuance of the Underlying Shares upon conversion of the Shares or Series B Stock or upon exercise of the Exchange Warrants in conformity with the terms thereof, constitute transactions exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended. 48 Exhibit 5: [Reserved] 49 Exhibit 6: Waiver WAIVER, CONSENT AND AMENDMENT GRAPHON WARRANT HOLDERS This WAIVER, CONSENT AND AMENDMENT (this "Waiver") is being executed and delivered as of the 2nd day of February, 2005, by and among GraphOn Corporation, a Delaware corporation ("GraphOn") and the investors listed on Exhibit A hereto (collectively, the "Investors"), who hold 5-year warrants, dated January 29, 2004, exercisable to purchase an aggregate of 2,500,000 shares of common stock, $.0001 par value per share of GraphOn (the "Common Stock"), at $0.33 per share (the "Warrants") that were issued pursuant to that certain Unit Subscription Agreement, dated as of January 29, 2004, among GraphOn and the Investors (or their legal predecessors in interest) party thereto (the "Unit Subscription Agreement"). All capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Warrants. WHEREAS, as contemplated by Section 1.3(a) of the Unit Subscription Agreement, the Investors (or their legal predecessors in interest) and GraphOn entered into the Investor Rights Agreement, dated as of January 29, 2004 (the "Investor Rights Agreement"); WHEREAS, pursuant to Sections 7.1, 7.2 and 7.3 of the Warrants, respectively, an adjustment to the Purchase Price is required in the event of the issuance by GraphOn of (i) Common Stock for a price per share (as calculated in accordance with the provisions of Section 7.1 of the Warrants) that is less than the Purchase Price of $.33 (the "Purchase Price") payable by the Investors, (ii) Convertible Securities at a price per share of Common Stock issuable upon the conversion thereof (as calculated in accordance with the provisions of Section 7.2 of the Warrants) less than the Purchase Price and (iii) rights to purchase Common Stock for total consideration at a price per share of Common Stock issuable upon the conversion thereof (as calculated in accordance with the provisions of Section 7.3 of the Warrants) less than the Purchase Price, (such adjustment, the "Antidilution Protection"); WHEREAS, pursuant to Section 10 of the Investor Rights Agreement, the proposed issuance by GraphOn of Common Stock, Convertible Securities or certain rights to purchase Convertible Securities on any occasion subsequent thereto entitles the Investors to purchase a number of shares of Common Stock or Convertible Securities in proportion to their respective Proportionate Percentages (as defined therein), to be issued on the terms set forth for the proposed issuance thereof (such entitlement of the Investors, the "Preemptive Rights"); WHEREAS, Griffin Securities, Inc. ("Griffin") and certain affiliates of Griffin listed on Exhibit B hereto (collectively with Griffin, the "Griffin Holders"), hold warrants in substantially the same form as the Warrants, exercisable to purchase an aggregate of 250,000 shares of Common Stock at $.33 per share and 470,000 at $.23 per share, (the "Griffin Warrants"); WHEREAS, GraphOn presently anticipates entering into an additional Unit 50 Subscription Agreement (the "Subsequent Unit Subscription Agreement") providing for the sale by GraphOn of an aggregate of 148,148 shares of Series A Participating Convertible Preferred Stock of GraphOn (the "Series A Shares") in units with 5-year warrants, exercisable to purchase an aggregate of up to 74,074 shares of Series B Participating Convertible Preferred Stock of GraphOn at $40.00 per share (the "Series B Warrants"), all for an aggregate price of $3,999,996 pursuant to agreements in the form provided herewith to the Investors (the "Subsequent Offering"); WHEREAS, among the transactions contemplated as part of the Subsequent Offering (as described in Section 2.6 of the Subsequent Unit Subscription Agreement), GraphOn plans to issue to Griffin warrants to purchase an aggregate of up to 14,814 shares of Series A Participating Convertible Preferred Stock of GraphOn and up to 7,407 shares of Series B Participating Convertible Preferred Stock of GraphOn (the "Griffin Warrants", and such issuance of the Griffin Warrants, the "Griffin Issuance"); WHEREAS, the Convertible Securities to be purchased pursuant to the Subsequent Offering and to be issued pursuant to the Griffin Issuance are potentially convertible into shares of Common Stock at prices per share (as calculated in accordance with the provisions of Sections 7.1, 7.2 and 7.3 of the Warrants) that are or may be lower than the Purchase Price paid by the Investors, thereby triggering the Antidilution Protection; WHEREAS, GraphOn anticipates that it may issue up to 500,000 additional shares of Common Stock in payment of certain fees and expenses of NES incurred prior to or in connection with the Acquisition and in settlement of disputes related to NES, which securities may be deemed sold at prices lower than the Purchase Price, thereby triggering the Antidilution Protection (the "Expense Shares" and such issuances of Expense Shares, the "Expense Issuances"); WHEREAS, the transactions that comprise the Subsequent Offering, the Griffin Issuance and the Expense Issuances also trigger the Preemptive Rights of the Investors; WHEREAS, the Subsequent Offering will benefit the Investors by attracting additional investors to invest in securities of GraphOn, thereby aiding the overall financial condition of GraphOn, in which the Investors have a significant interest as shareholders thereof; WHEREAS, GraphOn will, simultaneously with the Subsequent Offering, issue 10,000,000 shares of its Common Stock (the "Acquisition Shares") in connection with the Acquisition (as defined in the Subsequent Unit Subscription Agreement), including 1,750,000 shares to be issued to affiliates of Sierra Patent Group ("Sierra") in payment of fees owed by NES to Sierra, and such shares constitute Excluded Stock, as defined in the Warrants and the Investor Rights Agreement, and do not trigger the Preemptive Rights or the Antidilution Protection; and WHEREAS, GraphOn seeks, and the Investors are willing to provide, a waiver of the Preemptive Rights and the Antidilution Protection, and GraphOn and the Investors wish to waive the Preemptive Rights for the Subsequent Offering and 51 the Griffin Issuance, on the terms set forth in this Waiver. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereto hereby agree as follows: 1. Waiver and Consent Concerning Preemptive Rights. Each of the Investors hereby irrevocably waives, pursuant to Section 14(a) of the Investor Rights Agreement, such Investor's Preemptive Rights with respect to the issuance of (i) Series A Shares and Series B Warrants in connection with the Subsequent Offering, (ii) the Griffin Warrants, (iii) the Acquisition Shares, (iv) the Expense Issuances (provided that in the case of each Expense Issuance, such waiver in respect of such Expense Issuance is separately approved in writing by Investors owning an aggregate of at least 1,250,000 Warrants) and (v) any other Convertible Securities and any Common Stock issued or issuable upon exercise, conversion or exchange of the Series A Shares, the Series B Warrants and the Griffin Warrants. Each of the Investors hereby irrevocably consents, pursuant to Section 14(a) of the Investor Rights Agreement, to the waiver by each of the Investors that is provided for by this Section 1. 2. Waiver of Antidilution Protection. Each of the Investors hereby irrevocably waives, pursuant to Section 19 of the Warrant, such Investor's Antidilution Protection with respect to the issuance of (i) Series A Shares and Series B Warrants in connection with the Subsequent Offering, (ii) the Griffin Warrants, (iii) the Acquisition Shares, (iv) the Expense Issuances (provided that in the case of each Expense Issuance, such waiver in respect of such Expense Issuance is separately approved in writing by Investors owning an aggregate of at least 1,250,000 Warrants) and (v) any other Convertible Securities and any Common Stock issued or issuable upon exercise, conversion or exchange of the Series A Shares, the Series B Warrants and the Griffin Warrants at the prices specified in the Subsequent Unit Subscription Agreement and the Griffin Warrants, respectively, and agrees that the Purchase Price shall not be adjusted as a result of the Subsequent Offering or the Griffin Issuance. 3. Acknowledgement by Investors. Each of the Investors hereby acknowledges that the restrictions contained in Section 12.2 of the Warrants and Section 11 of the Investor Rights Agreement, prohibiting GraphOn's issuance of certain Convertible Securities and other specific types of securities as described further therein (the "Prohibition"), are not violated or invoked in any manner by the Subsequent Offering or the Griffin Issuance. Each of the Investors and GraphOn hereby agrees that the Prohibition, as set forth in each of the Warrants and the Investor Rights Agreement, shall be amended to read in full as follows: "Issuance of Certain Securities. The Company shall not issue any (a) Convertible Securities or similar securities that contain a provision that provides for any change or determination of the applicable conversion price, conversion rate, or exercise price (or a similar provision which might have a similar effect) based on any determination of the market price or other value of the Company's securities or any other market based or contingent standard, such as so-called "toxic" or "death spiral" convertible securities; provided, however, that this prohibition shall not include Convertible Securities or similar securities the conversion or exercise price or conversion rate of which is (i) fixed on the date of issuance, (ii) subject to adjustment as a result of or in connection with 52 a business combination or similar transaction or (iii) subject to adjustment based upon the issuance by the Company of additional securities, including without limitation, standard anti-dilution adjustment provisions which are not based on calculations of market price or other variable valuations; and provided, further, that in no event shall this provision be deemed to prohibit the transactions contemplated in the Unit Subscription Agreement; (b) any preferred stock, debt instruments or similar securities or investment instruments providing for (i) preferences or other payments substantially in excess of the original investment by purchasers thereof or (ii) dividends, interest or similar payments other than dividends, interest or similar payments computed on an annual basis and not in excess, directly or indirectly, of the lesser of a rate equal to (A) twice the interest rate on 10 year US Treasury Notes and (B) 20%." 4. Griffin Holders. Each of the Griffin Holders agrees to be bound, as if such Griffin Holder were an Investor, to each of the waivers, acknowledgements, consents, agreements and covenants of the Investors set forth in this Waiver. 5. Reservation of Rights. Except as specifically provided herein, the Warrants, the Investor Rights Agreement, the Unit Subscription Agreement and all other agreements, instruments and documents executed and/or delivered in connection therewith, shall remain in full force and effect and are hereby ratified and confirmed. Except as specifically provided herein, the execution, delivery and effectiveness of this Waiver shall not constitute a waiver of any provision of the Warrants, the Investor Rights Agreement, the Unit Subscription Agreement or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 6. Governing Law. This Waiver shall be governed by and construed and enforced in accordance with the laws of the State of New York. 7. Successors and Assigns. This Waiver shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors or assigns. This Waiver shall also be binding upon and inure to the benefit of any transferee of any of the Warrants or the Registrable Shares (as defined in the Investor Rights Agreement). 8. Counterparts. This Waiver may be executed in a number of counterparts, any of which together shall for all purposes constitute one Waiver, binding on all the parties hereto notwithstanding that all such parties have not signed the same counterpart. 53 IN WITNESS WHEREOF, the parties hereto have executed this Waiver as of the date first above written. GRAPHON CORPORATION By: ----------------------------- Name: Title: INVESTORS: ---------------------------------- Hershel Berkowitz ---------------------------------- Paul Packer GLOBIS CAPITAL PARTNERS By: ----------------------------- Name: Title: ---------------------------------- Richard Grossman ---------------------------------- Joshua Hirsch ---------------------------------- James Kardon 54 ---------------------------------- Orin Hirschman ---------------------------------- Anthony Altamura THE HEWLETT FUND By: ----------------------------- Name: Title: GRIFFIN HOLDERS: GRIFFIN SECURITIES, INC. By: ----------------------------- Name: Title: ---------------------------------- Robert U. Giannini ---------------------------------- Mark H. Zizzamia ---------------------------------- Thomas W. Muldowney 55 ---------------------------------- Salvatore J. Saraceno 56 Exhibit A SCHEDULE OF INVESTORS Hershel Berkowitz Paul Packer Globis Capital Partners Richard Grossman Joshua Hirsch James Kardon Orin Hirschman Anthony Altamura The Hewlett Fund Griffin Securities, Inc. 57 Exhibit B SCHEDULE OF GRIFFIN HOLDERS Griffin Securities, Inc. Robert U. Giannini Mark H. Zizzamia Thomas W. Muldowney Salvatore J. Saraceno 58 Exhibit 7: Voting Agreement VOTING AGREEMENT This Voting Agreement (this "Agreement") is made as of the 2nd day of February, 2005, by and among certain holders, as set forth in Schedule I hereto (the "Management Holders"), of the Common Stock, $.0001 par value per share, (the "Common Stock") of GraphOn Corporation, a Delaware corporation ("GraphOn" or the "Company"). RECITALS WHEREAS, it is contemplated that certain investors (collectively the "Investors") are purchasing securities of GraphOn pursuant to a Unit Subscription Agreement dated as of January __, 2005 (the "Unit Subscription Agreement"), which provides, among other matters, for a Stockholders Meeting and approval of the Certificate of Amendment, each as defined in the Unit Subscription Agreement; and WHEREAS, the Management Holders have entered into this Agreement regarding the voting of the Common Stock acquired or beneficially owned by any Management Holder, including without limitation any shares of capital stock of the Company that may be issued upon exercise of any rights, warrants or options to purchase, or other securities convertible into, capital stock of GraphOn and any rights, warrants or options to purchase, or other securities convertible into such capital stock (collectively, with the Common Stock, the "GraphOn Securities"); NOW, THEREFORE, in consideration of the Investors' consummating the transactions contemplated by the Unit Subscription Agreement and other good and valuable consideration, the adequacy of which is hereby affirmed, the parties hereby agree as follows: 1. EFFECTIVENESS. This Agreement shall be effective as of the date hereof (the "Effective Date"). 2. AGREEMENT TO VOTE. (a) In connection with the Stockholders Meeting, each Management Holder shall vote all of such Management Holder's GraphOn Securities (or grant or withhold approval or consent) in favor of the Certificate of Amendment. (b) Each Management Holder shall be present, in person or by proxy, at the Stockholders Meeting and any adjournments thereof so that all GraphOn Securities owned of record or beneficially owned by such Management Holder may be counted for the purpose of determining the presence of a quorum. 3. AFFILIATES. In the event any Affiliate of a Management Holder acquires any Common Stock during the term of this Agreement, such Management Holder agrees to use its best efforts to cause such Affiliate to become a party to this Agreement. For purposes of this Agreement, an "Affiliate" of a Management Holder shall be a person that controls, is controlled by or is under common control 59 with such Management Holder. 4. TERMINATION OF AGREEMENT. This Agreement shall terminate upon the earlier to occur of (a) the sale or transfer to third parties not affiliated with the Investors of more than 50% of the Common Stock beneficially owned by the Investors as of the date hereof, and (b) the approval of the Certificate of Amendment. 5. REPRESENTATIONS OF THE MANAGEMENT HOLDERS. Each Management Holder hereby represents and warrants that such Management Holder (a) owns beneficially and has the right to vote the Common Stock set forth opposite such Management Holder's name on Schedule I, (b) such Management Holder has full power to enter into this Agreement, and (c) such Management Holder will not take any action inconsistent with the purposes and provisions of this Agreement. 6. ENFORCEABILITY; REMEDIES; EXPENSES. Each Management Holder, in such person's capacity as a stockholder, shall take any and all actions necessary for the enforceability of this Agreement under Delaware law, including without limitation making or causing the Company to make all necessary filings or actions, if any, required by applicable Delaware corporate law. Each Management Holder expressly agrees that this Agreement shall be specifically enforceable in any court of competent jurisdiction in accordance with its terms including, without limitation, the right to entry of restraining orders and injunctions, whether preliminary, mandatory, temporary, or permanent, against a violation, threatened or actual, and whether or not continuing, of such obligation, without the necessity of showing any particular injury or damage, and without the posting of any bond or other security, it being acknowledged and agreed that any such breach or threatened breach would cause immediate and irreparable injury and that money damages alone would not provide an adequate remedy. The Investors shall be third party beneficiaries of this Agreement with the right to enforce it in accordance with its terms. Without limitation on the other remedies of the Investors, the Management Holders shall bear all of the Investors' expenses, including reasonable legal fees and expenses, incurred in connection with the enforcement of this Agreement. 7. GENERAL PROVISIONS. (a) All of the covenants and agreements contained in this Agreement shall be binding upon, and inure to the benefit of, the respective parties and their successors, assigns, heirs, executors, administrators and other legal representatives, as the case may be. (b) This Agreement, and the rights of the parties hereto, shall be governed by and construed in accordance with the laws of the State of Delaware applicable to a contract made and to be performed in Delaware. (c) This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together shall constitute one and the same instrument. (d) If any provision of this Agreement shall be declared void or 60 unenforceable by any court or administrative board of competent jurisdiction, such provision shall be deemed to have been severed from the remainder of the Agreement, and this Agreement shall continue in all respects to be valid and enforceable. (e) Whenever the context of this Agreement shall so require, the use of the singular number shall include the plural and the use of any gender shall include all genders. [Signature page follows] 61 IN WITNESS WHEREOF, the parties hereto have executed this Voting Agreement as of the date first above written. ---------------------------------------- Robert Dilworth ---------------------------------------- August Klein ---------------------------------------- Michael Volker ---------------------------------------- Gordon M. Watson ---------------------------------------- William Swain 62 SCHEDULE I Management Holders Name and Address Shares of Common Stock Common Stock Underlying Options Robert Dilworth 53,820 440,000 c/o GraphOn Corporation 3130 Winkle Avenue Santa Cruz, CA 95065 August Klein 150,760 135,000 c/o GraphOn Corporation 3130 Winkle Avenue Santa Cruz, CA 95065 Michael Volker 106,200 100,000 c/o GraphOn Corporation 3130 Winkle Avenue Santa Cruz, CA 95065 Gordon M. Watson 0 120,000 c/o GraphOn Corporation 3130 Winkle Avenue Santa Cruz, CA 95065 William Swain 15,000 420,000 c/o GraphOn Corporation 3130 Winkle Avenue Santa Cruz, CA 95065 EX-10.2 6 orinamnd.txt FAA AMENDMENT AMENDMENT TO FINANCIAL ADVISORY AGREEMENT THIS AMENDMENT TO FINANCIAL ADVISORY AGREEMENT (this "Amendment"), dated as of the 2nd day of February, 2005 by and among Orin Hirschman, an individual with a mailing address at 6006 Berkeley Ave., Baltimore, MD 21209 ("Hirschman"), and GraphOn Corporation, a Delaware corporation, and any of its direct or indirect affiliates ("GraphOn"). W I T N E S S E T H: WHEREAS, Hirschman and GraphOn entered into a letter agreement (the "Agreement") dated as of January 29, 2004; WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Agreement; WHEREAS, the Agreement provides for a term therefor expiring on the third anniversary of the date thereof; WHEREAS, contemporaneously herewith, Hirschman and GraphOn are entering into an additional Unit Subscription Agreement providing for the purchase by Hirschman and other investors of an aggregate of 120,000 shares of Series A Participating Convertible Preferred Stock of GraphOn and 5-year warrants, exercisable to purchase an aggregate of 60,000 shares of Series B Participating Convertible Preferred Stock of GraphOn, with all such securities sold pursuant thereto potentially convertible or exchangeable into common stock of GraphOn (such transaction, together with related agreements and documents entered into in connection therewith, the "Subsequent Offering"); and WHEREAS, in light of the Subsequent Offering and the mutually beneficial, significant financial relationship between Hirschman and GraphOn, the parties hereto wish to extend the term of the Agreement. NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto hereby agree as follows: 1. Extension of Term. Section 3 of the Agreement is hereby amended to provide for a term expiring on the third anniversary of the closing of the Subsequent Offering. 2. Effect Upon Agreement. (a) Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Agreement as amended hereby. (b) Except as explicitly amended as set forth in this Amendment, the terms and provisions of the Agreement shall continue in full force and effect and are hereby ratified and confirmed. 3. Counterparts. This Amendment may be executed in a number of counterparts, any of which together shall for all purposes constitute one Amendment, binding on all the parties hereto notwithstanding that all such parties have not signed the same counterpart. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. /s/ Orin Hirschman ------------------ ORIN HIRSCHMAN GRAPHON CORPORATION By: /s/ William Swain ---------------------- Name: William Swain Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----